Clause 188: Charge to tax on post-cessation receipts

711.     This clause applies the corporation tax charge on income to post-cessation receipts. It is based on sections 103 and 104 of ICTA. This application of the charge is separate from that on the profits of a trade (see clause 35 of this Bill). The corresponding rule for income tax is in section 242 of ITTOIA.

Clause 189: Extent of charge to tax

712.     This clause sets out the charge to tax. It is based on sections 103 and 104 of ICTA, which create a charge under Schedule D Case VI on post-cessation receipts. This Bill deals with the income where it logically belongs. In this case the income is trading income. The corresponding rule for income tax is in section 243 of ITTOIA.

713.     The charge in the source legislation under Schedule D Case VI has consequences for loss relief. This Bill preserves the position for loss relief by amending section 396 of ICTA and listing this Chapter in section 834A of ICTA (see Schedule 1 to this Bill).

714.     Subsection (3) deals with a company which has become non-UK resident after the trade has ceased. A trade carried on at least partly in the United Kingdom may include income that arises abroad. When the company was resident in the United Kingdom all the profits of the trade would have been within the charge under Part 2 of this Bill (see clause 5). This subsection removes the charge on a non-UK resident company if the receipt arises abroad.

Clause 190: Basic meaning of “post-cessation receipt”

715.     This clause sets out the basic meaning of “post-cessation receipt”. It is based on sections 103, 104 and 110 of ICTA. The corresponding rule for income tax is in section 246 of ITTOIA.

716.     Subsection (2) deals with the unusual case of a company receiving a “sum” which arises from the carrying on of a trade by a person liable to income tax.

717.     Paragraph (a) deals with a non-UK resident company liable to income tax. If a company becomes liable to corporation tax it is treated as ceasing to carry on the income tax trade. A post-cessation receipt from that trade may be charged to corporation tax.

718.     Paragraph (b) applies where the trade was carried on in partnership. If a partner leaves a firm and a company receives a sum arising from the carrying on of the trade by that partner, the sum may be a post-cessation receipt.

Clause 191: Other rules about what counts as post-cessation receipts

719.     This clause is new. It contains signposts to:

• the seven clauses in this Bill that treat other sums as post-cessation receipts; and

• the two clauses in this Bill that exclude certain sums from the charge on post-cessation receipts.

720.     The corresponding rule for income tax is in section 247 of ITTOIA.

Clause 192: Debts paid after cessation

721.     This clause sets out what happens when a trader is allowed a deduction for a bad or doubtful debt owed to the trade but then recovers the debt after the trade has ceased. It is based on section 103 of ICTA. The corresponding rule for income tax is in section 248 of ITTOIA.

722.     If a deduction for the debt has been given during the course of the trade section 103(5) of ICTA makes it clear that the recovery has not been “brought into account” in calculating the trade profits. The result is that the recovery is within the charge in section 103 of ICTA.

723.     Subsections (1) and (2) treat the recovery of the debt as a post-cessation receipt. The references to section 35 of ITTOIA and income tax cater for the possibility that a deduction for a bad debt is allowed to a person liable to income tax but the debt is paid to a person liable to corporation tax.

Clause 193: Debts released after cessation

724.     This clause sets out the rules that apply when a debt owed by the trader is released after the trade has ceased. It is based on section 103 of ICTA. The corresponding rule for income tax is in section 249 of ITTOIA.

725.     Subsection (1) sets out the four conditions to be met if the clause is to apply. It is the equivalent of clause 94 of this Bill which applies in the case of a continuing trade. The reference to income tax caters for the possibility that a deduction for an expense is allowed to a person liable to income tax but a person liable to corporation tax takes over the related trade debt and is released from it.

Clause 194: Transfer of rights if transferee does not carry on trade

726.     This clause deals with the position of the transferor if the right to a post-cessation receipt is transferred for value to a non-trading transferee. It is based on section 106 of ICTA. The corresponding rule for income tax is in section 251 of ITTOIA.

727.     The transferor is charged to tax on the amount received for the transfer if the transfer is at arm’s length. Otherwise the transferor is charged to tax on the arm’s length value of the transfer. There is no later charge to tax on the transferee when the post-cessation receipt is received.

728.     Clause 95 of this Bill sets out the position if the transfer is to a trading transferee.

Clause 195: Transfer of trading stock

729.     This clause excludes from the charge on post-cessation receipts sums arising from the transfer of stock. It is based on sections 103, 104 and 110 of ICTA. The corresponding rule for income tax is in section 252 of ITTOIA.

730.     Subsection (1) makes explicit the general rule that there is no tax charge on a post-cessation receipt arising from trading stock.

