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Clause 236: Payment of tax by instalments

869.     This clause provides for corporation tax, attributable to lease premium receipts, to be paid by instalments in certain cases. It is based on section 34(8) of ICTA. The corresponding provision for income tax is in section 299 of ITTOIA.

870.     Subsection (2) attributes the power to determine the amount and timing of instalments to an officer of Revenue and Customs where the source legislation refers to “the Board” (defined by source legislation to mean “the Commissioners of Inland Revenue”). See Change 1 in Annex 1.

Clause 237: Statement of accuracy for purposes of section 222

871.     This clause provides for an officer of Revenue and Customs to certify a statement, made in cases where assignment of a lease does or may give rise to a taxed receipt, if satisfied that that the statement is accurate. It is based on section 35(3) of ICTA. The corresponding provision for income tax is in section 300 of ITTOIA.

Clause 238: Claim for repayment of tax payable by virtue of section 224

872.     This clause provides for corporation tax, paid in respect of a receipt under clause 224 (sales with right to reconveyance), to be repaid in certain cases. It is based on section 36(2) of ICTA. The corresponding provision for income tax is in section 301 of ITTOIA.

873.     Subsection (3) refers to a period of four years where the source legislation provides for six years. Schedule 2 preserves the six year period in the source legislation until an order is made by the Treasury reducing the period to four years.

Clause 239: Claim for repayment of tax payable by virtue of section 225

874.     This clause provides for corporation tax, paid in respect of a receipt under clause 225 (sale and leaseback transactions), to be repaid in certain cases. It is based on section 36(2) and (3) of ICTA. The corresponding provision for income tax is in section 302 of ITTOIA.

875.     Subsection (3) refers to a period of four years where the source legislation provides for six years. Schedule 2 preserves the six year period in the source legislation until an order is made by the Treasury reducing the period to four years.

Clause 240: Appeals against proposed determinations

876.     This clause provides for determinations of amounts under this Chapter that may affect the tax liability of more than one person and for appeals against proposed determinations. It is based on section 42(1), (2) and (3) of ICTA.

Clause 241: Section 240: supplementary

877.     This clause supplements clause 240. It is based on section 42(6) and (7) of ICTA.

Clause 242: Determination by tribunal

878.     This clause provides for objections to provisional determinations under clause 240 to be determined by an independent tribunal. It is based on section 42(4) and (5) of ICTA.

879.     Schedule 2 provides for objections to be determined by the Special Commissioners or General Commissioners until their functions are transferred to the First-tier Tribunal and Upper Tribunal.

Clause 243: Rules for determining effective duration of lease

880.     This clause contains rules for determining the effective duration of a lease. It is based on section 38(1) and (6) of ICTA. The corresponding provisions for income tax are in section 303 of ITTOIA.

881.     Subsection (1) sets out various circumstances in which a lease may be treated as ceasing other than on the date specified in the lease. Rules 1, 2 and 3 are based on paragraphs (a), (b) and (c) respectively of section 38(1) of ICTA.

882.     Rule 1 provides that the lease is treated as ending on the date beyond which it is unlikely that the lease will continue. See Change 50 in Annex 1.

883.     Subsection (3) is new. It ensures that all amounts that may give rise to a charge to tax by reason of clauses 218 to 221 are treated as premiums in applying Rule 1 in subsection (1). See Change 50 in Annex 1.

884.     Schedule 1 to this Bill amends section 303 of ITTOIA (rules for determining effective duration of lease) so that the changes also apply for income tax. See Change 50 in Annex 1.

Clause 244: Applying the rules in section 243

885.     This clause supplements the rules in clause 243. It is based on section 38(2), (3) and (4) of ICTA. The corresponding provisions for income tax are in section 304 of ITTOIA.

886.     Section 38(4) of ICTA refers to benefits conferred and payments made for the purposes of securing a corporation tax advantage in the application of Part 2 of ICTA (provisions relating to the Schedule A charge) or an income tax advantage in the application of Chapter 4 of Part 3 of ITTOIA (profits of property businesses: lease premiums etc).

