Clause 827 and 828: Gain attributable to period before intention to develop formed and disposals of shares in companies holding land as trading stock

2459.     These clauses are based on section 776(7) and (10) of ICTA. Apart from differences of the kind described in the Overview and the fact that clause 827 refers to CTA 2009 rather than to ITTOIA, they replicate sections 765 and 766 of ITA.

Clauses 829 and 830: Cases where consideration receivable by person not assessed; certificates of tax paid etc

2460.     These clauses are based on section 777(8) of ICTA. They replicate exactly sections 768(1) to (5) and 769(1) and (2) of ITA.

2461.     There is no equivalent in these clauses of sections 768(6) to (8) and 769(3) of ITA, which are income tax specific.

Clause 831: Clearance procedure

2462.     This clause is based on section 776(11) of ICTA; apart from differences of the kind described in the Overview, it replicates exactly section 770 of ITA.

2463.     This clause includes a minor change in the law. Section 776(11) of ICTA gives the clearance function to “the inspector to whom [the taxpayer] makes its return of income”. In practice, HMRC do not interpret this restrictively. This clause gives the clearance function to the Commissioners for HMRC. See Change 53 in Annex 1, which corresponds to Change 118 in Annex 1 to the explanatory notes on ITA.

Clause 832: Power to obtain information

2464.     This clause is based on section 778 of ICTA. It replicates exactly section 771 of ITA.

2465.     Subsection (1) includes a minor change in the law: it expressly restricts the particulars to be provided to those which an officer of Revenue and Customs may reasonably require. See Change 54 in Annex 1, which corresponds to Change 114 in Annex 1 to the explanatory notes on ITA.

Clause 833: Interpretation of Part

2466.     This clause is based on sections 776(13) and 777(13) of ICTA. Except as noted in the Overview above, it replicates exactly section 772 of ITA.

Part 19: Sale and lease-back etc

Overview

2467.     This Part rewrites sections 779 to 785 of ICTA (sales and lease-backs) for the purposes of corporation tax.

2468.     Sections 779 and 781 to 785 of ICTA first appeared as sections 17 to 19 of, and Schedule 7 to, FA 1964. Section 780 of ICTA first appeared as section 80 of FA 1972. There have been numerous changes to the taxation of leasing since 1972, but sections 779 to 785 of ICTA are still capable of applying.

2469.     The four main operative sections of the source legislation - sections 779, 780, 781 and 782 of ICTA - have been rewritten in separate Chapters. Within each Chapter, the detailed provisions have been laid out in clauses arranged in a rational order. The legislation is also being split between the corporation tax and income tax codes.

2470.     This Part has the following structure.

• Chapter 1 (payments connected with transferred land) is based on section 779 of ICTA.

• Chapter 2 (new lease of land after assignment or surrender) is based on section 780 of ICTA.

• Chapter 3 (leased trading assets) is based on sections 782 and 785 of ICTA.

• Chapter 4 (leased assets: capital sums) is based on sections 781, 782(1) and 783 to 785 of ICTA.

2471.     Chapters 1 and 2 apply to certain transactions in land. Chapters 3 and 4 apply to certain transactions in assets other than land.

2472.     If Chapter 1 or Chapter 3 applies, tax relief for lease rental (or similar) expenditure is deferred (and may in certain circumstances be denied).

2473.     If Chapter 2 or Chapter 4 applies, a capital sum is taxed as income.

Chapter 1: Payments connected with transferred land

Overview

2474.     This Chapter is based on section 779 of ICTA. It counters certain avoidance devices based on arrangements for the sale and lease-back of land or on analogous arrangements, such as arrangements for sale of land with reservation of a rentcharge. It restricts tax relief for lease rental expenditure.

2475.     The Chapter has the following structure.

• Clause 834 summarises the Chapter.

• Clauses 835 to 837 say when the Chapter applies and define “relevant corporation tax relief”.

• Clause 838 restricts relevant corporation tax relief and carries forward relief which has been denied.

• Clauses 839 to 842 restrict corporation tax relief for certain insurance company expenses and carry forward relief which has been denied.

• Clauses 843 to 848 are interpretative.

Clause 834: Overview

2476.     This clause summarises this Chapter. It is new.

Clause 835: Transferor or associate becomes liable for payment of rent

2477.     This clause sets out the conditions for clause 838 or, as the case may be, clause 839 to apply in a case involving the payment of rent. It is based on section 779(1), (3), (13) and (14) of ICTA.

2478.     Subsection (1) lists the conditions which must be met if clause 838 (relevant corporation tax relief: deduction not to exceed commercial rent) is to apply.

2479.     The words “rent” and “lease” appear for the first time in this Chapter in subsection (1)(b). They are defined in clause 846.

