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Change 38: Trading income: waste disposal: site preparation expenditure: drop requirements to make claim and submit plans and documents: clause 142 and Schedule 1
This change drops the requirements to make a claim and submit plans and documents when making deductions under clause 142.
It brings the income tax and corporation tax codes back into line.
Section 91B of ICTA allows a revenue deduction for capital expenditure on preparing a waste disposal site for use. The expenditure is spread over the life of the site by means of a formula based on the total capacity of the site and the amount of that capacity which has been used.
The company must make a claim for relief under section 91B(1) of ICTA (in such form as HMRC may direct), and submit such plans and documents as HMRC may require.
The requirement to submit plans and documents sits uneasily with Self Assessment - Part 3 of Schedule 18 to FA 1998 requires companies to keep such information and produce it in the event of an enquiry.
The clause also drops the requirement to make a claim for relief, with the result that relief is simply a deduction in the company’s self-assessment. Once the requirement to submit plans and documents is removed, there seems no reason to require a claim for this particular deduction as opposed to any other.
Section 42(7) of TMA sets out the rules for making claims. Schedule 1 to this Bill removes the reference to section 91B of ICTA in paragraph (a) of that subsection and does not replace it.
The claim under section 91B(1) of ICTA must be made within six years from the end of the accounting period to which it relates (paragraph 55 of Schedule 18 to FA 1998). Removing the need to claim means that companies generally have 12 months from the end of the accounting period in which to include the deduction in their self-assessment. However, mistake claims are available if too much tax has been paid as a result of omitting the deduction from the tax return.
In rare cases (involving the very late issue of a notice to make a return) the time limit for claiming a deduction is extended. In other cases (where there is no mistake in a return) the time limit is shortened.
This change is adverse to some taxpayers and favourable to others in principle but is not expected to have any practical effect.
Change 39: Trading income: valuation of stock: clauses 164 to 167 and Schedule 1
This change relaxes the conditions that apply if stock or work in progress is to be valued at the price actually paid when that stock or work in progress is transferred between persons who carry on trades, professions or vocations. It removes an unnecessary distinction between trades, professions and vocations.
It is possible for the same thing to be stock for one taxpayer but work in progress for another. Examples are the “incomplete services” part of stock (see section 100(2)(b) of ICTA, rewritten as clause 163(2) of this Bill) and the “materials” part of work in progress (see section 183(1) of ITTOIA).
The usual rule is that stock and work in progress are valued when a person ceases to carry on a trade profession or vocation at:
- open market value (stock - section 100(1)(b) of ICTA, rewritten for income tax as section 175(4) of ITTOIA and in this Bill as clause 164(4)); or
- arm’s length value (work in progress - section 101(1)(b) of ICTA, rewritten for income tax as section 184(2) of ITTOIA).
But in each case there is an exception if the stock or work in progress is transferred to a person who carries on, or intends to carry on, a trade, profession or vocation in the United Kingdom and is entitled to deduct the cost of the stock or work in progress in calculating the profits of that trade, profession or vocation. In that case, the transfer takes place for tax purposes at the price actually paid (subject to special rules where the buyer and seller are connected or an election is made).
In the case of work in progress, the “actual price” basis of valuation applies only if the transferee carries on, or intends to carry on, a profession or vocation. This means that work in progress of a profession or vocation which is transferred to a trader (for whom it is trading stock) strictly does not qualify for the “actual price” basis of valuation.
In the case of trading stock, the “actual price” basis of valuation applies only if the transferee carries on, or intends to carry on, a trade. This means trading stock of a trade which is transferred to a person carrying on a profession strictly does not qualify for the “actual price” basis of valuation.
Corporation tax
In the case of trading stock transferred to an individual who carries on a profession or vocation, this Bill allows the stock to be valued at the price actually paid (see clauses 164 to 167 of the Bill). That basis of valuation is not available under section 100(1)(a) of ICTA.
