Clause 214: Relationship between rules prohibiting and allowing deductions

796.     This clause determines the interaction between those provisions that prohibit a deduction and those provisions that allow a deduction. It is new. The corresponding rule for income tax is in section 274 of ITTOIA.

797.     This clause does a similar job in Part 4 to that which clause 51 does in Part 3. The general principle is that a rule allowing a deduction takes priority over a rule prohibiting a deduction. But that is subject to the exceptions the clause mentions. See Change 7 in Annex 1.

798.     Subsection (4) makes it clear that the effect of this priority rule extends to the large number of trading income rules that apply to property income indirectly through clause 210.

Chapter 4: Profits of property businesses: lease premiums etc

Overview

799.     This Chapter contains rules under which a company may be treated as receiving property business receipts in relation to certain lease premiums, or certain other amounts, which would otherwise generally be amounts of a capital nature. It also contains rules whereby relief can, in certain cases, be given to companies in relation to an earlier property business receipt that another person was treated as receiving. The Chapter is based on sections 34 to 38 and 42 of ICTA. The corresponding provisions for income tax are in Chapter 4 of Part 3 of ITTOIA.

800.     See clauses 62 to 67 for cases in which trading expenses are treated as incurred and deductible by reference to an earlier deemed lease receipt. See clause 136 for a case in which trading receipts are reduced by property business receipts that are treated as arising under clauses 217 to 225.

Clause 215: Overview of Chapter

801.     This clause provides an overview of the Chapter. It is new. The corresponding provision for income tax is in section 276 of ITTOIA.

Clause 216: Meaning of “short-term lease”

802.     This clause defines “short-term lease” as “a lease whose effective duration is 50 years or less”. It is new. The corresponding provision for income tax is in section 276 of ITTOIA.

803.     The “effective duration” of a lease is its duration for the purpose of this Chapter. This may not be the same as the contractual duration of the lease. See commentary on clauses 243 and 244.

Clause 217: Lease premiums

804.     This clause treats a property business receipt as arising if a premium is payable in relation to the grant of a short-term lease. It is based on sections 34(1), (6) and (7A) and 37(2) of ICTA. The corresponding provision for income tax is in section 277 of ITTOIA.

805.     Subsection (2) treats a company to which the premium is due as receiving an amount as a result of entering into a transaction mentioned in clause 205 (UK property business) or clause 206 (overseas property business), depending on the location of the land to which the lease relates. The effect is that the amount will be treated as a receipt of the company’s UK or overseas property business.

806.     The approach adopted in subsection (2) is also followed in clauses 219 to 225.

807.     Subsection (3) requires the company to which the premium is due to bring the amount into account in calculating the profits of the property business for the accounting period in which the lease is granted. Source legislation is not explicit about the accounting period concerned in the case of a company which is not the landlord. See Change 43 in Annex 1.

Clause 218: Amount treated as lease premium where work required

808.     This clause treats a lease premium as payable if a lease places an obligation on the tenant to carry out certain works. It is based on section 34(2) and (3) of ICTA. The corresponding provision for income tax is in section 278 of ITTOIA.

809.     Such treatment could lead to a property business receipt, or a greater receipt, being treated as arising to the landlord under clause 217.

Clause 219: Sums payable instead of rent

810.     This clause treats a property business receipt as arising in certain cases where a payment is made instead of rent for some or all of the duration of a lease. It is based on sections 34(1), (4), (6) and (7A) and 37(2) of ICTA. The corresponding provision for income tax is in section 279 of ITTOIA.

811.     Subsection (1) makes clear that, irrespective of the length of the lease, the payment of a sum instead of rent for a period of 50 years or less is within the scope of this clause. Source legislation is not explicit on this point. See Change 44 in Annex 1.

812.     Subsection (3) requires the company to which the sum is due to bring an amount into account in calculating the profits of its property business for the accounting period in which the sum is payable. Source legislation is not explicit about the accounting period concerned in the case of a company which is not the landlord. See Change 43 in Annex 1.

