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Income Tax (Trading and Other Income) Act 2005

Type Public General Act

Publication 2005-03-24

Last updated 2026-01-20

State In force

Department Statute Law Database

Source legislation.gov.uk

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Part 1 — Overview

Counselling and other outplacement services

1

(1) This Act imposes charges to income tax under—

(a) Part 2 (trading income),

(b) Part 3 (property income),

(d) Part 5 (certain miscellaneous income).

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Exemptions from those charges are dealt with in Part 6 (exempt income) but any Part 6 exemptions which are most obviously relevant to particular types of income are also mentioned in the provisions about those types of income.

(4) What is or is not mentioned in those provisions does not limit the effect of Part 6.

(5) This Act also contains—

(za) provision about a trading allowance and property allowance (see Part 6A),

(a) provision about rent-a-room relief and qualifying care relief (see Part 7),

(b) special rules for foreign income (see Part 8),

(d) certain calculation rules and general provisions (see Part 10).

(6) For abbreviations and defined expressions used in this Act, see section 885 and Schedule 4.

Contents of Chapter

2

(1) This Act contains some rules establishing an order of priority in respect of certain amounts which would otherwise—

(a) fall within a charge to income tax under two or more Chapters or Parts of this Act, or

(b) fall within a charge to income tax under a Chapter or Part of this Act and ITEPA 2003.

(2) See, in particular—

section 4 (provisions which must be given priority over Part 2),

section 261 (provisions which must be given priority over Part 3),

section 262 (priority between Chapters within Part 3),

section 366 (provisions which must be given priority over Part 4),

section 367 (priority between Chapters within Part 4),

section 575 (provisions which must be given priority over Part 5), and

section 576 (priority between Chapters within Part 5).

(3) But the rules in those sections need to be read with other rules of law (whether in this Act or otherwise) about the scope of particular provisions or the order of priority to be given to them.

(4) Section 171(2) of FA 1993 (profits of Lloyd's underwriters charged only under Chapter 2 of Part 2 of this Act) and sections 16A (voluntary office-holders: compensation for lost profits), 16B (payments to company directors) and 16C (professionals in practice: incidental income from an office or employment) of this Act are each an example of another rule of law.

Part 2 — Trading income

Chapter 1 — Introduction

Relief for policies and contracts with European Economic Area insurers

3

(1) This Part imposes charges to income tax under—

(a) Chapter 2 (the profits of a trade, profession or vocation which meet the territorial conditions mentioned in section 6),

(b) Chapter 17 (amounts treated as adjustment income under section 228), and

(2) Part 6 deals with exemptions from the charges under this Part.

(3) See, in particular, the exemptions under sections 777 (VAT repayment supplements) and 778 (incentives to use electronic communications).

(4) The charges under this Part apply to non-UK residents as well as UK residents but this is subject to sections 6(1A), (2) and (3) and 243(3) and (4) (charges on non-UK residents only on UK income).

(5) The rest of this Part contains rules relevant to the charges to tax under this Part.

(6) This section needs to be read with the relevant priority rules (see sections 2 and 4).

Exempt sum: term dependent solely on duration of life

4

(1) Any receipt or other credit item, so far as it falls within—

(a) Chapter 2 of this Part (receipts of trade, profession or vocation), and

(b) Chapter 3 of Part 3 so far as it relates to a UK property business,

is dealt with under Part 3.

(2) Any receipt or other credit item, so far as it falls within—

(a) this Part, and

(b) Part 2, 9 or 10 of ITEPA 2003 (employment income, pension income or social security income),

is dealt with under the relevant Part of ITEPA 2003.

Chapter 2 — Income taxed as trade profits

Charge to tax on trade profits

5

Income tax is charged on the profits of a trade, profession or vocation.

Territorial scope of charge to tax

6

(1) Profits of a trade arising to a UK resident are chargeable to tax under this Chapter wherever the trade is carried on.

(1A) Profits of a trade of dealing in or developing UK land arising to a non-UK resident are chargeable to tax under this Chapter wherever the trade is carried on.

(2) Profits of a trade other than a trade of dealing in or developing UK land arising to a non-UK resident are chargeable to tax under this Chapter only if they arise—

(a) from a trade carried on wholly in the United Kingdom, or

(b) in the case of a trade carried on partly in the United Kingdom and partly elsewhere, from the part of the trade carried on in the United Kingdom.

(2A) If the tax year is a split year as respects a UK resident individual, this section has effect as if, for the overseas part of that year, the individual were non-UK resident.

