|
Clause 1231: Absence of accounts
3116. This clause sets out what happens if there are no accounts. It is based on sections 75B and 578A of ICTA.
3117. The reversal amount is the amount that would have been credited to GAAP accounts for the company’s accounting period.
3118. There are alternative definitions of GAAP in section 50 of FA 2004. International standards apply if the company “prepares accounts in accordance with international accounting standards”. In any other case (including the case where no accounts are prepared), UK GAAP applies.
3119. The combined effect of section 50(1) and (4) of FA 2004 is that in section 75B(10) GAAP means UK GAAP. A similar point arises in clause 1227. In each case the clause specifies UK GAAP.
Chapter 3: Amounts treated as expenses of management
Clause 1232: Chapter applies to amounts not otherwise relieved
3120. This clause is a priority rule. It is based on section 75 of ICTA.
3121. If an expense falls within the general rule for management expenses in clause 1219(1) that clause takes priority over the rules in this Chapter. And if an expense is otherwise deductible for tax purposes the rules in this Chapter do not apply to it.
Clause 1233: Excess capital allowances
3122. This clause gives a deduction for some capital allowances. It is based on section 75 of ICTA.
3123. A company with an investment business carries on a “qualifying activity” (see section 15(1)(g) of CAA). The rule in section 253 of CAA is that capital allowances are to be deducted in calculating the profits of the business. But, if there is an excess of allowances, the excess is treated as management expenses and can be set against profits generally.
Clauses 1234 to 1246
Overview
3124. The following 13 clauses are equivalent to trading income clauses.
3125. Generally there are no timing rules in the clauses. So a deduction is made in the accounting period to which it is “referable” in accordance with clause 1224. There are two exceptions: clauses 1240(4) and 1242(4) require the deduction for a redundancy payment to be made in the final accounting period of the business if the payment is made after the business has ceased.
Clause 1234: Payments for restrictive undertakings
3126. This clause allows a company to deduct certain amounts paid to employees for restrictive undertakings. It is based on section 73 of FA 1988. The corresponding rule for trading income is in clause 69.
Clause 1235: Employees seconded to charities and educational establishments
3127. This clause allows a company carrying on investment business to deduct the cost of an employee seconded to a charity or educational establishment. It is based on section 86 of ICTA. The corresponding rule for trading income is in clause 70.
3128. The rule in section 86 of ICTA is that the cost of the employee “shall continue to be deductible in the manner and to the like extent” as if the employee continued to work in the employer’s business. This clause allows the employer to deduct all costs attributable to the seconded employee during the period of the secondment, regardless of whether those costs would have been allowed if the employee had not been seconded. See Change 14 in Annex 1.
Clause 1236: Payroll deduction schemes
3129. This clause allows an employer a deduction for expenses incurred in operating the payroll deduction scheme. It is based on section 86A of ICTA. The corresponding rule for trading income is in clause 72.
Clause 1237: Counselling and other outplacement services
3130. This clause gives a deduction for certain expenses of counselling provided for employees. It is based on section 589A of ICTA. The corresponding rule for trading income is in clause 73.
Clause 1238: Retraining courses
3131. This clause gives a deduction for certain expenses of retraining provided for employees. It is based on section 588 of ICTA. The corresponding rule for trading income is in clause 74.
3132. The clause does not rewrite section 588(3)(b) of ICTA. That provision makes a deduction as a management expense conditional on the employee’s exemption under section 311 of ITEPA in respect of the expenditure in question. This condition is not consistent with the similar provision in clause 1237 and does not serve any material purpose. See Change 16 in Annex 1.
Clauses 1239 to 1243: Redundancy payments etc
3133. These five clauses are based on sections 90, 579 and 580 of ICTA. The parts of the rules that deal with the employee’s liability are in section 309 of ITEPA. The corresponding rules for trading income are in clauses 76 to 81.
Timing
3134. In clauses 1240(4) and 1242(4) there is a special timing rule for management expenses. For trading income the Bill adopts a “person-based” approach. So the corresponding trading income rules refer to a “payment .. made after the employer has permanently ceased to carry on the trade [or part of the trade]”.
3135. In these clauses the rules refer to a payment “referable to .. an accounting period beginning after the business [or the part of the business] has [permanently] ceased to be carried on”. This produces the same result as the trading income clauses, without the need to explain the rule for businesses carried on in partnership.
3136. If an investment business ceases, the closing words of the second sentence of section 90(1) and section 579(3A) of ICTA make the payments referable to the “accounting period ending on the last day on which the .. business was carried on”. These clauses specify instead “the last accounting period in which the business was carried on”. See Change 82 in Annex 1.
