Taxation (International And Other Provisions) Bill - continued          House of Commons

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Section 614BM: Recovery of bad debts following reduction under section 614BL

860.     This section reinstates any relief for cumulative accountancy rental excess reduced under section 614BL if the bad debt deduction is subsequently reversed (because the debt is recovered or prospects for its recovery improve). It is based on paragraph 9(5) to (7) of Schedule 12 to FA 1997.

Section 614BN: Relief for bad debts: reduction of cumulative normal rental excess

861.     This section deals with the interaction of bad debt deductions and relief for cumulative normal rental excess under section 614BK. It is based on paragraph 10(1) to (4) and (7) of Schedule 12 to FA 1997.

862.     As with section 614BL, the rationale is that the relief should only represent an excess of normal rent over accountancy rental earnings which have effectively been brought into account for tax and that the relief should only be given against rents similarly brought into account.

863.     The structure of the detailed rules is identical with that in section 614BL.

Section 614BO: Recovery of bad debts following reduction under section 614BN

864.     This section reinstates any relief for cumulative normal rental excess reduced under section 614BN if the bad debt deduction is subsequently reversed (because the debt is recovered or prospects for its recovery improve). It is based on paragraph 10(5) to (7) of Schedule 12 to FA 1997.

Section 614BP: Effect of disposals of leases: general

865.     This section treats a period of account of the lessor as coming to an end for the purposes of Part 11A immediately before any disposal of the lessor’s interest under the lease, the leased asset or an asset representing the leased asset. It is based on paragraph 12(5) to (7) of Schedule 12 to FA 1997.

866.     This enables the cumulative accountancy rental excess or the cumulative normal rental excess for the period of account of the lessor that then begins, and in which the disposal takes place, to be calculated.

867.     The remaining sub-paragraphs of paragraph 12 of Schedule 12 to FA 1997 are rewritten as section 37A of TCGA by Part 2 of this Schedule. See the commentary on that section. Subsection (5) provides a signpost to that section.

Section 614BQ: Assignments on which neither a gain nor a loss accrues

868.     This section deals with the assignment of a lease in circumstances which are regarded for the purposes of capital gains tax as giving rise to neither a gain nor a loss. It is based on paragraph 7 of Schedule 12 to FA 1997.

869.     Paragraph 7(2) of Schedule 12 to FA 1997, on which subsection (2) is based, provides for a period of account of the assignor to end and a period of account of the assignee to begin with the assignment.

870.     Paragraph 7(3) of Schedule 12 to FA 1997 provides that the assignee takes over the assignor’s “unused cumulative accountancy rental excess” or “unused cumulative normal rental excess”.

871.     These “unused” cumulative excesses are the aggregate of the cumulative rental excess for the period of the assignor which ends with the assignment and any rental excess for that period.

872.     But the combined effect of section 614BP(2) (based on paragraph 12(5) of Schedule 12 to FA 1997) and subsection (2) is that the period of account of the assignor which ends with the assignment is infinitesimally short. There can, therefore, in practice be no accountancy rental excess or normal rental excess for that period.

873.     Accordingly, in rewriting paragraph 7(3) of Schedule 12 to FA 1997 in subsections (3) and (4), the provision has been simplified by referring only to the cumulative accountancy rental excess or the cumulative normal rental excess for that period.

874.     Subsection (5) ensures that the division of the income tax provisions in Part 11A of ITA and the corporation tax provisions in Part 21 of CTB2 works as intended.

Sections 614BR to 614BW: Capital allowances: claw-back of major lump sum

Overview

875.     These sections unpack paragraph 11 of Schedule 12 to FA 1997 to improve its accessibility.

Section 614BR: Effect of capital allowances: introduction

876.     This section introduces sections 614BS to 614BW and provides that they apply if a major lump sum (see section 614BC(5)) falls to be paid in relation to a lease. It is based on paragraph 11(1) and (2) of Schedule 12 to FA 1997.

Section 614BS: Cases where expenditure taken into account under Part 2, 5 or 8 of CAA 2001

877.     This section deals with capital allowances in respect of plant or machinery, mineral extraction and patent rights. It is based on paragraph 11(3) to (7) of Schedule 12 to FA 1997.

878.     Subsection (2) brings into account as disposal value for the purposes of CAA an amount equal to the amount or value of the major lump sum. This is subject to adjustment under subsections (3) to (6) if the disposal value is limited in accordance with CAA.

Section 614BT: Cases where expenditure taken into account under other provisions of CAA 2001

879.     This section deals with capital allowances given under any provision of CAA other than those mentioned in section 614BS. It is based on paragraph 11(8) and (14) of Schedule 12 to FA 1997.

