This change will not alter the amount charged to tax. The most it will do is affect the timing of that tax liability. In a small minority of cases this could mean a different rate of tax being applied, according to circumstances. Any overall tax effect is likely to be negligible.

Change 98: Unremittable income: appeals to the Special Commissioners: Schedules 1 and 2

This change involves the omission from this Bill of any provision rewriting the requirement under section 584(9) of ICTA that appeals concerning questions about relief for unremittable income should be heard by the Special Commissioners. The corresponding change was made for income tax by paragraph 153 of Schedule 2 to ITTOIA (see Change 142 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(9) of ICTA provides that appeals involving any question as to the operation of that section (relief for unremittable overseas income) must be made to the Special Commissioners and not to the General Commissioners. This is a departure from the normal rules in sections 31B to 31D of TMA under which in most cases a taxpayer may have an appeal heard by the General Commissioners or make an election under section 31D of TMA for the appeal to be heard by the Special Commissioners.

This Bill omits any requirement about appeals that involve any question as to the operation of Part 18 of the Bill. So the normal rules in sections 31B to 31D of TMA will apply to such appeals without restriction. The paragraph headed “tribunal reform” in Part 21 of Schedule 2 (transitionals and savings etc) to the Bill preserves the requirement under section 584(9) of ICTA where a claim to relief under Part 18 involves income that arose in an accounting period ending before 31 March 2009.

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 99: Repeal of sections 586 and 587 of ICTA: Schedule 1

This change concerns the repeal of sections 586 and 587 of ICTA.

Section 586 of ICTA was enacted in 1940 and denies relief for payments made in connection with certain war damage indemnity schemes. Section 587 of ICTA was enacted in 1941 and denies relief for certain payments in respect of war injuries of employees.

Both sections apply only if the United Kingdom is in a declared state of war and were a response to the particular circumstances of the Second World War. Because of the very high rates of taxation during the war (seen most clearly in the case of Excess Profits Tax at 100%) these payments could often be made entirely at the Exchequer’s expense. The likelihood of the sections becoming operative and accurately reflecting policy at that time is remote. Sections 586 and 587 are for all practical purposes obsolete.

Both sections apply only for corporation tax. They were effectively repealed for income tax by the consequential amendments made by paragraphs 247 and 248 of Schedule 1 to ITTOIA.

This change completes the repeal of a prohibition on relief for all tax purposes.

This change is in taxpayers’ favour in principle. But it is expected to have no practical effect.

Change 100: Repeal of section 695(6) of ICTA: Schedule 1

This change relates to the omission of section 695(6) of ICTA, which requires that where relief is given to a company with a limited or discretionary interest in a foreign estate for United Kingdom income tax borne by the income of the estate, the company’s income should include an amount corresponding to the relief.

It brings the income tax and corporation tax codes back into line.

Section 695(5) of ICTA enables a beneficiary of a foreign estate who is entitled to a limited interest in the residue of the estate and is charged to tax for an accounting period in respect of income from the estate to claim relief if any of the aggregate income of the estate has borne United Kingdom income tax for a relevant year of assessment. Section 698(3)(b) of ICTA applies this also to beneficiaries who are charged in respect of income paid from the estate under a discretion.

Section 695(6) of ICTA (which is also applied by section 698(3)(b) of ICTA) provides that where the relief is given “such part of the amount in respect of which [the beneficiary] has been charged to corporation tax as corresponds to the proportion mentioned in [section 695(5) of ICTA] shall be deemed to represent income of such amount as would after deduction of income tax be equal to that part of the amount charged”. (The proportion referred to is the proportion that the amount of the beneficiary’s income that has borne United Kingdom income tax, less the tax, bears to the amount of the aggregate income of the estate, less United Kingdom income tax.) The meaning of this provision, which originated while surtax was still charged, is now obscure, and it is particularly difficult to see how it could operate in the context of Self Assessment for corporation tax. Consequently, in practice it tends to be ignored. Therefore it is not being rewritten in this Bill.

