Finance Act 2022

PART 6 Transitional provision: continuing trades etc

Application of this Part of this Schedule

64 (1) This Part of this Schedule applies in relation to a person (“the trader”) who—

(a) carries on a trade (alone or in partnership) in the tax year 2023-24,

(b) does not start to carry on the trade in that tax year, and

(c) does not permanently cease to carry on the trade in that tax year.

(2) This Part of this Schedule applies to professions and vocations as it applies to trades.

Basis period for tax year 2023-24

65 (1) Chapter 15 of Part 2 of ITTOIA 2005 (basis periods) applies as if—

(a) the basis period for the tax year 2023-24 were, instead of the period determined in accordance with that Chapter, the period—

(i) beginning immediately after the end of the basis period for the tax year 2022-23 (determined in accordance with that Chapter as it applies in relation to that tax year), and

(ii) ending with 5 April 2024;

(b) section 220 of that Act were disregarded.

(2) In this Part of this Schedule, the “standard part” of the basis period for the tax year 2023-24 is the period of 12 months beginning with the start of that basis period (determined in accordance with sub-paragraph (1)(a)(i)).

(3) If the standard part of the basis period for the tax year 2023-24 ends before 31 March 2024 (or where an election under paragraph 67(3) has effect), there is a “transition part” of that basis period which—

(a) begins immediately after the end of the standard part, and

(b) ends with the date given by sub-paragraph (4).

(4) The date given by this sub-paragraph is—

(a) if the date (or the latest of the dates) to which accounts are drawn up in that tax year is 31 March or 1, 2, 3 or 4 April 2024, that date;

(b) in any other case (or where an election under paragraph 67(3) has effect), 5 April 2024.

Relevant maximum for purposes of cash basis election

66 (1) Sub-paragraph (2) applies if the basis period for the tax year 2023-24 (determined in accordance with paragraph 65(1)(a)), is longer than 12 months.

(2) For the purposes of section 31B of ITTOIA 2005 (relevant maximum for purposes of cash basis election), the amounts specified in subsections (3), (4) and (5) of that section, and the VAT threshold (within the meaning given by subsection (7) of that section), are proportionately increased.

Late accounting date rules

67 (1) This paragraph applies if—

(a) the standard part of the basis period for the tax year 2023-24, or

(b) any transition part of that basis period,

ends with 31 March or 1, 2, 3 or 4 April 2024 (“the late accounting date”).

(2) For the purposes of Chapter 2 of Part 2 of ITTOIA 2005—

(a) treat the profits or losses of the period beginning immediately after the late accounting date and ending with 5 April, as nil, and

(b) treat the actual profits or losses of that period as arising in the tax year 2024-25.

(3) The trader may, on or before the first anniversary of the normal self-assessment filing date for the tax year 2023-24, elect for sub-paragraph (2) not to apply.

(4) If an election under sub-paragraph (3) has effect—

(a) there is a transition part of the basis period for the tax year 2023-24 (whether or not there would otherwise be such a part), and

(b) that transition part ends on 5 April 2024 (instead of the date on which it would otherwise end).

Deductions for overlap profit allowed under this Part of this Schedule

68 References in this Part of this Schedule to a “deduction for overlap profit allowed under this Part of this Schedule” are to—

(a) any deduction for overlap profit that would be allowed under section 205 of ITTOIA 2005 (deduction for overlap profit in final tax year), were the trader to have permanently ceased to carry on the trade on 5 April 2024, or

(b) any deduction for overlap profit allowed under section 220 of that Act (deduction for overlap profit on change of accounting date) for a tax year before the tax year 2023-24 but not made for that earlier tax year (or any amount of such a deduction not made).

Trade profits if there is no transition part of the basis period for the tax year 2023-24

69 (1) Sub-paragraph (2) applies if there is no transition part of the basis period for the tax year 2023-24 (because the standard part ends on or after 31 March 2024 and there is no election under paragraph 67(3)).

