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

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Change 10: Oil taxation: abandonment guarantees and expenditure under sections 63 and 65 of FA 1991: Schedule 1 (sections 225O, 225Q, 225R and 225T of ITTOIA)

This change clarifies that sections 63 and 65 of FA 1991 apply for income tax as well as for corporation tax.

Sections 62 to 65 of FA 1991 contain a scheme for relieving certain costs involved with the abandonment of oil installations. Section 62 provides relief for the costs of obtaining an abandonment guarantee and is not limited to corporation tax. Section 64 provides relief where an oil field participator meets expenditure that should have been met by another participator, but where that participator has defaulted in their obligation. Again, this is not limited to corporation tax.

Section 63 of FA 1991 deals with a situation where a guarantee has been set up and the guarantor meets certain expenditure, but the participator is then required to reimburse some or all of those costs to the guarantor. Section 63(5) uses the term “accounting period” which suggests that it applies only to corporation tax. But there appears to be no indication in the remainder of section 63 that it should only apply to corporation tax. A similar point arises in connection with the wording of section 65(4) and (5).

Section 63(4) of FA 1991 provides relief for an oil field participator against their income from the oil ring fence trade for certain expenditure incurred under the terms of an abandonment guarantee. If that provision does not apply for income tax purposes then that relief might not be available to a participator that is liable to income tax. Section 65(3) of FA 1991 provides relief when a defaulter reimburses expenditure met by another participator, while section 65(4) provides for a charge to tax on the participator who is reimbursed. In this case, both the relief and the charge might not apply if the provision does not apply for income tax purposes.

Schedule 1 contains the rewritten material for income tax, and it includes full rewrites of sections 63 and 65 of FA 1991, suitably adapted for income tax to refer to a tax year rather than an accounting period.

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 11: Sale and lease-back etc: restriction of excessive lease rentals: relationship with accounting practice: Schedule 4 (sections 681AD and 681CC of ITA)

This change puts on a statutory basis HMRC’s published practice on the interaction between section 779 of ICTA (sale and lease-back: limitation on tax reliefs) and the accounting treatment for finance lease rentals.

The Inland Revenue set out in Statement of Practice 3/91 (SP3/91) its view on the timing of deductions for rentals payable by lessees under finance leases. The Inland Revenue also published an article supplementing SP3/91 in the Tax Bulletin, February 1995 (TB15). The material in SP3/91 and TB15 is substantially reproduced in paragraphs 61105 to 61185 of HMRC’s Business Income Manual (BIM 61105 to 61185).

Generally speaking, the effect of SP3/91 is that tax relief is given for finance lease rentals in the period in which they are charged in calculating the lessee’s accounting profit or loss. If a lessee makes a payment under a lease, and the economic benefit of the payment extends over several periods of account, then (broadly speaking) the accounting treatment will be to charge the payment as expenditure in the periods of account to which the payment in economic substance relates. Thus under SP3/91 tax relief is not necessarily given in the period in which the finance lease rental payment is made; tax relief may be deferred to later periods.

Section 779 of ICTA is an anti-avoidance provision restricting tax relief for excessive rentals paid under sales and lease-backs of land. If it applies to a payment, tax relief for that payment is deferred (and may in certain circumstances be denied altogether). Section 782 of that Act (leased assets: special cases) is a similar provision applying to transactions involving assets other than land. Sections 779 and 782 of that Act apply for the purposes of both income tax and corporation tax.

HMRC’s practice, as published in TB15 and BIM 61105, is to apply SP3/91 before making any adjustments under section 779 of ICTA (see BIM 61105). Depending on the facts, this may mean that there is no need for any adjustments to be made under section 779 of ICTA.

FA 1998 introduced specific legislation which (broadly speaking) is to the same effect as SP3/91, but goes further. Section 42 of FA 1998 has been rewritten for the purposes of income tax and corporation tax in, respectively, section 25 of ITTOIA and section 46 of CTA 2009 (use of generally accepted accounting practice in calculating trade profits). Section 272 of ITTOIA and section 210 of CTA 2009 apply, respectively, section 25 of ITTOIA and section 46 of CTA 2009 in calculating profits of a property business.

Under section 25 of ITTOIA and section 46 of CTA 2009, trade profits are calculated in accordance with GAAP, subject to adjustments required or authorised by law. These provisions operate by reference to receipts and expenses to be brought into account, not by reference to payments made. But sections 779 and 782 of ICTA do not acknowledge GAAP. And they assume that tax relief is given for payments made rather than expenses brought into account. So there is a conflict. Schedule 4, inserting new sections 681AD and 681CC of ITA, resolves this conflict in this way.

First, it acknowledges that a calculation for tax purposes is made in accordance with GAAP.