(3) This section applies to professions and vocations as it applies to trades.

Income charged

7

(1) Tax is charged under this Chapter on the full amount of the profits of the tax year (including amounts treated as profits of the tax year under section 23E(1)).

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) This section is subject to Part 8 (foreign income: special rules).

(5) And, for the purposes of section 830 (meaning of “relevant foreign income”), the profits of a trade, profession or vocation arise from a source outside the United Kingdom only if the trade, profession or vocation is carried on wholly outside the United Kingdom.

Person liable

8

The person liable for any tax charged under this Chapter is the person receiving or entitled to the profits.

Trades and trade profits

Farming and market gardening

9

(1) Farming or market gardening in the United Kingdom is treated for income tax purposes as the carrying on of a trade or part of a trade (whether or not the land is managed on a commercial basis and with a view to the realisation of profits).

(2) All farming in the United Kingdom carried on by a person, other than farming carried on as part of another trade, is treated for income tax purposes as one trade.

(3) In the case of farming carried on by a firm, this rule is explained by section 859(1).

Commercial occupation of land other than woodlands

10

(1) The commercial occupation of land in the United Kingdom is treated for income tax purposes as the carrying on of a trade or part of a trade.

(2) For this purpose the occupation of land is commercial if the land is managed—

(a) on a commercial basis, and

(b) with a view to the realisation of profits.

(3) This section does not apply—

(a) to farming or market gardening (which is dealt with by section 9),

(b) if the land is being prepared for forestry purposes, or

Commercial occupation of woodlands

11

(1) The commercial occupation of woodlands in the United Kingdom is not a trade or part of a trade for any income tax purpose.

(2) For this purpose the occupation of woodlands is commercial if the woodlands are managed—

(a) on a commercial basis, and

(b) with a view to the realisation of profits.

(3) See also sections 267 and 768 (which, when read with this section, secure that profits or losses from the commercial occupation of woodlands in the United Kingdom are ignored for income tax purposes).

Profits of mines, quarries and other concerns

12

(1) Profits or losses arising out of land in the case of a concern to which this section applies are calculated as if the concern were a trade.

(2) Any profits arising out of the land are charged to income tax as if the concern were a trade carried on in the United Kingdom.

But this does not impose a charge to tax on a non-UK resident in the case of a concern outside the United Kingdom.

(3) Any losses arising out of the land are treated for the purposes of Part 4 of ITA 2007(loss relief) as losses of a trade carried on in the United Kingdom.

(4) The concerns to which this section applies are—

(a) mines and quarries (including gravel pits, sand pits and brickfields),

(b) ironworks, gasworks, salt springs or works, alum mines or works, waterworks and streams of water,

(d) rights of fishing,

(e) rights of markets and fairs, tolls, bridges and ferries,

(f) railways and other kinds of way, and

(g) a concern of the same kind as one specified in paragraph (b), (c), (d) or (e).

(5) This section does not apply to a concern if section 10 (commercial occupation of land other than woodlands) applies to the occupation of the land out of which the profits or losses arise.

Visiting performers

13

(1) This section applies if an entertainer, sportsman or sportswoman of a prescribed description (a “performer”)—

(a) is non-UK resident in a tax year, and

(b) performs a relevant activity in the United Kingdom in the tax year.

(2) If a payment or transfer connected with the relevant activity is made, the performer is treated for income tax purposes as performing the relevant activity in the course of a trade, profession or vocation carried on in the United Kingdom.

(3) It does not matter whether the payment or transfer is made to the performer or anyone else.

(4) Subsection (2) does not apply—

(a) so far as the performer would otherwise be performing the relevant activity in the course of a trade, profession or vocation carried on in the United Kingdom, or

(b) if the relevant activity is performed in the course of an employment or office.

(5) If a payment or transfer connected with the relevant activity is made to —

(a) a person other than the performer, and

(b) that person is of a prescribed description,

the payment or transfer is treated for income tax purposes as made instead to the performer in the course of a trade, profession or vocation carried on in the United Kingdom.

(6) Subsection (5) does not apply in such circumstances as may be prescribed.

(7) If—

(a) income tax is chargeable on profits arising from payments or transfers (made to any person), and

(b) the payments or transfers are connected with the relevant activity,

the tax is charged as if the payments or transfers were received in the course of a separate trade, profession or vocation (distinct from any other trade, profession or vocation carried on by the performer).

(8) In this section and section 14—

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

“prescribed” means prescribed by regulations,

“regulations” means regulations made by the Treasury,

“relevant activity” means an activity of a prescribed description, and

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

and a payment or transfer is connected with a relevant activity if it has a connection of the prescribed kind with that activity.

