Clause 1308: Expenditure brought into account in determining value of intangible asset

3350.     This clause provides that expenditure on research and development, if not of a capital nature, may be taken into account for the purposes of Part 13, even though for accounting purposes it has been brought into account in determining the value of an intangible asset. It is based on section 53 of FA 2004.

Clause 1309: Payments treated as made to visiting performers

3351.     This clause provides that some payments made to a company are not to be included in the company’s income. It is based on sections 556 and 558 of ICTA. The corresponding rule for income tax is in sections 13 and 14 of ITTOIA.

3352.     Section 966 of ITA requires deduction of tax from certain payments to entertainers and sportsmen and women. The section also applies in some cases to payments made to a person other than the performer. In those cases section 13(5) of ITTOIA treats the payments as made instead to the performer.

Part 21: Other general provisions

Clause 1310: Orders and regulations

3353.     This clause sets out how orders and regulations are to be made or may be annulled. It is based on section 828 of ICTA. The corresponding rule for income tax is in section 873 of ITTOIA.

Clause 1311: Apportionment to different periods

3354.     This clause sets out how apportionments to different periods are to be made. It is based on section 834 of ICTA.

Clause 1312: Abbreviated references to Acts

3355.     This clause provides details of abbreviations used in this Bill. The corresponding list for income tax is in Part 1 of Schedule 4 to ITTOIA.

Clause 1313: Activities in UK sector of continental shelf

3356.     This clause sets out how certain activities carried on in the UK sector of the continental shelf are treated for corporation tax purposes. It is based on section 830 of ICTA. The corresponding rule for income tax is in section 874 of ITTOIA.

Clause 1314: Meaning of “caravan”

3357.     This clause defines “caravan”. It is based on sections 15 and 70A of ICTA, section 29 of the Caravan Sites and Control of Development Act 1960, section 13 of the Caravan Sites Act 1968 and section 8 of the Mobile Homes Act 1975. The corresponding rule for income tax is in section 875 of ITTOIA.

3358.     It effects a change in the law in two ways. First it provides a uniform definition of “caravan” for the whole of the United Kingdom. Second it applies that definition to all occurrences of “caravan” in this Bill. See Change 96 in Annex 1.

Clause 1315: Claims and elections

3359.     This clause provides that references to a claim or election are to claims or elections in writing. It is based on paragraphs 57, 58 and 59 of Schedule 18 to FA 1998.

Clause 1316: Meaning of “connected” persons and “control”

3360.     This clause defines “connected” persons and “control” by reference to definitions in ICTA.

Clause 1317: Meaning of “farming” and related expressions

3361.     This clause defines “farming” and “market gardening” and clarifies the meaning of “forestry” and “woodlands”. It is based on section 832 of ICTA and section 154 of FA 1995. The corresponding rules for income tax are in section 996 of ITA.

3362.     Section 832(1) of ICTA defines “farm land” and “market garden land”. It then goes on to say that “farming” and “market gardening” “shall be construed accordingly”. The reasons for this approach are largely historic and date from the time when the charge on farming and market gardening was under Schedule B. “Farm land” and “market garden land” are no longer terms used in the rules concerned with farming and market gardening; they remain only in the definition in section 832(1) of ICTA.

3363.     The definitions in this clause take a different approach. They define “farming” and “market gardening” by reference to the nature of the activity, not the land on which the activity is carried out. Farming excludes market gardening.

3364.     Farming is an activity which is given differing taxation treatment depending on whether or not the land is situated in the United Kingdom. Section 832(1) of ICTA provides that the definitions of “farm land” and “market garden land” are confined to land occupied in the United Kingdom.

3365.     There is no territorial restriction in the definitions in this Bill. Instead the territorial restriction is included in the rewrite of section 53(1) and (2) of ICTA as clause 36 of this Bill and not in the definitions.

