Change 46: Property income: lease premiums etc: additional calculation rule may reduce receipts in respect of sums payable for variation or waiver of a term of a lease: clauses 221, 227, 228, 229 and 234
This change permits reductions, under the additional calculation rule, in arriving at the amount of a property business receipt arising in relation to the variation or waiver of a term of a lease.
It brings the income tax and corporation tax codes back into line.
Section 37(2) of ICTA (the additional calculation rule) permits a reduction, in certain cases, in arriving at the amount of a property business receipt that would otherwise be given by section 34 or 35 of ICTA. Section 37(2) of ICTA applies if:
(a) a lease is granted out of, or there is a disposition of, the head lease, and
(b) in respect of that grant or disposition a company would..be treated by virtue of section 34 or 35 as receiving any amount..
Where section 34(5) of ICTA gives rise to a property business receipt the receipt arises in respect of:
the variation or waiver of any of the terms of a lease
So section 37(2) of ICTA does not appear to allow a reduction in arriving at a property business receipt arising because of section 34(5) of ICTA (amount in respect of variation or waiver). But, in practice, such a reduction is allowed.
Clauses 221(5), 227(1) and (3), 228(2), 229(2) and 234(1) and (2) explicitly provide for a reduction in the calculation of a receipt under clause 221 (sums payable for variation or waiver of terms of lease). The same change was made for income tax in sections 281, 287, 288, 289 and 294 of ITTOIA (see Change 71 of Annex 1 to ITTOIA).
Section 295 of ITTOIA (as amended by Schedule 1 of this Bill) and clause 235 place a cap on the total amount of relief that can be obtained by reference to a taxed receipt. So if, as a result of this change, the relief to which a company is entitled is increased, this may reduce the amount of relief subsequently available to other persons under Chapter 4 of Part 3 of ITTOIA or under Chapter 4 of Part 4 of this Bill.
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 47: Property income: lease premiums etc: receipts in respect of sales with right to reconveyance and sale and leaseback transactions: clauses 224 and 225
This change provides that a property business receipt does not arise in respect of a sale with a right to a reconveyance (or a sale and lease back transaction) unless the period between the sale and the earliest date of reconveyance (or leaseback) is 50 years or less.
It brings the income tax and corporation tax codes back into line.
Section 36(1) of ICTA provides for a property business receipt to arise where, broadly, an interest in land is sold (for price A) and the terms of sale provide for the interest to be reconveyed (for lower price B) to the vendor or someone connected with the vendor. The property business receipt that arises is, in effect, the following percentage of :
T is the number of complete years between the sale and the earliest date of reconveyance (but not greater than 51), if the number of complete years is at least 2, and
T is 1, if the number of complete years is less than 2.
If the earliest date of reconveyance is more than 51 years after the sale, the property business receipt under section 36(1) of ICTA will always be zero. The same result is achieved by an approach under which a property business receipt does not arise if the earliest date of reconveyance is more than 51 years after sale (an approach taken by sections 34 and 35 of ICTA).
Sections 34 and 35 of ICTA adopt 50 years as the interval which determines whether a property business receipt arises. Adopting a similar interval for the purposes of section 36(1) of ICTA is taxpayer favourable.
Exactly the same considerations apply in relation to section 36(3) of ICTA (sale and leaseback) as are set out above in relation to section 36(1) of ICTA.
Clauses 224(1)(b) and 225(1)(b) change the law, for corporation tax, by providing an interval of 50 years to determine whether a property business receipt arises in the case of a sale with a right to reconveyance or a sale and leaseback transaction. The same change was made for income tax in sections 284 and 285 of ITTOIA (see Change 72 of Annex 1 to ITTOIA).
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 48: Property income: lease premiums etc: relief for tenant under taxed lease if land is outside the United Kingdom: clause 227
This change restores a relief that was incorrectly removed from ICTA by ITTOIA.
It brings the income tax and corporation tax codes back into line.
Section 37(1) of ICTA provides that:
This section applies in any case where in respect of a lease of any premises-
(a) any amount falls to be treated as a receipt of a Schedule A business by virtue of section 34 or 35,..