Just and reasonable apportionment
3137. Clause 1241(2) requires a “just and reasonable” apportionment. Section 579(5) of ICTA does not specify the basis of apportionment. See Change 12 in Annex 1.
Part of a business
3138. Clause 1242 applies to payments in connection with the cessation of part of a business in the same way as it applies to payments in connection with the cessation of a whole business. See Change 17 in Annex 1.
Devolution
3139. Clause 1243(2)(b) reflects the effect of the devolution settlements. See Change 15 in Annex 1.
Clause 1244: Contributions to local enterprise organisations or urban regeneration companies
3140. This clause allows deductions for contributions to local enterprise agencies, training and enterprise councils, local enterprise companies in Scotland, business links and urban regeneration companies. It is based on sections 79, 79A and 79B of ICTA. The corresponding rule for trading income is in clause 82.
3141. Subsection (3) is an anti-avoidance rule. It prevents a company using the clause to obtain a deduction for non-commercial expenditure, such as funding the training of a member of a shareholder’s family, by passing funds through one of these bodies. The source legislation disallows any deduction if there is a benefit to the company (or a connected person). This clause merely restricts the deduction by the value of the benefit. See Change 18 in Annex 1.
3142. Subsection (6) of this clause invokes the supporting clauses 83 and 86.
3143. If a disqualifying benefit is later received it is charged to tax by clause 1253.
Clause 1245: Payments to Export Credits Guarantee Department
3144. This clause allows a company to deduct the cost of certain payments to the Export Credits Guarantee Department. It is based on section 88 of ICTA. The corresponding rule for trading income is in clause 91.
Clause 1246: Levies under FISMA 2000
3145. This clause allows a deduction for certain payments arising from FISMA. It is based on section 76B of ICTA. The corresponding rule for trading income is in clause 92.
3146. A company carrying on investment business may be called upon to make payments in connection with FISMA. The payments are of two sorts:
- a “levy” to meet the running costs of the schemes set up by FISMA; and
- “costs” which may be awarded at the conclusion of a hearing of a complaint.
3147. Section 76B of ICTA allows as a management expense both sorts of payment. But there is a difficulty with one sort of levy. So some changes are made in this clause and in the trading income clause to ensure that all the payments under FISMA qualify for a deduction. Schedule 1 to this Bill makes a corresponding relaxation in section 155 of ITTOIA. See Change 22 in Annex 1.
Chapter 4: Rules restricting deductions
Clause 1247: Introduction
3148. This clause introduces the Chapter. It is new.
3149. Subsection (2) lists rules outside this Part that affect the calculation of management expenses. All these rules in the source legislation are drafted in wide terms (for instance, “for the purpose of calculating profits or other income charged to corporation tax”). The rules apply to the calculation of management expenses because that is part of the calculation of profits charged to corporation tax.
3150. In some cases the application of the rewritten rules is restricted so that they do not apply in calculating the profits of a trade or property business. That is because there is an equivalent rule in Part 3 (trading income) which is also applied to property income by clause 210.
3151. The permissive rules for management expenses in Chapter 3 of this Part say that expenses are “treated for the purposes of Chapter 2 as expenses of management”. The restrictive rules in this Chapter “restrict the deduction of expenses of management under section 1219” (which is in Chapter 2). So it is clear that the restrictive rules have priority.
3152. This is the reverse of the position for trading income, where the general rule in clause 51 is that the permissive rules have priority. But, in the unusual cases where it is possible for the rules to overlap, the result is the same.
3153. Subsection (3) draws attention to section 196A of FA 2004. This rule about pension scheme contributions does not itself restrict management expenses. But it gives HMRC power to make regulations that may make such a restriction.
Clause 1248: Expenses in connection with arrangements for securing a tax advantage
3154. This clause disallows expenses incurred in connection with arrangements to secure a tax advantage. It is based on section 75 of ICTA.
3155. Subsections (1) and (2) are the basic rule that the expenses are not allowed as management expenses. The wording of the subsections echoes that of clause 1220, which treats investments held in connection with arrangements to secure a tax advantage as held for a disallowable purpose.
3156. Subsection (3) establishes an order of priority for “disallowable purposes” rules.
- If the investments concerned are held for an unallowable purpose, the expenses are not expenses of management of the company’s investment business (clause 1219(2)(b)).
- Otherwise, if a manufactured payment is made in pursuance of arrangements that have an unallowable purpose, relief may be denied for the payment by paragraph 7A of Schedule 23A to ICTA.
- If neither of these applies, this clause may apply.
