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This change is adverse to some taxpayers and favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.
Change 14: Trading income etc: clarification of position of employees seconded to charities: clauses 70 and 1235 and Schedule 1
This change provides that a company which seconds an employee to a charity or educational establishment is entitled to a deduction in calculating its profits, irrespective of the duties undertaken by the employee while on secondment.
The change brings the income tax and corporation tax codes back into line. It also applies to management expenses.
Section 86 of ICTA gives relief for companies which second employees to charities or educational establishments. It does this by providing that, notwithstanding anything in the general rules on deductions not allowable in section 74 or 75 of ICTA, the cost of the seconded employee:
shall continue to be deductible in the manner and to the like extent as if, during the time that his services are so made available .. they continued to be available for the purposes of the employer’s trade ..
So if the costs of the employee would not be allowed under the normal rules - for example because the employee is employed on a capital project - the employer is not entitled to any deduction under section 86 of ICTA.
In practice, the costs of the secondment are allowed whatever the nature of the work carried out by the employee during the secondment. So if, for example, an employee is seconded to a medical charity to help build a hospice, the company is allowed to deduct the cost of employing the seconded person. This change gives statutory effect to that practice.
This change applies also to the corresponding rule for expenses of insurance companies in section 76ZB of ICTA (inserted by Schedule 1 to this Bill).
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 15: Devolution: clauses 71, 81, 83, 155, 1243, 1284, 1320 and 1321 and Schedules 1 and 2
This change concerns the effect of the devolution settlements.
The change brings the income tax and corporation tax codes back into line. It also applies to management expenses and to the establishment of marketing authorities and similar statutory bodies.
Clauses 81 and 1243
The references to the Department for Employment and Learning in these clauses reflect:
- the transfer of functions from the Department of Economic Development to the Department of Higher and Further Education, Training and Employment under Part II of Schedule 2 to SR (NI) 1999 No. 481; and
- the renaming of that Department as the Department of Economic Development by the Department for Employment and Learning Act (Northern Ireland) 2001.
This change applies also to the corresponding rule for expenses of insurance companies in section 76ZJ of ICTA (inserted by Schedule 1 to this Bill).
Clause 83
The approval function in section 79(4) of ICTA conferred on the Secretary of State is exercisable in relation to Scotland by the Scottish Ministers (see SI 1999/1750 made under section 63 of the Scotland Act 1998).
Clause 83 of this Bill reflects that transfer of functions. So far as the function under section 79(4) of ICTA is concerned, SI 1999/1750 is partly superseded by this Bill. One consequence is that any change in the persons by whom those functions are exercisable will have to be made by primary legislation.
Clause 155
Section 509 of ICTA provides special rules for the treatment of the statutory reserve funds which must in certain circumstances be maintained by certain statutory authorities. Section 509(3) of ICTA defines the terms “Minister of the Crown” and “government department” to include a “Head of Department or a Department in Northern Ireland”.
Clause 155(1) of this Bill maintains parity of treatment throughout the United Kingdom following the recent devolution settlements by rewriting the definition of “Minister of the Crown” to refer to a Minister of the Crown, the Scottish Ministers or the Welsh Ministers. Similarly, clause 155(2) rewrites the definition of “government department” to refer to a government department, a Northern Ireland department, a part of the Scottish Administration, and a part of the Welsh Assembly Government.
Some functions that are relevant for the purposes of section 509 of ICTA were, as a result of transfers of functions, exercisable in relation to Wales by the Welsh Ministers (see SI 1969/388, SI 1978/272, SI 1999/672 and the Government of Wales Act 2006). Some functions that may be relevant for the purposes of section 509 of ICTA (but not the function of making schemes under section 13 of the Agriculture Act 1967) were, as a result of transfers of functions, exercisable for Scotland by the Scottish Ministers (see SI 1999/1747).
The effect of section 85(1) of the Government of Wales Act 2006 is that, so far as statutory functions that are relevant for the purposes of section 509(1) or (2) of ICTA are exercisable by the Welsh Ministers, the corresponding references in those subsections to “a Minister of the Crown or government department” include the Welsh Ministers.
