Clause 261: Adjustment on change of basis

944.     This clause sets out the circumstances in which an adjustment may arise. It is based on section 64 of FA 2002. The equivalent rule for trades is in clause 180. The corresponding rule for income tax is in section 329 of ITTOIA.

945.     In the source legislation the change of basis rules apply to a Schedule A business because they are “other rules applicable to Case I of Schedule D” (see section 21B of ICTA). On the other hand, for an overseas property business section 70A(5) of ICTA imports only “the rules applicable to the computation of the profits” (see section 21A of ICTA). So the change of basis rules do not apply to an overseas property business.

Clause 262: Giving effect to positive and negative adjustments

946.     This clause sets out how to calculate an adjustment and how it is treated for tax purposes. It is based on paragraphs 2 and 4 to 7 of Schedule 22 to FA 2002. The corresponding rules for income tax are in sections 330, 333 and 334 of ITTOIA.

947.     Subsection (6) is a cross-reference to the trading income rule about expenses for which a deduction has already been made.

Clause 263: Expenditure on integral features

948.     This clause draws attention to the rule in section 33A(3) of CAA. There is a signpost to that rule in section 74(1)(da) of ICTA. That subsection is repealed. The signpost is not formally rewritten but it is replaced in this clause (and in the trading income clause 60).

Chapter 6: Commercial letting of furnished holiday accommodation

Overview

949.     The clauses in this Chapter define the lettings that can qualify for special tax advantages: “the commercial letting of furnished holiday accommodation”. They are based on section 504 of ICTA. The corresponding rules for income tax are in sections 322 to 327 of ITTOIA.

950.     The clauses do not, themselves, provide for the tax advantages. That is the function of the particular “relieving” provisions (such as the loss relief provisions) that are cross-referred to.

951.     The primary purpose of this Chapter is to provide a central definition of this particular type of letting, income from which benefits from tax advantages provided for in other Acts.

952.     This income is part of the single property business denoted in clause 205 and chargeable therefore under this Part.

Clause 264: Overview of Chapter

953.     This clause is introductory and explanatory. It is new. It makes clear that the provisions that provide for the tax advantages are to be found elsewhere. The corresponding rule for income tax is in section 322 of ITTOIA.

Clause 265: Meaning of “commercial letting of furnished holiday accommodation”

954.     This clause defines the lettings that can benefit from the special tax treatment. It is based on section 504 of ICTA. The corresponding rule for income tax is in section 323 of ITTOIA.

955.     It is not sufficient that the letting is simply of furnished holiday accommodation: it must also be “qualifying holiday accommodation”. Subsection (3)(b) provides a signpost to the clauses that define “qualifying holiday accommodation”.

Clause 266: Meaning of “relevant period” in sections 267 and 268

956.     This clause defines the period during which certain conditions need to be satisfied in order to benefit from the special tax treatment. It is based on section 504(5) of ICTA. The corresponding rule for income tax is in section 324 of ITTOIA.

957.     Subsection (4) gives the general rule and identifies the relevant period for the case where there is established and continuing letting. It follows the source legislation (in section 504(5)(c) of ICTA) by putting the general rule covering what is likely to be the most common case, last. This is because the company still needs to read the first two rules to know whether it falls within the general rule.

Clause 267: Meaning of “qualifying holiday accommodation”

958.     This clause sets out the additional tests the letting must satisfy to qualify for the special treatment. It is based on section 504(3) and (5) of ICTA. The corresponding rule for income tax is in section 325 of ITTOIA.

959.     Subsection (1), which is based on section 504(3), introduces the term “qualifying holiday accommodation” and defines it by reference to the three conditions that are set out in the subsequent subsections.

960.     Subsection 504(3) of ICTA is particularly complex. The three tests it imposes in paragraphs (a) to (c) are referred to in the subsequent subsections of this clause as, respectively, the “availability”, “letting” and “pattern of occupation” conditions. If all three are met, the accommodation is “qualifying holiday accommodation”.