3366.     Subsection (1) provides the definition of “farming”. It requires the land to be occupied wholly or mainly for the purposes of husbandry. This reflects a long-standing distinction in tax law between profits resulting from the taxpayer’s occupation of the land and profits from an activity in which occupation of the land is merely incidental.

3367.     In the first case the trader exploits or uses the land, for example, by growing crops or grazing animals. In the second case the trader occupies the land only because a physical location, such as a shop or factory, is needed from which to carry on the trade. Factory farming, that is the intensive rearing of fish or livestock, is not farming for tax purposes. This is because the animals do not live or draw their sustenance from the land.

3368.     Husbandry is a fairly old-fashioned term but one that is the subject of a considerable body of case law. The status of any marginal case must be determined in the light of that case law subject to the clarification given in subsection (2).

3369.     The definition of “farm land” in section 832 of ICTA excludes “any dwelling or domestic offices”. This clause does not repeat this exclusion of farmhouses.

3370.     As originally enacted, the definition of farm land in section 832(1) of ICTA specifically included the farmhouse and farm buildings as part of the farm land. The House of Lords in IRC v Korner and Others (1969), 45 TC 287 HL, held that the effect of this provision was that a farmhouse was an asset of the trade for which a 100% deduction could be obtained. This applies even if the farmhouse is used as a private residence. An amendment was introduced in FA 1969 to reverse the effect of that decision. This is why the definition of “farm land” in section 832(1) of ICTA excludes “any dwelling or domestic offices”.

3371.     In practice a farming company is allowed to make deductions in respect of expenditure of a revenue nature on office buildings used purely for business purposes. Such expenditure has always been treated as being incurred wholly and exclusively for the purposes of the trade and not prohibited from being deducted under section 74(1)(a) of ICTA.

3372.     Section 74(1)(c) of ICTA deals with the deduction of rent where only part of a dwelling house or domestic offices are used for trade purposes. Again, in practice, a company whose trade is farming is permitted to make deductions in respect of such houses and offices.

3373.     In the case of any other expenses of a residential property which is subject to dual private and business use a company is permitted to apportion these and the proportion attributable to trade use is allowed as a deduction. Again this treatment applies to farming companies. See clause 54 of this Bill (expenses not wholly and exclusively for trade and unconnected losses).

3374.     A company which wishes to claim a deduction for the proportion of expenses of a farmhouse attributable to trade rather than private purposes can do so through clause 54. Omitting the exclusion of farmhouses and domestic offices from the definition of farming gives statutory effect to what occurs in practice.

3375.     Subsection (2) identifies two specific types of activity as “husbandry” and therefore farming.

3376.     Paragraph (a) is based on the definition of market garden land in section 832(1) of ICTA. Hop growing is generally recognised to be farming but is often spoken of as taking place in a garden. This could bring it within the definition of “market garden land” in section 832(1) of ICTA but for the fact that hop growing is excluded from that definition. Subsection (2)(a) makes clear that hop growing is farming.

3377.     Paragraph (b) is based on the ordinary meaning of the word farming. Stud farming has generally been assumed to be farming for income tax purposes. The reference to “the breeding and rearing of horses and the grazing of horses in connection with those activities” makes clear what that activity encompasses for the purposes of this Bill.

3378.     Subsection (5) defines “market gardening”. It makes it clear that the produce sold must have been grown on the relevant land rather than being bought in for resale.

Clause 1318: Meaning of grossing up

3379.     This clause explains what is meant by “grossing up” for the purposes of this Act and provides a formula for calculating the gross amount to be taxed. It is new. The corresponding rule for income tax is in section 998 of ITA.

Clause 1319: Other definitions

3380.     This clause defines various terms.

Clause 1320: Interpretation: Scotland

3381.     This clause deals with the application to Scotland of certain terms used in the Bill. It is based on section 24 of ICTA. The corresponding rule for income tax is in section 879 of ITTOIA.