Professions and corporation tax
The reference to corporation tax in section 101 of ICTA was inserted by ITTOIA. As Change 2 explains, companies do not carry on professions for corporation tax purposes. So section 101 of ICTA is not needed for corporation tax and this Bill repeals it. Section 42(7) of TMA sets out the rules for making claims. Schedule 1 to this Bill removes the reference to section 101(2) of ICTA in paragraph (a) of that subsection and does not replace it.
Income tax
This Bill amends ITTOIA (see Schedule 1 to the Bill).
In the case of trading stock transferred to an individual carrying on a profession or vocation, the amendments allow the stock to be valued in accordance with section 176, 177 or 178 instead of section 175(4) of ITTOIA.
In the case of professional work in progress transferred to an individual or a company carrying on a trade, the amendment allows the work in progress to be valued in accordance with section 184(1) instead of section 184(2) of ITTOIA.
Any change in the valuation rules for transfers of stock and work in progress is necessarily favourable to one of the parties to the transfer and adverse to the other. But the overall effect of this change is to give more choice to taxpayers.
This change is in principle and in practice adverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.
Change 40: Trading income: deductions for unremittable amounts: clauses 172 to 175
This change gives statutory effect to ESC C34 (tax concessions on overseas debts). In doing this the Bill makes a number of changes to the approach in the extra-statutory concession.
It brings the income tax and corporation tax codes back into line.
(A) ESC C34 provides relief for trade debts that cannot be remitted to the United Kingdom. It is similar in scope to section 584 of ICTA, which provides relief for unremittable income arising outside the United Kingdom, including unremittable trade profits. But section 584 of ICTA does not extend to trade debts owed to, or paid to, the company outside the United Kingdom if the profits of the trade arise in the United Kingdom (for example, debts or payments arising from export sales). The extra-statutory concession gives relief for such debts and payments.
Chapter 12 of Part 3 of this Bill gives statutory effect to the extra-statutory concession, extending relief for trade debts.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.
(B) ESC C34 requires the relief to be claimed. Clause 173 provides for the relief to be allowed as a deduction in calculating the company’s trade profits. In practice this makes little difference to the time limits but it simplifies the procedure for giving the relief.
Paragraph 5(d) of the extra-statutory concession gives the time limits for making the claim. Relief can be claimed no earlier than 12 months after the end of the accounting period in which the unremittable payment was received or the unremittable debt arose. If the Bill repeated this time limit a company could not claim the relief before the filing date for the return for the period (assuming a notice to make the return was issued at the normal time). This would be an inconvenience to any company that wanted to file its return before that date.
There is one case in which the time limit for claiming the relief may be extended. The extra-statutory concession requires that the assessment for the accounting period has not become final and conclusive. The corporation tax self assessment equivalent of that is that the time limit for amending the return has not passed. Normally that time limit would expire 12 months after the filing date. Giving the relief as a deduction would allow the company to make a mistake claim up to six years from the end of the accounting period to which the return relates.
This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.
(C) Paragraph 4 of the extra-statutory concession denies any relief for a debt to the extent that the debt is insured. Clause 174(2) (restrictions on relief) denies relief only to the extent that an insurance recovery has been received in respect of the debt. Also clause 175(2)(f) withdraws relief only to the extent that an insurance recovery has been received in respect of the debt.
Accordingly a limitation on the amount of relief available is relaxed.
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 41: Trading income: disposal of know-how: restore an express definition of mineral deposits: clauses 176 and 908
This change restores a previous definition of “mineral deposits”.
It brings the income tax and corporation tax codes back into line.
The definition of “mineral deposits” in these clauses is in substance the definition that applied for the purposes of the definition of “know-how” in the source legislation for clause 176 of this Bill. That definition applied before certain amendments of Chapter 1 of Part 13 of ICTA were made by CAA.
Section 531 of ICTA makes provision about the tax treatment of certain disposals of know-how. Different provision is made about disposals of know-how that has been used in the course of a trade and other disposals of know-how. The former provision is rewritten in clauses 177 and 178 of this Bill.
Section 533 of ICTA defines know-how for the purposes of section 531 of ICTA as:
any industrial information and techniques likely to assist in the manufacture or processing of goods or materials, or in the working of a mine, oil-well or other source of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto), or in the carrying out of any agricultural, forestry or fishing operations.