This change is beneficial to the taxpayer because the amount of the relief given under section 695(5) of ICTA to a beneficiary does not count as the beneficiary’s income and so the beneficiary’s income is reduced.

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 101: Repeal of section 817 of ICTA: Schedule 1

This change concerns the repeal of section 817 of ICTA.

Section 817 of ICTA can trace its origins back almost unchanged to the 1803 Income Tax Act. The general clarifications it provides may have served some useful purpose in the early years of income tax. But they are no longer required.

The section is a profit calculation rule. It applies in “arriving at the amount of profits or gains”. It does not apply to deductions made after those profits have been calculated. The scope of the word “profits” is not clear. Section 817 of ICTA is not included in the definition of “profits” in section 6 of ICTA. Given the restrictions in section 38 of TCGA, section 817 of ICTA could have no application to the calculation of chargeable gains even if it were thought capable of applying to that element of the corporation tax profit.

Section 817 of ICTA appears to apply to the calculation of the income element only of corporation tax profits.

The primary purpose of the section is set out in subsection (1)(a). This provides that no deduction is allowed in calculating the profits unless the deduction is “expressly enumerated in the Corporation Tax Acts”. This Bill and those parts of the corporation tax code that are not yet rewritten set out what deductions are to be allowed in calculating the various types of profit. There is no need for a general rule that says no other deductions are to be allowed.

Subsection (1)(b) denies a deduction for an annuity or other annual payment from which income tax is deducted and which is paid out of the profits. A payment made out of the profits pre-supposes that the profits have been calculated. Such a rule can have no application in calculating the amount of the profits.

Subsection (2) denies a deduction for a loss of capital or a loss in a trade or office or profession. In this Bill the treatment of capital is dealt with in the rules that set out how to calculate profits from different sources. There is no method of calculation that would allow a deduction for a trade loss in calculating the profit from another trade or source. It is not clear what is meant by a loss in an office. If it means an excess of expenses over income again there is no method of calculation that would allow a deduction for this negative amount in calculating the profit from another source.

Section 817 was repealed for income tax by the amendments made by paragraph 327 of Schedule 1 to ITTOIA.

This change completes for all tax purposes the repeal of a rule restricting deductions.

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 102: Repeal of paragraph 5 of Schedule 30 to ICTA: Schedule 1

This change concerns the repeal of paragraph 5 of Schedule 30 to ICTA.

Paragraph 5 of Schedule 30 to ICTA is a transitional measure that relates to the pre-1963 version of Schedule A. Under that version of Schedule A, a company which owned the property from which it carried on a trade was allowed a Schedule D Case I deduction equal to the amount of the Schedule A charge on the property. The right to the deduction was removed when Schedule A moved from a charge on the annual value of the property to a charge on the rent received.

At that time companies were liable to income tax not corporation tax. Timing differences between Schedule D Case I and Schedule A could result in a loss of relief if the company ceased to occupy the property for the purposes of the trade in a period in which it did not also cease to carry on the trade. FA 1963 introduced a deduction to compensate for this loss of relief. It is based on the relief that would have been given for the years 1963-64 and 1964-65 and is allowed in calculating the trade profits for the accounting period in which the company ceases to carry on the trade.

In theory it is still possible to claim the relief but given the passage of 45 years and the effects of inflation it is unlikely any new claims will be made on or after 1 April 2009. For this reason paragraph 5 of Schedule 30 to ICTA is redundant and can be repealed.

Paragraph 5 was repealed for income tax by the amendments made by paragraph 352 of Schedule 1 to ITTOIA.

This change completes the repeal for all tax purposes of a relieving provision.

This change is adverse to some taxpayers in principle. But it is expected to have no practical effect.

Change 103: Repeal of section 63 of FA 1999: treatment of transfer fees under pre-1999 contracts: Schedule 1

This change concerns the repeal of section 63 of FA 1999.

Section 63 of FA 1999 provides for transitional relief for football and other sports clubs on the introduction of new accounting standards for intangible assets in 1997 and 1998.