961.     Subsections (4) to (6) are based on section 504(3)(c) of ICTA. Section 504(3)(c) of ICTA is particularly ambiguous and this clause seeks to reduce that ambiguity. The approach differs from that in the source legislation and involves a change that alters the period during which, in order to qualify for the special treatment, the accommodation must not be occupied for more than 31 days at a time. See Change 51 in Annex 1.

Clause 268: Under-used holiday accommodation: averaging elections

962.     This clause allows accommodation that would be “qualifying holiday accommodation”, were it not simply for insufficient actual letting, nevertheless to qualify if, on average, the letting condition in clause 267(3) is met. It is based on section 504(6) to (8) of ICTA. The corresponding rule for income tax is in section 326 of ITTOIA.

963.     Subsection (1) introduces a new term, “under-used accommodation”, to denote this accommodation.

964.     Subsection (4) introduces a change. This changes the period over which lettings are averaged for the purpose of treating infrequently let property as qualifying holiday accommodation from the accounting period to the relevant period (as defined in clause 266). See Change 52 in Annex 1.

Clause 269: Capital allowances and loss relief

965.     This clause provides for separate calculations in order to give effect to the tax advantages of qualifying holiday lettings. It is new. The corresponding rule for income tax is in section 327 of ITTOIA.

966.     There is no explicit requirement for separate furnished holiday lettings calculations in section 503 of ICTA. But it is clearly not possible to give effect to the special corporation tax treatments available to furnished holiday lettings without separating out the relevant income and expenditure. Requiring, where appropriate, separate calculations makes explicit what is only implicit in section 503 of ICTA.

967.      This clause provides a mechanism to ensure that the special rules that can give tax advantages in respect of these lettings work properly and clearly in the context of a UK property business of which the furnished holiday lettings is part: the profit from such lettings must be identified separately but only when there is a practical need to do so.

Chapter 7: Rent receivable in connection with a UK section 39(4) concern

Overview

968.     This Chapter charges as property income rent receivable in connection with a section 39(4) concern. It also provides for certain deductions and reliefs to be given from that income.

969.     This Chapter makes the relationship between the rules derived from sections 119 (rent payable in connection with mines, quarries and similar concerns) and 122 (relief in respect of mineral royalties) of ICTA clear. So section 201(2) of TCGA (mineral leases: royalties) is omitted, see Part 2 of Schedule 1 to this Bill.

Clause 270: Charge to tax on rent receivable in connection with a UK section 39(4) concern

970.     This clause applies the charge to corporation tax to rent receivable in connection with a “UK section 39(4) concern”. It is based on section 119 of ICTA. The corresponding rule for income tax is in section 335 of ITTOIA.

971.     The loss regime in section 396 of ICTA applies to income charged under this Chapter and not the regime in section 392A of ICTA.

972.     The charge under Schedule D Case III imposed by section 119(2) of ICTA is not rewritten. It is otiose. See Change 53 in Annex 1. This Change reproduces Change 158 in ITTOIA in relation to section 119(2) of ICTA and so brings the income and corporation tax codes back into line.

Clause 271: Meaning of “rent receivable in connection with a UK section 39(4) concern”

973.     This clause clarifies:

• what is meant by “UK section 39(4) concern”;

• what is meant by “rent”; and

• when rent is treated as “receivable in connection with” such a concern.

974.     It is based on section 119 of ICTA. The corresponding rules for income tax are in section 336 of ITTOIA.

975.     Subsection (1) identifies when rent is receivable in connection with a “UK section 39(4) concern”. It uses the language of clause 207(1) (meaning of “generating income from land”) to rewrite the phrase “in respect of any land or easement” in section 119(1) of ICTA. Clause 207 is based on paragraph 1(1) of Schedule A (section 15(1) of ICTA). The concept in clause 207 of “generating income from land” serves to determine the scope of Schedule A. The approach in this clause assumes that the income taxed by section 119 of ICTA would otherwise have been taxed under Schedule A.

