Finance (No. 2) Act 2017

23 In Chapter 5 of Part 3 (profits of property businesses: other rules about receipts and deductions), after the Chapter heading insert—

“Cash basis: application of Chapter

307A Cash basis: application of Chapter

(1) The following provisions of this Chapter apply only where the profits of a property business are calculated on the cash basis—

(a) section 307B (cash basis: capital expenditure),

(b) section 307C (cash basis: deduction for costs of loans), and

(c) section 307D (cash basis: modification of deduction for costs of loans).

(2) Sections 307E and 307F make provision about capital receipts in certain cases where the profits of a property business are calculated on the cash basis or have previously been calculated on the cash basis.

Property businesses using cash basis

307B Cash basis: capital expenditure

(1) This section applies in relation to the calculation of the profits of a property business on the cash basis.

(2) No deduction is allowed for an item of a capital nature incurred on, or in connection with, the acquisition or disposal of a business or part of a business.

(3) No deduction is allowed for an item of a capital nature incurred on, or in connection with, education or training.

(4) No deduction is allowed for an item of a capital nature incurred on, or in connection with, the provision, alteration or disposal of land.

(5) But subsection (4) does not prevent a deduction being made for expenditure that—

(a) is incurred on the provision of a depreciating asset which, in being provided, is installed or otherwise fixed to qualifying land (see subsection (8)) so as to become, in law, part of the land, but

(b) is not incurred on, or in connection with, the provision of—

(i) a building,

(ii) a wall, floor, ceiling, door, gate, shutter or window or stairs,

(iii) a waste disposal system,

(iv) a sewerage or drainage system, or

(v) a shaft or other structure in which a lift, hoist, escalator or moving walkway may be installed.

(6) No deduction is allowed for an item of a capital nature incurred on, or in connection with, the provision, alteration or disposal of an asset for use in ordinary residential property (see subsection (8)).

But see section 311A (replacement domestic items relief).

(7) If an asset is provided partly for use in ordinary residential property and partly for other purposes, such apportionment of the expenditure incurred on, or in connection with, the provision, alteration or disposal of the asset is to be made for the purposes of subsection (6) as is just and reasonable.

(8) In relation to the calculation of profits for a tax year—

(a) “ordinary residential property” means a dwelling-house or part of a dwelling-house in relation to which an ordinary property business (see subsection (9)) is carried on in the tax year, and

(b) “qualifying land” means land not falling within paragraph (a).

(9) “Ordinary property business” means—

(a) so much of a UK property business as does not consist of the commercial letting of furnished holiday accommodation (within the meaning of Chapter 6) in the UK, or

(b) so much of an overseas property business as does not consist of the commercial letting of furnished holiday accommodation in one or more EEA states.

(10) No deduction is allowed for an item of a capital nature incurred on, or in connection with, the provision, alteration or disposal of—

(a) any asset that is not a depreciating asset (see subsections (11) and (12)),

(b) any asset not acquired or created for use on a continuing basis in the property business,

(c) a car (see subsection (20)),

(d) a non-qualifying intangible asset (see subsections (13) to (16)), or

(e) a financial asset (see subsection (17)).

(11) An asset is a “depreciating” asset if, on the date the item of a capital nature is incurred, it is reasonable to expect that before the end of 20 years beginning with that date—

(a) the useful life of the asset will end, or

(b) the asset will decline in value by 90% or more.

(12) The useful life of an asset ends when it could no longer be of use to any person for any purpose as an asset of a business.

(13) “Intangible asset” means anything that is capable of being an intangible asset within the meaning of FRS 105 and, in particular, includes—

(a) an internally-generated intangible asset, and

(b) intellectual property.

(14) An intangible asset is “non-qualifying” unless, by virtue of having a fixed maximum duration, it must cease to exist before the end of 20 years beginning with the date on which the item of a capital nature is incurred.

(15) An intangible asset is “non-qualifying” if it consists of a right, whether conditional or not, to obtain an intangible asset without a fixed maximum duration by virtue of which that asset must, assuming the right is exercised at the last possible time, cease to exist before the end of 20 years beginning with the date on which the item of a capital nature is incurred.

(16) Where—

(a) the person carrying on the property business (“P”) has an intangible asset, and

(b) P grants a licence or any other right in respect of that asset to another person,

any intangible asset that consists of a licence or other right granted to P in respect of the intangible asset mentioned in paragraph (a) is “non-qualifying”.

(17) A “financial asset” means any right under or in connection with—

(a) a financial instrument, or

(b) an arrangement that is capable of producing a return that is economically equivalent to a return produced under any financial instrument.

(18) A reference to acquisition, provision, alteration or disposal includes potential acquisition, provision, alteration or (as the case may be) disposal.