813.     In calculating the amount to be treated as received in respect of a sum in lieu of rent within section 34(4) of ICTA, the duration of the lease for the purposes of the formula in section 34(1) of ICTA must be adjusted in accordance with section 34(4)(a) of ICTA. For this purpose, there is excluded from the duration of the lease any period other than that in respect of which the sum in lieu of rent is paid. Subsections (4) and (6) have the same effect as those provisions of section 34(1) and (4)(a) of ICTA.

Clause 220: Sums payable for surrender of lease

814.     This clause treats a property business receipt as arising in certain cases where a sum is payable for the surrender of a short-term lease. It is based on sections 34(1), (4), (6) and (7A) and 37(2) of ICTA. The corresponding provision for income tax is in section 280 of ITTOIA.

815.     Subsection (3) requires the company to which the sum is due to bring an amount into account in calculating the profits of its property business for the accounting period in which the sum is payable. Source legislation is not explicit about the accounting period concerned in the case of a company which is not the landlord. See Change 43 in Annex 1.

Clause 221: Sums payable for variation or waiver of terms of lease

816.     This clause treats a property business receipt as arising in certain cases where a payment is made for the variation or waiver of any of the terms of a lease. It is based on section 34(1), (5), (6), (7) and (7A) of ICTA. The corresponding provision for income tax is in section 281 of ITTOIA.

817.     Subsection (1) makes clear that, irrespective of the length of the lease, the payment of a sum as consideration for the variation or waiver of the terms of a lease for a period of 50 years or less is within the scope of this clause. Source legislation is not explicit on this point. See Change 44 in Annex 1.

818.     Subsection (1) also provides that this clause applies only if the sum is due to the landlord or to a connected company. Source legislation does not contain this restriction. See Change 45 in Annex 1.

819.     Subsection (3) requires the company to which the sum is due to bring an amount into account in calculating the profits of its property business for the accounting period in which the contract providing for the variation or waiver is entered into. Source legislation is not explicit about the accounting period concerned in the case of a company which is not the landlord. See Change 43 in Annex 1.

820.     Clause 227(1) extends relief under clause 228 (the additional calculation rule) to receipts in respect of sums payable for the variation or waiver of the terms of a lease. This is reflected in subsection (5) of this clause. See Change 46 in Annex 1.

821.     In calculating the amount to be treated as received in respect of a sum for the variation or waiver within section 34(5) of ICTA, the duration of the lease for the purposes of the formula in section 34(1) of ICTA must be adjusted in accordance with section 34(5)(a) of ICTA. For this purpose, there is excluded from the duration of the lease any period other than that in respect of which the variation or waiver has effect. Subsections (4) and (6) have the same effect as those provisions of section 34(1) and (5)(a) of ICTA.

Clause 222: Assignments for profit of lease granted at undervalue

822.     This clause treats a property business receipt as arising in certain cases where a company makes a profit on the assignment of a lease that had been granted at an undervalue. It is based on sections 35(1), (2) and (2A) and 37(2) of ICTA. The corresponding provision for income tax is in section 282 of ITTOIA.

823.     The formula in subsection (4) for calculating the deemed receipt if there is an assignment at a profit is based on section 35(2) of ICTA (which refers back to the formula in section 34(1) of ICTA).

Clause 223: Provisions supplementary to section 222

824.     This clause supplements clause 222. It is based on section 35(1) and (2) of ICTA. The corresponding provision for income tax is in section 283 of ITTOIA.

Clause 224: Sales with right to reconveyance

825.     This clause treats a property business receipt as arising in certain cases where a property is sold on terms which provide for the property to be reconveyed to the seller, or to a connected person, at less than the sale price. It is based on section 36(1) and (4A) of ICTA. The corresponding provision for income tax is in section 284 of ITTOIA.

826.     Subsection (1)(b) provides that this clause applies only if the period between sale and reconveyance is 50 years or less. Source legislation effectively applies if the period is 51 years or less. See Change 47 in Annex 1.