2480.     Subsection (2) lists the conditions which must be met if clause 839 (deduction under section 76 of ICTA not to exceed commercial rent) is to apply.

2481.     Subsection (3) explains what is meant in subsections (1)(a) and (2)(a) by “transferring” an estate or interest in land.

2482.     Subsection (4) explains what is meant in this Chapter by the “transferor”.

2483.     Subsections (5) and (6) explain what is meant in subsections (1)(b) and (2)(b) by becoming “liable” to make a payment.

2484.     Subsection (7) preserves the rule that, if the transfer was made before the legislation was first introduced, a lease-back after that date will not activate the legislation.

Clause 836: Transferor or associate becomes liable for payment other than rent

2485.     This clause sets out the conditions for the Chapter to apply in a case involving a payment other than rent. It is based on section 779(2), (3), (13) and (14) of ICTA. It is very similar in structure to clause 835. See the commentary on that clause.

2486.     If, in a given case, the reader is satisfied that at least one of the conditions in clause 835 is not met and at least one of the conditions in this clause is not met, the reader can conclude that as this Chapter does not have effect there is no need to read any further in it.

Clause 837: Relevant corporation tax relief

2487.     This clause lists, for the purposes of this Chapter, the deductions by way of “relevant corporation tax relief”. It is based on section 779(13) of ICTA.

2488.     Paragraph (a) omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See Change 4 in Annex 1. The same change is being made in clauses 851, 860, 864, 880, 883 and 886.

Clause 838: Relevant corporation tax relief: deduction not to exceed commercial rent

2489.     This clause restricts relevant corporation tax relief for payments falling within clause 835(1) or 836(1) and, in certain cases, provides for such relief to be carried forward. It is based on section 779(1), (2) and (4) to (6) of ICTA.

2490.     Subsection (3) puts on a clear statutory footing the practice of spreading lease rental expenditure in accordance with GAAP before applying section 779 of ICTA. This is a minor change in the law, in favour of the taxpayer. See Change 55 in Annex 1.

2491.     Clause 865 makes the same change in rewriting section 782 of ICTA.

Clause 839: Deduction under section 76 of ICTA not to exceed commercial rent

2492.     This clause is a special rule restricting deductions under section 76 of ICTA (relief for certain insurance company expenses) in relation to payments falling within clause 835(2) or 836(2). It is based on section 779(1), (2), (4) and (6) of ICTA.

2493.     Section 76 of ICTA does not use GAAP. Accordingly, cases within section 76 of ICTA are excluded from the main rule in clause 838, and clauses 840 to 842 supplement this clause.

Clause 840: Carrying forward parts of payments

2494.     This clause permits amounts which have been disallowed under clause 839 to be carried forward to a later period (and thus, potentially, relieved). It is based on section 779(5) and (6) of ICTA, and is the first of three clauses supplementing clause 839.

2495.     Subsections (1) to (3) specify the conditions which must be met if this clause is to apply.

2496.     Subsection (4) is the main operative provision.

2497.     Subsection (5) permits the clause to be applied repeatedly.

Clause 841: Aggregation and apportionment of payments

2498.     This clause is concerned with the aggregation and apportionment, for the purposes of clause 839, of payments under the lease or rentcharge etc. It is based on section 779(6) of ICTA, and is the second of three clauses supplementing clause 839.

Clause 842: Payments made for later periods

2499.     This clause prevents the taxpayer escaping clause 839 by labelling the bunched-up payments as payments for later periods. It is based on section 779(7) of ICTA, and is the third of three clauses supplementing clause 839.

Clause 843: Exclusion of service charges etc

2500.     This clause is concerned with service charges and the like. It is based on section 779(6) and (12) of ICTA. It applies for the purposes of both the main rule in clause 838 and the special rule for certain insurance company expenses in clause 839.

2501.     Leases commonly provide for the tenant to pay the landlord not only rent but also service charges and the like, and these may be paid in a single sum; the definitions of “commercial rent” in clauses 844 and 845 of this Bill do not include service charges etc and so this clause correspondingly excludes them from the amount with which the commercial rent is compared.

2502.     Subsections (3) and (4) prevent the taxpayer escaping this Chapter by agreeing to pay an excessive amount by way of service charge. They include a minor change in the law to bring it into line with Self Assessment. See Change 56 in Annex 1.

2503.     The source legislation uses the term “asset”, which is defined to exclude land and interests in land. Since many readers may find this counter-intuitive, subsection (2)(b) refers to “relevant assets”. The term “relevant asset” is defined in subsection (5). Chapters 3 and 4 of this Part also use the term “relevant asset”, for the same reason. See clauses 869 and 885 of this Bill.

Clause 844: Commercial rent: comparison with rent under a lease

2504.     This clause defines “commercial rent” for the purpose of comparison with rent under a lease. It is based on section 779(8) of ICTA.