(19) If there is a letting of accommodation only part of which is furnished holiday accommodation, such apportionments as are just and reasonable in all the circumstances are to be made for the purposes of this section.

(20) In this section—

• “arrangement” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable);

• “building” includes any fixed structure;

• “car” has the same meaning as in Part 2 of CAA 2001 (see section 268A of that Act);

• “financial instrument” has the same meaning as in FRS 105;

• “FRS 105” means Financial Reporting Standard 105 (the Financial Reporting Standard applicable to the Micro-entities Regime), issued by the Financial Reporting Council in July 2015;

• “intellectual property” means—

  (a)

  any patent, trade mark, registered design, copyright or design right, plant breeders’ rights or rights under section 7 of the Plant Varieties Act 1997,

  (b)

  any right under the law of a country or territory outside the United Kingdom corresponding or similar to a right within paragraph (a),

  (c)

  any information or technique not protected by a right within paragraph (a) or (b) but having industrial, commercial or other economic value, or

  (d)

  any licence or other right in respect of anything within paragraph (a), (b) or (c);

• “provision” includes creation, construction or acquisition.

307C Cash basis: deduction for costs of loans

(1) Section 307D applies in calculating the profits of a property business for a tax year if conditions A to D are met.

(2) Condition A is that the profits of the business are calculated on the cash basis for the tax year.

(3) Condition B is that a deduction for costs of a loan is allowed in calculating the profits of the business for the tax year or, ignoring section 272A (restricting deductions for finance costs related to residential property) and section 307D (cash basis: modification of deduction for costs of loans), would be so allowed.

In this section such a loan is referred to as a “relevant loan”.

(4) Condition C is that an amount of the principal of one or more relevant loans is outstanding at the end time (and a relevant loan in respect of which such an amount is outstanding at the end time is referred to in this section as an “outstanding relevant loan”).

(5) Condition D is that—

L>V

where—

• L is the total outstanding amount of relevant loans (see subsections (6) and (7)), and

• V is the sum of the values of all relevant properties (see subsections (8) to (10)).

(6) The “total outstanding amount of relevant loans”—

(a) if there is only one outstanding relevant loan, is the outstanding business amount of that loan, and

(b) if there are two or more outstanding relevant loans, is found by calculating the outstanding business amount of each such loan and adding those amounts together.

(7) The “outstanding business amount” of a relevant loan is given by—

where—

• A is the amount of the principal of the loan which is outstanding at the end time,

• X is the amount of the deduction for costs of the loan that would be allowed, apart from sections 272A and 307D, in calculating the profits of the business for the tax year, and

• Y is the amount of the deduction for costs of the loan that would be allowed, apart from the wholly and exclusively rule and sections 272A and 307D, in calculating the profits of the business for the tax year.

(8) A property is a “relevant property” if—

(a) it is involved in the property business at the end time, or

(b) although it is not involved in the business at the end time—

(i) it was last involved in the business at an earlier time in the tax year, and

(ii) the person carrying on the business holds the property throughout the period beginning with that earlier time and ending with the end time.

(9) The “value” of a relevant property is the total of—

(a) the market value of the property at the time that it is first involved in the property business, and

(b) such amount of any expenditure of a capital nature incurred by the person carrying on the business in respect of the property as is not brought into account in calculating the profits of the business for the tax year or any previous tax year.

(10) A property is “involved in the property business” if it is a property whose exploitation forms the whole or part of the business.

(11) The “end time” is—

(a) the time immediately before the end of the tax year, or

(b) if in the tax year the person carrying on the business permanently ceases to carry it on, the time immediately before the person permanently ceases to carry on the business.

(12) “Costs”, in relation to a loan, means—

(a) interest on the loan,

(b) an amount in connection with the loan that, for the person receiving or entitled to the amount, is a return in relation to the loan which is economically equivalent to interest, or

(c) incidental costs of obtaining finance by means of the loan.

(13) Section 58(2) to (4) (meaning of “incidental costs of obtaining finance”) apply for the purposes of subsection (12)(c).

(14) In this section—

• “market value”, in relation to a property, means the price which the property might reasonably be expected to fetch—

  (a)

  in the market conditions then prevailing, and

  (b)

  between persons dealing with each other at arm’s length in the open market;

• “property” means an estate, interest or right in or over land;

• “the wholly and exclusively rule” means the rule in section 34 (expenses not wholly and exclusively for trade and unconnected losses), as applied by section 272ZA (application of trading income rules: cash basis).

307D Cash basis: modification of deduction for costs of loans

(1) Where section 307C provides that this section applies in calculating the profits of a property business for a tax year, the amount which is allowed as a deduction for costs of a loan in calculating the profits for the tax year is the non-adjusted deduction multiplied by the relevant fraction.

This is subject to section 272A (restricting deductions for finance costs related to residential property).