Before introduction of the new accounting standards transfer fees etc were charged to the club’s profit and loss account in the year in which they were due. Under the new accounting standards sums paid for players are spread over the life of the player’s contract.

Without section 63 of FA 1999 the value of the unexpired part of an existing contract at the date the new accounting standard is adopted would be transferred to the balance sheet and charged to tax as income. Relief for that amount would then be spread over the remaining life of the contract.

Section 63 of FA 1999 gives transitional relief by providing that for tax purposes the requirements of the new accounting standards can be ignored for any contracts entered into before the beginning of the first accounting period in which the club adopted the new accounting standard.

The new accounting standards are effective for accounting periods ending on or after 23 December 1998. So section 63 of FA 1999 applies only to contracts entered into before 1999.

In most cases a footballer’s contract will last three or four years. Contracts may be shorter in the case of a veteran player or longer in the case of a promising young player. But it is unlikely that any contracts to which section 63 of FA 1999 could apply will still be in force when this Bill comes into effect on 6 April 2009. For this reason, section 63 FA 1999 is redundant and can be repealed.

This change has no implications for the amount of income liable to tax or who is liable for tax on it. It affects (in principle but not in practice) only when tax is paid.

Change 104: Amendments of CAA: Schedule 1

The consequential amendments made by this Bill have brought to light some minor errors in the corresponding consequential amendments made by ITTOIA.

This Bill is drafted on the basis of a company starting or ceasing to carry on a trade etc, rather than on the basis of a trade etc commencing or being discontinued. So sections 114(1)(c) (partnership changes) and 337(1)(a) (successions) of ICTA are not specially rewritten. Instead the effects of partnership changes and successions are set out in the main rules where they are relevant.

Some rules that are not rewritten by this Bill rely on section 114 or 337 of ICTA. So they are consequentially amended. A similar exercise was undertaken in ITTOIA. In amending the following rules in CAA it has come to light that the amendments made by ITTOIA may not have preserved the law as it was before ITTOIA.

Sections 108, 112 and 115 of CAA

Before ITTOIA section 108(1)(b) of CAA said “the disposal is not an occasion on which the qualifying activity is treated as continuing under any of the relevant provisions of ICTA”. That condition can be satisfied if there is a disposal of the plant and machinery without a change in the persons carrying on the qualifying activity.

The condition in section 108(1)(b)(i), as substituted by ITTOIA, can only be satisfied if there is a change in the persons carrying on the qualifying activity.

The amendments of section 108 made by this Bill, so far as relating to income tax, aim to reverse the inadvertent change in the law that resulted from the amendment made by ITTOIA.

There is also a need to reverse changes of a similar nature, again so far as relating to income tax, that resulted from the amendments by ITTOIA of sections 112 and 115 of CAA.

Section 263 of CAA

In subsection (1A)(b) the reference to section 18 or 362 of ITTOIA was wrongly inserted by ITTOIA. This Bill removes the reference.

The conditions in subsection (1A) are expressed as alternatives but they are intended to operate independently: paragraph (a) in the case of income tax; and paragraph (b) in the case of corporation tax. The replacement subsections (1)(c), (1A) and (1B) clarify the way the rules work.

Before amendment by ITTOIA the income tax rule did not apply to businesses (such as “special leasing”) which are neither a trade nor a property business. The new subsection (1B) preserves the position for corporation tax. The replacement subsection (1A) reverses a change made by ITTOIA.

Section 265 of CAA

In subsection (1A)(b) the reference to section 18 or 362 of ITTOIA was wrongly inserted by ITTOIA. This Bill removes the reference.

The conditions in subsection (1A) are expressed as alternatives but they are intended to operate independently: paragraph (a) in the case of income tax; and paragraph (b) in the case of corporation tax. The replacement subsections (1)(b), (1A) and (1B) clarify the way the rules work.

