|
This change is in principle adverse to some taxpayers and favourable to others but it is expected to have no practical effect as it is in line with generally accepted practice.
Change 87: Partnerships: resident partners and double taxation agreements: clause 1266 and Schedule 1
This gives statutory effect to the HMRC practice of giving a narrow interpretation to the word “affect” in section 115(5A) of ICTA.
It brings the income tax and corporation tax codes back into line.
The business profits article of the United Kingdom/Jersey double taxation agreement exempts the profits of a Jersey firm from United Kingdom tax. In the case of Padmore v CIR (1989), 62 TC 352 CA 2, the Court of Appeal decided that the exemption covered the share of the profits arising to a United Kingdom resident partner. The rules in section 115(5) to (5B) of ICTA were enacted in 1987 to remove the exemption.
It was intended that the 1987 legislation should do no more than remove the exemption claimed in the Padmore case. The words used in section 115(5A) of ICTA are “do not affect any liability to corporation tax”. On the face of it, these words could deny the partner any relief, including tax credit relief, under a double taxation treaty.
Subsection (2) of clause 1266 of this Bill makes it clear that it is only the partner’s chargeability to tax that is preserved, overriding any provision to the contrary in a double taxation treaty. No other effect of the treaty is overridden.
The amendment of section 59 of TCGA in of Schedule 1 to this Bill makes a similar clarification in relation to relief under double taxation arrangements for capital gains tax and for corporation tax on chargeable gains.
This change is in principle in taxpayers’ favour but is expected to have no practical effect as it is in line with generally accepted practice.
Change 88: Partnerships: change of basis: Schedule 1
This change concerns the charge on a change of basis by a firm carrying on a property business.
ICTA and FA 2002
The change of basis rules in section 64 of, and Schedule 22 to, FA 2002 apply to property businesses because the rules are specifically applied by section 21B of ICTA. In the case of a property business carried on in partnership section 111(10) of ICTA (before it was repealed by ITTOIA) and section 114(1) of ICTA (for corporation tax) set out how each partner’s share of the income from a property business is determined.
In addition paragraph 13 of Schedule 22 to FA 2002 sets out how to calculate each partner’s share of an adjustment charge.
ITTOIA
Section 860 of ITTOIA rewrites paragraph 13 of Schedule 22 to FA 2002 for income tax. It is expressed to apply to trades. The extension of the rules in the partnership Part of ITTOIA to non-trade businesses (see section 847(2) of that Act) does not apply to section 860. So for income tax there is no explicit rule about how to deal with the partners’ share of adjustment income in a property business.
This Bill
Clause 1267 of this Bill applies explicitly to property businesses and rewrites the FA 2002 rules (as applied by section 21B of ICTA). Schedule 1 to the Bill amends section 860 of ITTOIA to fill the gap left by ITTOIA and to bring the income tax and corporation tax codes back into line.
The change does not affect the total amount charged to income tax on a change of basis. It makes more certain what each partner’s share of that amount is. If a partner was able to take advantage of any uncertainty in ITTOIA and argue that the partner’s share should be less than that previously prescribed by ICTA and FA 2002, the change in this Bill is adverse to that partner. But in that case the change is necessarily favourable to the other partners.
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 89: Partnerships: sale of patent rights: clauses 1271 and 1272 and Schedule 1
This change explains how section 558 of CAA applies if there is a change of membership of a firm.
Under section 524(1) of ICTA an amount of tax is charged on the seller in instalments over a number of accounting periods. Section 525(3) of ICTA applies “where .. a charge falls to be made on two or more persons jointly as being the persons for the time being carrying on a trade ..”.
It is clear from section 558 of CAA that the intention is that the present partners should step into the shoes of the seller of the patent rights. But it is not clear how this should work in practice. In particular, it is not clear:
- how such a charge is to be converted into a charge that falls on the persons for the time being carrying on the business;
- by what mechanism the corporation tax charged under section 524 of ICTA is to be replaced by the charges (to income tax or corporation tax) that are appropriate to the persons for the time being carrying on the business; or
- how the spreading of the charge should work given that individuals may become liable for tax that was originally charged by reference to accounting periods and companies may become liable for tax that was originally charged by reference to tax years.