(2) “The non-adjusted deduction” means the deduction for costs of the loan that would be allowed, apart from section 272A and this section, in calculating the profits of the business for the tax year.

(3) “The relevant fraction” means—

where V and L have the same meaning as in section 307C.

(4) For the meaning of “costs of a loan” see section 307C.

Property businesses that use, or have used, cash basis

307E Capital receipts under, or after leaving, cash basis

(1) This section applies in relation to a property business carried on by a person in two cases—

(a) Case 1 (see subsections (2) to (4)), and

(b) Case 2 (see subsections (5) to (8)).

(2) Case 1 is a case in which conditions A and B are met.

(3) Condition A is that the person receives disposal proceeds or a capital refund in relation to an asset in a tax year for which the profits of the property business are calculated on the cash basis (see section 271D).

For the meaning of “disposal proceeds” and “capital refund” see subsections (9) and (10).

(4) Condition B is that—

(a) an amount of capital expenditure (see subsection (11)) relating to the asset has been brought into account in calculating the profits of the property business on the cash basis, or

(b) an amount of relevant capital expenditure (see subsection (17)) relating to the asset has been brought into account in calculating the profits of the property business in accordance with GAAP (see section 271B)—

(i) by means of a deduction allowed under section 58 or 59 (incidental costs of obtaining finance) (as applied by section 272) or section 311A (replacement domestic items relief), or

(ii) under CAA 2001 (see subsection (20)).

(5) Case 2 is a case in which—

(a) condition C is met, and

(b) condition D or E is met.

(6) Condition C is that disposal proceeds or a capital refund arise to the person in relation to an asset in a tax year—

(a) for which the profits of the property business are calculated in accordance with GAAP, and

(b) which is after a tax year for which the profits of the business had been calculated on the cash basis.

(7) Condition D is that an amount of capital expenditure relating to the asset—

(a) has been paid in a tax year for which the profits of the property business were calculated on the cash basis,

(b) has been brought into account in calculating the profits of the business on the cash basis, and

(c) on the assumption that the profits had not been calculated on the cash basis at the time the expenditure was paid, would not have been qualifying expenditure.

(8) Condition E is that—

(a) an amount of capital expenditure relating to the asset has been brought into account in calculating the profits of the property business for a tax year in accordance with GAAP by means of a deduction allowed under section 58 or 59 (as applied by section 272) or section 311A, and

(b) that tax year is before the tax year for which the person last entered the cash basis.

(9) “Disposal proceeds” means—

(a) any proceeds arising from the disposal of an asset or any part of it,

(b) any proceeds arising from the grant of any right in respect of, or any interest in, the asset, or

(c) any amount of damages, proceeds of insurance or other compensation received in respect of the asset.

See also section 307F for circumstances in which a person is to be regarded as disposing of an asset.

(10) “Capital refund” means an amount that is (in substance) a refund of capital expenditure relating to an asset.

(11) “Capital expenditure” means expenditure of a capital nature incurred, or treated as incurred, on or in connection with—

(a) the provision, alteration or disposal of an asset, or

(b) the potential provision, alteration or disposal of an asset.

(12) The disposal proceeds or capital refund mentioned in condition A or (as the case may be) condition C are to be brought into account as a receipt in calculating the profits of the property business.

(13) In a case where only part of the total capital expenditure incurred, or treated as incurred, by the person in relation to the asset has been brought into account in calculating the profits of the property business (whether or not on the cash basis), the amount brought into account under subsection (12) is proportionately reduced.

The reference in this subsection to expenditure brought into account includes a reference to expenditure brought into account under CAA 2001 (see subsection (20)).

(14) Subsection (12) does not apply if the whole of the amount which would otherwise be brought into account under that subsection—

(a) has already been brought into account as a receipt in calculating the profits of the property business under this section,

(b) is brought into account as a receipt in calculating the profits of the business under any other provision of this Part (except section 334D(4) (assets not fully paid for)), or

(c) is brought into account under Part 2 or 3A of CAA 2001 as a disposal value.

The reference to any other provision of this Part in paragraph (b) includes a reference to any provision applied by section 272 or 272ZA.

(15) If part of the amount which would otherwise be brought into account under subsection (12) has already been or is brought into account as mentioned in subsection (14), subsection (12) applies in relation to the remainder of that amount.

(16) For the purposes of this section, any question as to whether or to what extent expenditure is brought into account in calculating the profits of a property business is to be determined on such basis as is just and reasonable in all the circumstances.

(17) In subsection (4)(b) “relevant capital expenditure” means capital expenditure which—

(a) has been incurred (or treated as incurred) by the person before the tax year for which the person last entered the cash basis, and

(b) is cash basis deductible in relation to that tax year.