976.     The justification for this assumption is that section 119 of ICTA can have no application to income that is already taxed under Schedule D Case VI. Neither is there any question that the rent would go untaxed if it were not for section 119 of ICTA. Rents are clearly annual profits or gains as described in Schedule D Case VI of ICTA. The effect of section 119 of ICTA is to take income that would be taxed under Schedule A and tax it under Schedule D. So in identifying the scope of the charge it is possible to use the ordinary property business definitions and avoid the need to rewrite the complicated definitions of “easement” and “rent” in section 119(3) of ICTA.

977.     The section makes explicit a territorial restriction to the United Kingdom that is implicit in section 119(1) of ICTA. If a “UK section 39(4) concern” is located outside the United Kingdom it would be a foreign possession for the purposes of the charge under Schedule D Case V. Any income arising from such a possession would have been taxed under Schedule D Case V. Section 119 of ICTA could have had no application to income that was already taxed under Schedule D.

978.     Subsection (3) provides the definition of rent. It is based on section 119(3) of ICTA. As explained in the commentary on subsection (1), this clause is based on the assumption that the rents taxed by section 119 of ICTA would otherwise have been taxed under Schedule A. This means it is not necessary to reproduce the definition of “rent” in section 119(3) of ICTA.

Clause 272: Deduction for management expenses of owner of mineral rights

979.     This clause allows a deduction for the expenses of managing mineral rights. It is based on section 121 of ICTA. The corresponding rule for income tax is in section 339 of ITTOIA.

980.     Subsection (1) sets out the conditions for the clause to apply. It does not reproduce the condition that the expenses must be incurred “necessarily”. See Change 54 in Annex 1. The “necessarily” test is impractical in this context. This change reproduces Change 78 in ITTOIA and so brings the income and corporation tax codes back into line.

981.     Subsection (2) provides that a deduction is allowed for the qualifying expenses paid in the accounting period. This rewrites the requirement that the expenses are “disbursed” in the period.

982.     The relief applies only to rents received from a “UK section 39(4) concern”. If the income is taxed as income from a UK property business there is no need for special rules identifying what deductions are allowable. The normal rules apply.

Clause 273: Relief in respect of mineral royalties

983.     This clause provides that only half of the net profit earned in respect of mineral royalties is charged to corporation tax. It is based on section 122 of ICTA. The other half of the net profit is charged to corporation tax on chargeable gains by section 201 of TCGA. The corresponding rule for income tax is in section 340 of ITTOIA.

984.     Subsection (1) limits the relief to royalties taxed under this Chapter of this Bill. If the royalty is not taxed under this Chapter the same relief is given by clause 135 or clause 258.

Clause 274: Meaning of “mineral lease or agreement” and “mineral royalties”

985.     This clause defines various terms used in clause 273. It is based on section 122 of ICTA. The corresponding rules for income tax are in section 341 of ITTOIA.

986.     Clause 291 includes a definition of “lease” that applies for the purposes of this Part. It is based on section 24 of ICTA, which applies for the purposes of Schedule A in the source legislation. Because the definition applies only for Schedule A in strictness it does not extend to the income taxed under clause 273. But the definition of “mineral lease or agreement” in section 122(6) of ICTA applies to any agreement conferring a right to win and work minerals in the United Kingdom. Such an agreement would also satisfy the definition in section 24 of ICTA so there is no change in the law.

987.     The legislation rewritten by subsection (2) does not include any rent receivable before 6 April 1970. This limitation is preserved in Schedule 2 (transitionals and savings).

Clause 275: Extended meaning of “mineral royalties” etc in Northern Ireland

988.     This clause modifies the definition of “mineral royalties” to deal with the different rules that apply to the ownership of mineral rights in Northern Ireland. It is based on section 122 of ICTA. The corresponding rule for income tax is in section 342 of ITTOIA.