887.     Part 2 of ICTA consists of sections 21A to 42 of ICTA. Other than the lease premiums rules in sections 34 to 39, the sections of Part 2 of ICTA which are in force are sections 21A to 21C (calculation of the profits of a Schedule A business), section 24 (construction of Part 2), section 30 (sea walls), sections 31ZA to 31ZC (energy-saving items), section 40 (receipts and outgoings on sale of land) and section 42 (appeals against determinations under sections 34 to 36 of ICTA or Chapter 4 of Part 3 of ITTOIA).

888.     Sections 43A to 43G of ICTA were also in Part 2 of ICTA and could have applied to leases granted before 6 June 2006. But where those sections applied they gave rise to taxable receipts, rather than deductions from taxable income.

889.     It is considered that the only tax advantage that could be secured in the context of section 38(4) of ICTA would be under sections 34 to 37 of ICTA. So subsection (4) refers to a corporation tax advantage under this Chapter or an income tax advantage in the application of Chapter 4 of Part 3 of ITTOIA.

Clause 245: Information about effective duration of lease

890.     This clause provides for an officer of Revenue and Customs to require, by notice, information relevant to determining the effective duration of a lease. It is based on section 38(5) of ICTA. The corresponding provision for income tax is in section 305 of ITTOIA.

Clause 246: Provisions about premiums

891.     This clause contains rules about sums that may be treated as premiums and the lease to which a premium may be attributed. It is based on section 24(2) to (4) of ICTA. The corresponding provision for income tax is in section 306 of ITTOIA.

Clause 247: Interpretation

892.     This clause provides rules about the interpretation of “premium” and the application of the Chapter to Scotland. It is based on sections 24(1), (4) and (5), 37(10) and 37A(9) of ICTA. The corresponding provision for income tax is in section 307 of ITTOIA.

Chapter 5: Profits of property businesses: other rules about receipts and deductions

Overview

893.     This Chapter contains provisions that supplement the basic calculation rules in Chapter 3 of this Part of the Bill. The corresponding rules for income tax are in Chapter 5 of Part 3 of ITTOIA.

894.     The provisions in this Chapter are about particular receipts or more unusual circumstances.

Clause 248: Furnished lettings

895.     This clause brings the “letting” of furniture, when it is part and parcel of the letting of accommodation, within the property income charge. It is based on section 15 of ICTA. The corresponding rule for income tax is in section 308 of ITTOIA.

896.     Without this provision, rent paid for use of the furniture in furnished lettings would not be included in the property income charge because the “rent” for the furniture does not derive from land.

897.     The purpose of subsection (1)(b) is to make it clear that related revenue expenses such as the expenses of repair and insurance of the furniture are deductible in calculating the profits of the property business.

898.     Subsection (2) excludes income and expenses where the hiring of the furniture is not simply incidental to exploiting an interest in land.

899.     Subsection (4)(a) refers to a “caravan and a houseboat”. There is a Bill-wide definition of “caravan” in clause 1314: see the commentary on clause 1314 and Change 96 in Annex 1. “Houseboat” is defined in clause 1319 (other definitions), the corporation tax equivalent of section 878 of ITTOIA.

Clause 249: Acquisition of business: receipts from transferor’s UK property business

900.     This clause sets out what happens if a successor to a property business receives a sum that arose from the business when it was carried on by the predecessor. It is based on sections 21B and 106 of ICTA. The corresponding rule for income tax is in section 310 of ITTOIA.

901.     Subsection (2) treats the “sum” received as a receipt of the property business. As this rule affects the calculation of the profits of a property business it appears in this Chapter rather than with the post-cessation receipt rules, where it is in the source legislation.

902.     The source legislation applies “for all purposes”. This clause applies for corporation tax purposes. Section 310 of ITTOIA applies for income tax purposes. Section 37(1) of TCGA (as construed in accordance with section 8(4) of TCGA) ensures that any sums received as a result of the transfer are not charged to corporation tax on a company’s chargeable gains.