The change clarifies the effect of the legislation by filling in these gaps.
The same clarification is made by amendments to sections 861 and 862 of ITTOIA (see Schedule 1 to this Bill).
Whether this particular basis is adverse or favourable to any particular taxpayer in comparison with any other theoretical basis will depend upon the specific circumstances.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 90: Unremittable income: conditions for granting relief: clause 1274
This change broadens one condition and removes another condition for claims for relief in respect of unremittable income under section 584 of ICTA. The corresponding change was made for income tax by section 841 of ITTOIA (see Change 135 in Annex 1 to the explanatory notes for that Act).
This change brings the income tax and corporation tax codes back into line.
Section 584 of ICTA provides for relief for companies taxed on income arising outside the United Kingdom, where the income cannot be remitted to the United Kingdom and certain conditions are met. Section 584(1)(a) and (2)(b) of ICTA refers to income which cannot be remitted to the United Kingdom because of the laws of the overseas territory, any executive action of its government or the impossibility of the company obtaining foreign currency in the overseas territory “notwithstanding any reasonable endeavours on its part”.
(A) It could be argued that there cannot be an inability to transfer due to the impossibility of obtaining foreign currency in that territory if foreign currency is in fact obtainable there (regardless of whether it may be transferred to the United Kingdom). Clause 1274(3)(c) of this Bill removes the possibility of that narrow interpretation being taken. It requires an inability to transfer because of the impossibility of obtaining in the territory currency “that could be transferred to the United Kingdom”. The reference to that currency being foreign has been dropped as misleading. If local currency can be obtained that cannot be transferred to the United Kingdom, the case is likely to fall within clause 1274(3)(a) or (b), but there is no point in excluding it from paragraph (c).
(B) The condition about “reasonable endeavours” in section 584(2) of ICTA has not been rewritten in this Bill. It is regarded as adding little to the requirements of section 584(1)(a) ICTA. If, by reasonable endeavours, the taxpayer company could transfer the income to the United Kingdom, the test in section 584(1)(a) of ICTA of its being prevented from transferring it must not be met, and there would then be no inability to transfer because of local law, government action or the impossibility of obtaining foreign currency as required under section 584(1)(a) of ICTA.
This change increases the range of income in respect of which relief for unremittable income may be available.
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 91: Unremittable income: withdrawal of relief: ECGD payments received: clause 1276
This change involves the withdrawal of relief in respect of unremittable income on the making of an Export Credit Guarantee Scheme payment in respect of the income. The corresponding change was made for income tax by section 843 of ITTOIA (see Change 141 in Annex 1 to the explanatory notes for that Act).
This change brings the income tax and corporation tax codes back into line.
Section 584 of ICTA provides a relief from income tax where a company’s income arising outside the United Kingdom is charged on the basis of the income arising in the accounting period, but that income cannot be transferred to the United Kingdom because of circumstances outside the company’s control (“unremittable income”). Section 584(2) of ICTA provides that if such a company makes a claim in respect of overseas income which:
- it will continue to be prevented from transferring to the United Kingdom, notwithstanding any reasonable endeavours on its part,
the amount of the income is to be left out of account in charging income from that source.
However, under section 584(2A) of ICTA, if on any date “paragraph (a) or (b) of subsection (2) above ceases to apply” the income is treated as arising on the date of the change and is charged to tax for the accounting period in which that date falls.
Section 584(5) of ICTA modifies the operation of the relief where a payment is made under the Export Credit Guarantee Scheme in respect of the unremittable income. Section 584(5) of ICTA provides that “..to the extent of the payment, the income shall be treated as income to which paragraphs (a) and (b) of subsection (2) above do not apply (and accordingly cannot cease to apply)”. This makes it clear that no claim can be made, but not whether relief already given may be withdrawn or, if it may, whether the charge to withdraw the relief is to be made for the accounting period in which the income first arose, or the accounting period in which the Export Credits Guarantee Department payment (“ECGD payment”) is made.