Section 117 of the Scotland Act 1998 (construction of references to Ministers of the Crown in pre-commencement enactments) does not appear to be relevant for present purposes, as it relates only to the exercise of functions within devolved competence.
Clause 1284
In Schedule 1 to the Interpretation Act 1978 “Act” is defined to mean an Act of Parliament and “enactment” is defined as not including “an enactment comprised in, or in an instrument made under, an Act of the Scottish Parliament”. The definitions in that Schedule apply “unless the contrary intention appears” (see section 5 of the 1978 Act).
Section 578 of ICTA confers an exemption from tax in relation to housing grants made under any enactment. Under the Interpretation Act 1978 it is not clear that “enactment” covers Acts of the Scottish Parliament (“ASPs”) or Scottish statutory instruments. And it is not clear that “enactment” covers all of the different kinds of legislation which may apply to Northern Ireland.
Clauses 1320 and 1321 of this Bill provide that ASPs, Scottish statutory instruments and Northern Ireland legislation are covered by the reference to “enactment” in clause 1284. So payments under them are capable of falling within the exemption in that clause. If this is a change, it is in line with practice, reflects the intention of the devolution settlement and widens the scope of the exemption.
It is very unlikely that these changes have any effect on any tax liabilities.
The changes are in line with current practice and reflect the devolution settlements.
Change 16: Trading income etc: retraining courses: deduction no longer dependent on employee’s exemption: clauses 74 and 1238 and Schedule 1
This change removes the link in the source legislation between the employee’s exemption and the employer’s entitlement to a deduction.
This change brings the income tax and corporation tax codes back into line. It also applies to management expenses.
Section 588(3)(b) of ICTA permits a deduction when:
by virtue of section 311 of ITEPA 2003, no liability to income tax arises in respect of the payment or reimbursement [of retraining course expenditure].
The requirement for the deduction to be allowed in clause 74(1) or 1238(1) is that the “relevant conditions” must be met. “Relevant conditions” is defined in clause 74(2) or 1238(3) which cross-refer to the detail of the conditions in section 311 of ITEPA. That does not include the employee’s exemption from tax under that provision.
This change removes the requirement that the employee must be exempt on the benefit under section 311 of ITEPA. An employee may not be taxable on the employment income at all. That may be on account of the employee’s residence position or on account of where the duties of the employment are performed. In such a case there is no need to deny relief to the employer.
This change applies also to the corresponding rule for expenses of insurance companies in section 76ZD of ICTA (inserted by Schedule 1 to this Bill).
The effect is that the employer’s entitlement to a deduction ceases to be dependent, in part, on the employee’s exemption.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 17: Trading income etc: redundancy payments: legislate the practice of allowing voluntary payments made in connection with a cessation of part of a trade or business: clauses 79 and 1242 and Schedule 1
This change legislates the practice of allowing as a deduction voluntary redundancy payments made in connection with the cessation of part of a trade or business.
The change brings the income tax and corporation tax codes into line. It also applies to management expenses.
Statement of Practice 11/81 extends the operation of section 90 of ICTA to payments in connection with the cessation of part of a trade. Clause 79(1) and (4) of this Bill gives effect to that practice. And clause 1242(1) and (4) extends the rule to the case where a part of an investment business ceases to be carried on.
Schedule 1 to this Bill amends ITTOIA to make clear that the practice applies to the cessation of part of a trade even if there is a change in the membership of a partnership.
If part of the trade or business continues, it would be possible to allow the deduction in the period of account in which the payment is made. But it is logical, and usually beneficial to the taxpayer, to make the deduction in the last period of account in which the part of the trade or business was carried on.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 18: Trading income etc: contributions to local enterprise organisations or urban regeneration companies: disqualifying benefits: clauses 82, 1244 and 1253 and Schedule 1
This change concerns the anti-avoidance rules in sections 79(3) and (9), 79A(3) and (4) and 79B(3) and (4) of ICTA.
The change brings the income tax and corporation tax codes back into line. It also applies for management expenses.