2505.     Commercial rent is the rent payable under a hypothetical lease. Under subsection (3)(d), the hypothetical lease provides for rent to be payable “at an appropriate rate”. This expression is defined in subsection (4).

Clause 845: Commercial rent: comparison with payments other than rent

2506.     This clause defines “commercial rent” for the purpose of comparison with payments other than rent. It is based on section 779(9) and (12) of ICTA.

2507.     Commercial rent is the rent payable under a hypothetical lease. Under subsection (2)(b), the hypothetical lease is “a tenant’s repairing lease”. This expression is defined in subsection (3).

2508.     Under subsection (2)(c), the hypothetical lease is “of an appropriate duration”. The rules for determining whether a lease is of an appropriate duration are laid down in subsection (4).

Clause 846: Lease and rent

2509.     This clause defines “lease” and “rent” for the purposes of this Chapter. It is based on section 779(10) and (12) of ICTA.

Clause 847: Associated persons

2510.     This clause defines “associated persons” for the purposes of this Chapter. It is based on section 779(11) of ICTA.

Clause 848: Land outside the UK

2511.     This clause explains how expressions in this Chapter relating to interests in land in the United Kingdom and their disposition are to be interpreted in cases involving land outside the United Kingdom. It is based on section 779(12) of ICTA.

Chapter 2: New lease of land after assignment or surrender

Overview

2512.     This Chapter is based on section 780 of ICTA. It deals with the situation where the existing occupier of premises incurs additional rental liability in return for the payment of a lump sum.

2513.     In form, the lump sum is the consideration received for assigning the lease, usually to a charity or a pension fund, and the lease-back is at an increased rent.

2514.     In substance, however, the lump sum is a loan and the additional rent represents the repayment of principal and interest.

2515.     Where the Chapter applies, a proportion of the lump sum is to be treated as income of the recipient.

2516.     The Chapter has the following structure.

• Clause 849 summarises the Chapter.

• Clause 850 states when the Chapter applies.

• Clauses 851 and 852 tax some or all of the consideration as income.

• Clause 853 concerns relief for rent under the new lease.

• Clauses 854 to 858 deal with cases in which the new lease is deemed to end.

• Clause 859 deals with a case in which a lease is varied to provide for increased rent.

• Clauses 860 to 862 are interpretative.

Clause 849: Overview

2517.     This clause summarises this Chapter. It is new.

2518.     The word “lease” appears in subsection (1) for the first time in this Chapter. On the meaning of “lease” in this Chapter, see clause 862.

Clause 850: New lease after assignment or surrender

2519.     This clause states when this Chapter applies. It is based on section 780(1), (7) and (9) of ICTA.

2520.     Subsection (1) provides that five conditions must be met if the Chapter is to apply. If, in a given case, the reader is satisfied that at least one of these conditions is not met, the reader need read no further in this Chapter.

2521.     Subsection (2) specifies condition A, concerning the original lease.

2522.     The word “lessee” appears in subsection (2)(a) for the first time in this Chapter. On the meaning of “lessee” in this Chapter, see clause 862.

2523.     The expression “a deduction by way of relevant corporation tax relief” appears in subsection (2)(b) for the first time in this Chapter. It is defined in clause 860.

2524.     Subsection (3) specifies condition B, concerning the assignment or surrender of the original lease. Clause 1166 provides that in the application of the Corporation Tax Acts to Scotland “assignment” means assignation. This gives effect to the application of section 24(5) of ICTA by section 780(8) of that Act. Clause 1166 also provides that in the application of the Corporation Tax Acts to Scotland “surrender” includes renunciation.

2525.     Subsection (4) specifies condition C, concerning the new lease.

2526.     The expression “a person linked to L” appears for the first time in this Chapter in subsection (4)(a). It is defined in clause 861. See further the commentary on clause 851(6) and (7).

2527.     Subsection (5) specifies condition D, concerning the relationship between the new lease and the original lease.

2528.     Condition E in subsection (6) preserves the rule that, if, before the legislation was introduced, there was a legal or equitable right to the grant of a new lease, then the grant of the new lease will not activate the legislation.

2529.     Subsection (7) signposts the transitory provision based on the second limb of section 780(9) of ICTA. The “relevant provisions” are the paragraphs headed “New lease of land after assignment or surrender: right to new lease existed pre-22 June 1971” in the “sale and lease-back etc” Parts of Schedule 2 to this Bill and Schedule 9 to TIOPB.

Clause 851: Taxation of consideration

2530.     This clause taxes, as if it were income, some or all of the consideration received by the lessee. It is based on section 780(1), (3), (3A), (7) and (8) of ICTA.