(9) In this section and section 14—

(a) references to a payment include references to a payment by way of loan of money, and

(b) references to a transfer do not include references to a transfer of money but, subject to that, include references to—

(i) a temporary transfer (as by way of loan), and

(ii) a transfer of a right (whether or not a right to receive money).

(10) This section does not apply to payments or transfers of a kind prescribed in regulations under section 966(6) of ITA 2007.

Visiting performers: supplementary

14

(1) Regulations may provide—

(a) for the deduction, in calculating any profits of the performer arising from the payment or transfer, of expenses incurred by other persons in relation to the payment or transfer,

(b) that any liability to income tax (whether of the performer or anyone else) which would, apart from section 13(5), arise in relation to the payment or transfer is not to arise (or is to arise so far as prescribed).

(2) Regulations may provide—

(a) for the apportionment of profits between different trades, professions or vocations of the performer,

(b) for the apportionment between different tax years of the profits arising from relevant activities of the performer,

(c) for losses made in any trade, profession or vocation of the performer to be deducted from or set off against the profits of another trade, profession or vocation of the performer,

(d) that prescribed provisions of the Income Tax Acts about losses, or about expenses, are not to apply (or are to apply with prescribed modifications) in prescribed circumstances relating to the performer.

(3) References in this section to a trade, profession or vocation of the performer include references to the separate one referred to in section 13(7) as well as to any other carried on by the performer.

(4) Regulations may—

(a) make provision generally for giving effect to section 13, and

(b) make different provision for different cases or descriptions of cases.

Divers and diving supervisors

15

(1) This section applies if—

(a) a person performs the duties of employment as a diver or diving supervisor in the United Kingdom or in any area designated by Order in Council under section 1(7) of the Continental Shelf Act 1964 (c. 29),

(b) the duties consist wholly or mainly of seabed diving activities, and

(2) The performance of the duties of employment is instead treated for income tax purposes as the carrying on of a trade in the United Kingdom.

(3) For the purposes of this section the following are seabed diving activities—

(a) taking part as a diver in diving operations concerned with the exploration or exploitation of the seabed, its subsoil and their natural resources, and

(b) acting as a diving supervisor in relation to any such diving operations.

16

(1) If a person carries on any oil-related activities as part of a trade, those activities are treated for income tax purposes as a separate trade, distinct from all other activities carried on by the person as part of the trade.

(2) For this purpose the following are oil-related activities—

(a) oil extraction activities, and

(b) any activities consisting of the acquisition, enjoyment or exploitation of oil rights.

(3) “Oil extraction activities” and “oil rights” have the meaning given by sections 225A and 225B.

Starting and ceasing to trade

Effect of becoming or ceasing to be a UK resident

17

(1) This section applies if—

(a) an individual carries on a trade (alone or in partnership), and

(b) there is a change of residence.

(1A) For the purposes of this section there is a “change of residence” if—

(a) the individual becomes or ceases to be UK resident, or

(b) a tax year is, as respects the individual, a split year.

(1B) The change of residence occurs—

(a) in a case falling within subsection (1A)(a), at the start of the tax year for which the individual becomes or ceases to be UK resident, and

(b) in a case falling within subsection (1A)(b), at the start of whichever of the UK part or the overseas part of the tax year is the later part.

(2) If this section applies and the individual does not actually cease permanently to carry on the trade immediately before the change of residence occurs, the individual is treated for income tax purposes—

(a) as permanently ceasing to carry on the trade at the time of the change of residence, and

(b) so far as the individual continues to carry on the trade, as starting to carry on a new trade immediately afterwards.

(3) But subsection (2) does not prevent a loss made before the change of residence from being deducted under section 83 of ITA 2007 from profits arising after the change.

(4) This section applies to professions and vocations as it applies to trades.

(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Effect of company starting or ceasing to be within charge to income tax

18

(1) This section applies if a company starts or ceases to be within the charge to income tax under this Chapter in respect of a trade.

(2) The company is treated for the purposes of this Part—

(a) as starting to carry on the trade when it starts to be within the charge, or

(b) as permanently ceasing to carry on the trade when it ceases to be within the charge.

Trading income and property income

Tied premises

19

(1) This section applies if —

(a) in the course of carrying on a trade a person (“the trader”) supplies, or is concerned in the supply of, goods sold or used on premises occupied by another person,

(b) the trader has an estate or interest in the premises,

(d) receipts and expenses in connection with the premises would otherwise be brought into account in calculating the profits of a property business of the trader.