The aim of the anti-avoidance rules is to stop companies obtaining a deduction for contributions that have strings attached. For example, a company may give money to a local enterprise agency which is used to meet the costs of a shareholder’s relative setting up in business. These costs would normally not be tax deductible. So the anti-avoidance rules are designed to prevent the costs becoming tax deductible by passing the money through a local enterprise organisation.
The denial of the deduction in the source legislation is “all or nothing”. This may cause a problem. For example, a company gives £1 million to a training and enterprise council, but asks that employees be given free places on a word processing course (worth say £5000). The anti-avoidance rule bars any deduction under these provisions.
When section 79A of ICTA was enacted in 1990 an assurance was given that in a case such as this a deduction would be allowed. In practice HMRC ignore such benefits, or treat the payment as split into two, one part for the training and one for the donation.
Paragraph 47610 of the HMRC Business Income Manual makes it clear that relief is not denied if the costs of obtaining the benefit provided would have been allowable as a deduction if incurred directly on an arm’s length basis. So the clause disallows a deduction only if there is a “disqualifying benefit”.
Even if there is a “disqualifying benefit” the deduction may not be lost entirely. Instead, the deduction is restricted to take account of the benefit.
This change applies also to the corresponding rule for expenses of insurance companies in section 76ZK of ICTA (inserted by Schedule 1 to this Bill).
The change may give some relief in a case where the source legislation denies it because there is a benefit to the company making the contribution.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 19: Trading income etc: income charged on withdrawal of relief after source ceases: clauses 82, 101, 108 and 1277
This change treats certain amounts as post-cessation receipts and other amounts as if the source had not ceased.
It brings the income tax and corporation tax codes back into line.
Sections 79(9), 79A(4), 79B(4), 83A(4), and 84(4) of ICTA and section 55(4) of FA 2002 create a charge under Schedule D Case VI if the trader is not chargeable under Schedule D Case I or II in the accounting period in which a benefit is received. Section 491(3) of ICTA creates a similar charge on a distribution by a mutual concern. Section 584(4) of ICTA creates a charge under Schedule D Case VI if overseas income becomes remittable after the trade or other source of income has ceased.
This Bill unpacks Schedule D Case VI charges and deals with the income where it logically belongs. If the income becomes trading income, by treating the benefit or distribution as a post-cessation receipt, this Bill:
- allows the trader to make the same deductions as those available from other post-cessation receipts;
- removes any possibility that the benefit is charged both by the specific rule about benefits and by any general rule; and
- preserves the loss relief position by amending section 396 of ICTA and listing Chapter 15 of Part 3 of this Bill in section 834A of ICTA (see Schedule 1 to this Bill).
Clause 1277(4) of this Bill contributes to the unpacking of Schedule D Case VI charges. It treats the source of the overseas income as not having ceased, where income that was relieved under clause 1275 ceases to be unremittable after the source has actually ceased. The income is then charged under the provision that would apply had clause 1276 (withdrawal of relief) applied instead. The loss relief position under section 396 of ICTA is again preserved by Schedule 1 to this Bill.
In some cases this change may allow relief for deductions from post-cessation receipts that are not available in the source legislation.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 20: Trading income: patent fees paid: clauses 89 and 90
This change sets out the basis on which a deduction is allowed for patent fees. It brings the timing of the deduction into line with the vast majority of deductions allowed in calculating trading income.
It brings the income tax and corporation tax codes back into line.
Section 83 of ICTA allows a deduction for “fees paid or expenses incurred” in connection with the grant of patents etc. It is thought that the “fees paid” are those paid when a patent application is made. Such fees are incurred only when they are paid. So it is unlikely that business accounts would recognise the fees until they are paid.
There is no doubt that “expenses” include “fees”.
These clauses allow a deduction for all expenses on the basis of the amounts incurred. In principle the rule in these clauses may allow companies to take a deduction for fees earlier than the ICTA rule.
This change will not alter the amount charged to tax. The most it will do is affect the timing of the tax liability. In a small minority of cases this could mean a different rate of tax being applied, according to individual circumstances. Any overall tax effect is likely to be negligible.