731.     The policy is that stock should be valued at cessation in accordance with the rules in Chapter 11 of this Part. Once that has been done there is no need to charge tax on any sums arising from the disposal or realisation of stock.

Clause 196: Allowable deductions

732.     This clause is the first of two that set out the rules for allowing deductions from sums charged as post-cessation receipts. It is based on section 105 of ICTA. The corresponding rule for income tax is in section 254 of ITTOIA.

733.     Subsection (3) ensures that a deduction is not allowed for any expenses for which relief has already been allowed (for income tax) under section 96 of ITA or under any other provision.

Clause 197: Further rules about allowable deductions

734.     This clause is the second of two that set out the rules for allowing deductions from sums charged as post-cessation receipts. It is based on section 105 of ICTA. The corresponding rule for income tax is in section 255 of ITTOIA.

735.     Subsection (2) ensures that any loss unused at the date of cessation is set off against post-cessation receipts in the same order as it would have been set off against profits under section 393 of ICTA, that is, against an earlier accounting period before a later accounting period.

736.     The references to capital allowances in section 105(1)(b) and (3) of ICTA are no longer needed because any capital allowance is allowed as a trading expense.

Clause 198: Election to carry back

737.     This clause allows a company to elect to have a post-cessation receipt taxed as though it had been received in the accounting period in which the company ceased to carry on the trade. It is based on section 108 of ICTA, although that section was repealed by ITTOIA. The corresponding rule for income tax is in section 257 of ITTOIA.

738.     See Change 42 in Annex 1.

739.     Subsection (1) requires that the post-cessation receipt is received (broadly) within six years after the company ceases to carry on the trade. This corresponds to the limit in section 108 of ICTA (which was expressed in terms of years of assessment).

740.     Subsection (3) gives a two year time limit for the election. This was the original time limit in section 108 of ICTA before it was amended for (income tax) Self Assessment.

Clause 199: Deductions already made are not displaced

741.     This clause is a rule about losses allowed against a post-cessation receipts carried back to the period of cessation under clause 198. It is new.

742.     The rule in this clause is broadly the same as the income tax rule in paragraph 5(5) of Schedule 1B to TMA. If relief has already been given under clause 196, for a period later than the period of cessation, this clause makes clear that the relief is not to be re-calculated as a result of the election under clause 198.

743.     The clause refers only to a “loss” for which a deduction has already been made. Any “expense or debit” already allowed under clause 196 would in any event not be available for the accounting period in which the cessation occurred.

744.     Subsection (3) makes clear that the rule about “displacing” a deduction for a loss does not apply to a deduction that has been made from the post-cessation receipt that is to be carried back.

745.     See Change 42 in Annex 1.

Clause 200: Election given effect in accounting period in which receipt is received

746.     This clause sets out the procedure for dealing with an election under clause 198. It is new.

747.     The procedure for giving the relief is broadly the same as that for income tax. This is an election to which paragraph 58 of Schedule 18 to FA 1998 applies. This clause makes clear that the relief is in terms of tax and corresponds to the income tax rule in paragraph 5 of Schedule 1B to TMA.

748.     See Change 42 in Annex 1.

Chapter 16: Priority rules

Clause 201: Provisions which must be given priority over this Part

749.     This clause sets out the priority rules that apply when a receipt or other credit item might otherwise fall within more than one head of charge. It is based on section 18 of ICTA. The corresponding rules for income tax are in section 4 of ITTOIA.

750.     Subsection (2) deals with potential overlap with ITEPA. It is based on section 18 of ICTA. In the source legislation Schedule D is the residual Schedule. So the charge in ITEPA on employment income, and other income formerly within Schedule E, has priority over the charge on profits of a trade (Schedule D in the source legislation).

Part 4: Property income

Overview

751.     This Part applies to “property income”. That is, income from land. The corresponding rules for income tax are in Part 3 of ITTOIA.

752.     This Part covers income that is taxed under different Schedules and Cases in the source legislation. So it covers, for example, income from land both in the United Kingdom and abroad, as well as post-cessation receipts from property businesses.

753.     This reflects the approach of grouping types of income which are logically part of the same “family”. In this Part the unifying factor is that all the elements are amounts that are, ultimately, attributable to exploiting an interest in land.

754.     As a consequence, this Part groups elements which in the source legislation are separate. But those elements do not lose their identity for all purposes. Loss relief, for example, requires them to be kept apart. For this reason the charge to corporation tax on “property income” has specific components (see clause 202).

755.     This Part is not an exhaustive statement of the rules for the calculation of property income. Other regimes may affect that calculation. In particular, Parts 8, 11 and 14 of this Bill contain rules that may affect property business profits.