3382.     Subsection (2) is based on Change 15 in Annex 1 and gives certainty to the meaning of “enactment”.

Clause 1321: Interpretation: Northern Ireland

3383.     This clause deals with the application to Northern Ireland of certain terms used in the Bill. It is new. The corresponding rule for income tax is in section 880 of ITTOIA.

3384.     It clarifies the meaning of “enactment”. See Change 15 in Annex 1.

Clause 1322: Minor and consequential amendments

3385.     This clause introduces Schedule 1. It is new.

Clause 1323: Power to make consequential provision

3386.     This clause provides a power for the Treasury to make by order consequential amendments additional to those contained in Schedule 1. It is new.

3387.     The power is in substance the same as that in section 1028 of ITA. As with that power, it will not be exercised without the agreement of the Tax Law Rewrite Project’s Consultative and Steering Committees to the proposed modifications.

3388.     Subsection (2) provides that the power may not be used after 31 March 2012. It is sensible to enable additional consequential amendments to be made in this way only over a limited period, and it would in any case become progressively more difficult to do so accurately as subsequent Finance Bills are enacted. The date of 31 March 2012 takes account of this while giving a reasonable amount of time for missed consequential amendments to come to light.

3389.     Subsection (4) provides that the power may contain provision having retrospective effect. Whether that would be appropriate would need to be considered on a case-by-case basis. As the power can be used only to make provision in consequence of this Act, any retrospective effect is limited to provision having effect from the date the Act comes into force.

Clause 1324: Power to undo changes

3390.     This clause provides a power for the Treasury to undo changes in the law made by the Bill for the purpose of restoring the effect of the law to what it was immediately before 1 April 2009. It is new. A corresponding provision is in section 1029 of ITA.

3391.     The power will not be exercised without the agreement of the Tax Law Rewrite Project’s Consultative and Steering Committees to the proposed modifications. It will make it possible for any errors made in rewriting the source legislation, or in making consequential amendments, to be corrected without recourse to a Finance Bill.

3392.     Subsection (2) provides that the power may not be exercised after 31 March 2010. As with section 1029 of ITA, it is considered sensible to time-limit the power in this way, especially as successive Finance Acts may make it progressively more difficult to make such amendments. The time limit will provide a reasonable period for missed consequential amendments to come to light.

3393.     Subsection (4) provides that the power may contain provision having retrospective effect. Whether that would be appropriate would need to be considered on a case-by-case basis.

Clause 1325: Transitional provisions and savings

3394.     This clause introduces Schedule 2 and provides for the Treasury to make transitional or savings provisions additional to those contained within the Schedule. It is new. A corresponding provision is in section 1030 of ITA.

3395.     The power will not be exercised without the agreement of the Tax Law Rewrite Project’s Consultative and Steering Committees.

3396.     Subsection (3) provides that the power may contain provision having retrospective effect.

Clause 1326: Repeals and revocations

3397.     This clause introduces Schedule 3.

Clause 1327: Index of defined expressions

3398.     This clause introduces Schedule 4.

Clause 1328: Extent

3399.     This clause provides for the Bill to form part of the law of each part of the United Kingdom.

Clause 1329: Commencement

3400.     This section provides for the commencement of the Act.

3401.      This Bill deals for the most part only with corporation tax. However, it does amend legislation relating to income tax and capital gains tax, mostly consequentially. Separate provision is made about commencement in relation to those amendments.

Clause 1330: Short title

3402.     This clause specifies the short title for the Act.

Schedule 1: Minor and consequential amendments

Part 1: Income and Corporation Taxes Act 1988

The charge to corporation tax

3403.     See the commentary on Chapter 1 of Part 2 for an explanation of the charges to corporation tax in this Bill. That Chapter deals with the charge to corporation tax on profits.

3404.     The charge under clause 2 is on amounts of income and on chargeable gains that together form the “profits pot”. The label “the charge to corporation tax on income” is explained in clause 2(2). There are examples of consequential amendments expressed in these terms in the amendments to section 761(1) and section 776(3A) of ICTA.