989.     The right to win, and win and work, most minerals in Northern Ireland is vested in the Department of Enterprise, Trade and Investment (DETI). The DETI will grant licences to work the minerals and make compensatory payments to the former owners of the mineral rights under various Acts of the Northern Ireland Parliament. This clause treats those payments as mineral royalties for the purposes of clause 273.

Clause 276: Power to determine what counts as “mineral royalties”

990.     This clause allows the Commissioners to make regulations concerning the application of the relief in clause 273. It is based on section 122 of ICTA. The corresponding rule for income tax is in section 343 of ITTOIA. Any regulations made under this power would apply also to clauses 135 and 258 through clauses 135(3) and 258(3).

Chapter 8: Rent receivable for UK electric-line wayleaves

Overview

991.     This Chapter rewrites the Schedule D Case VI charge on rent received for a wayleave granted in the United Kingdom. It is based on section 120 of ICTA.

992.     If a landowner receives rent for a UK electric-line wayleave section 120 of ICTA provides that:

• the rent is charged under Schedule A if the landowner receives other rent in respect of the same land; otherwise

• the rent is charged under Schedule D.

993.     In practice this meant that if the landowner carries on a trade on the land the rent can be treated as a trade receipt. Otherwise the rent was taxed under Schedule D Case VI.

994.     Section 396 of ICTA gives the rules for dealing with Schedule D Case VI losses. In order to preserve that loss regime it is necessary to isolate the income that ICTA charges under Schedule D Case VI.

Clause 277: Charge to tax on rent receivable for a UK electric-line wayleave

995.     This clause applies the charge to corporation tax to rent receivable for a UK electric-line wayleave. It is based on section 120 of ICTA. The corresponding rule for income tax is in section 344 of ITTOIA.

Clause 278: Meaning of “rent receivable for a UK electric-line wayleave”

996.     This clause provides the definition of “rent receivable for a UK electric-line wayleave”. It is based on section 120 of ICTA. The corresponding rule for income tax is in section 345 of ITTOIA.

997.     Section 120(1) of ICTA identifies the right in respect of which the rent is payable as an “easement”. Section 120(5) of ICTA cross-refers to the definition of “easement” in section 119(3) of ICTA. Section 119 of ICTA is rewritten in Chapter 7 of this Part. As explained in the commentary on clause 45 both this Chapter and clause 45 use the term “wayleave” to describe the right in respect of which the rent is received. In practice this is how most of the payments covered by this clause are usually described. But the generality of the words in section 119(3) of ICTA has not been lost. The clause also uses the Scottish term for “easement”, “servitude”.

998.     Subsection (2) clarifies the meaning of “electric, telegraph or telephone wire or cable”. It does not repeat the reference to “transformer” in the source legislation. In its context it is clear that “apparatus” would include “transformer”.

Clause 279: Extent of charge to tax

999.     This clause sets out the two exceptions under which the rent received in respect of a UK electric-line wayleave is not taxed under this Chapter. It is based on section 120 of ICTA. The corresponding rule for income tax is in section 346 of ITTOIA.

1000.     Subsections (1) and (2) deal with the case in which the company receives other rent in respect of the land except rent from another wayleave. The rent from the wayleave is taxed as property income.

1001.     Subsections (3) and (4) deal with the case in which the company carries on a trade on the land. See Change 6 in Annex 1 and the commentary on clause 45. The rent may be taxed as a trade receipt.

Chapter 9: Post-cessation receipts

Overview

1002.     This Chapter applies the rules about post-cessation receipts to UK property businesses, broadly as they apply to trades. The main rules for trades are in Chapter 15 of Part 3 of this Bill. The application of the rules to property businesses is based on section 21B of ICTA, which specifically mentions sections 103 to 106 of ICTA.

1003.     Although the post-cessation receipt rules apply to a Schedule A business, they do so by virtue of section 21B of ICTA. That section deals with “other rules applicable to Case I of Schedule D”. On the other hand, section 21A of ICTA deals with rules about the computation of profits of a trade. So section 70A of ICTA imports only the computation rules in section 21A and the post-cessation receipt rules do not apply to an overseas property business.