(2) In calculating the profits of the tax year 2023-24 for the purposes of Chapter 2 of Part 2 of ITTOIA 2005, make any deduction for overlap profit allowed under this Part of this Schedule (see paragraph 68).

Trade profits if there is a transition part of the basis period for the tax year 2023-24

70 (1) Sub-paragraph (2) applies if there is a transition part of the basis period for the tax year 2023-24 (see paragraphs 65(3) and 67(4)(a)).

(2) In calculating the profits of the tax year 2023-24 for the purposes of Chapter 2 of Part 2 of ITTOIA 2005, take the following Steps.

• Step 1

  Determine the amount of the profits of the tax year 2023-24 attributable to the standard part of the basis period for that tax year.

  To do this, apply Chapter 2 of Part 2 of ITTOIA 2005 as if references in that Act to the basis period for the tax year 2023-24 were to the standard part of the basis period for that tax year.

• Step 2

  Determine the amount of the profits of the tax year 2023-24 attributable to the transition part of the basis period for that tax year.

  To do this, apply Chapter 2 of Part 2 of ITTOIA 2005 as if references in that Act to the basis period for the tax year 2023-24 were to the transition part of the basis period for that tax year.

• Step 3

  Deduct from the amount given by Step 2 the amount of any deduction for overlap profit allowed under this Part of this Schedule (see paragraph 68).

• Step 4

  Calculate the sum of the amounts given by Steps 1 and 3.

  If the amount given by either or both of—

  (a)

  Step 3, and

  (b)

  this Step,

  is nil, or less than nil, the profits of the tax year 2023-24 for the purposes of Chapter 2 of Part 2 of ITTOIA 2005 is the amount given by this Step (and see paragraph 71 for the treatment of a loss, or an increased loss, for the tax year 2023-24 arising from this Step).

  Otherwise, proceed to Steps 5 and 6.

• Step 5

  For the purposes of Step 6, and paragraphs 72 to 75, the amount of the trader’s “transition profits” for the tax year 2023-24 is the lesser of—

  (a)

  the amount given by Step 3, and

  (b)

  the amount given by Step 4.

• Step 6

  The amount of the profits of the tax year 2023-24 for the purposes of Chapter 2 of Part 2 of ITTOIA 2005 is—

  (a)

  if the amount given by Step 1 is nil, or less than nil, such amount of the transition profits for the tax year 2023-24 as is treated (in accordance with paragraphs 72 and 73) as arising in that tax year;

  (b)

  if the amount given by Step 1 is more than nil, the sum of that amount and such amount of the transition profits for the tax year 2023-24 as is treated (in accordance with paragraphs 72 and 73) as arising in that tax year.

Treatment of losses arising from deduction for overlap profit

71 (1) This paragraph applies if, by virtue of a deduction for overlap profit allowed and made under this Part of this Schedule (see paragraphs 68 and 69(2) and Step 3 of the calculation in paragraph 70(2))—

(a) the trader makes a loss for the tax year 2023-24 where the trader would (but for the deduction) have made a profit, or

(b) the trader makes a loss for the tax year 2023-24 that is greater than it would have been had the deduction not been made.

(2) Sections 89 to 91 of ITA 2007 (terminal trade loss relief) apply in relation to the trader as if—

(a) the trader had permanently ceased to carry on the trade on 5 April 2024, and

(b) the amount of the loss mentioned in sub-paragraph (1)(a), or the amount by which the loss mentioned in sub-paragraph (1)(b) is increased as a result of the deduction being made, were a terminal loss made in the trade in the final tax year.

(3) Nothing in this paragraph is to be taken to affect the further application of sections 89 to 91 of ITA 2007 in relation to the trade.

Spreading of transition profits

72 (1) This paragraph applies if the trader has transition profits for the tax year 2023-24 (see Step 5 of the calculation in paragraph 70(2)).

(2) The amount of the transition profits is spread over five tax years as follows.

(3) In each of the four tax years beginning with the tax year 2023-24, an amount equal to 20% of the amount of the transition profits is treated as arising and chargeable to income tax under Chapter 2 of Part 2 of ITTOIA 2005.