(c) any amount falls to be treated as a receipt of a UK property business by virtue of any of sections 277 to 282 of ITTOIA 2005 (receipts in respect of lease premiums, sums payable instead of rent, for surrender of lease and for variation or waiver of term of lease and assignments),..
That subsection sets out the condition for the availability of the reliefs given by section 37(2) or (4) of ICTA (reduction of later chargeable amount or tenant treated as paying rent). Each of those reliefs applies in calculating the profits of a Schedule A business.
Section 70A(5) of ICTA provides that:
income from an overseas property business shall be computed for the purposes of Case V of Schedule D in accordance with the rules applicable to the computation of the profits of a Schedule A business.
Section 70A(5) of ICTA therefore extends the reliefs under section 37 of ICTA to land outside the UK.
Where section 37(2) or (4) of ICTA applies in relation to land outside the UK, the reference in section 37(1)(a) of ICTA to a receipt of a Schedule A business must be read as a reference to a receipt of an overseas property business.
Section 37(1)(c) of ICTA was inserted by paragraph 20(2)(b) of Schedule 1 to ITTOIA to provide for relief under section 37 of ICTA where the superior landlord is liable to income tax. But because section 37(1)(c) refers to a UK property business (see italicised words above) it excludes relief in the case where the superior landlord was liable to income tax in respect of a property outside the UK.
The relief corresponding to section 37 of ICTA in sections 287 to 295 of ITTOIA applies to property outside the UK in the same way as to property in the UK.
The reference to a UK property business in section 37(1)(c) of ICTA was introduced in error when that paragraph was inserted by ITTOIA. Clause 227(4) corrects that error and is in line with the corresponding ITTOIA provision (section 287(4) of that Act, as amended by Schedule 1 to this Bill). The change will result in a company receiving relief in circumstances where there is currently no entitlement to relief.
Section 295 of ITTOIA (as amended by Schedule 1 to this Bill) and clause 235 place a cap on the total amount of relief that can be obtained by reference to a taxed receipt. So if, as a result of this change, the relief to which a tenant is entitled is increased, this may reduce the amount of relief subsequently available to other persons under Chapter 4 of Part 3 of ITTOIA or under Chapter 4 of Part 4 of this Bill.
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 49: Property income: lease premiums etc: limiting the reductions in receipts under clause 228 and the deductions for expenses under clause 232: clauses 227, 228, 229, 230, 231 and 235
This change concerns the way section 37(9) of ICTA is rewritten for corporation tax.
It brings the income tax and corporation tax codes back into line.
Section 37(9) of ICTA provides:
An amount or part of an amount shall not be deducted under this section more than once from any sum, or from more than one sum, and shall not in any case be so deducted if it has been otherwise allowed as a deduction in computing the income of any person for income tax or corporation tax purposes or if it has been deducted under the rule in section 288 of ITTOIA 2005 (the additional calculation rule) in calculating the amount of a receipt of a property business (within the meaning of that Act) under Chapter 4 of Part 3 of that Act
Those words do not fit well with the rest of section 37 of ICTA and their effect on the rest of that section is not entirely clear. The italicised words An amount in section 37(9) of ICTA must refer to the amount chargeable on the superior interest (ACSI - see section 37(1) of ICTA) because the reliefs under section 37(2) and (4) of ICTA depend on ACSI. But the italicised words shall not be deducted under this section are not, strictly speaking, appropriate since neither of section 37(2) or (4) of ICTA is explicitly expressed as providing a deduction.
In construing section 37(9) of ICTA it is relevant to consider the rationale underlying the rest of section 37 of ICTA. Sections 34, 35 and 37 of ICTA broadly deal with one person (landlord/assignor) who, in relation to a lease, receives a sum from another person (tenant/assignee). Sections 34 and 35 of ICTA may treat a property business receipt (of amount X) as arising to the landlord/assignor. Section 37 of ICTA sets out two ways in which the tenant/assignee (or a successor) may obtain relief, effectively as a property business expense, in respect of X.