756.     References to “profits or gains” in the source legislation which relate only to income are rewritten in this Part omitting the reference to “gains”. This continues the tidying up of such references begun in section 46(3) of, and Schedule 7 to, FA 1998.

Chapter 1: Introduction

Clause 202: Overview of Part

757.     This clause is introductory. It is new.

Chapter 2: Property businesses

Clause 203: Overview of Chapter

758.     This clause introduces the Chapter and provides a “road map” to the key provisions. It is new.

759.     Chapter 2 sets out the key concepts underlying the main component of income within this Part of this Bill by defining “property business” and “generating income from land”.

Clause 204: Meaning of “property business”

760.     This clause defines “property business”. It is new.

761.     Subsection (1) reflects the fact that section 70A of ICTA applies the same basic rules for income from UK land to income from overseas land. So most of the provisions in this Part apply to both UK and overseas property businesses alike. Where they do not, the particular clause makes that clear by, for example, referring to a UK property business only.

762.     The term “property business” is not entirely straightforward. The term used in the source legislation, “Schedule A business”, was introduced as part of the 1995 reform of Schedule A for income tax and was applied to corporation tax in 1998. That concept was helpful in providing a vessel to contain all the income from land previously charged under Schedule A and to which the rules for calculating trade profits could be applied. But the concept of a Schedule A business, and a UK property business, is rather more complex than that of a trade. That is reflected in this and the other clauses that, together, define the range of income that is assessed as income of a property business.

Clause 205: UK property business

763.     This clause defines “UK property business” and introduces the concept of “generating income from land”. It is based on section 15(1) of ICTA. The corresponding rule for income tax is in section 264 of ITTOIA.

764.     It gives a basic “one business per company” rule: that (subject to special cases such as those mentioned in clause 203(3) and (4)) all the income from a company’s UK land interests is treated as falling within a single UK property business.

765.     Although the Chapter builds on the concept of the “business”, the approach differs from the approach in the source legislation. This Bill adopts the same approach as ITTOIA and uses the term “UK property business” rather than “Schedule A business”.

Clause 206: Overseas property business

766.     This clause defines “overseas property business”. It is based on section 70A of ICTA. The corresponding rule for income tax is in section 265 of ITTOIA.

767.     The definition is identical to that of “UK property business” except that the land from which the income arises is outside the United Kingdom.

768.     For the purpose of deciding whether there is an overseas property business, overseas land law is interpreted in accordance with clause 290.

Clause 207: Meaning of “generating income from land”

769.     This clause defines “generating income from land”. It is based on sections 15(1) and 24 of ICTA. The corresponding rule for income tax is in section 266 of ITTOIA.

770.     The clause defines what may be described as the essence of the property business. That is, exploiting rights of land ownership for profit. But it is not intended to identify everything that must be taken into account in calculating the profits of such a business. The concept of the property business is wider than that. “Property business” includes, for example, amounts specifically charged under other provisions such as certain insurance recoveries (see clause 103 applied by clause 210(2)).

771.     Subsection (2) extends the meaning of “rents” and is based on section 24(6)(b) of ICTA. Including this extension in the main clause (in the source legislation it is relegated to a “construction” section) keeps all the relevant definitions together.

772.     Subsection (3) explains “other receipts” in subsection (1). This list is not exhaustive but amounts that are not listed here would have to be of a similar nature to those that are listed to come within the definition.

773.     Subsection (4) extends the charge to particular types of receipt. The source legislation cross-refers to a definition of “caravan” in the Caravan Sites and Control of Development Act 1960. There is a Bill-wide definition of “caravan” in clause 1314 (and see Change 96 in Annex 1). “Houseboat” is defined in clause 1319 (other definitions).

Clause 208: Activities not for generating income from land

774.     This clause excludes certain “land-related” income from property income and cross-refers to the trading income provisions under which that income is charged. It is based on section 15(1) of ICTA. The corresponding rule for income tax is in section 267 of ITTOIA.

Chapter 3: Profits of property businesses: basic rules

Clause 209: Charge to tax on profits of a property business

775.     This clause applies the corporation tax charge to the profits of a property business. It is based on sections 9, 15 and 18 of ICTA.

Clause 210: Profits of a property business: application of trading income rules

776.     This is the main rule for calculating the profits of a property business. It is based on section 21A of ICTA. The corresponding rule for income tax is in section 272 of ITTOIA.

777.     The same basic rules apply to the calculation of both UK and overseas property businesses.

778.     From 1998, the profits of a Schedule A business charged to corporation tax are calculated by treating the business as similar to a trade and applying the calculation rules of Schedule D Case I.