Clause 1249: Unpaid remuneration
3157. This clause delays a deduction for employees’ (or an office-holder’s) pay if it is paid late. The clause is based on section 44 of FA 1989. The corresponding rule for other businesses (based on section 43 of FA 1989) is in clause 1288.
Clause 1250: Unpaid remuneration: supplementary
3158. This clause provides definitions and further explanation of the main rule in clause 1249. It is based on section 44 of FA 1989. The corresponding rule for other businesses (based on section 43 of FA 1989) is in clause 1289.
3159. Subsection (1) applies clause 1249 to provisions made in the accounts for amounts that may become employees’ remuneration.
3160. Subsection (3) deals with the case in which the company submits its tax return before the end of the nine month limit in clause 1249(2) and all or any of the remuneration is unpaid. The company must assume the remuneration will remain unpaid. If, subsequently, the remuneration is paid within the time limit the calculation can be adjusted and the return amended. See Change 68 in Annex 1.
Clause 1251: Car or motor cycle hire
3161. This clause restricts the amount that a company can deduct in respect of the cost of hiring certain cars or motor cycles with a retail price (when new) of more than £12,000. The clause is based on sections 578A and 578B of ICTA. The corresponding rule for trading income is in clause 56.
3162. Under section 75B(3) of ICTA any recovery of the hire charge is restricted to the reversal of “so much of the debit as represents the expenses of management.” Subsection (4) makes this restriction explicit and mirrors the trading income rule in clause 56(4). See Change 83 in Annex 1.
3163. Subsection (7) of the clause invokes the supporting clauses 57 and 58. So the definition of “qualifying hire car or motor cycle” includes a car or motor cycle where ownership passes without the exercise of an option to purchase. See the commentary on clause 57 and Change 10 in Annex 1.
Chapter 5: Companies with investment business: receipts
Clause 1252: Industrial development grants
3164. This clause deals with the treatment of certain grants under the Industrial Development Act 1982 or the corresponding provision in Northern Ireland. It is based on section 93 of ICTA. The corresponding rule for trading income is in clause 102.
3165. Under section 93(1) of ICTA the payment of a grant is “taken into account as a receipt in computing [the company’s] profits under Case VI of Schedule D”. Under section 70(1) of ICTA the basis of assessment for Schedule D is the “profits gains or income arising” in an accounting period. But there is no explicit rule to say into which accounting period the grant falls.
Clause 1253: Contributions to local enterprise organisations or urban regeneration companies: disqualifying benefits
3166. This clause sets out what happens if a company (or a connected person) receives a benefit in connection with a contribution to a local enterprise organisation or urban regeneration company (see clause 1244). It is based on sections 79, 79A and 79B of ICTA. The corresponding rule for trading income is in clause 82.
3167. Section 79(9) of ICTA refers to relief having been given “under subsection (1) above”. Strictly, relief for management expenses is given under subsection (2) by reference to a “deduction under subsection (1)”. But it is clear in the context of the section that the recovery under subsection (9) is intended to apply to management expenses as it applies to a trading deduction. The same analysis applies to the corresponding provisions in sections 79A and 79B of ICTA. This clause clarifies the position.
3168. The charge is restricted to the amount of the “disqualifying benefit”. That expression is explained in clause 1244(5). See the commentary on that clause and Change 18 in Annex 1.
Clause 1254: Repayments under FISMA 2000
3169. This clause charges tax on a repayment made to a company under FISMA. It is based on section 76B of ICTA. The corresponding rule for trading income is in clause 92.
3170. Under section 76B(2) of ICTA the repayment is “charged to tax under Case VI of Schedule D”. Under section 70(1) of ICTA the basis of assessment for Schedule D is the “profits gains or income arising” in an accounting period. But there is no explicit rule to say in which accounting period the repayment falls.
Chapter 6: Supplementary
Clause 1255: Meaning of some accounting terms
3171. This clause provides definitions of some accounting terms used in this Part. It is based on sections 75A and 75B of ICTA.
3172. Subsection (1) deals with the concept of management expenses being “debited in accounts”. This expression is used in the rules that determine to which accounting period expenses are referable.
3173. Subsection (2) deals with the concept of an amount being “brought into account”. This expression is used in the rule that deals with the claw back of relief. There is no reason why the expression should be defined differently in sections 75A(10) and 75B(8) of ICTA. So this clause adopts the fuller words of section 75A(10).
3174. Subsection (3) removes a small inconsistency between sections 75A(10) and 75B(12) of ICTA by referring to a debit that increases or creates a loss.
Part 17: Partnerships
Overview
3175. This Part contains the rules that apply to partnerships. The corresponding rules for income tax are in Part 9 of ITTOIA.