The rationale for section 37(9) of ICTA is that the total relief for the tenant/assignee (or successors) under section 37(2) and (4) must not exceed X (as reduced by relief that the tenant/assignee (or successor) has obtained in respect of X under other provisions such as section 87 of ICTA).
Clause 235 makes this rationale explicit for corporation tax. The same change was made for income tax in section 295 of ITTOIA (see Change 73 of Annex 1 to ITTOIA).
Section 37(2) and (4) of ICTA is also difficult to construe because neither subsection explicitly says how section 37(9) of ICTA affects the relief for which it provides.
Clauses 227(5), 228(3), 229(4), 230(1), (5) and (6) and 231(4) make explicit the effect that section 37(9) of ICTA has on section 37(2) and (4) of ICTA. This is facilitated by the use (in clause 228(3)) of the concept of the unused amount of a taxed receipt (corresponding to ACSI in ICTA). And providing that, in relation to a taxed receipt, relief under each of clause 228, (corresponding to section 37(2) of ICTA) and clause 231 (corresponding to section 37(4) of ICTA) must not result in that relief (taken with other relief under those, and other, provisions) of more than the taxed receipt. The same change was made for income tax in sections 287 to 292 of ITTOIA (see Change 73 of Annex 1 to ITTOIA).
Clause 235 restricts total relief to the taxed receipt in question. A tenant/assignee (or successor) is entitled to relief only if the taxed receipt in question has an unused amount. Each relief, in relation to the taxed receipt in question, reduces the unused amount of that taxed receipt and therefore the relief available in future to the tenant/assignee (or successor) by reference to that taxed receipt. Making this explicit is, in principle, favourable to a tenant/assignee and unfavourable to a successor because the tenant/assignees relief arises before that of the successor.
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 50: Property income: lease premiums etc: rules for determining effective duration of lease: clause 243 and Schedule 1
This change makes some minor adjustments to the rules for determining the effective duration of a lease.
Section 38(1) of ICTA provides:
In ascertaining the duration of a lease for the purposes of sections 34 to 36-
(i) any of the terms of the lease (whether relating to forfeiture or any other matter) or any other circumstances render it unlikely that the lease will continue beyond a date falling before the expiry of the term of the lease, and
(ii) the premium was not substantially greater than it would have been, on the assumptions required by subsections (3) and (4) below, had the term been one expiring on that date,
the lease shall not be treated as having been granted for a term longer than one ending on that date.
Rule 1 in section 303(1) of ITTOIA is in similar terms.
Section 38(1)(a) of ICTA and rule 1 in section 303(1) of ITTOIA do not prevent the lease being treated as expiring before the date on which it is thought likely that the lease will in fact end. But it is difficult to see what justification there could be for treating a lease as ending before that date.
Accordingly, rule 1 in clause 243(1) requires the lease to be treated as ending on the date beyond which it is unlikely that the lease will continue. It will no longer be possible to contend that the lease should be treated as ending before that date. Schedule 1 amends rule 1 in section 303(1) of ITTOIA in line with rule 1 in clause 243(1).
Section 38(1)(a) of ICTA and rule 1 in section 303(1) of ITTOIA will give a date falling before the expiry of the lease in question only if:
the premium was not substantially greater than it would have been .. had the term been one expiring on that date.
Section 34(2), (4) and (5) of ICTA deems, in certain cases, amounts to be premiums for the purposes of section 34 of ICTA.
Section 278 of ITTOIA deems, in certain circumstances, an amount to be a premium for the purposes of section 277 of ITTOIA. Sections 279 to 281 of ITTOIA provide, in certain cases, for amounts to be taken into account in a way that is similar to section 277 of ITTOIAs treatment of premiums (but without deeming those amounts to be premiums).
It has been HMRC practice to treat sums deemed to be premiums in section 34 of ICTA as if they were also premiums for the purposes of considering under section 38(1)(a)(ii) of ICTA whether the premium was not substantially greater than it would have been had the term been one expiring on the date in question.