779.     In the source legislation this is achieved by section 21A of ICTA. But, at the margins, the application of certain of the Case I rules to Schedule A is not altogether clear.

780.     First, the relationship of section 21A(2) of ICTA to section 21A(1) of ICTA is uncertain. Section 21A(2) of ICTA refers to provisions that apply “in accordance” with section 21A(1). It is open to debate whether section 21A(2) of ICTA merely contains examples of the Schedule D Case I provisions that apply in accordance with the general rule in section 21A(1) of ICTA or whether it contains an exhaustive list of those provisions. The former appears the better view and the one best reflecting the underlying policy.

781.     Second, some Schedule D Case I provisions that are applied to Schedule A are inherently incapable of applying to income from land. The “herd basis” provisions in section 97 of, and Schedule 5 to, ICTA (rewritten in Chapter 8 of Part 3 of this Bill) are an example. They are among the provisions of Chapter 5 of Part 4 of ICTA that are applied to Schedule A specifically (subject to stated exceptions) by section 21A(2) of ICTA. But they are not among the exceptions referred to in section 21A(4) of ICTA. On the other hand, some Schedule D Case I provisions outside Chapter 5 of Part 4 of ICTA that seem potentially more relevant, such as the car hire provisions in sections 578A and 578B of ICTA, are not applied specifically.

782.     Clause 210 clarifies these matters by listing all the trading income provisions in Part 3 of this Bill that are relevant to property business profits.

783.     Some of the clauses in Part 3 of this Bill that are applied to a property business contain rewrite changes. Those changes are carried through to property income. Details of those changes are recorded in the Annex 1 notes on the particular clauses in Part 3.

784.     Subsection (2) lists all the provisions in Part 3 that are relevant to property business income. It reflects the principle that section 21A(1) of ICTA applies all Schedule D Case I calculation provisions to Schedule A unless they are expressly disapplied elsewhere. Provisions that are expressly disapplied in the source legislation are excluded from the list.

785.     Also excluded are provisions which are attracted to Schedule A in the source legislation either expressly by section 21A(2) of ICTA or under the general principle expressed in section 21A(1) of ICTA, but which are incapable of applying once carried over to the context of the property business. Exclusion is achieved simply by omitting them from the list of provisions that do apply.

786.     The majority of the provisions in Part 3 that can apply to a property business are applied by subsection (2). But in some cases later clauses set out the provisions specifically (clauses 261 and 262 (adjustment on change of basis) and the clauses in Chapter 9 of this Part (post-cessation receipts)).

787.     The following clauses that are applied by subsection (2) merit specific mention. These are:

• clauses 56 to 58: expenses of car hire; and

• clauses 172 to 175: deduction for unremittable amounts.

788.     Including these accurately reflects the effect of section 21A(1) of ICTA.

789.     Although the list in subsection (2) excludes trading income provisions that are inherently incapable of applying to a property business it does not exclude those that are merely unlikely to apply. This recognises the possibility of certain provisions applying in unusual circumstances. Examples are clauses 87 and 88 (scientific research). Although their relevance to a property business is unlikely, it is not inconceivable and they are needed to cater for the possibility of a landlord funding an activity that would qualify as “scientific research”. An example might be research on the decontamination of brown land with a view to building an investment property on it.

Clause 211: Loan relationships and derivative contracts

790.     This clause defines the relationship of the rules in Parts 5 and 7 to those in this Part. It is based on section 15 of ICTA.

791.     Subsection (1) drops the words of the source “carried on by a company” in referring to a property business because in the context of corporation tax only legislation, they are redundant.

792.     Subsection (2) is based on the premise that, in the source legislation, the second sentence of paragraph 2(3) of Schedule A is really about the relationship between that provision and section 80(5) of FA 1996 and paragraph 1(2) of Schedule 26 to FA 2002. The source makes a wide statement about the relationship between “this Schedule [A]” and Part 4 of FA 1996 and Schedule 26 to FA 2002. The Bill disposes of the concept of Schedule A so the rewritten references are necessarily more focussed.

Clause 212: Items treated as receipts and expenses

793.     This clause gives signposts to other relevant rules of calculation. It is new.

794.     In particular the CAA rules override the rules against the inclusion of capital items in clauses 53 and 93 of this Bill (applied to this Part by clause 210(2)).

Clause 213: Certain amounts brought into account under Part 3

795.     This clause excludes from the profits of a property business certain income from land that, exceptionally, may be taxed as profits of a trade. It is based on section 15 of ICTA. See Changes 4, 5 and 6 in Annex 1 and the commentary on clauses 43, 44 and 45. The corresponding rule for income tax is in section 273 of ITTOIA .