2531.     Subsection (1) requires an “appropriate amount” of the consideration to be found.

2532.     Subsection (1)(a) refers to the assignment of the original lease. Clause 1166 provides that in the application of the Bill to Scotland “assignment” means assignation. This gives effect to the application of section 24(5) of ICTA by section 780(8) of that Act. Clause 1166 also provides that in the application of the Bill to Scotland “surrender” includes renunciation.

2533.     Subsection (2) provides that the appropriate amount is not to be treated as a capital receipt.

2534.     Subsection (3) defines the appropriate amount if the term of the new lease is not more than one year. Subsection (4) defines the appropriate amount if the term of the new lease is more than one year.

2535.     In a case in which the term of the new lease (a) exceeds one year and (b) is not for a whole number of years, the formula in section 780(3) of ICTA does not expressly say how to deal with parts of years. Subsection (5) makes it clear that, in such a case, a part of a year is to be taken as an appropriate proportion of a year.

2536.     Subsection (6) provides that the way in which the appropriate amount is treated depends on whether certain specified conditions are met.

2537.     If these conditions are met, subsection (7) treats the appropriate amount as a receipt of the trade mentioned in subsection (6)(a).

2538.     Subsections (6)(a) and (7) omit references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation. See the commentary on clause 837 and Change 4 in Annex 1. This Change is not made in subsection (6)(b), because a person linked to L is not necessarily a corporation tax payer.

2539.     If the conditions in subsection (6) are not met, subsection (8) treats the appropriate amount as chargeable to corporation tax under the charge to corporation tax on income.

Clause 852: Position where new lease does not include all original property

2540.     This clause deals with the position where the new lease does not include all the original property. It is based on section 780(4) of ICTA.

Clause 853: Relief for rent under new lease

2541.     This clause makes it clear that the normal rules for tax relief apply to rent under the new lease. It is based on section 780(1) of ICTA.

Clause 854: New lease treated as ending

2542.     This clause introduces three clauses which treat the new lease as ending in certain circumstances. It is based on section 780(2) of ICTA.

2543.     Subsection (2) is a tie-breaker rule. Section 780(2) of ICTA indicates that if section 780(2)(a) and (2)(b) could both apply then only one of them applies, namely the one that produces the earlier date. But section 780(2)(b) might on its own produce different dates, and it seems to take section 780(2)(b)(i) and (ii) separately (see “as the case may be”) without expressly providing which prevails. But it would be anomalous if section 780(2) included a tie-breaker rule for some but not all of the possible cases, or if it had different tie-breaker rules for different cases. Subsection (2) therefore makes it clear that the earliest date prevails in all cases.

Clause 855: Position where rent reduces

2544.     This clause deals with the position where the rent is reduced. It is based on section 780(2) and (8) of ICTA.

2545.     Subsection (1) uses the expressions “rent for a relevant period” and “following comparable period”. Subsection (2)(a), (b) and (c) define “relevant period”, “following comparable period” and “rent for a period” respectively.

2546.     Subsection (2)(a) uses the expressions “rental period” and “fifteenth anniversary [of the new lease]”. These expressions are defined in subsection (2)(d) and (e) respectively.

2547.     Subsection (3) supplements the definition of “rental period” in subsection (2)(d).

Clause 856: Position where lease may be ended

2548.     This clause deals with the position where the lease has a provision for early termination. It is based on section 780(2) and (7) of ICTA.

Clause 857: Position where lease may be varied

2549.     This clause deals with the position where the lessee has the power to vary the terms of the lease in the lessee’s favour (for example, by reducing the rent which the lessee would otherwise have to pay). It is based on section 780(2) and (7) of ICTA.

Clause 858: Lease treated as ending: rentcharge

2550.     This clause supplements the previous three; it deals with rentcharges. It is based on section 780(2) and (7) of ICTA.

Clause 859: Lease varied to provide for increased rent

2551.     This clause deals with a case in which a lease is varied to provide for increased rent. It is based on section 780(6) of ICTA.

2552.     Subsection (1) provides that four conditions must all be met if this clause is to apply.

2553.     Subsection (2) specifies condition A, concerning the original lease.

2554.     Subsection (3) specifies condition B, concerning the variation of the lease.

2555.     Subsection (4) specifies condition C, concerning the increase in the rent.

2556.     Subsection (5) specifies condition D, concerning the period within which the increased rent is to be paid.

2557.     Subsection (6) is the main operative provision. Condition A in subsection (2) is the same as condition A in clause 850 (new lease after assignment or surrender). In consequence of subsection (6)(a), condition B in that clause is met. In consequence of subsection (6)(b), conditions C and D in that clause are met. Accordingly, if conditions A to D in this clause are met, conditions A to D in that clause are met and this Chapter therefore has effect.