Second, it provides that, if deductions for tax purposes are allowed, for example for the rental payments under a lease, the first step is to calculate -

(a)     the total expenses to date brought into account, in accordance with GAAP, in respect of the payments, less

(b)     the total deductions allowed in previous periods for the payments.

Third, it then provides for the rules currently contained in section 779 or 782 of ICTA to be applied to the figure given by that calculation, so that the deduction allowed for the period will be that figure as reduced by those rules (but will be the unreduced figure if those rules do not require a reduction to be made).

Resolving the conflict in this way - rather than making the adjustments required by sections 779 and 782 of ICTA first and then applying GAAP to give relief for lease rental expenditure - could, in principle, affect the periods in which relief is given. This could be favourable to the taxpayer, adverse to the taxpayer or favourable to the taxpayer in some respects and adverse to the taxpayer in other respects. The extent to which it would be favourable or adverse would depend on the facts and, in particular, on the rental profile of the lease under review.

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 12: Sale and lease-back etc: exclusion of service charges etc to be on just and reasonable basis: Schedule 4 (section 681AI of ITA)

This change requires that, in calculating the amount of a payment for which income tax relief is restricted under section 779 of ICTA, a just and reasonable amount must be excluded from the rent or other payment in respect of services or the use of relevant assets or rates usually borne by the tenant.

Section 779 of ICTA is an anti-avoidance provision which restricts tax relief for excessive payments of rent (and similar charges) in respect of land. Section 779(6)(d) provides that:

  • in calculating the amount subject to restriction it is necessary to exclude so much of any payment as is in respect of services or the use of assets or rates usually borne by the tenant; and

  • in determining the amount to be so excluded provisions in any lease or agreement fixing the payments or parts of payments which are in respect of services or the use of services may be overridden.

But section 779 of ICTA does not indicate either what considerations would justify such an override or what criterion should be used instead. In 1964, when this anti-avoidance provision was first introduced, it was natural to envisage that the decision to override the lease or agreement would be taken by the Inland Revenue. But that does not sit easily with Self Assessment.

Section 681AI of ITA, inserted by Schedule 4, therefore replaces the overriding provision of section 779(6)(d) of ICTA with a requirement to exclude so much of the payment as is just and reasonable.

This change has no implications for the amount of tax paid, who pays it, or when. It affects (in principle but not in practice) only administrative matters.

Change 13: Trading income: omission of references to a company carrying on a profession or a vocation: Schedule 4 (section 681DP of ITA)

This change 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.

The change is reflected in numerous sections in Part 3 of CTA 2009 (trading income). It is included in the origins of the main provisions affected, where it is acknowledged as Change 2. It is carried through into new section 681DP of ITA (inserted by Schedule 4).

There are strong grounds for believing that for the purposes of the charge to corporation tax there are no activities that should be taken to constitute the carrying on of a profession or vocation by a corporate body or unincorporated association. There is a full discussion of the issues involved in Change 2 in Annex 1 to the explanatory notes on CTA 2009.

It is theoretically possible that the application of trading income rules to activities that a company could argue is a profession or a vocation could lead to a change in the measure of taxable profits.

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 14: Relocation of section 152 of ICTA: Schedule 7

This change clarifies how an application to make a late objection to a notified amount of taxable benefit is handled in section 152 of ICTA.

Section 152 of ICTA deals with circumstances where an officer of the Department for Work and Pensions (DWP) notifies a benefit claimant of the amount of unemployment benefit, jobseeker’s allowance or income support that is part of the claimant’s income for tax purposes. The term “unemployment benefit” is retained as the wording of the legislation suggests that it may have a broader scope than the statutory name for the benefit, replaced by jobseeker’s allowance.

The claimant has 60 days in which to object to the notice. In addition, a claimant may make an objection after 60 days by making an “application for the purpose”. An officer of DWP must then consider the circumstances, and in particular whether the claimant had a reasonable excuse for the delay and took the necessary action without further unreasonable delay. If the officer is not satisfied the matter is referred to the tribunal.

But it is not clear if it is the application to make a late objection or the objection itself that must be made without further unreasonable delay. Section 152(5)(b) suggests that it is the objection, but that would mean that the objection would have to be made while the application to make the late objection was still under consideration.

Similar legislation can be found in section 49 of TMA concerning an application to make a late appeal. That provision is clear - it is the application that must be made without further unreasonable delay.

The rewritten provision in section 54B(4) of TMA makes it clear that it is the application to make a late objection that must be made without further unreasonable delay, and not the objection itself.

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 15: Omission of section 59(3) of ICTA: Schedule 8

Section 59(3) of ICTA provides that owners, occupiers or receivers of profits from markets, fairs, tolls, fisheries, etc are answerable for income tax charged and can retain and deduct the tax from the profits.