This lack of clarity appears to be an unintentional result of amendments made by paragraph 33 of Schedule 20 to FA 1996, which substituted the present subsections (2) and (2A) of section 584 of ICTA for the original subsection (2) and amended subsection (5) in consequence. Those amendments, which were part of the changes made to facilitate Self Assessment for income tax, built on the changes already made by F(No 2)A 1987 for the introduction of “Pay and File” for corporation tax. (Prior to ITTOIA, section 584 of ICTA applied for both income tax and corporation tax.)
Before the FA 1996 changes section 584(2) of ICTA provided not only that account would not be taken of the income to the extent that the claimant showed “to the satisfaction of the Board that conditions [corresponding to those in paragraphs (a) and (b) in the present subsection (2)]” were satisfied with respect to it, but also that “on the Board ceasing to be satisfied that those conditions are satisfied” such assessments etc were to be made as were necessary to take account of the income and of any tax payable in the overseas territory in respect of it “according to their value at the date when in the opinion of the Board those conditions cease to be satisfied with respect to it”.
The original section 584(5) of ICTA provided that, to the extent of the Export Credit Guarantee Scheme payment, the income should be treated as income “with respect to which the conditions mentioned in subsection (2) above are not satisfied (and accordingly cannot cease to be satisfied)”. So it plainly had the effect that not only could no claim be made, but the Board would be bound to be satisfied that the income had ceased to be unremittable - or perhaps had never been unremittable - and so it could be assessed. It was never very clear what date was to be used for the value of the income and the foreign tax. But presumably the only date that could be used was the date when the Board had to cease to be satisfied, that is the date of the payment.
There is no good reason for the treatment of income which is no longer unremittable to vary according to whether circumstances have changed or an ECGD payment has been made. So the apparent change in the effect of section 584(5) of ICTA introduced by FA 1996 appears to have been completely unintentional. In practice, the income is taxed in the accounting period in which the ECGD payment is made. Therefore clause 1276(4) and (5) of this Bill, which rewrites section 584(5) of ICTA, provides for the income to be taxed in that accounting period, and accordingly for the income and any tax payable in respect of it in the place where it arises to be taken into account for corporation tax purposes at that date.
This change withdraws or prohibits relief by reference to the payment of an Export Credit Guarantee Scheme payment in addition to, rather than solely by virtue of, the income becoming remittable.
This change is adverse to some taxpayers in principle. But it is in line with the original legislation before amendment and with the intention of the amended legislation. And it is expected to have no practical effect as it is in line with current practice.
Change 92: General exemptions: savings certificates: unauthorised purchases involving multiple certificates: clauses 1281 and 1282
This change enables multiple savings certificates to be regarded as authorised in part where an unauthorised number of certificates have been purchased, and so confers exemption on the income from the part that is so regarded.
The Treasury limit the number of savings certificates of any particular issue that a person is permitted to purchase. The limits are stated in the prospectus for each issue.
The income from savings certificates is exempt from corporation tax under section 46 of ICTA. However, the exemption only applies to certificates purchased within the permitted limits. Section 46(3) of ICTA provides that the exemption does not apply to savings “.. certificates .. purchased .. in excess of the amount which a person is for the time being authorised to purchase ..”. It is not entirely clear how this would work in the case of multiple certificates. (These are certificates which represent a number of individual unit certificates.)
For example, if the maximum number of certificates permitted is 100, X holds 80, and then purchases a multiple certificate of 50, section 46(3) of ICTA appears to prevent the exemption from applying to the second multiple certificate. However, in practice, the second certificate is treated as 50 individual certificates, so that 20 would be treated as authorised and 30 as unauthorised.
Clauses 1281(2) and 1282(4) of this Bill reflect this practice by providing that certificates are authorised “so far as” their acquisition was not prohibited by regulations made by the Treasury limiting a person’s holding or, in the case of Ulster Savings Certificates, such regulations made by the Department of Finance and Personnel.
The change provides an exemption where it could otherwise be argued that no exemption is due.
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 93: General calculation rules: exceptions from the disallowance of expenditure on business entertainment and gifts in calculating the profits of non-trade and non-property businesses: clauses 1298 to 1300
This change extends an exception made in calculating profits of a business which is a trade or property business to non-trade and non-property businesses.
It brings the income tax and corporation tax codes back into line.