Clause 225: Sale and leaseback transactions

827.     This clause treats a property business receipt as arising in certain cases where a company sells property on terms which provide for the grant of a lease to the vendor or to a connected person. It is based on section 36(1), (3), (4) and (4A) of ICTA. The corresponding provision for income tax is in section 285 of ITTOIA.

828.     Subsection (1)(b) provides that this clause applies only if the period between sale and leaseback is 50 years or less. Source legislation effectively applies if the period is 51 years or less. See Change 47 in Annex 1.

Clause 226: Provisions supplementary to sections 224 and 225

829.     This clause supplements sections 224 and 225. It is based on section 36(2), (3) and (4B) of ICTA. The corresponding provision for income tax is in section 286 of ITTOIA.

Clause 227: Circumstances in which additional calculation rule applies

830.     This clause sets out cases where a deemed business property receipt is to be reduced, under clause 228, by reference to an earlier taxed receipt. It is based on section 37(1), (2), (3) and (9) of ICTA. The corresponding provision for income tax is in section 287 of ITTOIA.

831.     Subsection (1) provides that those cases include a deemed business property receipt arising in relation to payments for a variation or waiver of terms of a lease. See Change 46 in Annex 1.

832.     Amounts within clause 218 (amount treated as lease premium where work required) are not specified separately in subsection (1), or in clause 228(2), because clause 218(2) treats such amounts as premiums within clause 217.

833.     Subsection (3) sets out the connection that must exist between the lease in relation to which the taxed receipt arises and the lease in relation to which the later deemed business property receipt arises.

834.     Subsection (4)’s definitions of “taxed lease” and “taxed receipt” are based on the definitions of “head lease” and “amount chargeable on the superior interest” in section 37(1) of ICTA. The definition of a taxed lease, and taxed receipt, includes leases of land, and associated receipts, outside the UK. This restores a relief that was incorrectly removed by ITTOIA. See Change 48 in Annex 1.

835.     Subsection (5) stipulates that for clause 228 to apply there must be at least one taxed receipt with an “unused amount”. That is because clause 235 (limit on reductions and deductions) prevents relief being given under clause 228 by reference to a taxed receipt if that taxed receipt does not have an unused amount. Source legislation is not as explicit about the way in which relief in relation to a taxed receipt must not exceed the amount of the taxed receipt. See Change 49 in Annex 1.

Clause 228: The additional calculation rule

836.     This clause provides for the amount of a deemed business property receipt to be reduced, in cases within clause 227, by reference to an earlier taxed receipt. It is based on section 37(2), (3), (7) and (9) of ICTA. The corresponding provision for income tax is in section 288 of ITTOIA.

837.     The amount to be reduced is referred to in this clause, and in clause 229, as “the receipt under calculation”.

838.     Clause 227 extends relief to deemed business property receipts arising in relation to the variation or waiver of the terms of a lease. Subsection (2) reflects this by referring to clause 221. See Change 46 in Annex 1.

839.     This clause introduces the label “basic relieving amount” for the amount by which the receipt under calculation is to be reduced.

840.     Subsection (3) requires the basic relieving amount to be restricted under clause 229(5) so that it does not exceed the amount of the receipt under calculation. Source legislation is not as explicit about what happens if relief is given in relation to more than one earlier taxed receipt. If there is more than one taxed receipt by reference to which the receipt under calculation may be reduced, it is for the company entitled to the relief to decide the order in which relief is to be taken by reference to those taxed receipts.

841.     For subsection (3) to apply there must be at least one taxed receipt with an “unused amount”. That is because clause 235 (limit on reductions and deductions) prevents relief under this clause being given by reference to a taxed receipt if that taxed receipt does not have an unused amount. Source legislation is not as explicit about the way in which relief in relation to a taxed receipt must not exceed the amount of the taxed receipt. See Change 49 in Annex 1.