880.     In these cases, an amount equal to the allowances given or, if less, the amount or value of the major lump sum is treated as a balancing charge.

881.     Following the repeal of section 532 of ICTA by CTA 2009, the extended definition of the Capital Allowances Act in paragraph 11(14) of Schedule 12 to FA 1997 is otiose and has not been rewritten.

Section 614BU: Capital allowances deductions: waste disposal and cemeteries

882.     This section deals with deductions for capital expenditure allowed under section 165, 168 or 170 of ITTOIA. It is based on paragraph 11(11) and (12) of Schedule 12 to FA 1997.

883.     In these cases, an amount equal to the deductions allowed or, if less, the amount or value of the major lump sum is treated as a trading receipt.

Section 614BV: Capital allowances deductions: films and sound recordings

884.     This section deals with deductions in respect of films and sound recordings allowed under section 135, 138, 138A, 139 or 140 of ITTOIA. It is based on paragraph 11(9) and (10) of Schedule 12 to FA 1997.

885.     In these cases, if the amount or value of the major lump sum exceeds so much of that sum as was treated as a receipt of a revenue nature under section 134(2) of ITTOIA, the excess is also treated as a receipt of a revenue nature.

Section 614BW: Contributors to capital expenditure

886.     This section deals with the case where capital allowances have been made to a person making contributions to capital expenditure on the provision of a leased asset under sections 537 to 542 of CAA. It is based on paragraph 11(13) of Schedule 12 to FA 1997.

887.     Subsection (2) provides that sections 614BS and 614BT have the same effect in relation to the contributor and those allowances as they do in relation to the lessor and allowances given to the lessor for such expenditure by the lessor.

Section 614BX: Pre-26 November 1996 schemes where this Chapter does not at first apply

888.     This section makes provision for recognising income from some finance leases which form part of a “pre-26 November 1996 scheme” as defined in section 614D(1)(a). It is based on paragraph 13 of Schedule 12 to FA 1997.

889.     A lease which forms part of a pre-26 November 1996 scheme only falls within Part 11A if it meets all the conditions in section 614BC. It does not fall within Chapter 3 as that Chapter only applies to leases which do not form part of a pre-26 November 1996 scheme (see section 614CB(1)(b) and the definition of a post-25 November 1996 scheme in section 614D(1)(b)).

890.     If a lease forming part of a pre-26 November 1996 scheme met all the conditions in section 614BC on 26 November 1996, it falls within Chapter 2 for all periods of account beginning, or treated under section 614DB as beginning, on or after that date, subject to section 614BB(3).

891.     But such a lease may not meet all those conditions until after 26 November 1996. In that case, this section effects a catching up exercise by taxing under section 614BF in the period when the lease is first subject to the rules in Chapter 2 the accumulated excess (if any) of the accountancy measure of income from the lease over the income actually taxed in earlier periods. No such excess relating to periods prior to 26 November 1996 can be taxed in this way nor are the assessments for earlier periods of account actually re-opened. The catching up is done in the period in which the conditions are met.

892.     Subsection (3)(b) provides that for the purposes of Part 11A the time when the conditions are satisfied forms its own brief period of account. This ensures that the computational provisions in this section work correctly.

893.     Subsection (10) provides for the case where for example there has been an assignment within section 614BQ and the lessor at an earlier time was within the charge to corporation tax.

Section 614BY: Post-25 November 1996 schemes to which Chapter 3 applied first

894.     This section provides continuity of reliefs when a lease changes status. It is based on paragraph 14 of Schedule 12 to FA 1997.

895.     It applies if a lease which is initially subject to the rules of Chapter 3 subsequently comes within those of Chapter 2. Any cumulative accountancy rental excess or any cumulative normal rental excess for the purposes of Chapter 3 counts for the purposes of Chapter 2.

896.     Subsection (4) provides for the case where for example there has been an assignment within section 614BQ and the lessor at an earlier time was within the charge to corporation tax.

Chapter 3: Other finance leases

Overview

897.     This Chapter is concerned with cases outside Chapter 2 where any assets are leased in such a way that they are in accordance with GAAP a finance lease or loan.

Section 614C: Introduction to Chapter

898.     This section introduces the Chapter. It is based on paragraph 15(1) of Schedule 12 to FA 1997.

Section 614CA: Purpose of this Chapter

899.     This section sets out the main purpose of the Chapter. It is based on paragraph 15(2) of Schedule 12 to FA 1997.