Change 21: Trading income: payments to Export Credits Guarantee Department: clause 91
This change allows payments to the Export Credits Guarantee Department (“ECGD”) to be deducted in calculating the profits of a trade when the expense is payable rather than when it is paid.
It brings the income tax and corporation tax codes back into line.
Section 88 of ICTA allows a company carrying on a trade to deduct “sums paid” to the ECGD in calculating the profits of that trade.
Clause 91 follows accounting treatment in allowing traders to deduct a payment to the ECGD at the time it is payable.
This change will not alter the amount charged to tax. The most it will do is affect the timing of the tax liability. In a small minority of cases this could mean a different rate of tax being applied, according to individual circumstances. Any overall tax effect is likely to be negligible.
Change 22: Trading income etc: allow all FISMA levies and costs: clauses 92, 104 and 1246 and Schedule 1
This change ensures that all payments of levies and costs under FISMA are allowed as deductions.
Trading income
Section 76A of ICTA allows a deduction for “any sum expended .. in paying a levy”. “Levy” is defined in section 76A(2) by listing the sorts of payment that may be required under FISMA.
- The first sort of payment relates to the legal assistance scheme in connection with hearings before the Financial Services and Markets Tribunal (see sections 134 to 136 of FISMA).
- The second sort of payment relates to the Financial Services Compensation Scheme. A levy in connection with this scheme may be made on an “authorised person” (see section 31 of FISMA) by the “scheme manager” (see section 212 of FISMA). The power to do this is in section 213(3)(b) of FISMA.
- The third sort of payment relates to the ombudsman scheme (see sections 225 to 234 of FISMA). The expenses of the scheme are funded by payments required from authorised persons by the Financial Services Authority under section 234 of FISMA.
- The fourth sort of payment relates to the ombudsman’s “compulsory jurisdiction” (see section 226 of FISMA). Under paragraph 15 of Schedule 17 to FISMA the scheme operator may require a respondent (defined in section 226(1) to mean the person complained of) to pay a fee.
- The fifth sort of payment relates to the ombudsman’s “voluntary jurisdiction” (see section 227 of FISMA). Under paragraph 18 of Schedule 17 to FISMA the scheme operator sets “standard terms” for dealing with complaints dealt with under the voluntary jurisdiction. Paragraph 18(3) of Schedule 17 allows the standard terms to require the making of payments to the scheme operator (paragraph (a)) and to include the award of costs (paragraph (b)).
The first four sorts of payment may be described as contributions towards the costs of running the schemes that are set up by FISMA. And, within the fifth sort of payment, the payments to the scheme operator also have the character of a contribution to running costs (in that case, of the voluntary jurisdiction).
It is clear that the contributions to running costs are allowable. But the position of “costs” is unclear. Section 76A(2)(e) excludes payments “other than an award which is not an award of costs under costs rules”. “Costs rules” are defined in subsection (6) as rules made under section 230 of FISMA (which are not relevant to the voluntary jurisdiction) and rules contained in the “standard terms” for the voluntary jurisdiction. The standard terms published by the Financial Standards Authority do not distinguish between:
- the levies to be paid on the same basis as those for the compulsory jurisdiction; and
- the costs that may be awarded against a respondent.
Management expenses
Section 76B of ICTA allows a deduction for “any sums paid .. by way of a levy or as a result of an award of costs under the costs rules”. The definitions of “levy” and “costs rules” are imported from section 76A.
As with the trading income rule, it is clear that the contributions to running costs are allowable. But, unlike in the trading income rule, all “costs” are also allowable.
What the Bill does
If section 76A(2)(e) of ICTA means that some costs are not allowable as a trading deduction it is difficult to explain why this is the case. So the trading income rule in clause 92 is brought into line with the management expenses rule.
Section 76A of ICTA applies only to an “authorised person”. But section 76B apparently applies more widely. It is conceivable that an unauthorised person may make a payment within section 76A. There is no reason why such a person should not have a trading deduction. So clause 92 is not restricted to authorised persons.