(2) Both the receipts and expenses are instead brought into account in calculating the profits of the trade.

(3) Any apportionment of receipts or expenses that is necessary because—

(a) the receipts or expenses do not relate only to the premises, or

(b) the above conditions are met only in relation to part of the premises,

is to be made on a just and reasonable basis.

Caravan sites where trade carried on

20

(1) This section applies if—

(a) a person (“the trader”) carries on material activities connected with the operation of a caravan site,

(b) the activities are, or are part of, a trade, and

(c) receipts from, and expenses of, lettings of caravans or pitches for caravans on the site would otherwise be brought into account in calculating the profits of a property business of the trader.

(2) The trader may instead bring both the receipts and expenses into account in calculating the profits of the trade.

(3) But if the conditions in subsection (1)(a) and (b) are met for only part of a tax year, subsection (2) applies only to the receipts and expenses that would otherwise be brought into account in calculating the profits of the property business for that part of the tax year.

(4) In this section—

“caravan site” means—land on which a caravan is stationed for the purposes of human habitation, andland which is used in conjunction with land on which a caravan is so stationed, and

“letting” includes a licence to occupy.

Surplus business accommodation

21

(1) This section applies if—

(a) a person (“the trader”) carrying on a trade obtains receipts from a letting of business accommodation that is temporarily surplus to requirements (see subsections (3) and (4)),

(b) the accommodation is not held as trading stock,

(d) the receipts are relatively small, and

(e) the receipts, and the expenses of the letting, would otherwise be brought into account in calculating the profits of a property business of the trader.

(2) The trader may instead bring both the receipts and expenses into account in calculating the profits of the trade.

(3) Accommodation is temporarily surplus to requirements only if—

(a) it has been used within the last 3 years to carry on the trade or acquired within the last 3 years,

(b) the trader intends to use it to carry on the trade at a later date, and

(4) If accommodation is temporarily surplus to requirements at the beginning of a period of account, it continues to be temporarily surplus to requirements until the end of that period.

(5) If under this section any of the receipts from and expenses of a letting are brought into account in calculating the profits of the trade, all subsequent receipts from and expenses of the letting must be dealt with in the same way (but only so long as this section continues to apply).

(6) In this section “letting” includes a licence to occupy.

(7) This section applies to professions and vocations as it applies to trades.

Payments for wayleaves

22

(1) This section applies if—

(a) a person (“the trader”) carries on a trade on some or all of the land to which a wayleave relates,

(b) rent is receivable, or expenses are incurred, by the trader in respect of the wayleave, and

(c) apart from any rent or expenses in respect of a wayleave, no other receipts or expenses in respect of any of the land are brought into account in calculating the profits of any property business of the trader.

(2) If—

(a) the trader would otherwise be liable to tax under Chapter 9 of Part 3 in respect of the rent for the wayleave (rent receivable for UK electric-line wayleaves), or

(b) expenses incurred by the trader in respect of the wayleave would otherwise be brought into account in calculating profits charged under that Chapter,

the trader may instead bring both the rent and expenses into account in calculating the profits of the trade.

(3) If—

(a) rent for the wayleave would otherwise be brought into account in calculating the profits of a property business of the trader, or

(b) expenses incurred by the trader in respect of the wayleave would otherwise be so brought into account,

the trader may instead bring both the rent and expenses into account in calculating the profits of the trade.

(4) In this section “rent” includes—

(a) a receipt mentioned in section 266(3), and

(b) any other receipt in the nature of rent.

(5) In this section “wayleave” means an easement, servitude or right in or over land which is enjoyed in connection with—

(a) an electric, telegraph or telephone wire or cable,

(b) a pipe for the conveyance of any thing, or

(6) The reference to the enjoyment of an easement, servitude or right in connection with an electric, telegraph or telephone wire or cable includes (in particular) its enjoyment in connection with—

(a) a pole or pylon supporting such a wire or cable, or

(b) apparatus used in connection with such a wire or cable.

(7) This section applies to professions and vocations as it applies to trades.

Rent-a-room and qualifying care relief

Rent-a-room and foster-care relief

23

(1) The rules for calculating the profits of a trade carried on by an individual are subject to Chapter 1 of Part 7 (rent-a-room relief).

(2) That Chapter provides relief on income from the use of furnished accommodation in the individual's only or main residence (see, in particular, sections 792 and 796).

