Chapter 1: Payments connected with transferred land
Overview
943.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.
944.This Chapter corresponds to Chapter 1 of Part 19 of CTA 2010, which makes similar provision for the purposes of corporation tax. It has the following structure.
Section 681A summarises the Chapter.
Sections 681AA to 681AC say when the Chapter applies and define “relevant income tax relief” and “relevant deduction from earnings”.
Section 681AD restricts relevant income tax relief and carries forward relief which has been denied.
Sections 681AE to 681AH restrict income tax relief for certain deductions from earnings and carry forward relief which has been denied.
Sections 681AI to 681AN are interpretative.
Section 681A: Overview
945.This section summarises this Chapter. It is new.
Section 681AA: Transferor or associate becomes liable for payment of rent
946.This section sets out the conditions for section 681AD or, as the case may be, section 681AE to apply in a case involving the payment of rent. It is based on section 779(1), (3), (13) and (14) of ICTA.
947.Subsection (1) lists the conditions which must be met if section 681AD (relevant income tax relief: deduction not to exceed commercial rent) is to apply.
948.The words “rent” and “lease” appear for the first time in this Chapter in subsection (1)(b). They are defined in section 681AL.
949.Subsection (2) lists the conditions which must be met if section 681AE (deduction from earnings not to exceed commercial rent) is to apply.
950.Subsection (3) explains what is meant in subsections (1)(a) and (2)(a) by “transferring” an estate or interest in land.
951.Subsection (4) explains what is meant in this Chapter by the “transferor”.
952.Subsections (5) and (6) explain what is meant in subsections (1)(b) and (2)(b) by becoming “liable” to make a payment.
953.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.
Section 681AB: Transferor or associate becomes liable for payment other than rent
954.This section 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 section 681AA. See the commentary on that section.
955.If, in a given case, the reader is satisfied that at least one of the conditions in section 681AA is not met and at least one of the conditions in this section 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.
Section 681AC: Relevant income tax relief and relevant deduction from earnings
956.This section lists, for the purposes of this Chapter, the deductions by way of “relevant income tax relief” and defines “relevant deduction from earnings”. It is based on section 779(13) of ICTA.
Section 681AD: Relevant income tax relief: deduction not to exceed commercial rent
957.This section restricts income tax relief for payments falling within section 681AA or 681AB 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.
958.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. See Change 11 in Annex 1.
959.Section 681CC makes the same change in rewriting section 782 of ICTA.
Section 681AE: Deduction from earnings not to exceed commercial rent
960.This section is a special rule restricting relevant deductions from earnings in relation to payments falling within section 681AA(2) or 681AB(2). It is based on section 779(1), (2), (4) and (6) of ICTA.
961.The rules for calculating relevant deductions from earnings do not use GAAP. Accordingly, cases involving relevant deductions from earnings are excluded from the main rule in section 681AD, and sections 681AF to 681AH supplement this section.
Section 681AF: Carrying forward parts of payments
962.This section permits amounts which have been disallowed under section 681AE 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 sections supplementing section 681AE.
963.Subsections (1) to (3) specify the conditions which must be met if this section is to apply.
964.Subsection (4) is the main operative provision.
965.Subsection (5) permits the section to be applied repeatedly.
Section 681AG: Aggregation and apportionment of payments
966.This section is concerned with the aggregation and apportionment of payments under the lease or rentcharge etc. It is based on section 779(6) of ICTA.
Section 681AH: Payments made for later periods
967.This section prevents the taxpayer escaping this Chapter by labelling the bunched-up payments as payments for later periods. It is based on section 779(7) of ICTA.
Section 681AI: Exclusion of service charges etc
968.This section is concerned with service charges and the like. It is based on section 779(6) and (12) of ICTA.
969.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 sections 681AJ and 681AK do not include service charges etc and so this section correspondingly excludes them from the amount with which the commercial rent is compared.
970.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 12 in Annex 1.
971.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 sections 681CG and 681DO.
Section 681AJ: Commercial rent: comparison with rent under a lease
972.This section defines “commercial rent” for the purpose of comparison with rent under a lease. It is based on section 779(8) of ICTA.
973.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).
Section 681AK: Commercial rent: comparison with payments other than rent
974.This section defines “commercial rent” for the purpose of comparison with payments other than rent. It is based on section 779(9) and (12) of ICTA.
975.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).
976.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).
Section 681AL: Lease and rent
977.This section defines “lease” and “rent” for the purposes of this Chapter. It is based on section 779(10) and (12) of ICTA.
Section 681AM: Associated persons
978.This section defines “associated persons” for the purposes of this Chapter. It is based on section 779(11) of ICTA.