Before certain amendments of ICTA were made by CAA, the following definition applied to the expression “mineral deposits” in that definition:
“mineral deposits” includes any natural deposits capable of being lifted or extracted from the earth and, for this purpose, geothermal energy, whether in the form or aquifers, hot dry rocks or otherwise, shall be treated as a natural deposit.
The history of that definition is as follows. The provisions of section 531 of ICTA derive from section 21 of FA 1968, which included the following definition:
(7) In this section “know-how” means any industrial information and techniques likely to assist in the manufacture or processing of goods or materials, or in the working of a mine, oil-well or other source of mineral deposits (including the searching for, discovery, or testing of deposits or the winning of access thereto), or in the carrying out of any agricultural, forestry or fishing operations.
Subsection (9) of that section required the above definition to be construed as if it were contained in Part 1 of the Capital Allowances Act 1968, so that the following definition of “mineral deposits” applied:
“mineral deposits” includes any natural deposits capable of being lifted or extracted from the earth.
That definition was amended by paragraph 2(3) of Schedule 13 to FA 1968, which added the words from “and, for this purpose” onwards.
The relevant provisions were consolidated in 1970 and again in 1988. Section 532 of ICTA originally provided for the definition of “know-how” to be construed as if it were contained in Part 1 of the Capital Allowances Act 1968. A reference to “the 1990 Act” was substituted by CAA 1990. This attracted the definition of “mineral deposits” which is set out above in the fifth paragraph of this note, and applied throughout that Act.
CAA rewrote provisions about know-how allowances that were previously in Chapter 1 of Part 13 of ICTA. In consequence of the repeal of CAA 1990, CAA also amended section 532 of ICTA with the result that it provides for the definition of “know-how” to be construed as if it were contained in the 2001 Act. However, no definition of “mineral deposits” applies for the purposes of CAA as a whole. So the consequential amendment failed to preserve the application of CAA 1990 definition of “mineral deposits” to the remaining provisions of Chapter 1 of Part 13 of ICTA (including those on which clauses 176 and 908 are based).
It is noteworthy that a version of the definition of “mineral deposits” is carried forward in CAA to apply to the rewritten material about know-how allowances. See section 452(3) of that Act.
The failure to preserve the application of CAA 1990 definition of “mineral deposits” to the remaining provisions of Chapter 1 of Part 13 of ICTA is believed to have resulted from an oversight. The inclusion of a definition of “mineral deposits” in clauses 176 and 908 corrects this error.
The definition of “mineral deposits” in clauses 176 and 908of this Bill differs from the definition formerly in section 161(2) of CAA 1990 in that the words “whether in the form of aquifers, hot dry rocks or otherwise” are omitted. The definition of “mineral deposits” in section 452(3) of CAA also omits these words. The omission was made in that Act on the basis that the words are merely illustrative and that leaving them out does not change the legal effect of the definition. They are omitted in this Bill for the same reasons. A fuller discussion of this point can be found in Note 46 in Annex 2 to the explanatory notes to CAA.
This change clarifies the law by making it certain that the definition of “mineral deposit” continues to apply for the purposes described above.
This change clarifies the law and removes uncertainty. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 42: Trading and property income: post-cessation receipts: reinstatement of section 108 of ICTA: clauses 198 to 200 and 286
Section 108 of ICTA allowed a taxpayer to elect to have a post-cessation receipt carried back to the year in which the trade ceased. For income tax it is rewritten as section 257 of ITTOIA.
When ITTOIA was enacted it was thought that section 108 of ICTA applied only for income tax. So the section was repealed.
Until 1996 an election to carry a post-cessation receipt back to the year of cessation resulted in an assessment for the year of cessation. So section 108 of ICTA provided that an assessment for that year could be made even if it was otherwise out of time for assessment. That treatment was inconsistent with (income tax) Self Assessment. So the relief is given in terms of tax (see paragraph 5 of Schedule 1B to TMA). The power to make late assessments was removed by FA 1996.