Before amendment by ITTOIA the income tax rule did not apply to businesses (such as “special leasing”) which are neither a trade nor a property business. The new subsection (1B) preserves the position for corporation tax. The replacement subsection (1A) reverses a change made by ITTOIA.

Section 558 of CAA

In subsection (1)(c)(ii) the reference to section 18 or 362 of ITTOIA was wrongly inserted by ITTOIA. This Bill makes the necessary correction.

Section 559 of CAA

In subsection (1A)(b) the reference to section 18 or 362 of ITTOIA was wrongly inserted by ITTOIA. This Bill removes the reference.

The conditions in subsection (1A) are expressed as alternatives but they are intended to operate independently: sub-paragraph (a) in the case of income tax; and sub-paragraph (b) in the case of corporation tax. The replacement subsections (1)(b), (1A) and (1B) clarify the way the rules work.

Section 577 of CAA

Following the repeal of sections 114(1) and 337(1) of ICTA (and the corresponding income tax rule in section 113(1) of ICTA) there is no longer any rule that treats an event as the equivalent of the setting up, commencement or discontinuance of a trade etc. The new subsections (2A) to (2C) set out how the rules work. Subsection (2B) sets out the income tax rule that should have been inserted by ITTOIA.

It is difficult to predict how the courts would interpret these provisions for income tax following the ITTOIA amendments. In general, treating an event as a cessation of a trade etc changes the tax liabilities of those carrying on the trade etc before and after the event: a reduction for one is balanced by an increase for the other.

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 105: Qualifying hire car or motor cycle: section 49(2)(b) of ITTOIA: Schedule 1

This change concerns the definition of “qualifying hire car or motor cycle” for the purposes of section 48 of ITTOIA in section 49(2)(b) of ITTOIA. It corrects a minor error in ITTOIA.

It brings the income and corporation tax codes back into line.

Section 48 of ITTOIA restricts the amount which can be deducted in calculating the profits of a trade for income tax purposes in respect of the cost of the hire of a car or motor cycle with a retail price (when new) of more than £12,000 other than “a qualifying hire car or motor cycle”.

Section 49 of ITTOIA defines various terms used in section 48 of ITTOIA.

Section 49(2)(b) of ITTOIA defines “a qualifying hire car or motor cycle” as a car or motor cycle which:

(b) is hired under a hire-purchase agreement under which there is an option to purchase exercisable on the payment of a sum equal to not more than 1% of the retail price of the car when new.

The income tax rule in section 48 of ITTOIA was formerly in section 578A of ICTA. The definition of “qualifying hire car” in section 49(2)(b) of ITTOIA was formerly in section 578B(2)(a) of ICTA.

Section 578B(2)(a) of ICTA, as it applied for income tax, referred to “an option to purchase exercisable on the payment of a sum equal to not more than 1% of the retail price of the car when new”. But because section 578B(1) of ICTA provided that “references to a car .. include a motor cycle”, the option to purchase in the case of a motor cycle had to be exercisable for a sum equal to 1% of the retail price of the motor cycle.

Instead of defining “car” so as to include motor cycle, sections 48 and 49 of ITTOIA refer to “a car or motor cycle” where appropriate. But the reference to the retail price of the motor cycle when new was omitted in error from the definition of “qualifying hire car” in section 49(2) of ITTOIA.

This change corrects that error. It removes any doubt as to the amount for which an option to purchase must be exercisable for a motor cycle to qualify for exemption from the restriction in section 48 of ITTOIA.

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 106: Derivative contracts: contracts which became derivative contracts on 16 March 2005: assumption in respect of consideration on deemed disposal: Schedule 2

This change clarifies what accounting period is relevant to the calculation of the deferred capital gain to be brought into account when a company ceases to be a party to a contract that became a derivative contract as from 3.00pm on 16 March 2005.