Clause 243(3) reflects this practice by providing that premium in rule 1 includes such deemed sums. Schedule 1 inserts section 303(2A) of ITTOIA containing a corresponding definition of premium for the purposes of rule 1 in section 303(1) of ITTOIA.
This makes rule 1 in clause 243(1) and in section 303(1) of ITTOIA less likely to apply because the (larger) premium is less likely to be not substantially greater than the premium expected had the term been one expiring on the date in question.
In some cases the question of whether or not there is a property business receipt and, if so, how much depends on the effective duration of the lease. If, as a result of this change, the effective duration of a lease is made longer, a landlord may have a smaller property business receipt than would otherwise have been the case and a tenant may correspondingly be entitled to less 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 51: Property income: furnished holiday accommodation: permitted longer-term occupation: clause 267
This change alters the period during which, in order to qualify for the special tax treatment of the commercial letting of furnished holiday accommodation, the accommodation must not be occupied for more than 31 days at a time.
It brings the income and corporation tax codes back into line.
Section 504(3) of ICTA provides:
(3) Accommodation shall not be treated as holiday accommodation for the purposes of this section unless-
(a) it is available for commercial letting to the public generally as holiday accommodation for periods which amount, in the aggregate, to not less than 140 days;
(b) the periods for which it is so let amount in the aggregate to at least 70 days; and
(c) for a period comprising at least seven months (which need not be continuous but includes any months in which it is let as mentioned in paragraph (b) above) it is not normally in the same occupation for a continuous period exceeding 31 days.
It is not clear whether a month for the purposes of paragraph (c) means a calendar month (in the sense of January, February, etc) or any period of one month. It is also not clear whether any breaks in the period of at least seven months can fall at any time or must divide the period into periods of whole months. The better view seems to be that any period of a month during which the accommodation is commercially let to members of the public as holiday accommodation must not overlap with any period during which it is continuously in the same occupation for more than 31 days.
A further uncertainty is whether, for the purposes of paragraph (c), the time that the accommodation is let as mentioned in paragraph (b) is 70 days or (which is the better view) all the time that it is commercially let to the public generally as holiday accommodation.
On the latter reading, section 504(3)(c) of ICTA secures that accommodation is not let as holiday accommodation if it is let for more than 31 days continuously (otherwise than because of circumstances that are not normal). Clause 267(4) gives effect to this reading.
This reading also reduces to less than five months the total periods during which the accommodation can be in the same occupation for more than 31 days. This can operate capriciously to extend the period of at least seven months where the holiday lettings are spaced out throughout the relevant period (see clause 266) and not concentrated in a few months.
In clause 267(5), the requirement in section 504(3)(c) of ICTA is relaxed so that the periods for which the accommodation is continuously in the same occupation for more than 31 days must not amount to more than 155 days (the aggregate length of the five longest months) during the relevant period. This means that the period during which any occupation of the accommodation must be on a short-term basis:
- need not be composed of whole months but can be made up of non-consecutive days; and
- is never extended beyond 155 days.
So, where two or three days of a holiday letting fall in a particular month, the requirement in clause 267(5) of this Bill (unlike section 504(3)(c) of ICTA) does not restrict what can be done with the accommodation during the rest of the month (provided that the condition is satisfied over the relevant period as a whole).
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 52: Property income: furnished holiday accommodation: period over which lettings are averaged: clause 268
This change alters the period during which lettings are averaged for the purpose of treating infrequently let property as qualifying holiday accommodation from the accounting period to the relevant period (as defined in clause 266).
It brings the income and corporation tax codes back into line.
Subsections (6) to (8) of section 504 of ICTA allow averaging where a taxpayer lets both furnished holiday accommodation and accommodation that would be holiday accommodation if the test in section 504(3)(b) of ICTA were satisfied in relation to it (under-used accommodation). The requirement in section 504(3)(b) of ICTA is that the accommodation must be commercially let to members of the public for at least 70 days. Section 504(5) of ICTA says that that requirement, for a particular accounting period must be determined by reference to a twelve month period (called the relevant period in clause 268). That twelve month period will often coincide with the accounting period. But it may not, an example being when the accommodation is first let as furnished accommodation. Then the relevant period begins on the first day in the accounting period that it is so let.