Section 577 of ICTA (business entertaining expenses) prohibits the deduction of business entertaining expenditure in calculating profits chargeable to tax under Schedule D. Profits chargeable to tax under Schedule D include not only profits of a trade, profession or vocation, whether chargeable under Case I, II or V of that Schedule, but also profits chargeable under other Cases of that Schedule. Section 21A(2) of ICTA applies section 577 of ICTA to the computation of income under Schedule A.
Section 577(8) of ICTA extends the restriction of expenses to those incurred in the provision of gifts.
There are a number of exceptions from the restriction under section 577(1) or (8) of ICTA. Subsection (9) makes an exception for “expenditure incurred in making a gift to a body of persons or trust established for charitable purposes only” and two named bodies are treated as such a body of persons for this purpose. This exception applies only in “computing profits under Case I or II of Schedule D”.
So the exception provided by section 577(9) of ICTA does not apply to businesses other than trades, professions and vocations or property businesses.
It is not HMRC policy, despite the words of section 577(9) of ICTA, to make a distinction in the application of the exception between trades and property businesses and other businesses. Clauses 1298 to 1300 of this Bill extend the benefit of the exception in principle to those other businesses.
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 94: General calculation rules: exceptions to the rule restricting deductions for business gifts: clause 1300
This change provides for the monetary limit on the cost of gifts excluded from the general rule prohibiting a deduction for such expenses (see clause 1298 of this Bill) to be increased by Treasury order.
It brings the income tax and corporation tax codes back into line.
Clause 1300(3) of this Bill is based on section 577(8)(b) of ICTA. The £50 limit in section 577(8)(b) of ICTA (previously £10) was inserted with effect in relation to accounting periods beginning on or after 1 April 2001 by section 73 of FA 2001 in line with an increase in the corresponding VAT provision made by Treasury order.
Section 577(8)(b) of ICTA was rewritten as it applied to employees by section 358(3)(b) of ITEPA. Section 716(2) of ITEPA provides that the Treasury may by order increase, or further increase, the sum specified in various provisions in ITEPA including the £50 limit in section 358(3)(b) of ITEPA.
Section 577(8)(b) of ICTA was rewritten as it applied to income tax on trades, professions and vocations by section 47 of ITTOIA. (Section 47 of ITTOIA is applied to other businesses for income tax purposes by sections 272 and 867 of ITTOIA.) Section 47 of ITTOIA provides that the Treasury may by order increase, or further increase, the £50 limit in section 47(3)(b) of ITTOIA.
Clause 1300 of this Bill brings the mechanism for changing the limit for corporation tax purposes into line with ITEPA, ITTOIA and the VAT provisions.
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.
Change 95: General calculation rules: apportionment etc of miscellaneous profits and losses to accounting period: clause 1307
This change modifies the application of section 72 of ICTA so that it applies to certain income within Schedule D Case V as well as Case VI. The corresponding change was made by for income tax by section 871 of ITTOIA (see Change 147 in Annex 1 to the explanatory notes for that Act).
This change brings the income tax and corporation tax codes back into line.
Section 72(1) of ICTA permits the apportionment of profits or losses for the purposes of Schedule D Cases I, II or VI if accounts have been made up for a period which is not coterminous with the accounting period. Section 72 of ICTA is applied by section 21A of ICTA for the purpose of calculating the profits of a Schedule A business.
Although section 72 of ICTA is expressed to apply in the case of profits or gains chargeable under Schedule D Cases I, II and VI only, it applies also to income from a trade chargeable to tax under Schedule D Case V. Section 70(2) of ICTA applies the rules applicable to Schedule D Case I in computing such Schedule D Case V income. Clause 52 of this Bill (apportionment etc. of profits and losses to accounting period) applies the rule in section 72 of ICTA to all trades, whether income from the trade falls within Schedule D Case I or Case V.
Clause 1307 of this Bill applies the rule in section 72 of ICTA for the purpose of calculating income charged under provisions listed in section 834A of ICTA (inserted by Schedule 1 to this Bill). Subsection (2) of clause 1307 disapplies section 834A(3) of ICTA, which excludes income chargeable under Chapter 8 of Part 10 of this Bill from the tables in that section so far as the income arises from a source outside the United Kingdom. This ensures that clause 1307 extends to income within Schedule D Case V as well as income within Case VI.