900.     That purpose is to ensure that the taxable measure of earnings from the lease is not less than the accountancy measure. In effect, the rules take as the taxable earnings the amount which, but for Part 11A, the lessor would bring into account as rent from the lease for the purposes of income tax or the amount of the return on investment from the lease in accordance with GAAP, whichever is the higher. Unlike Chapter 2, this Chapter contains no special rules relating to reliefs for capital expenditure.

Section 614CB: Leases to which this Chapter applies

901.     This section determines whether Chapter 3 applies to a particular lease. It is based on paragraph 16 of Schedule 12 to FA 1997.

902.     The Chapter only applies to leases granted on or after 26 November 1996 and then only if they form part of a post-25 November 1996 scheme as defined in section 614D(1)(b) (see subsection (1)(a) and (b)).

903.     The lease may be of any property or rights (see subsection (1)(a) and the definition of “asset” in section 614DG).

904.     In addition, for the Chapter to apply, condition A, but not all of conditions B to E, in section 614BC must have been met in relation to the lease at some time on or after 26 November 1996 in a period of account of the current lessor (see subsection (1)(c) and (d)). But once condition A has been met in relation to the lessor at the time, it is treated as continuing to be met as regards any subsequent lessor unless and until the lease is assigned to a wholly unrelated person (see subsections (4) to (6)).

905.     Subsection (3) provides that the Chapter does not apply to long funding leases of plant or machinery in relation to which Part 2 of CAA gives capital allowances to the lessee instead of the lessor. Chapter 10A of Part 2 of ITTOIA sets out the basis of taxation of rental earnings under such leases.

906.     Subsection (7) is a necessary consequence of the split into separate provisions for income tax purposes and corporation tax purposes.

Section 614CC: Current lessor taxed by reference to accountancy rental earnings

907.     This section provides for the lessor to bring into account for income tax purposes the accountancy rental earnings in respect of the lease for a period of account if they exceed the normal rent for the period. It is based on paragraph 17 of Schedule 12 to FA 1997.

908.     Paragraph 17 applies paragraph 5 of Schedule 12 to FA 1997 for the purposes of Part 2 of that Schedule by cross-reference. This section restates section 614BF (based on paragraph 5 of Schedule 12 to FA 1997) in full for the purposes of Chapter 3.

Section 614CD: Application of provisions of Chapter 2 for purposes of this Chapter

909.     This section applies the provisions of sections 614BG to 614BQ for the purposes of this Chapter. It is based on paragraph 17 of Schedule 12 to FA 1997.

Chapter 4: Supplementary provisions

Overview

910.     This Chapter contains supplementary and interpretative provisions.

Section 614D: Pre-26 November 1996 schemes and post-25 November 1996 schemes

911.     This section defines a “pre-26 November 1996 scheme” and a “post-25 November 1996 scheme”. It is based on paragraph 27 of Schedule 12 to FA 1997.

912.     For the significance of these terms see the commentary on sections 614BX and 614CB.

Section 614DA: Time apportionment where periods of account do not coincide

913.     This section deals with situations where the measure of the accountancy rental earnings taxed under Part 11A on the lessor is that shown in the accounts of a connected person or a group of companies as a whole and the period for which those accounts are drawn up is different from the period for which the lessor’s accounts are drawn up. It is based on paragraph 24 of Schedule 12 to FA 1997.

914.     In these circumstances the figures are time-apportioned as necessary to arrive at the measure of accountancy rental earnings for the lessor’s period of account.

Section 614DB: Periods of account and related periods of account and tax years

915.     This section sets out the definition of “period of account”. It is based on paragraphs 23 and 30 of Schedule 12 to FA 1997.

Section 614DC: Connected persons

916.     This section provides that persons are regarded as connected throughout the period beginning at the time the leasing arrangements are made and ending with the termination of the current lessor’s interest, if they are connected at some point during that period. It is based on paragraph 25(1) of Schedule 12 to FA 1997.

917.     Section 1021(1) of ITA provides that section 993 of that Act (meaning of “connected” persons) applies for the purposes of ITA unless otherwise indicated (whether expressly or by implication). Accordingly it is unnecessary to rewrite paragraph 25(2) of Schedule 12 to FA 1997 here.

Section 614DD: Assets which represent the leased asset

918.     This section defines assets which represent leased assets. It is based on paragraph 26 of Schedule 12 to FA 1997.

919.     The purpose is to identify assets which in economic terms are essentially the same asset, in whole or in part, as the leased asset. Part 11A provides broadly that transactions in such assets are treated as transactions involving the leased asset itself.