(3) The rules for calculating the profits of a trade, profession or vocation carried on by an individual are subject to Chapter 2 of Part 7 (qualifying care relief).

(4) That Chapter provides relief on income from the provision by the individual of qualifying care (see, in particular, sections 813, 816, 822 and 823).

Chapter 3 — Trade profits: basic rules

Professions and vocations

24

Apart from section 30 (animals kept for trade purposes), the provisions of this Chapter apply to professions and vocations as they apply to trades.

Generally accepted accounting practice

25

(1) The profits of a trade to which the cash basis does not apply must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for income tax purposes.

(2) This does not—

(a) require a person to comply with the requirements of the Companies Act 2006 or subordinate legislation made under that Act except as to the basis of calculation, or

(b) impose any requirements as to audit or disclosure.

(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) This section does not affect provisions of the Income Tax Acts relating to the calculation of the profits of Lloyd's underwriters.

Losses calculated on same basis as profits

26

(1) The same rules apply for income tax purposes in calculating losses of a trade as apply in calculating profits.

(2) This is subject to any express provision to the contrary.

Receipts and expenses

27

(1) In the Income Tax Acts, in the context of the calculation of the profits of a trade, references to receipts and expenses are to any items brought into account as credits or debits in calculating the profits.

(2) There is no implication that an amount has been actually received or paid.

(3) This section is subject to any express provision to the contrary.

Items treated under CAA 2001 as receipts and expenses

28

The rules for calculating the profits of a trade need to be read with—

(a) the provisions of CAA 2001 which treat charges as receipts of a trade, and

(b) the provisions of CAA 2001 which treat allowances as expenses of a trade.

Interest

29

For the purpose of calculating the profits of a trade, interest is an item of a revenue nature, whatever the nature of the loan.

Animals kept for trade purposes

30

(1) Animals or other living creatures kept for the purposes of a trade are treated as trading stock if they are not kept wholly or mainly—

(a) for the work they do in connection with the carrying on of the trade,

(b) for public exhibition, or

(2) But they are not treated as trading stock if they are part of a herd in relation to which a herd basis election has effect (see Chapter 8).

(3) This section applies to shares in animals or other living creatures as it applies to the creatures themselves.

(4) This section does not apply to professions or vocations.

Relationship between rules prohibiting and allowing deductions

31

(1) Any relevant permissive rule in this Part—

(a) has priority over any relevant prohibitive rule in this Part, but

(b) is subject to section 36 (unpaid remuneration), section 38 (employee benefit contributions), section 48 (car ... hire) and section 55 (crime-related payments).

(1A) But, if the relevant permissive rule would allow a deduction in calculating the profits of a trade in respect of an amount which arises directly or indirectly in consequence of, or otherwise in connection with, relevant tax avoidance arrangements, that rule—

(a) does not have priority under subsection (1)(a), and

(b) is subject to any relevant prohibitive rule in this Part (and to the provisions mentioned in subsection (1)(b)).

(2) In this section “any relevant permissive rule in this Part” means any provision of—

(a) Chapter 5 (apart from sections 60 to 67),

(aa) Chapter 5A,

(b) Chapter 11, ...

(d) Chapter 17A,

which allows a deduction in calculating the profits of a trade.

(3) In this section “any relevant prohibitive rule in this Part”, in relation to any deduction, means any provision of this Part (apart from sections 36, 38, 48 and 55) which might otherwise be read as—

(a) prohibiting the deduction, or

(b) restricting the amount of the deduction.

(4) In this section “relevant tax avoidance arrangements” means arrangements—

(a) to which the person carrying on the trade is a party, and

(b) the main purpose, or one of the main purposes, of which is the obtaining of a tax advantage (within the meaning of section 1139 of CTA 2010).

“Arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).

Chapter 4 — Trade profits: rules restricting deductions

Introduction

Professions and vocations

32

The provisions of this Chapter apply to professions and vocations as they apply to trades.

Capital expenditure

33

In calculating the profits of a trade, no deduction is allowed for items of a capital nature.

Wholly and exclusively and losses rules

Expenses not wholly and exclusively for trade and unconnected losses

34

(1) In calculating the profits of a trade, no deduction is allowed for—

(a) expenses not incurred wholly and exclusively for the purposes of the trade, or

(b) losses not connected with or arising out of the trade.

(2) If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.

Bad and doubtful debts

35

(1) In calculating the profits of a trade, no deduction is allowed for a debt owed to the person carrying on the trade, except so far as—

(a) the debt is bad,

(b) the debt is estimated to be bad, or

(c) the debt is released wholly and exclusively for the purposes of the trade as part of a statutory insolvency arrangement.