Clause 250: Reverse premiums

903.     This clause sets out the rules for taxing reverse premiums as receipts of a property business. It is based on Schedule 6 to FA 1999. The corresponding rule for income tax is in section 311 of ITTOIA.

904.     Subsection (1) refers to a “reverse premium”. In accordance with subsection (6) that expression has the same meaning as in clause 96. So this clause applies to reverse premiums excluding any of the “excluded cases” within clause 97. The subsection also excludes any reverse premium that is charged to tax as a trade receipt by clause 98.

905.     Subsections (2) and (3) bring the reverse premium within the scope of the property income rules as United Kingdom or overseas property business even if the recipient is not already carrying on a property business.

906.     Schedule 2 to this Bill rewrites the transitional provision in section 54(2) of FA 1999. This clause does not apply to pre 9 March 1999 reverse premiums.

Clause 251: Deduction for expenditure on energy-saving items

907.     This clause provides a deduction for certain expenditure on energy-saving items where that expenditure would not otherwise be allowable because it is capital. It is based on section 31ZA of ICTA.

Clause 252: Restrictions on relief

908.     This clause imposes certain restrictions on the relief that would otherwise be due under clause 251. It is based on section 31ZB of ICTA.

Clause 253: Regulations

909.     This clause provides for the Treasury’s powers to make regulations for the purposes stated. It is based on section 31ZC of ICTA.

Clause 254: Deduction for expenditure on sea walls

910.     This is the first of four clauses that provide relief to a landlord for making a sea wall or other embankment to protect let premises against flooding by the sea or a tidal river. The corresponding rules for income tax are in sections 315 to 318 of ITTOIA.

911.     This clause states the circumstances in which the relief is given. It is based on section 30(1), (4) and (5) of ICTA. The corresponding rule for income tax is in section 315 of ITTOIA.

912.     Subsection (2) makes it clear that to obtain a deduction for sea walls expenditure, the person carrying on the property business and the person incurring the sea walls expenditure must be the same person. This may appear to be stating the obvious but section 30(1) of ICTA says merely that the person incurring the expenditure is treated as making a payment “for the purpose of computing the profits of any Schedule A business carried on in relation to those premises” (emphasis added). This does not mean literally any such business carried on by someone other than the person incurring the expenditure: there would be no point in deeming the payment to be made by that person if it were otherwise. And the provisions on transfer of interests in section 30(2) to (3) of ICTA reflect the notion that the deemed payment, and hence the right to relief, moves from the former owner to the transferee. There is no suggestion of involvement by any other party.

913.     Subsection (3) defines the “deduction period” referred to in subsection (2). Qualifying expenditure is deducted over 21 years in calculating the profits of the property business. The “deduction period” is comparable to the “writing-down period” over which expenditure qualifying for capital allowances is written off. This reflects the similarity between the relief given by the sea walls provisions and certain capital allowances provisions. The relief is for expenditure which would otherwise be capital in nature. And the expenditure is not relieved all at once but over a period, even if there are changes in the person who obtains the relief.

914.     Subsection (5) is based on section 30(4) of ICTA which deals with the unusual fact that for corporation tax purposes sea walls relief is given by reference to a year of assessment (“tax year” in ITTOIA and this Bill). A year of assessment is not a term that is normally relevant to corporation tax where the relevant measures of time are financial years and accounting periods. “Tax year” is defined in a clause 1319 (other definitions), the equivalent for corporation tax purposes of section 878 of ITTOIA.

Clause 255: Transfer of interest in premises

915.     This clause deals with the case where the person who incurred the sea walls expenditure sells the premises during the 21 year period over which the deduction is due. It is based on section 30(2) and (3) of ICTA. The corresponding rule for income tax is in section 316 of ITTOIA.