842.     Subsection (4)’s use of the “unreduced amount” of the taxed receipt (defined in clause 230(2)) in the formula makes clear that the basic relieving amount by reference to a taxed receipt is to be calculated according to the amount of that receipt before any reductions or deductions.

843.     The definition in subsection (6) of “receipt period” in relation to a receipt under clauses 217 and 219 to 222 is based on the definition of “the period in respect of which an amount arose” in section 37(7)(b) of ICTA.

Clause 229: The additional calculation rule: special cases

844.     This clause:

• modifies the rule in clause 228 if the receipt under calculation arises in respect of part only of the premises subject to the taxed lease; and

• sets limits on the reduction under that clause in two cases.

It is based on section 37(2), (3) and (9) of ICTA. The corresponding provision for income tax is in section 289 of ITTOIA.

845.     Clause 227 extends relief under clause 228 to business property receipts treated as arising in relation to the variation or waiver of the terms of a lease. This is reflected in the reference in subsection (2) to clause 221. See Change 46 in Annex 1.

846.     But subsection (2) does not apply to receipts under clause 222 (assignments for profit of lease granted at undervalue) because it is not possible for a lease to be assigned other than in respect of the whole of the premises subject to the lease.

847.     Subsection (3) requires the fraction in subsection (2) to be calculated on a “just and reasonable basis”, where section 37(3) of ICTA requires a “just apportionment”. See Change 12 in Annex 1.

848.     Subsection (4) restricts the reduction calculated under clause 228(4) or subsection (2) of this clause to the “unused amount” of the taxed receipt by reference to which it is calculated. That is because giving greater relief would create a conflict with clause 235 (limit on reductions and deductions). Source legislation is not as explicit about the way in which relief in relation to a taxed receipt must not exceed the amount of the taxed receipt. See Change 49 in Annex 1.

Clause 230: Meaning of “unused amount” and “unreduced amount”

849.     This clause is based on section 37(1), (8) and (9) of ICTA. The corresponding provision for income tax is in section 290 of ITTOIA.

850.     The “unused amount” of a taxed receipt is defined in subsections (1) and (5). That label is used by clauses 228 and 229 to ensure that relief given by reference to a taxed receipt under those clauses does not conflict with clause 235 (limit on reductions and deductions). Source legislation is not as explicit about the way in which relief in relation to a taxed receipt must not exceed the amount of the taxed receipt. See Change 49 in Annex 1.

Clause 231: Deductions for expenses under section 232

851.     This clause provides business property deductions to a company for expenses that it is treated as incurring in respect of an earlier taxed receipt. This clause is based on section 37(4) and (9) of ICTA. The corresponding provision for income tax is in section 291 of ITTOIA.

852.     Subsection (2) provides that a deduction for an expense which the tenant is treated as incurring under clause 232 is allowed for each “qualifying day” on which all or part of the premises subject to the taxed lease is either occupied for the purposes of the tenant’s property business or is sublet. A “qualifying day” is defined in clause 232(3) as a day which falls within the receipt period of the taxed receipt.

853.     Subsection (3) provides that a deduction for an expense which a tenant is treated as incurring under clause 232 is subject to the application of any provision of Chapter 4 of Part 3 (rules restricting deductions). This is based on the source legislation providing that the amounts, corresponding to those in subsection (2), are treated as rent, whose deductibility is therefore subject to rules corresponding to those in Chapter 4 of Part 3.

854.     Subsection (4) provides that the deduction allowed in respect of an expense under clause 232 may be restricted to prevent the cap in clause 235, on the total relief which can be given by reference to a taxed receipt, being exceeded. See Change 49 in Annex 1.

Clause 232: Tenants under taxed leases treated as incurring expenses

855.     This clause sets out the method of calculating the expense for which a deduction may be allowed under clause 231. It is based on section 37(4) of ICTA. The corresponding provision for income tax is in section 292 of ITTOIA.