When Self Assessment for corporation tax was introduced Schedule 1B to TMA ceased to apply for corporation tax (see section 117(1)(a) of FA 1998). Paragraph 58 of Schedule 18 to FA 1998 deals in general terms with claims (such as one under section 108 of ICTA) which affect more than one accounting period. But there is no rule corresponding to the income tax rule in paragraph 5 of Schedule 1B to TMA.
Clause 198 gives a company the right to elect to carry back a post-cessation receipt to the accounting period in which it ceased to carry on the trade. Clauses 199 and 200 set out the form of the relief, which is modelled on the income tax relief in paragraph 5 of Schedule 1B to TMA.
Clause 286 applies the relief to UK property businesses.
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 43: Property income: lease premiums etc: identifying when a company (not the landlord) takes amounts into account as a receipt in calculating the profits of a property business: clauses 217, 219, 220 and 221
This change explicitly identifies the period in which a company (not being the landlord) is required to take account of a receipt which it is treated as receiving in respect of a lease premium (or an amount that is treated as a lease premium).
It brings the income tax and corporation tax codes back into line.
For corporation tax purposes, section 34(1), (4) and (5) of ICTA provide for cases in which a landlord is treated as receiving rent and also for the time at which the landlord is treated as receiving that rent. Section 34(7A) of ICTA then explicitly deals with the period in which that deemed rent must be brought into account.
If section 34(6) of ICTA applies, the landlord is not treated as receiving an amount of rent but a company (not being the landlord) is treated as receiving an equivalent amount as a receipt of a property business. Section 34(7A) of ICTA does not explicitly deal with the period in which the company (not being the landlord) must bring the equivalent amount into account. That is because section 34(7A) of ICTA is expressed in terms of amounts that section 34 of ICTA treats as rent and section 34(6) of ICTA does not expressly treat the company (not being the landlord) as receiving rent.
In practice, receipts under section 34(6) of ICTA are brought into account as if section 34(7A) of ICTA applied to them (in other words at the same time as the landlord would otherwise have had to bring them into account). Clauses 217(3), 219(3), 220(3) and 221(3) reflect this practice. The same change was made for income tax in sections 277, 279, 280 and 281 of ITTOIA (see Change 69(A) of Annex 1 to ITTOIA).
This change has no implications for the amount of income liable to tax or who is liable for tax on it. In principle it affects the timing of the tax liability but it is expected to have no practical effect as it is in line with generally accepted practice.
Change 44: Property income: lease premiums etc: sums payable instead of rent, or for the variation or waiver of a term of a lease, for periods of 50 years or less: clauses 219 and 221
This change explicitly applies the lease premium rules to certain sums paid instead of rent, or for the variation or waiver of a term of a lease, in cases where:
- the period for which the sum is paid, or the variation or waiver has effect, is 50 years or less, and
- the duration of the lease is more than 50 years.
It brings the income tax and corporation tax codes back into line.
For corporation tax purposes, section 34(1) of ICTA treats part (or all) of certain premiums (“CP”), payable in relation to a lease, as rent received by the landlord. In order for section 34(1) to apply to CP the lease in question must be one whose:
duration..does not exceed 50 years.
Section 34(4) of ICTA is an anti-avoidance provision. It treats certain sums (“CS”) payable in lieu of rent by the tenant as if they were CP. This treatment potentially feeds through to section 34(1) of ICTA. But for section 34(1) to apply the duration of the lease must not exceed 50 years. In this respect section 34(4)(a) of ICTA also provides that:
in computing the profits of the Schedule A business of which the sum payable in lieu of rent is by virtue of this subsection to be treated as a receipt, the duration of the lease shall be treated as not including any period other than that in relation to which the sum is payable.