Section 76A of ICTA does not apply to an “investment company”. This rule was not changed when most of the rules about investment companies were amended to refer to companies with investment business. The rule applies only to give a deduction under Schedule D Case I. In the rare case of an investment company carrying on a trade there is no reason why it should not have a trading deduction. So clause 92 does not exclude investment companies.
Amendments to section 155 of ITTOIA (see Schedule 1 to this Bill) keep the income tax and corporation tax codes in line.
This change allows a deduction for some levies or costs that are not allowed by the source legislation.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 23: Trading income: reverse premiums: excluded cases: clause 97
This change restores an exemption that was incorrectly removed by ITTOIA.
Paragraph 6 of Schedule 6 to FA 1999 exempted from the charge on reverse premiums a premium relating to an individual’s only or main residence. The rule was rewritten for income tax in section 100(2) of ITTOIA. Paragraph 509(5) of Schedule 1 to ITTOIA omits paragraph 6 of Schedule 6 from FA 1999 on the assumption that the exemption is not relevant for corporation tax.
But paragraph 1(1)(a) of Schedule 6 to FA 1999 caters for different persons receiving the reverse premium and entering into the transaction. So it is possible for an individual to enter into a property transaction which relates to a residence but for a (connected) company to receive the reverse premium. In such a case the exemption is relevant to companies and this change reinstates it.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 24: Trading income: assets of mutual concerns: exclude distributions of chargeable gains from the charge to tax: clause 101
This change defines the profits out of which a chargeable distribution is made so as to exclude distributions of chargeable gains.
It brings the income tax and corporation tax codes back into line.
Section 491(1) of ICTA excludes distributions of assets representing capital from the charge in subsection (3). Subsection (8) explains what is meant by such assets. It is generally understood that chargeable gains made by the concern do not represent capital as described in subsection (8). So distributions of such gains are within the charge in subsection (3).
Nevertheless, HMRC do not in practice seek to apply section 491 of ICTA to distributions of chargeable gains. The clause adopts a positive approach to defining the distributions to which the clause applies. The condition in clause 101(1)(d) of this Bill refers to profits of the mutual business. Chargeable gains are not profits of the mutual business and so the clause reflects the current practice. So such gains are no longer within the charge in subsection (3).
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 25: Trading income: sums recovered under insurance policies etc: clause 103
This change gives statutory effect to the accountancy treatment for crediting a sum recovered under an insurance policy.
It brings the income tax and corporation tax codes back into line.
Section 74(1) of ICTA lists various items in respect of which no deduction is allowed in computing profits to be charged to corporation tax including:
(l) any sum recoverable under an insurance or contract of indemnity
A sum recovered under an insurance policy or contract of indemnity is a receipt and not therefore an item in respect of which a deduction would normally be made in calculating profits for corporation tax.
The courts have interpreted section 74(1)(l) of ICTA and the enactments from which it is derived as prohibiting the deduction of a loss or expense to the extent that the loss or expense is recovered under an insurance policy or contract of indemnity (even where that recovery is on capital account). See, for example, Lawrence LJ’s description of the meaning of the equivalent provision in the Income Tax Act 1918 1 on page 381 of Green v J Gliksten and Son Ltd (1929), 14 TC 364 HL:
in arriving at the balance of profits or gains there has to be no deduction in respect of a loss which is covered by insurance to the extent by which that loss is so recovered.
Clause 103 achieves the same effect as section 74(1)(l) of ICTA by bringing a capital amount recovered into account as a trade receipt rather than by prohibiting a deduction in respect of the loss or expense in respect of which it is recovered. This makes the proposition easier to understand without changing the law.
Section 74(1)(l) of ICTA requires a deduction in respect of a loss or expense to be reduced by the amount of any insurance recovery. But where the loss and the recovery fall in different periods the accountancy treatment is to deduct the loss or expense in the period in which it is incurred and to credit the recovery in the period in which it arises.
In practice, HMRC allow traders to follow the accounting treatment in crediting the recovery. This informal concession is set out in paragraphs 40130 and 40755 of the HMRC Business Income Manual. Clause 103 gives the concession statutory effect.
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