Section 614DE: Parent undertakings and consolidated group accounts

920.     This section sets out an assumption about consolidated accounts of companies which would count as “parent undertakings” for the purposes of the Companies Act 2006 but are not required for accounting purposes to prepare consolidated accounts in accordance with GAAP. It is based on paragraph 28 of Schedule 12 to FA 1997.

921.     Such companies are regarded for the purposes of Part 11A as having to draw up consolidated accounts whether or not they are actually required to do so for accounting purposes. So parent companies incorporated outside the United Kingdom are treated, for the purpose of identifying leases within Part 11A and calculating the rental income from them, as having to draw up consolidated accounts if they would not be so required for accounting purposes.

Section 614DF: Assessments and adjustments

922.     This section ensures that all assessments and adjustments necessary to give effect to the provisions of Part 11A may be made. It is based on paragraph 29 of Schedule 12 to FA 1997.

Section 614DG: Interpretation

923.     This section provides definitions and interpretative rules. It is based on paragraph 30 of Schedule 12 to FA 1997.

Part 2: New section 37A of TCGA 1992

Overview

924.     This new section moves to TCGA the provisions of paragraph 12 of Schedule 12 to FA 1997 relating to the calculation of the amount of any chargeable gain on a disposal of the lessor’s interest in a lease, the leased asset or an asset representing the leased asset.

Section 37A: Consideration on disposal of certain leases

925.     This section deals with the calculation of the amount of any chargeable gain on a disposal within section 614BP of ITA (including that section as applied by section 614CD of that Act) or within clause 915 of CTB2 (including that clause as applied by clause 929 of CTB2) if there is any cumulative accountancy rental excess. It is based on paragraph 12(1) to (4) and (6) of Schedule 12 to FA 1997.

926.     In such cases any unused part of the cumulative accountancy rental excess is set against the disposal proceeds in calculating the chargeable gains position on the disposal. This is to ensure that the same sum is not taxed twice, once as income and again as a chargeable gain. The charge to income tax or to corporation tax on income takes priority because the cumulative accountancy rental excess represents that part of the proceeds on the disposal which is in substance of an income nature.

927.     Section 614BP(2) of ITA and clause 915(2) of CTB2 treat a period of account as coming to an end immediately before any disposal. This ensures that the amount of cumulative accountancy rental excess available for set off against the disposal proceeds under this section can be properly calculated.

928.     The cumulative accountancy rental excess for any period of account is, in effect, the aggregate accountancy rental excess for periods before the current period of account (see section 614BH(5) of ITA and clause 907(5) of CTB2). By treating a period of account as ending immediately before the disposal, the accountancy rental excess for that period can be included in the cumulative accountancy rental excess available to be used in calculating the chargeable gain.

929.     If the disposal mentioned in subsection (1) or (2) is a part disposal, subsections (6) to (9) provide that the amount of the cumulative accountancy rental excess to be set against the disposal proceeds in accordance with subsection (3) is an apportioned part only of the full amount.

930.     If two or more of the disposals mentioned in subsection (1) or (2) are made at the same time, subsection (10) provides that a just and reasonable proportion of the full cumulative accountancy rental excess is to be set against the proceeds of each disposal in accordance with subsection (3).

Schedule 4: Sale and lease-back etc: new Part 12A of ITA 2007

Part 12A of ITA: Sale and lease-back etc

Overview

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

932.     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.

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

934.     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.

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

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

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

938.     This Part largely replicates Part 19 of CTB2, which makes similar provision for the purposes of corporation tax. See the commentary on that Part.

939.     As far as possible, the income tax provisions and the corporation tax provisions are drafted in the same terms. The drafting differs in the following respects.

  • Part 19 of CTB2 refers to corporation tax; Part 12A of ITA refers to income tax.

  • Companies may in certain circumstances be liable to income tax, but persons other than companies are not liable to corporation tax. Accordingly, the corporation tax provisions use “company” to denote the person liable where the corresponding income tax provisions use “person”.

  • Part 19 of CTB2 refers to provisions which are specific to corporation tax; Part 12A of ITA refers to provisions which are specific to income tax.

  • Part 19 of CTB2 does not refer to companies carrying on professions or vocations; Part 12A of ITA refers to persons carrying on professions and vocations. See clause 837 of CTB2, with the commentary thereon, and section 681CA.

940.     For consequential amendments and repeals see Part 9 of Schedule 8 and Part 9 of Schedule 10.

941.     Since the changes to the law of income tax are made by a different Bill from the changes to the law of corporation tax, they are acknowledged in Annex 1 to the explanatory notes on a different Bill. Accordingly, separate Change Notes are presented for them in Annex 1 to the explanatory notes on this Bill.

 
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Prepared: 19 November 2009