(4) In the fifth tax year, the balance of the amount of the transition profits is treated as arising and chargeable to income tax under Chapter 2 of Part 2 of ITTOIA 2005.

(5) Sub-paragraph (6) applies if, before the whole of the amount of the transition profits has been charged to income tax, the trader permanently ceases to carry on the trade.

(6) The balance of the amount of the transition profits is treated as arising, and chargeable to income tax under Chapter 2 of Part 2 of ITTOIA 2005, for the tax year in which the trader permanently ceases to carry on the trade.

Election to accelerate charge

73 (1) If the trader is liable to a charge to income tax for a tax year on an amount of the transition profits for the tax year 2023-24 (see Step 5 of the calculation in paragraph 70(2) and paragraph 72), the trader may elect for an additional amount of those profits to be treated as arising in the tax year.

(2) The election must be made on or before the first anniversary of the normal self-assessment filing date for the tax year to which it relates.

(3) The election must specify the amount of the transition profits to be treated as arising in the tax year (which may be any amount of those profits not previously charged to tax).

(4) If an election is made, paragraph 72 applies in relation to any subsequent tax year as if the amount of the transition profits (as reduced by any previous application of this paragraph) were reduced by the amount given by the following formula—

where—

• A is the additional amount of the transition profits treated as arising in the tax year for which the election is made;

• T is the number of tax years remaining after that tax year in the period of five tax years referred to in paragraph 72.

Transition profits ignored in averaging of profits of farmers and creative artists

74 No amount of the transition profits for the tax year 2023-24 treated as arising and chargeable to income tax in a tax year (see Step 5 of the calculation in paragraph 70(2) and paragraphs 72 and 73) is to be taken into account in determining “the relevant profits” for the purposes of Chapter 16 of Part 2 of ITTOIA 2005 (averaging profits of farmers and creative artists).

Calculation of income tax liability on amount of transition profits

75 (1) This paragraph applies for determining the trader’s liability to income tax for a tax year in which an amount of the transition profits for the tax year 2023-24 is chargeable to income tax under Chapter 2 of Part 2 of ITTOIA 2005 (see Step 5 of the calculation in paragraph 70(2) and paragraphs 72 and 73).

(2) To find the trader’s liability to income tax for the tax year, section 23 of ITA 2007 applies as if—

(a) the amount of the transition profits chargeable to income tax were a separate component of total income (“the transition component”),

(b) the transition component were relieved in accordance with Step 2,

(c) the amount of the transition component left after Step 2 were left out of the calculation of net income (and subsequent Steps), and

(d) for the purposes of Steps 5 to 7, the amount (if any) given by sub-paragraph (3) were treated as an amount of tax calculated at Step 4.

(3) The amount given by this sub-paragraph is the difference between—

(a) the total amount of tax that would be calculated at Step 5 if Steps 1 to 4 were applied in accordance with sub-paragraph (2)(a) to (c) (ignoring sub-paragraph (2)(d)), and

(b) the total amount of tax that would be calculated at Step 5 if Steps 1 to 4 were applied in accordance with sub-paragraph (2)(a) and (b) (ignoring sub-paragraph (2)(c) and (d)).

(4) The Steps mentioned in sub-paragraphs (2) and (3) are Steps of the calculation in section 23 of ITA 2007.

Other modifications

76 (1) For the purposes of this Part of this Schedule, the following provisions apply subject to the following modifications.

(2) Section 24A of ITA 2007 (limit on deductions at Step 2 of the calculation in section 23) applies as if, in subsection (7)(c), the reference to a deduction allowed under section 205 or 220 of ITTOIA 2005 includes a deduction made under paragraph 69(2), or Step 3 of the calculation in paragraph 70(2), of this Schedule.

(3) Section 24 of TIOPA 2010 (claw-back of relief under section 22(2)) applies as if, in subsections (1)(b) and (3), references to an amount deducted under section 205 or 220 of ITTOIA 2005 included an amount deducted under paragraph 69(2), or Step 3 of the calculation in paragraph 70(2), of this Schedule.