Finance (No. 2) Act 2017

PART 1 Trades etc: amendments of ITTOIA 2005

1 ITTOIA 2005 is amended as follows.

2 For section 33A (cash basis: capital expenditure) substitute—

“33A Cash basis: capital expenditure

(1) This section applies in relation to the calculation of the profits of a trade 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—

(a) any asset that is not a depreciating asset (see subsections (6) and (7)),

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

(c) a car (see subsection (14)),

(d) land,

(e) a non-qualifying intangible asset (see subsections (8) to (11)), or

(f) a financial asset (see subsection (12)).

(5) But subsection (4)(d) 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 land 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) 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.

(7) 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.

(8) “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.

(9) 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.

(10) 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.

(11) Where—

(a) the trader has an intangible asset, and

(b) the trader 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 the trader in respect of the intangible asset mentioned in paragraph (a) is “non-qualifying”.

(12) 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.

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

(14) 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;

• “the trader” means the person carrying on the trade.”

3 In section 95A (application of Chapter 6 of Part 2 (trade profits: receipts) to the cash basis)—

(a) the existing text becomes subsection (1),

(b) in that subsection, omit the entry relating to section 96A, and

(c) after that subsection insert—

“(2) Section 96A makes provision about capital receipts in certain cases where the profits of a trade are calculated on the cash basis or have previously been calculated on the cash basis (and see also section 96B).”

4 (1) Section 96A (cash basis: capital receipts) is amended as follows.

(2) For the heading substitute “Capital receipts under, or after leaving, cash basis”.

(3) For subsections (1) to (3) substitute—

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

(a) Case 1 (see subsections (2) to (3A)), and

(b) Case 2 (see subsections (3B) to (3E)).

(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 at a time when an election under section 25A (cash basis for trades) has effect in relation to the trade.

For the meaning of “disposal proceeds” and “capital refund” see subsections (3F) and (3G).

(3A) Condition B is that—

(a) an amount of capital expenditure (see subsection (3H)) relating to the asset has been brought into account in calculating the profits of the trade on the cash basis, or

(b) an amount of capital expenditure relating to the asset which—

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

(ii) is cash basis deductible in relation to that tax year (see section 96B(4)),

has been brought into account in calculating the profits of the trade for a tax year for which no election under section 25A had effect in relation to the trade.

(3B) Case 2 is a case in which—

(a) condition C is met, and

(b) condition D or E is met.

(3C) Condition C is that disposal proceeds or a capital refund arise to the person in relation to an asset at a time—

(a) when no election under section 25A has effect in relation to the trade, and

(b) which is after a time when such an election had had effect in relation to the trade.

(3D) Condition D is that an amount of capital expenditure relating to the asset—

(a) has been paid at a time when an election under section 25A had effect in relation to the trade,

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

(c) on the assumption that an election under section 25A had not had effect at the time the expenditure was paid, would not have been qualifying expenditure.

(3E) Condition E is that an amount of capital expenditure relating to the asset has been brought into account in calculating the profits of the trade for a tax year—

(a) for which no election under section 25A had effect in relation to the trade, and

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

The reference in this subsection to expenditure brought into account does not include a reference to expenditure brought into account under CAA 2001 (see section 96B(5)).

(3F) “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 subsections (4) and (5) for circumstances in which a person is to be regarded as disposing of an asset.

(3G) “Capital refund” means an amount that is (in substance) a refund of capital expenditure relating to an asset.

(3H) “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.

(3I) 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 trade.

(3J) 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 trade (whether or not on the cash basis), the amount brought into account under subsection (3I) 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 section 96B(5)).

(3K) Subsection (3I) 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 trade under this section,

(b) is brought into account as a receipt in calculating the profits of the trade under any other provision of this Part (except section 240D(3) (assets not fully paid for)), or

(c) is brought into account under any Part of CAA 2001 as a disposal value.

(3L) If part of the amount which would otherwise be brought into account under subsection (3I) has already been or is brought into account as mentioned in subsection (3K), subsection (3I) applies in relation to the remainder of that amount.”

(4) Omit subsection (7).

5 After section 96A insert—

“96B Section 96A: supplementary provision

(1) This section has effect for the purposes of section 96A.

(2) Any question as to whether or to what extent expenditure is brought into account in calculating the profits of a trade is to be determined on such basis as is just and reasonable in all the circumstances.

(3) A person carrying on a trade “enters the cash basis” for a tax year if—

(a) an election under section 25A has effect in relation to the trade for the tax year, and

(b) no such election had effect in relation to the trade for the previous tax year.

(4) 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 trade on the cash basis for that tax year.

(5) Expenditure is “brought into account under CAA 2001” in calculating the profits of a trade if and to the extent that—

(a) a capital allowance made under Part 2, 5, 6, 7 or 8 of that Act in respect of the expenditure is treated as an expense in calculating those profits (see, for example, section 247 of that Act), or

(b) qualifying expenditure (within the meaning of Part 2, 7 or 8 of CAA 2001) is allocated to a pool for the trade and is set-off against different disposal receipts.

(6) 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 trade, 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.

(7) For the purposes of subsection (6), 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.