(18) For the purposes of this section, a person carrying on a property business “enters the cash basis” for a tax year if the profits of the business are calculated—

(a) on the cash basis for the tax year, and

(b) in accordance with GAAP for the previous tax year.

(19) Expenditure is “cash basis deductible” in relation to a tax year if, on the assumption that the expenditure was paid in that tax year, a deduction would be allowed in respect of the expenditure in calculating the profits of the property business on the cash basis for that tax year.

(20) For the purposes of this section, expenditure is “brought into account under CAA 2001” in calculating the profits of a property business if and to the extent that—

(a) a capital allowance made under Part 2 of that Act in respect of the expenditure is treated as an expense in calculating those profits (see sections 248 to 250A of that Act), or

(b) qualifying expenditure (within the meaning of Part 2 of CAA 2001) is allocated to a pool for a relevant qualifying activity and is set-off against different disposal receipts.

(21) An amount of qualifying expenditure is “set-off against different disposal receipts” if—

(a) the amount would have been unrelieved qualifying expenditure carried forward in the pool for the relevant qualifying activity, but

(b) the amount is not so carried forward because (and only because) one or more disposal values in respect of one or more assets, other than the asset in respect of which the qualifying expenditure was incurred (or treated as incurred), have at any time been brought into account in that pool.

(22) For the purposes of subsections (20) and (21), an activity is a “relevant qualifying activity” if—

(a) it is a qualifying activity mentioned in section 15(1)(b) to (da) of CAA 2001 (property business activities), and

(b) the property business consists of or includes that qualifying activity.

(23) For the purposes of subsection (21), an amount of qualifying expenditure incurred (or treated as incurred) by a person is not to be regarded as not carried forward because the person enters the cash basis.

(24) In this section—

• “disposal value” means—

  (a)

  in subsection (14)(c)—

  (i)

  a disposal value for the purposes of Part 2 of CAA 2001 (see, in particular, section 61 of that Act), or

  (ii)

  proceeds from a balancing event for the purposes of Part 3A of that Act (see section 360O of that Act), and

  (b)

  in subsection (21), a disposal value for the purposes of Part 2 of that Act;

• “pool” means the main pool or a class pool to which qualifying expenditure is allocated under Part 2 of CAA 2001 (see section 54 of that Act);

• “provision” includes creation, construction or acquisition;

• “qualifying expenditure” means qualifying expenditure within the meaning of Part 2 of CAA 2001 (see section 11(4) of that Act for the general rule);

• “unrelieved qualifying expenditure” means unrelieved qualifying expenditure for the purposes of Part 2 of CAA 2001 (see section 59(1) and (2) of that Act).

307F Deemed capital receipts under, or after leaving, cash basis

(1) This section makes provision supplementary to section 307E.

(2) If—

(a) at any time a person ceases to use an asset or any part of it for the purposes of a property business (other than in the circumstances mentioned in subsection (5)), but

(b) the person does not dispose of the asset (or that part) at that time,

the person is to be regarded for the purposes of section 307E as disposing of the asset (or that part) at that time for an amount equal to the market value amount.

(3) If at any time there is a material increase in the person’s non-business use of an asset or any part of it, the person is to be regarded for the purposes of section 307E as disposing of the asset (or that part) at that time for an amount equal to the relevant proportion of the market value amount.

(4) For the purposes of subsection (3)—

(a) there is an increase in a person’s non-business use of an asset (or part of an asset) if—

(i) the proportion of the person’s use of the asset (or that part) that is for the purposes of the property business decreases, and

(ii) the proportion of the person’s use of the asset (or that part) that is for other purposes (the “non-business use”) increases;

(b) “the relevant proportion” is the difference between—

(i) the proportion of the person’s use of the asset (or part of the asset) that is non-business use, and

(ii) the proportion of the person’s use of the asset (or that part) that was non-business use before the increase mentioned in subsection (3).

(5) If—

(a) the property business in respect of which capital expenditure relating to an asset has been brought into account as mentioned in section 307E is an overseas property business, and

(b) there is a move overseas,

the person is to be regarded for the purposes of section 307E as disposing of the asset at the time of the move overseas for an amount equal to the market value amount.

(6) For the purposes of subsection (5) there is a “move overseas” if—

(a) the person ceases to be UK resident, or

(b) the tax year is, as respects the person, a split year, and the overseas part of the tax year is the later part.

(7) The move overseas occurs—

(a) in a case falling within subsection (6)(a), on the last day of the tax year for which the person is UK resident, or

(b) in a case falling within subsection (6)(b), on the last day of the UK part of the tax year.

(8) In this section—

• “capital expenditure” has the same meaning as in section 307E,

• “market value amount” means the amount that would be regarded as normal and reasonable—

  (a)

  in the market conditions then prevailing, and

  (b)

  between persons dealing with each other at arm’s length in the open market.”