916.     Subsection (1) applies to transfers of the relevant interest “whether by operation of law or otherwise”. These words derive directly from the source legislation. They ensure that the provision applies to, for example, successions to estates as well as the sort of merger of interests envisaged in clause 256.

917.     Subsection (2)(b) requires any apportionment to be “just and reasonable” whereas section 30(2)(a) of ICTA refers simply to an apportionment that is “just”. This change reflects the approach that was adopted in CAA and which has been followed in similar contexts elsewhere for consistency. There is no practical difference between the two forms of words. See Change 12 in Annex 1.

918.     Subsection (5) makes explicit what is merely implicit in the source legislation, namely, the extent of the transferor’s entitlement to a deduction in subsequent years. In particular, subsection (5)(a) makes it clear that if the transfer is of only part of the premises, the transferor continues to be entitled to a deduction in relation to the part not transferred.

Clause 256: Ending of lease of premises

919.     This clause deals with the case where the sea walls expenditure is incurred by a lessee and the lease comes to an end before the end of the deduction period. It is based on section 30(3) of ICTA. The corresponding rule for income tax is in section 317 of ITTOIA.

920.     The cases to which subsection (3) applies include renewals of the lease to the same person. Then the deduction passes to the immediate reversioner.

921.     In the source legislation “lease” is defined for the purposes of the sea walls provisions in section 24(6)(a) of ICTA. But that definition is redundant and, since it no longer applies to any other provision, is not rewritten in this Bill. It is redundant in the sea walls context for the following reasons.

922.     Section 24(6)(a) of ICTA defines references to a lease as extending only to a lease conferring a right, as against the person whose interest is subject to the lease, to the possession of the premises. It originated as paragraph 16 of Schedule 4 to FA 1963. Notes on Clauses to FA 1963 explain that the reference to possession was to ensure that a “lease” in Schedule A and sections 25 to 31 of ICTA must be one of land and not of incorporeal hereditament. So a lease of sporting rights, or a right of way, would not be covered. However, Street v Mountford [1985], AC 809 established that a “lease” of land which does not confer on the tenant exclusive possession is not, in fact, a lease but a licence.

923.     Section 30(2) of ICTA does not explain the meaning of the transfer of the whole of a person’s interest in any premises or part of any premises. The transfer of the whole of a person’s interest is significant because it can lead to the transfer of entitlement to a deduction for sea walls expenditure. But entitlement to a deduction for sea walls expenditure does not arise anyway unless a person is the owner or tenant of premises. A lease which makes a person a tenant of premises is not a lease of an incorporeal hereditament. So, although section 30 of ICTA does not expressly exclude leases of incorporeal hereditaments, to the extent that they might cover leases of incorporeal hereditaments references to “leases” in that provision are simply redundant.

Clause 257: Transfer involving person within the charge to income tax

924.     This clause ensures that entitlement to a deduction for expenditure on sea walls continues properly when the interest in the premises is transferred between a corporation tax payer and an income tax payer. It is based on section 30(2A) of ICTA. The corresponding rule for income tax is in section 318 of ITTOIA.

925.     Entitlement to a deduction for expenditure on sea walls can be transferred with ownership of the premises. That transfer can be between a corporation tax payer and an income tax payer. Clause 255 deals with transfers between corporation tax payers. But it cannot deal with a transfer from a corporation tax payer to an income tax payer or the reverse because the provisions in this Bill apply only to corporation tax payers.

926.     Clause 257 allows the seawalls provisions in this Bill to work properly in respect of the party to the transfer who is subject to corporation tax.

927.     Subsection (4) signposts to the provisions in ITTOIA that deal with the party to the transfer who is subject to income tax.

Clause 258: Relief in respect of mineral royalties

928.     This clause provides that only half the net profits received in respect of mineral royalties are charged to corporation tax on income. It is based on section 122 of ICTA. The other half of the profits are charged to corporation tax on chargeable gains by section 201 of TCGA. The corresponding rule for income tax is in section 319 of ITTOIA.