3405.     There are also consequential amendments to charges to an amount of corporation tax. These charges do not fall within the “profits pot” and are provisions of an administrative nature mainly recovering excessive relief. Two examples are the amendment to section 399(3) of ICTA and the amendment to paragraph 27(4) of Schedule 16 to FA 2002.

3406.     References to Schedule D Case VI are removed in these consequential amendments: see the commentary on the amendment inserting section 834A of ICTA.

Section 15 of ICTA

3407.     Section 15(1A) of ICTA is not rewritten because it is no longer necessary. It is part of a framework in which income tax and corporation tax are, broadly, governed by the same provisions. In that context its purpose is to keep the property income of a non-UK resident company chargeable to income tax separate from that company’s property income chargeable to corporation tax. But the provisions governing income tax have been separated from those governing corporation tax in the rewrite. Specifically, Part 3 of ITTOIA deals with property income charged to income tax and Part 4 of this Bill deals with property income charged to corporation tax. Clause 3(1)(b) prevents the provisions in ITTOIA from applying to income of a non-resident within the charge to corporation tax. Together, this is all that is required to achieve the result of dividing a non-UK resident company’s property income between separate income tax and corporation tax property businesses.

Section 42 of ICTA

3408.     Clauses 240 to 242 of this Bill rewrite the application of section 42 of ICTA for cases within section 42(1)(a) of ICTA (determination of amounts which may be chargeable to corporation tax). So section 42(1)(a) of ICTA is repealed.

3409.     Section 42 of ICTA continues to apply for cases within section 42(1)(b) of ICTA (determination of amounts which may be chargeable to income tax).

Section 74 of ICTA

3410.     Section 74(1) of ICTA lists various items in respect of which no deduction is allowed in computing profits charged to corporation tax under Schedule D Case I.

3411.     Section 74(1)(f) provides that in computing the amount of the profits to be charged to corporation tax under Case I, no sum shall be deducted in respect of:

(f) any capital withdrawn from, or any sum employed or intended to be employed as capital in, the trade .., but so that this paragraph shall not be treated as disallowing the deduction of any interest

3412.     The proposition in the second half of section 74(1)(f) of ICTA that the prohibition of any deduction in respect of capital should not be construed as disallowing the deduction of interest has been overtaken by the loan relationships legislation in Chapter 2 of Part 4 of FA 1996.

3413.     The tax treatment of returns from corporate debt now follows accountancy treatment in taxing a profit or allowing a loss at the time the return is credited or debited in the company’s accounts. And section 100 of FA 1996 extends the corporate debt regime to include interest arising other than in respect of the lending of money, for example interest on trade debts.

3414.     So the second half of section 74(1)(f) is redundant and this Bill repeals it.

3415.     Section 74(1)(h) of ICTA prohibits deductions for interest forgone on capital used in the trade or in improving the trade premises. It is unlikely that any accounts drawn up in accordance with generally accepted accounting practice would include a deduction for notional interest. So section 74(1)(h) of ICTA is redundant and this Bill repeals it.

3416.     Section 74(1)(k) of ICTA prohibits deductions for “any average loss beyond the actual amount of loss after adjustment”.

3417.     Generally accepted accountancy practice in such cases is to make a provision in the year of loss and review that provision in subsequent years. Without section 74(1)(k), the tax treatment of the average loss follows generally accepted accountancy practice. See Change 97 in Annex 1.

3418.     Section 74(1)(m) of ICTA prevents a deduction for any annuity and other annual payment “payable out of the profits”. Because the rule applies only to amounts payable “out of the profits”, it has no application to the calculation of those profits. So section 74(1)(m) of ICTA is redundant and this Bill repeals it.

Sections 76ZA to 76ZO of ICTA

3419.     A number of rules about calculating profits apply:

• in calculating the profits of a trade (or property business);

• to the calculation of expenses of management for the purpose of section 75 of ICTA; and

• to the calculation of expenses of insurance companies under section 76 of ICTA.