Paragraph 4A of Schedule 26 to FA 2002 provides for a chargeable gain or allowable loss to be brought into account when a company ceases to be a party to a relevant contract (an option, future or contract for differences) that became a derivative contract on 16 March 2005 but was a chargeable asset immediately before then. “Chargeable asset” is defined in paragraph 4A(4) of that Schedule as one where a gain on its disposal would be a chargeable gain for the purposes of TCGA.

A contract to which paragraph 4A applies became a derivative contract on 16 March 2005 as a result of amendments to the definition of a derivative contract in Part 2 of Schedule 26 to FA 2002 introduced by the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 (SI 2005/646).

The assumed consideration, for the purposes of the calculation of the gain or loss to be brought into account under paragraph 4A of Schedule 26 to FA 2002, is an amount “equal to the value (if any) given to the contract in the accounts of the company at the end of the company’s accounting period immediately before its first new period”. Neither in paragraph 4A nor anywhere else in Schedule 26 to FA 2002 is there any guidance as to what a company’s “first new period” is. The term occurs, in connection with provisions applying to derivative contracts, only in Schedule 28 to FA 2002 (transitional provisions on the implementation of Schedule 26 to that Act). It is defined for that purpose in paragraph 7 of Schedule 28 to FA 2002 as “its first accounting period to begin on or after” 1 October 2002, that is, the day that Schedule 26 to FA 2002 came into force.

The amendments made by the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 (SI 2005/646) have effect in relation to periods of account beginning on or after 1 January 2005 and ending on or after 16 March 2005. If a company makes up its accounts to, say, 31 December, its accounting period ended 31 December 2005 will be the first accounting period to which paragraph 4A of Schedule 26 to FA 2002 can apply. Logically, the chargeable gain (or allowable loss) to be brought into account under the paragraph should therefore be that which had accrued immediately before that period began, that is, at the end of the accounting period ended 31 December 2004. The consideration used in the calculation of the gain (or loss) will therefore be the value of the contract in the company’s accounts at 31 December 2004, even though the deemed disposal date is 16 March 2005. If a company makes up its accounts to, say, 30 September, the first accounting period to which the paragraph applies is that beginning on 1 October 2005. The accrued chargeable gain (or allowable loss) to be brought into account will therefore be calculated by reference to the value shown in the accounts at 30 September 2005 (but again the deemed disposal date is 16 March 2005). If the company made up accounts for a period of a few weeks early in 2005, the second leg of the commencement rule for the amendments made by the Order, that the first period to which the amendments apply must end on or after 16 March 2005, ensures that the amendments do not have effect in relation to an accounting period ending before they came into effect. “First new period” means in effect the first accounting period to which the amendments made by the Order apply.

This change repairs an omission in the Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2005 (SI 2005/646). It gives certainty for the calculation of the chargeable gain or allowable loss to be brought into account under paragraph 4A of Schedule 26 to FA 2002. The application of Schedule 26 to FA 2002 to accounting periods of the company in respect of the contract in question begins with the period immediately following that identified for the purposes of finding the consideration relevant to the calculation under paragraph 4A of Schedule 26 to FA 2002.

In principle, this change is favourable to some and adverse to other taxpayers as it may identify an amount of consideration for the calculation of the deferred chargeable gain or allowable loss that differs from the amount an alternative reading of “first new period” would identify. But it is unlikely to affect significantly the aggregate profits chargeable to tax in respect of the relevant contract, whether as a chargeable gain or as credits and debits arising on a derivative contract, as regards any company to which it applies.

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.

ANNEX 2: EXTRA-STATUTORY CONCESSIONS, CASE LAW AND LIST OF REDUNDANT MATERIAL NOT REWRITTEN

This Annex is in three parts:

Table 1: a list of ESCs (and one Statement of Practice) that are rewritten in the draft Bill;

Table 2: a list of clauses which involve enacting case law principles; and

Table 3: a list of provisions that are redundant in whole or in part and are omitted by the draft Bill.

TABLE 1

The following ESCs and Statement of Practice are rewritten in the draft Bill.

TABLE 2

The following table sets out the clauses which involve giving statutory effect to principles derived, wholly or mainly, from case law.