If the company elects for averaging, however, section 504(7) of ICTA treats the under-used accommodation specified in the election as qualifying holiday accommodation if the average of the number of days during the accounting period for which the furnished holiday accommodation and the under-used accommodation was let, is at least 70.
If the relevant period for particular accommodation does not coincide with the accounting period, the accommodation may have been let for more than 70 days during the relevant period but not for more than 70 days during the accounting period. But because the figures averaged in section 504(7) of ICTA are the numbers of days let during the accounting period, specifying the accommodation in an election could not raise the average number of days of letting during that period above 70.
In rewriting section 504(7) of ICTA, clause 268(4) provides that the average is to be taken by reference to days during the relevant period.
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 53: Property income: rent receivable in connection with a section 39(4) concern where the rent is paid in kind: clause 270 and Schedule 1
This change concerns repealing section 119(2) of ICTA without rewriting it.
It brings the income tax and corporation tax codes back into line.
Section 119 of ICTA makes provision about rent payable in respect of any land or easement used, occupied or enjoyed in connection with any of the concerns specified in section 55(2). Section 55 of ICTA includes mines, quarries, certain industrial concerns, canals, docks, markets, bridges, ferries and railways.
Section 119(1) of ICTA provides for the rent from such easements to be charged under Schedule D but it does not specify under which Case of Schedule D the rent is to be charged.
Section 119(2) of ICTA provides for the rent to be taxed under Schedule D Case III if the rent is paid in produce of the concern. If section 119(2) does not apply, the rent is charged under a provision in the table in section 834A of ICTA. The table in section 834A is inserted by Part 1 of Schedule 1 to this Bill, and is a list of places where some of the Schedule D Case VI charges are rewritten.
When section 119 of ICTA was introduced as section 34 of FA 1934 the lessee was required to deduct income tax when paying rent to the lessor. This was achieved by treating the rent as a royalty paid in respect of the user of a patent. But it would be impractical to deduct income tax if the rent were paid in kind. So what is now section 119(2) charged rent paid in kind under Schedule D Case III. This avoided the requirement to deduct income tax because these rents are not a category of income from which tax is deducted. Since the requirement to deduct income tax from rents taxable under section 119 of ICTA was repealed a separate charge on rents paid in kind is no longer required.
Section 119 of ICTA is rewritten in Chapter 7 of Part 4 of this Bill. The charge under Chapter 7 does not distinguish rents that are paid in produce. This represents a change from the position under ICTA. The rewrite of the charge under Schedule D Case III has been absorbed into the rewrite of the charge under Schedule D Case VI (see the table in section 834A of ICTA).
There is no difference between Schedule D Cases III and VI in the basis of assessment.
There may be a minor difference in the deductions that are allowed in calculating the income. Section 70(1) of ICTA provides that:
income shall be computed under Cases I to VI of Schedule D on the full amount of the profits or gains or income arising in the period .. without any other deduction than is authorised by the Corporation Tax Acts
No deduction is allowed under Schedule D Case III. Although Schedule D Case VI does not specify that any deductions may be allowed the word profits implies a calculation under which expenses are deducted from the income.
In practice it is likely that most income to which section 119(2) of ICTA applies is covered by section 121 of ICTA (rewritten as clause 272 in this Bill). That section provides for specific deductions to be made in taxing mineral rents and royalties. In the event that rewriting the charge under Schedule D Case III according to the rules of Schedule D Case VI allows any taxpayer to claim any deduction that would not otherwise be allowable the amounts involved are likely to be small.
A further minor difference is that the income charged under Chapter 7 of Part 4 of this Bill is subject to the loss regime in section 396 of ICTA. In the unlikely event that the deductions allowable exceed the rent charged under Chapter 7 the loss can be set against other income charged under a provision in the table in section 834A of ICTA. The more likely case is that losses on other income taxed under such a provision by the current law can be set against this income. But losses under those provisions are uncommon, as are rents paid in kind.
This change allows the deduction of amounts that are not deductible under the source legislation.
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