(2) If the debtor is bankrupt or insolvent, the whole of the debt is estimated to be bad for the purposes of subsection (1)(b), except so far as any amount may reasonably be expected to be received on the debt.

Unpaid remuneration

36

(1) This section applies if, in calculating the profits of a trade of a period of account—

(a) an amount is charged in the accounts for the period in respect of employees' remuneration, and

(b) a deduction for the remuneration would otherwise be allowable for the period.

(2) No deduction is allowed for the remuneration for the period of account unless it is paid before the end of the period of 9 months immediately following the end of the period of account.

(3) If the remuneration is paid after the end of that 9 month period, a deduction for it is allowed for the period of account in which it is paid.

Unpaid remuneration: supplementary

37

(1) For the purposes of section 36 an amount charged in the accounts in respect of employees' remuneration includes an amount for which provision is made in the accounts with a view to its becoming employees' remuneration.

(2) For the purposes of section 36 it does not matter whether an amount is charged for—

(a) particular employments, or

(b) employments generally.

(3) If the profits of the trade are calculated before the end of the 9 month period mentioned in section 36(2)—

(a) it must be assumed, in making the calculation, that any remuneration which is unpaid when the calculation is made will not be paid before the end of that period, but

(b) if the remuneration is subsequently paid before the end of that period, nothing in this subsection prevents the calculation being revised and any tax return being amended accordingly.

(4) For the purposes of this section and section 36 remuneration is paid when it—

(a) is treated as received by an employee for the purposes of ITEPA 2003 by section 18, 19, 31 or 32 of that Act (receipt of money and non-money earnings), or

(b) would be so treated if it were not exempt income.

(5) In this section and section 36—

“employee” includes an office-holder and “employment” therefore includes an office, and

“remuneration” means an amount which is or is treated as earnings for the purposes of ITEPA 2003.

Employee benefit contributions

Restriction of deductions

38

(1) This section applies if, in calculating for income tax purposes the profits of a trade of a person (“the employer”) for a period, a deduction would otherwise be allowable for the period in respect of employee benefit contributions made or to be made (but see subsection (4)).

(1A) No deduction is allowed under this section in respect of employee benefit contributions for a period of account which starts more than 5 years after the end of the period of account in which the contributions are made.

(2) No deduction is allowed for the contributions for the period except so far as—

(a) qualifying benefits are provided, or qualifying expenses are paid, out of the contributions during the period or within 9 months from the end of it, or

(b) if the making of the contributions is itself the provision of qualifying benefits, the contributions are made during the period or within 9 months from the end of it.

(2AA) Subsection (2) is subject to subsections (1A) and (2AB).

(2AB) Where subsection (3C) applies, no deduction is allowed for an amount in respect of the contributions for the period except so far as the amount is a qualifying amount (see subsection (3D)).

(2A) In calculating for income tax purposes the profits of a trade on the cash basis, this section has effect as if—

(a) in subsection (1), the words “or to be made” were omitted, and

(b) in subsection (2), the words “or within 9 months from the end of it” were omitted (in both places).

(3) An amount disallowed under subsection (2) is allowed as a deduction for a subsequent period so far as—

(a) qualifying benefits are provided out of the contributions before the end of the subsequent period, or

(b) if the making of the contributions is itself the provision of qualifying benefits, the contributions are made before the end of the subsequent period.

(3A) Subsection (3) is subject to subsections (1A) and (3B).

(3B) Where subsection (3C) applies, an amount disallowed under subsection (2) is allowed as a deduction for a subsequent period only so far as it is a qualifying amount.

(3C) This subsection applies where the provision of qualifying benefits out of, or by way of, the contributions gives rise both to an employment income tax charge and to an NIC charge.

(3D) An amount in respect of employee benefit contributions is a “qualifying amount” if the relevant tax charges are paid before the end of the relevant period (and are not repaid).

(3E) For the purposes of subsection (3D)—

(a) the “relevant tax charges”, in relation to an amount, are the employment income tax charge and the NIC charge arising in respect of benefits which are provided out of, or by way of, that amount, and

(b) the “relevant period” is the period of 12 months immediately following the end of the period of account for which the deduction for the employee benefit contributions would (apart from this section) be allowable.

(3F) For the purposes of subsections (3C) and (3E), “employment income tax charge” and “NIC charge” have the meaning given by section 40(7).