This change increases the range of income to which the apportionment provisions may apply.
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 96: Other general provisions: definition of “caravan”: clause 1314
This change provides a single definition of “caravan” and is based on section 29(1) of the Caravan Sites and Control of Development Act 1960 and section 13(1) of the Caravan Sites Act 1968.
It brings the income and corporation tax codes back into line.
The change is relevant to clauses 43, 207, and 248.
For the purposes of paragraph 3 of Schedule A (see section 15(1) of ICTA) “caravan” has the meaning given by section 29(1) of the 1960 Act. Paragraph 3 is re-written in clause 207. The same definition is attracted by paragraph 4 of Schedule A (re-written in clause 248).
Subsection (1) of clause 1314 of this Bill reproduces the effect of section 29(1) of the 1960 Act; and subsection (2) reproduces the effect of section 13(1) of the 1968 Act. The section does not, however, reproduce the effect of section 13(2) of the 1968 Act (which provides that a structure mentioned in section 13(1) (a twin-unit caravan) is not a caravan if its dimensions exceed specified limits). Neither the 1960 Act nor the 1968 Act extend to Northern Ireland. However, the Caravans Act (Northern Ireland) 1963 contains the same definition for Northern Ireland as is contained in section 29(1) of the 1960 Act.
It is not clear whether the 1968 Act modifications apply for the purposes of paragraphs 3 and 4 of Schedule A in ICTA. First, it is likely that Parliament intended that only one definition of “caravan” was to apply throughout the United Kingdom. But the 1968 Act does not extend to Northern Ireland. As the substance of the definitions in the 1960 Act (which applies to Great Britain) and in the Northern Ireland Act of 1963 are the same, a reference to the definition in the 1960 Act would be enough to secure a uniform definition.
Second, paragraph 3(2) of Schedule A in ICTA provides that “caravan” has the meaning “given by” section 29(1) of the 1960 Act. Section 13 of the 1968 Act modifies the operation of Part 1 of the 1960 Act (rather than the section 29(1) definition). Because the definitions in section 29(1) apply “in” Part 1 of the 1960 Act it is therefore not certain whether the modifications made by the 1968 Act have been attracted.
Clause 1314 resolves these doubts by reproducing only section 13(1) of the 1968 Act. Consequently it does not matter whether a twin-unit caravan can be lawfully moved on a highway when assembled. For the purposes of Schedule A (rewritten as property income in this Bill) it is also immaterial if the twin-unit caravan exceeds the dimensions specified in section 13(2) of the 1968 Act: property income treatment seems more appropriate the bigger the structure.
This change extends the meaning of “caravan” which may result in a more beneficial tax treatment.
The changes are 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 97: Repeal of section 74(1)(k) of ICTA: disallowance of deduction for average loss: Schedule 1
This change omits the prohibition of a deduction for “any average loss beyond the actual amount of loss after adjustment” in section 74(1)(k) of ICTA.
It brings the income tax and corporation tax codes back into line.
The rule in section 74(1)(k) of ICTA applies to the practice in shipping and aviation of sharing between all parties with a financial interest in a vessel and its cargo the financial loss incurred where part of a vessel or its cargo is jettisoned, lost or damaged in an attempt to save the vessel, the crew and passengers or the rest of the cargo.
The term “average loss” refers to the share of the loss allocated to each party. The term “actual amount of loss after adjustment” reflects the possibility that loss adjusters will be involved in determining the actual loss for insurance purposes.
The loss after adjustment may not be known for some years after the loss has occurred. Under section 74(1)(k) of ICTA, the tax position for the accounting period in which the loss occurred should strictly be kept open until the adjusted figure is known.
Generally accepted accountancy practice in such cases is to make a provision in the accounts for the period in which the loss occurs and review the provision in later years so that over time the total deduction matches the loss suffered. Dispensing with section 74(1)(k) allows the taxpayer to follow generally accepted accountancy practice by bringing the timing of the deduction into line with the accounts.
| 