3176. Section 1 of the Partnership Act 1890 defines partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”. Section 4 of the Partnership Act 1890 explains that “firm” is the term used for the purposes of that Act for persons in partnership.
3177. The clauses in this Bill follow the Partnership Act 1890 and refer to the partners collectively as a “firm”. But the word “partnership” is commonly used as a synonym for “firm”. So the title of the Part and some of the titles of the clauses use the word “partnerships”, again following the lead of the Partnership Act 1890.
3178. The rules in this Part determine each partner’s share of the income of the firm. That income share is then charged under the normal rules for the type of income concerned.
Clause 1256: Overview of Part
3179. This clause introduces this Part of the Bill. It is new. The corresponding rule for income tax is in section 846 of ITTOIA.
Clause 1257: General provisions
3180. This clause introduces the concept of a “firm”. It is new. The corresponding rule for income tax is in section 847 of ITTOIA.
3181. The clause drops the references in sections 111 and 114 of ICTA to professions. See Change 2 in Annex 1 and the commentary on clause 35.
Clause 1258: Assessment of partnerships
3182. This clause makes it clear that, for corporation tax purposes, a firm is not an entity distinct from the partners in the firm. It is based on section 111 of ICTA. The corresponding rule for income tax is in section 848 of ITTOIA.
3183. The clause extends the treatment of trades carried on by firms to businesses that are not trades. It is based on section 111(10) of ICTA which was repealed in error by ITTOIA. This brings the income tax and corporation tax codes back into line. See Change 84 in Annex 1.
3184. In the case of firms established under English law this provision merely confirms their position under that law. But Scottish firms, for example, are legal entities. This provision ensures that all firms are treated in the same way.
Clause 1259: Calculation of firm’s profits and losses
3185. This clause contains the basic rules for calculating the profits of a firm. It is based on sections 114 and 115 of ICTA. The corresponding rule for income tax is in section 849 of ITTOIA.
3186. Section 6(4) of ICTA extends the meanings of “profits” and “trades” in sections 114 and 115 of ICTA. None of the partnership rules in this Bill applies to chargeable gains. So the extension of “profits” to include chargeable gains is not needed. And for corporation tax purposes a company cannot:
- carry on a vocation (see Change 2 in Annex 1);
- hold an office in partnership.
3187. So this Bill does not rewrite either extension in section 6(4) of ICTA.
3188. If some of a firm’s partners are resident in the United Kingdom and some are not, the profits of the firm’s trade must be determined on different bases. For the resident partners, the determination includes profits arising outside the United Kingdom; for the non-UK resident partners, the determination is restricted to profits arising from a permanent establishment in the United Kingdom. (If there are other United Kingdom profits, a non-UK resident company is chargeable to income tax on those profits and the rules in ITTOIA apply.)
3189. Section 114 of ICTA is not explicit that the profits may have to be determined on more than one basis. This clause brings together the rules for resident and non-UK resident partners. Subsection (2) introduces the idea that more than one determination may be needed.
3190. Subsection (3) sets out the normal basis for determining the profits, for a partner resident in the United Kingdom. The profits are determined as if the firm were a company resident in the United Kingdom.
3191. Subsection (4) sets out an alternative basis for determining the profits. If the company partner is not resident in the United Kingdom the profits of the firm are determined as if the firm were a company not resident in the United Kingdom. That determination is restricted to the profits arising from a permanent establishment in the United Kingdom. So there is no need to rewrite the requirement in section 115(4)(b) of ICTA that the partner’s share of the profits is treated as arising from such a permanent establishment.
3192. The profits of the firm are determined by reference to the extent to which they would be chargeable to corporation tax. So, in the case of a non-UK resident, the profits of which the partner has a share are those attributable to a permanent establishment in the United Kingdom.
Changes in partnership
3193. Section 114(1) of ICTA provides that the business profits of a firm are calculated for corporation tax “as if the partnership were a company” (referred to in this part of the commentary as the “deemed company”). This rule applies “so long as” a company carries on the business in partnership.
3194. The deemed company exists only during the life of the partnership. So a company is treated as ceasing to carry on a business when that company takes another person into partnership (because the deemed company then carries on the business). And the deemed company is treated as ceasing to carry on a business when the partnership business is taken over by a company on its own.
3195. Furthermore, the deemed company calculation is made without regard to any change in the persons carrying on the business except that a change in the persons is treated as a transfer of the business to a different company if there is no company which carries on the business before and after the change.
3196. The occasions on which a company is treated as ceasing to carry on a business are set out in the rules to which they are relevant (see clauses 77(5), 80 and 162(3)). They also appear in this Part in clauses 1267(3) and (4) and 1271(3).
| 