(3G) Subsection (3H) applies where—

(a) a deduction would, apart from this section, be allowable for an amount (the “remuneration amount”) in respect of employees' remuneration, and

(b) in consequence of the payment of the employees' remuneration, employee benefit contributions are made, or are to be made, in respect of the remuneration amount.

(3H) In calculating for income tax purposes the profits of a trade, the deduction referred to in subsection (3G)(a) is to be treated as a deduction in respect of employee benefit contributions made or to be made (and is to be treated as not being a deduction in respect of employees' remuneration).

(4) This section does not apply to any deduction that is allowable for—

(a) anything given as consideration for goods or services provided in the course of a trade or profession,

(b) contributions under a registered pension scheme or under a superannuation fund to which section 615(3) of ICTA applies,

(c) contributions under a qualifying overseas pension scheme in respect of an individual who is a relevant migrant member of the pension scheme in relation to the contributions, or

(d) contributions under an accident benefit scheme.

For the purposes of paragraph (c) “qualifying overseas pension scheme” and “relevant migrant member” have the same meaning as in Schedule 33 to FA 2004 (see paragraphs 4 to 6 of that Schedule).

(5) See also—

section 39 (making of “employee benefit contributions”),

section 40 (provision of qualifying benefits),

section 41 (timing and amount of certain qualifying benefits),

section 42 (provision or payment out of employee benefit contributions),

section 43 (profits calculated before end of 9 month period), and

section 44 (interpretation of sections 38 to 44).

Making of “employee benefit contributions”

39

(1) For the purposes of section 38, an “employee benefit contribution” is made if, as a result of any act or omission—

(a) property is held, or may be used, under an employee benefit scheme, or

(b) there is an increase in the total value of property that is so held or may be so used (or a reduction in any liabilities under an employee benefit scheme).

(2) For this purpose “employee benefit scheme” means a trust, scheme or other arrangement for the benefit of persons who are, or include, present or former employees of the employer or persons linked with present or former employees of the employer .

(3) Section 554Z1 of ITEPA 2003 applies for the purposes of subsection (2) but as if references to A were to a present or former employee of the employer.

(4) So far as it is not covered by subsection (2), “employee benefit scheme” also means—

(a) an arrangement (the “relevant arrangement”) which is—

(i) an arrangement within subsection (1)(b) of section 554A of ITEPA 2003 to which subsection (1)(c) of that section applies, or

(ii) an arrangement within subsection (1)(b) of section 554AA of ITEPA 2003 to which subsection (1)(c) of that section applies, or

(b) any other arrangement connected (directly or indirectly) with the relevant arrangement.

Provision of qualifying benefits

40

(1) For the purposes of section 38 qualifying benefits are provided if there is—

(a) a payment of money, or

(b) a transfer of assets,

which meets condition A, B, C or D.

(2) Condition A is that the payment or transfer gives rise both to an employment income tax charge and to an NIC charge.

(3) Condition B is that the payment or transfer would give rise to both charges if—

(a) the duties of the employment in respect of which the payment or transfer was made were performed in the United Kingdom, and

(b) the person in respect of whose employment the payment or transfer was made met at all relevant times the conditions as to residence or presence in Great Britain or Northern Ireland prescribed under section 1(6) of the Contributions and Benefits Act.

(4) Condition C is that the payment or transfer is made in connection with the termination of the recipient's employment with the employer.

(5) Condition D is that the payment or transfer is made under an employer-financed retirement benefits schemeand the payment or transfer—

(a) gives rise to an employment income tax charge under Chapter 2 of Part 6 of ITEPA 2003 or under Part 9 of that Act, or

(b) is an excluded benefit as defined in section 393B(3) of that Act.

(6) None of the conditions is met if the payment or transfer is by way of loan.

(6A) For the purposes of section 38 qualifying benefits are also provided if—

(a) a relevant step within the meaning of Part 7A of ITEPA 2003 is taken, and

(b) Chapter 2 of that Part applies by reason of the step.

(7) In this section—

“the Contributions and Benefits Act” means—the Social Security Contributions and Benefits Act 1992 (c. 4), orthe Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c. 7),

“employment income tax charge” means a charge to tax under ITEPA 2003 (whether on the recipient or on someone else), and

“NIC charge” means a liability to pay national insurance contributions under section 6 (Class 1 contributions), section 10 (Class 1A contributions) or section 10A (Class 1B contributions) of the Contributions and Benefits Act.