929.     The clause applies only to mineral royalties that are not taxed under Chapter 7 of this Part. That Chapter taxes rents and royalties from concerns such as mines and quarries. In practice nearly all mineral royalties will be taxed under Chapter 7 of Part 4 of this Bill. For this reason this clause cross-refers to the definitions in that Chapter.

Clause 259: Nature of item apportioned on sale of estate or interest in land

930.     This clause preserves the capital or revenue nature of an amount due, or payable in arrears, that is apportioned to a seller on the sale of land. It is based on section 40(3)(b) of ICTA. The corresponding rule for income tax is in section 320 of ITTOIA.

931.     Most of section 40 of ICTA is not rewritten because it has become redundant following the application of Schedule D Case I principles to Schedule A.

932.     The original predecessor of section 40 of ICTA (section 20 of FA 1964) was introduced to deal with a specific problem. That was reflecting, in the calculation of income from land, any apportionments of rent (as a receipt or an expense) that took place between seller and purchaser when land was sold. That required two kinds of rule. The first were calculation rules. They were necessary because at the time section 20 of FA 1964 was introduced the charge on income from land was based on entitlement to incoming rent and payment of outgoing rent. Where there were apportionments on sale there might be neither entitlement nor payment by the “right” person. The second were timing rules to ensure that the consequential adjustments fell in the right tax year.

933.     As a result of the 1995 Schedule A reforms and their application, in 1998, to corporation tax, these rules are no longer necessary. Two main factors lead to this conclusion.

934.     The first relates to the object of charge under Schedule A: the profit of a Schedule A business. For there to be a Schedule A business a person has to be exploiting United Kingdom land for rent (section 15(1)1(1) of ICTA). In order to be a receipt (or outgoing) of the Schedule A business it is enough that an amount relates to a period when the person was exploiting the land.

935.     The second factor relates to the time when income within the charge is brought into account. Accounting principles have been imported from Schedule D Case I into Schedule A. These principles bring an item into account in the period to which it relates. So the rules in section 40(1) to (3) of ICTA about the time of receipt and payment are unnecessary.

936.     Section 40(4) of ICTA is similarly now unnecessary. It provides that any reference in section 40(1) and (2) of ICTA to a party to a contract includes a person to whom the rights and obligations of that party under the contract have passed by assignment or otherwise. Since the test of whether or not an item is to be brought into account under Schedule A is whether it arises from a person’s exploitation of land then whether the rights and obligations under the contract pass by assignment or otherwise, the person to whom they pass will be the person exploiting the land.

937.     Section 40(4A) of ICTA is not rewritten. It is linked to the parts of section 40 of ICTA that are unnecessary and also gives in certain circumstances the wrong result.

938.     Section 40(3)(b) of ICTA has a clear anti-avoidance purpose that is preserved in clause 259. But it also contains a timing rule. The timing rule in section 40(3)(b) of ICTA is not rewritten because accounting principles again attribute the apportioned amount to the correct period.

939.     This clause rewrites the anti-avoidance part of section 40(3)(b) of ICTA which preserves the capital or revenue nature of any amount due or paid in arrears and apportioned by the buyer to the seller on the sale of land.

940.     The time of apportionment referred to in the clause is normally the time of completion of the sale.

Clause 260: Mutual business

941.     This clause makes it clear that the concept of “mutuality” does not apply in the property income context. It is based on section 21C of ICTA. The corresponding rule for income tax is in section 321 of ITTOIA.

942.     Mutuality is a concept that has been developed by the courts over a long period. It derives from the principle that one cannot make a profit by dealing with oneself. It may arise in the trading context where a class of contributors to a common fund are entitled, as a class, to share in the surpluses of that fund.

943.     The approach in this clause differs from that of the source and is simpler. The approach in section 21C of ICTA is to apply the normal profit calculation rules to any “mutual business” and add the result to the profits of the rest of the Schedule A business. This clause on the other hand prevents, from the outset, the concept of mutuality operating on amounts within this Part of this Bill.

 
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Prepared: 5 December 2008