On one interpretation the deeming in section 34(4)(a) of ICTA does not affect the duration of the lease for the purposes of section 34(1) of ICTA. If this interpretation were correct, then the treatment of CS for a period of one year would differ depending on whether the duration of the lease was 50 years or 51 years. Then in the case of the lease with a duration of 50 years, all of CS could be treated as a rental receipt by the landlord under section 34(1) of ICTA (with the tenant eligible for relief on CS). But in the case of the lease with a duration of 51 years, none of CS could be treated as a rental receipt under section 34(1) of ICTA (and the tenant might not be eligible for relief on CS).
Since the lease premium legislation was introduced in 1963, HMRC have not accepted such an interpretation. Clause 219(1)(b) follows, for corporation tax, HMRC’s interpretation of section 34(4)(a) of ICTA. The same change was made for income tax in section 279(1)(b) of ITTOIA (see Change 68 of Annex 1 to ITTOIA).
Section 34(5) of ICTA is also an anti-avoidance provision. It treats certain sums payable for the variation or waiver of the terms of a lease as if they were CP. This treatment also potentially feeds through to section 34(1) of ICTA. But for section 34(1) to apply the duration of the lease must not exceed 50 years. In this respect section 34(5)(a) of ICTA also provides that:
in computing the profits of the Schedule A business of which that sum is by virtue of this subsection to be treated as a receipt, the duration of the lease shall be treated as not including any period which precedes the time at which the variation or waiver takes effect, or falls after the time at which it ceases to have effect.
On one interpretation the deeming in section 34(5)(a) of ICTA does not affect the duration of the lease for the purposes of section 34(1) of ICTA. The same considerations apply to this interpretation as have been noted above in relation to section 34(4)(a) of ICTA.
Since the lease premium legislation was introduced in 1963, HMRC have not accepted such an interpretation. Clause 221(1)(c) follows, for corporation tax, HMRC’s interpretation of section 34(5)(a) of ICTA. The same change was made for income tax in section 281(1)(c) of ITTOIA (see Change 68 of Annex 1 to ITTOIA).
This change prevents a company from contending, in certain cases, that a property business receipt does not arise or arises in a smaller amount. But correspondingly a tenant under the lease in question will not face a contention that there is no taxed receipt (or a smaller taxed receipt) by reference to which the tenant may be entitled to relief.
This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 45: Property income: lease premiums etc: sum payable to someone other than the landlord, or a person connected with landlord, for variation or waiver of term of lease: clause 221
This change prevents an amount being treated as a receipt of the landlord’s property business, where a sum is payable by the tenant as consideration for the variation or waiver of a term of a lease to somebody other than the landlord or a person connected with the landlord.
It brings the income tax and corporation tax codes back into line.
Section 34(5) of ICTA provides:
Where, as consideration for the variation or waiver of any of the terms of a lease, a sum becomes payable by the tenant otherwise than by way of rent, the lease shall be deemed for the purposes of this section to have required the payment of a premium to the landlord (in addition to any other premium) of the amount of that sum ..
The effect of this deeming may be to treat the landlord as receiving an amount by way of rent. This is subject to section 34(6) and (7) of ICTA.
Section 34(6) of ICTA provides that if a payment falls within section 34 (5) of ICTA but is due to a person other than the landlord, the landlord is not treated as receiving rent. And if the other person is a company, section 34(6) of ICTA treats that company as receiving an income receipt equal to the rent that the landlord would otherwise have been treated as receiving under section 34(5) of ICTA.
But section 34(7) of ICTA provides that section 34(6) of ICTA applies only in relation to a payment within section 34(5) of ICTA if the payment is due to a person who is connected with the landlord.
It follows that section 34(5) of ICTA might treat the landlord as receiving rent in cases where the consideration for the variation or waiver is not payable to the landlord (with the tenant potentially receiving relief for the amount of rent the landlord is treated as receiving). This is not the intention of section 34(5) of ICTA. In practice a landlord has not been treated as receiving, nor the tenant entitled to relief for, rental income in such cases. Clause 221(1)(b) reflects that practice for corporation tax. The same change was made for income tax in section 281 of ITTOIA (see Change 70 of Annex 1 to ITTOIA).
Relief will not be available to a tenant by reference to a property business receipt if, as a result of this change, a property business receipt does not arise to the landlord.
This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
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