(8) In this section and in section 96A—

• “disposal value” means—

  (a)

  in section 96A(3K)(c)—

  (i)

  a disposal value for the purposes of Part 2, 4A, 5, 6, 7 8 or 10 of CAA 2001 (for example, in relation to Part 2 of that Act, see (in particular) section 61 of that Act), or

  (ii)

  proceeds from a balancing event for the purposes of Part 3 or 3A of that Act (see sections 316 and 360O of that Act), and

  (b)

  in subsection (6), a disposal value for the purposes of—

  (i)

  Part 2 of that Act (see, in particular, section 61 of that Act),

  (ii)

  Part 7 of that Act (see section 462 of that Act), or

  (iii)

  Part 8 of that Act (see sections 476 and 477 of that Act);

• “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;

• “pool” means—

  (a)

  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),

  (b)

  a pool to which qualifying expenditure is allocated under Part 7 of that Act (see section 456 of that Act), or

  (c)

  a pool to which qualifying expenditure is allocated under Part 8 of that Act (see section 470 of that Act);

• “provision” includes creation, construction or acquisition;

• “qualifying expenditure” means—

  (a)

  qualifying expenditure within the meaning of Part 2 of CAA 2001 (see section 11(4) of that Act for the general rule),

  (b)

  qualifying expenditure within the meaning of Part 5 of that Act (see section 395 of that Act),

  (c)

  qualifying expenditure within the meaning of Part 6 of that Act (see section 439 of that Act),

  (d)

  qualifying expenditure within the meaning of Part 7 of that Act (see section 454 of that Act), or

  (e)

  qualifying trade expenditure within the meaning of Part 8 of that Act (see section 468 of that Act);

• “unrelieved qualifying expenditure” means unrelieved qualifying expenditure for the purposes of—

  (a)

  Part 2 of CAA 2001 (see section 59(1) and (2) of that Act),

  (b)

  Part 7 of that Act (see section 461 of that Act), or

  (c)

  Part 8 of that Act (see section 475 of that Act).”

6 In section 106D (capital receipts), for “(cash basis: capital receipts)” substitute “(capital receipts under, or after leaving, cash basis)”.

7 (1) Section 240C (unrelieved qualifying expenditure) is amended as follows.

(2) For the heading substitute “Unrelieved qualifying expenditure: Parts 2, 7 and 8 of CAA 2001”.

(3) In subsection (1)(b), after “unrelieved qualifying expenditure” insert “relating to the trade”.

(4) In subsection (3), for “the relevant portion of the expenditure” substitute “any cash basis deductible amount of the expenditure”.

(5) For subsection (4) substitute—

“(4) A “cash basis deductible amount” of the expenditure means any amount of the expenditure for which a deduction would be allowed in calculating the profits of the trade on the cash basis on the assumption that the expenditure was paid in the current tax year.”

(6) In subsection (5), for “The relevant portion” substitute “Any cash basis deductible amount”.

(7) After subsection (5) insert—

“(5A) For the purposes of subsection (1)(b), in determining the unrelieved qualifying expenditure the person has to carry forward, disregard sections 59(4), 461A(1) and 475A(1) of CAA 2001 (which provide that an amount is not to be carried forward as unrelieved qualifying expenditure when a person enters the cash basis).”

(8) For subsection (6) substitute—

“(6) In this section “unrelieved qualifying expenditure” means unrelieved qualifying expenditure for the purposes of—

(a) Part 2 of CAA 2001 (see section 59(1) and (2) of that Act),

(b) Part 7 of that Act (see section 461 of that Act), or

(c) Part 8 of that Act (see section 475 of that Act).”

8 After section 240C insert—

“240CA Unrelieved qualifying expenditure: Part 5 of CAA 2001

(1) This section applies if a person carrying on a mineral extraction trade enters the cash basis for a tax year (“the current tax year”).

(2) But this section does not apply if section 240D applies.

(3) In calculating the profits of the trade for the current tax year, a deduction is allowed for any amount of expenditure—

(a) which would, apart from section 419A(1) of CAA 2001, have been unrelieved qualifying expenditure for the current tax year, and

(b) for which a deduction would be allowed in calculating the profits of the trade on the cash basis on the assumption that the expenditure was paid in the current tax year.

(4) In this section—

• “mineral extraction trade” has the meaning given in section 394 of CAA 2001;

• “unrelieved qualifying expenditure” means unrelieved qualifying expenditure for the purposes of Part 5 of CAA 2001 (see section 419 of that Act).”

9 (1) Section 240D (assets not fully paid for) is amended as follows.

(2) In subsection (1)(b), for “obtained” to the end substitute “incurred relevant expenditure, and”.

(3) After subsection (1) insert—

“(1A) “Relevant expenditure” means expenditure—

(a) for which a deduction would be allowed in calculating the profits of the trade on the cash basis on the assumption that the expenditure was paid in the tax year, and

(b) in respect of which the person has obtained capital allowances under Part 2, 5, 6, 7 or 8 of CAA 2001.”

(4) In subsection (4), for “The amount of any capital allowance obtained in respect of expenditure on the provision of any plant or machinery” substitute “Any question as to whether or to what extent expenditure is relevant expenditure, or as to whether or to what extent any capital allowance obtained is in respect of relevant expenditure,”.

(5) In subsection (5), after “given” insert “under Part 2 of CAA 2001”.

(6) Omit subsection (6).

10 In section 786(6) (meaning of “rent-a-room receipts”), for “(capital receipts)” substitute “(capital receipts under, or after leaving, cash basis)”.

11 In section 805(5) (meaning of “qualifying care receipts”), for “(capital receipts)” substitute “(capital receipts under, or after leaving, cash basis)”.