856.     The formula in subsection (4) calculates the expense for each qualifying day by spreading the amount of the taxed receipt evenly over the receipt period of that receipt. Defining “A” in that formula as “the unreduced amount of the taxed receipt” makes clear that the amount of the expense which the tenant is treated as incurring for each qualifying day is calculated by reference to the amount of the taxed receipt before any reductions or deductions.

Clause 233: Restrictions on section 232 expenses: the additional calculation rule

857.     This clause supplements clause 232’s application to a taxed receipt where a lease premium receipt is also reduced by reference to that taxed receipt. It is based on sections 37(5) and (7) and 37A of ICTA. The corresponding provision for income tax is in section 293 of ITTOIA.

858.     Subsections (2) and (3) provide for a tenant to be treated as incurring an expense for a qualifying day under clause 232 only to the extent that the “daily amount of the taxed receipt” exceeds the “daily reduction of the lease premium receipt”. This prevents relief being lost in certain cases where more than one taxed receipt has been used to reduce the lease premium receipt to nil. See Change 13 in Annex 1.

859.     The daily amount of the taxed receipt and the daily reduction of the lease premium receipt are calculated according to the formulas in subsection (6):

• the formula for calculating the daily amount of the taxed receipt is the same formula used in clause 232(4) to calculate the amount of the expense which the tenant is treated as incurring for each qualifying day; and

• the formula for calculating the daily reduction of the lease premium receipt spreads the reduction calculated under clause 228 or the corresponding section in ITTOIA evenly over the receipt period of the lease premium receipt.

860.     Subsection (5) deals with the case where for a qualifying day a taxed receipt reduces more than one lease premium receipt. In such a case, the tenant is treated as incurring an expense for that day under clause 232 only to the extent that the daily amount of the taxed receipt exceeds the total of the daily reductions of each of the lease premium receipts. See Change 13 in Annex 1.

Clause 234: Restrictions on section 232 expenses: lease of part of premises

861.     This clause adapts clauses 232 and 233 for cases where the lease premium receipt arises in relation to only a part of the premises in respect of which the taxed receipt arose. It is based on sections 37(6) and 37A of ICTA. The corresponding provision for income tax is in section 294 of ITTOIA.

862.     Clause 227 extends relief under clause 228 to business property receipts treated as arising in relation to the variation or waiver of the terms of a lease. This is reflected in the reference in subsection (2) to clause 221. See Change 46 in Annex 1.

863.     Subsection (4) applies clauses 232 and 233 separately to that part of the premises in relation to which the lease premium receipt arises and to the remainder of the premises. And subsection (5) deals with the case where there is more than one sublease which does not extend to the whole of the landlord’s premises. See Change 13 in Annex 1.

864.     Subsection (6) adapts clauses 232 and 233 by multiplying the unreduced amount of the taxed receipt (“A”) by the fraction of the premises to which the lease premium relates in the formulas for calculating:

• the expense for a qualifying day in clause 232(4); and

• the daily amount of the taxed receipt in clause 233(6).

865.     Subsection (7) requires the fraction in subsection (6) to be calculated on a “just and reasonable basis”, where section 37(6) of ICTA is not explicit about the necessary basis of apportionment. See Change 12 in Annex 1.

Clause 235: Limit on reductions and deductions

866.     This clause places a limit on the relief that can be given under this Chapter in relation to a taxed receipt. It is based on section 37(9) of ICTA. The corresponding provision for income tax is in section 295 of ITTOIA.

867.     The clause restricts total relief in respect of a taxed receipt by way of:

• reductions under the additional calculation rule in clause 228; and

• deductions under clause 232.

868.     The total relief is restricted to the amount of the taxed receipt after the following (so far as given by reference to the taxed receipt):

• any reductions or deductions under sections 288 or 292 of ITTOIA (which correspond to clauses 228 and 232 respectively); and

• any deductions under clause 63 (trading expense), or under section 61 of ITTOIA (which corresponds to clause 63).

See Change 49 in Annex 1.