Section 59(1) of ICTA was rewritten in section 8 of ITTOIA and repealed. Section 59(2) of ICTA was repealed by ITTOIA without being rewritten as it did not appear to add anything to section 59(1), and if it did there was no justification (see the commentary on section 8 of ITTOIA in the explanatory notes on that Act). Section 59(3) of ICTA (along with section 59(4) of ICTA) was, at that time, considered as a candidate for relocation; but since then it has been determined to be unnecessary.

The differences between section 8 of ITTOIA and section 59(3) are (in part at least) a result of consolidations having preserved, in section 59(3), wording from the Income Tax Act 1806 which appears to have been derived from a taxation Act of 1763/4 (4 Geo.3 c.2).

If section 59(3) of ICTA applies in addition to section 8 of ITTOIA, the effect of repealing section 59(3) without rewriting it would be to remove the answerability to tax of owners or occupiers who are neither in receipt of, nor entitled to, the profits.

Repealing section 59(3) would reflect the fact that there is no longer any justification for a person to be liable to tax on profits from markets, fairs, tolls, fisheries etc when the person would not be liable to tax in respect of any other business. (Section 59(3) only applies to profits of markets, fairs, tolls, fisheries etc.)

If, however, section 59(3) applies instead of section 8 of ITTOIA, the effect of repealing section 59(3) without rewriting it would be to impose liability on people entitled to the profits but who are not owners or occupiers and are not in receipt of the profits. It is difficult to formulate a set of circumstances in which a person might be within this description otherwise than by avoidable choice. That, coupled with the fact that there is no recent known reliance on section 59(3), suggests that its disappearance would be unlikely in practice to give rise to new liabilities to tax.

The final element of section 59(3) entitles the recipient of profits to deduct and retain the tax on them before passing them to the entitled person. If a business is not covered by section 59(3), there is no corresponding rule. It is not easy to identify what the rule adds to the general law. Equally, it is not easy to be sure that it has no application. So although this element of section 59(3) of ICTA is also considered unnecessary in practice, its repeal may in theory amount to a change in the law.

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.

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

1484.     This Bill rewrites no Extra-statutory Concessions or Statements of Practice nor does it include any changes in the law which involve giving statutory effect to principles derived, wholly or mainly, from case law.

1485.     The omission of provisions which are redundant in whole or in part is an integral part of the rewrite process. In some cases provisions have become redundant with the passage of time; in others they have become unnecessary as a result of the approach taken to the rewriting of related provisions. For ease of reference, those omissions worthy of specific explanation are listed in the table below. The table also sets out where those explanations can be found.

Redundant provisionTopicSee commentary on clause etc
ICTA s.59(3)Persons chargeable: markets, fairs, fisheries, tolls etcPart 12 of Schedule 8
ICTA s.779(13)(f)Sale and lease-back etcPart 9 of Schedule 8
ICTA s.781(4)(e)Sale and lease-back etcPart 9 of Schedule 8
ICTA s.781(5)Sale and lease-back etcPart 9 of Schedule 8
ICTA s.785 (part)Sale and lease-back etcPart 9 of Schedule 8
ICTA s.790(5)(c)(iii)DTRPart 1 of Schedule 8
ICTA s.790(11) (part)DTR134
ICTA s.798(5)(c)DTR37
ICTA s.798A(2) (part) and (3) (part)DTR44
ICTA s.807(3)DTRPart 1 of Schedule 8
ICTA s.816(4)DTRPart 1 of Schedule 8
TMA s.98: entry for regulations under s.199 of FA 2003PenaltiesPart 17 of Schedule 7
FA 1988 s.130(part)Miscellaneous relocations: company migrationPart 10 of Schedule 7: section 109B of TMA
FA 1993 s.194(2)DTRPart 1 of Schedule 8
FA 1997 Sch.12 para.11(14) (part)Extended definition of Capital Allowances ActPart 1 of Schedule 3: section 614BT of ITA
FA 2004 s.115(4)DTRPart 1 of Schedule 8
ITTOIA Sch.2, para 91Saving in relation to section 151(2) of FA 1989Part 11 of Schedule 7
F(No 2)A 2005 s.26(4) (part)Tax arbitrage250
F(No 2)A 2005 s.28(7) (part)Tax arbitrage256
F(No 2)A 2005 s.26(9)(a) (part)Tax arbitrage251
F(No 2)A 2005 s.30(2) (part)Tax arbitrage234
ITA s.527(2)(b)DTRPart 1 of Schedule 8
ITA s.1026(g)DTRPart 1 of Schedule 8
 
 
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Prepared: 19 November 2009