3420.     This Bill rewrites the first set of rules in Part 3 or, in some cases, in Part 20.

3421.     This Bill rewrites the second set of rules in Part 16 or, in some cases, in Part 20.

3422.     This Bill does not rewrite section 76 of ICTA. Instead, it inserts sections 76ZA to 76ZO into ICTA, to provide a version of the rules adapted to insurance companies to which section 76 of ICTA applies. The new sections follow the corresponding rules in this Bill. So the new sections repeat the changes to the law made by this Bill. See (in the order in which they appear in this Schedule) Changes 14, 16, 82, 12, 17, 82, 15, 18, 68, 10 and 83 in Annex 1.

3423.     In section 76ZN of ICTA subsection (3)(a)(ii) caters for the possibility that the release of a debt for car hire may be a “reversal” within section 76(7) of ICTA. In that case, this rule ensures that the reversal is restricted by the appropriate fraction.

Section 84A of ICTA

3424.     Section 84A continues in force for income tax purposes.

Section 86 of ICTA

3425.     Section 86 of ICTA allows a company to deduct the cost of an employee seconded to a charity or educational establishment in calculating the profits to be charged to corporation tax.

3426.     Section 86(5) of ICTA lists educational establishments in Scotland for the purposes of relief under section 86 of ICTA. Section 86(5)(d) of ICTA refers to “a self-governing school within the meaning of the Self-Governing Schools etc (Scotland) Act 1989”. Self-governing schools were abolished on 1 April 2003. So section 86(5)(d) of ICTA is redundant.

Section 89 of ICTA

3427.     Section 89 of ICTA is not rewritten for corporation tax purposes. See the commentary on clause 55 and Change 8 in Annex 1.

Section 92 of ICTA

3428.     Section 92 of ICTA applies to regional development grants under Part 2 of the Industrial Development Act 1982. The Industrial Development Act 1982 was repealed by the Statute Law (Repeals) Act 2004 with effect from 22 July 2004. No applications under Part 2 of the 1982 Act could be made after 31 March 1988 and there are no payments outstanding in respect of grants made before that date. So section 92 of ICTA is redundant.

Section 101 of ICTA

3429.     The Bill does not cater for a company carrying on a profession. So this section is repealed. See Change 39 in Annex 1.

Section 116(4) of ICTA

3430.     The reference to section 834A of ICTA is to the provision inserted by this Schedule.

Section 119(2) of ICTA

3431.     Section 119(2) of ICTA is not rewritten because it is otiose. See Change 53 in Annex 1.

Section 209(6A) of ICTA

3432.     Section 209(6A) of ICTA provides that alternative finance return shall not be treated as a distribution for the purposes of the Corporation Tax Acts. It rewrites section 54(1) and (2) of FA 2006.

Section 337A(2)(b) of ICTA

3433.     Section 337A(2)(b) of ICTA is not rewritten because it only duplicates other provisions with the same effect.

3434.     Section 337A(2)(b) of ICTA provides that no deduction shall be made in computing income for the purposes of corporation tax in respect of losses from intangible fixed assets which come within Schedule 29 of FA 2002 except in accordance with the rules of that Schedule. However section 337A(2)(b) achieves nothing that is not already achieved by the provisions of Schedule 29. Section 337A(2)(b) is expressed to apply in respect of “losses from intangible assets within Schedule 29”. Paragraph 1(2) of Schedule 29 states that the Schedule “also has effect for determining how a company’s losses in respect of intangible fixed assets are brought into account for the purposes of corporation tax”. And paragraph 1(3) of Schedule 29 states that, apart from specified exceptions, “.. the amounts to be brought into account in accordance with this Schedule [29] in respect of any matter are the only amounts to be brought into account for the purposes of corporation tax in respect of that matter”.