1004.     A property business cannot have trading stock. So clause 195 (transfer of trading stock) does not have a corresponding rule in this Chapter.

1005.     The following trading income rules apply to property businesses but are not in separate clauses in this Chapter:

• clauses 192 and 193: rules about debts (these rules are applied by clause 283(2)); and

• clauses 196 and 197: allowable deductions (these rules are applied by clause 285).

Clause 280: Charge to tax on post-cessation receipts

1006.     This clause applies the corporation tax charge on income to post-cessation receipts. It is based on sections 103 and 104 of ICTA, as applied by section 21B of ICTA. The corresponding rule for income tax is in section 349 of ITTOIA.

Clause 281: Extent of charge to tax

1007.     This clause restricts the charge on the post-cessation receipts. It is based on sections 103 and 104 of ICTA, as applied by section 21B of ICTA. The corresponding rule for income tax is in section 350 of ITTOIA.

Clause 282: Basic meaning of “post-cessation receipt”

1008.     This clause defines post-cessation receipts of a UK property business. It is based on sections 103, 104 and 110 of ICTA, as applied by section 21B of ICTA. The corresponding rule for income tax is in section 353 of ITTOIA.

1009.     Subsection (2) explains that a person permanently ceases to carry on a UK property business if:

• a company ceases to be within the charge to income tax in respect of the UK property business; or

• a company or any other person ceases to be a member of a firm which carries on a UK property business.

Clause 283: Other rules about what counts as a “post-cessation receipt”

1010.     This clause brings together signposts to rules that operate so as to treat certain sums as post-cessation receipts and to exclude others from the charge. It is new. The corresponding rule for income tax is in section 354 of ITTOIA.

1011.     Subsection (1) is a signpost to the clause that deals with the transfer of a right to receive a post-cessation receipt to a person who does not carry on a UK property business.

1012.     Subsection (2) lists the trading income rules that apply to create post-cessation receipts for the purpose of this Chapter.

1013.     Subsection (3) draws attention to the rule in Chapter 5 of this Part that treats a sum received as not being a post-cessation receipt if the right to it was transferred with a property business. It also mentions the rule in Part 18 of this Bill that treats profits of an overseas property business as post-cessation receipts (of a UK property business) if they become remittable after the company has ceased to carry on the business.

Clause 284: Transfer of rights if transferee does not carry on UK property business

1014.     This clause sets out the positions of the transferor and transferee if the right to a post-cessation receipt is transferred for value. It is based on section 106 of ICTA, as applied by section 21B of ICTA. The corresponding rule for income tax is in section 355 of ITTOIA.

Clause 285: Allowable deductions

1015.     This clause applies the trading income rules about allowable deductions. It is based on section 105 of ICTA, as applied by section 21B of ICTA.

Clause 286: Election to carry back

1016.     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 UK property business. It is based on section 108 of ICTA, as applied by section 21B of ICTA, although section 108 was repealed by ITTIOA. The corresponding rule for income tax is in section 257 of ITTOIA, as applied by section 351(2)(b) of ITTOIA.

1017.     See Change 42 in Annex 1 and the commentary on clause 198.

Chapter 10: Supplementary

Clause 287: Provisions which must be given priority over this Part

1018.     This clause provides the rules to determine which Part takes priority in the event of any overlap of the charge on the profits of a trade and the charge on the profits of an overseas property business or the charge under Chapter 7 or 8 of this Part. It is based on sections 18 and 70A of ICTA.

1019.     The definitions of Schedule D Cases I and VI are in section 18 of ICTA. Those definitions deal with any overlap between a trade and the profits of a UK concern or the profits of a UK electric line wayleave. Case VI charges income that is not charged under any other case. So this clause gives trading income (Case I in the source legislation) priority.

1020.     The clause also gives statutory effect to the Crown Option between an overseas property business and a United Kingdom trade. See Change 55 in Annex 1. The corresponding rules for income tax are in section 261 of ITTOIA.