Timing and amount of certain qualifying benefits

41

(1) If the provision of a qualifying benefit takes the form of a payment of money, the benefit, so far as Chapter 4 of Part 2 of ITEPA 2003 applies to the money, is provided for the purposes of section 38 when the money is treated as received for the purposes of that Chapter (applying the rules in section 18 of that Act (receipt of money earnings)).

(1A) Except so far as subsection (1) applies to the provision of the qualifying benefit, if the provision of a qualifying benefit is a chargeable relevant step, for the purposes of section 38—

(a) the benefit is provided when A's employment with B starts if the chargeable relevant step is taken before then, or

(b) otherwise, the benefit is provided when the chargeable relevant step is taken.

(2) If the provision of a qualifying benefit takes the form of a transfer of an asset which meets condition A, B, C or D in section 40 , the amount provided for the purposes of section 38 is the total of—

(a) the amount (if any) spent on the asset by a scheme manager , ...

(b) in a case where the asset was transferred to a scheme manager by the employer, the amount of the deduction that would be allowable as mentioned in subsection (1) of that section in respect of the transfer, and

(c) if the transfer is a chargeable relevant step, the cost of the relevant step so far as not covered by paragraph (a) or (b).

(3) But if the amount given by subsection (2) is more than the amount that—

(a) is charged to tax under ITEPA 2003 in respect of the transfer, or

(b) would be so charged if condition B in section 40 were met,

the deduction allowable under section 38(2) or (3) is limited to that lower amount.

(4) If the provision of a qualifying benefit is a chargeable relevant step which does not involve a sum of money (see section 554Z(10) of ITEPA 2003) and is not covered by subsection (2), the amount provided for the purposes of section 38 is the cost of the relevant step (subject to subsection (5)).

(5) If the provision of a qualifying benefit is a chargeable relevant step which is not covered by subsection (2) (whether or not it involves a sum of money), the amount provided for the purposes of section 38 is not to exceed the amount that—

(a) is charged to tax under ITEPA 2003 in relation to the relevant step (whether under Part 7A of that Act or otherwise), or

(b) would be charged had not A been non-UK resident in any tax year.

(6) In this section—

(a) “chargeable relevant step” means a relevant step within the meaning of Part 7A of ITEPA 2003 by reason of which Chapter 2 of that Part applies (and references to A and B are to be read accordingly), and

(b) references to the cost of a chargeable relevant step are to be read in accordance with section 554Z3(6) of that Act.

Provision or payment out of employee benefit contributions

42

(1) For the purposes of section 38(2)(a)—

(a) any qualifying benefits provided, or

(b) any qualifying expenses paid,

by a scheme manager after the receipt by the scheme manager of employee benefit contributions are treated as being provided or paid out of the contributions.

(2) This operates up to the total amount of the contributions reduced by the amount of any benefits or expenses previously provided or paid as mentioned in section 38(2)(a).

(3) For the purposes of section 38(3)(a) any qualifying benefits provided by a scheme manager after the receipt by the scheme manager of employee benefit contributions are treated as being provided out of the contributions.

(4) This operates up to the total amount of the contributions reduced by the amount of any benefits or expenses previously provided or paid as mentioned in section 38(2)(a) or (3)(a).

(5) For the purposes of this section no account is taken of any other amount received or paid by the scheme manager .

Profits calculated before end of 9 month period

43

(1) This section applies if the profits of the trade are calculated before the end of the 9 month period mentioned in section 38(2).

(2) It must be assumed, in making the calculation, that any benefits, expenses or contributions which are not provided, paid or made when the calculation is made will not be provided, paid or made before the end of that period.

(3) But if the benefits, expenses or contributions are subsequently provided, paid or made before the end of that period, nothing in this section prevents the calculation being revised and any tax return being amended accordingly.

Interpretation of sections 38 to 44

44

(1) In this section and sections 38 to 43—

“accident benefit scheme” means an employee benefit scheme under which benefits may be provided only by reason of a person's disablement, or death, caused by an accident occurring during the person's service as an employee of the employer,

“employee benefit contribution” is to be read in accordance with section 39(1),

“employee benefit scheme” has the meaning given by section 39(2) to (4) ,

“the employer” is to be read in accordance with section 38(1),

“employer-financed retirement benefits scheme” has the same meaning as in Chapter 2 of Part 6 of ITEPA 2003 (see section 393A of that Act), but ignoring section 393B(2)(a) and (c) of that Act

“qualifying benefits” is to be read in accordance with section 40,

“qualifying expenses” includes any expenses of the third party (other than the provision of benefits to employees of the employer)—which are incurred in operating the employee benefit scheme, andwhich, if incurred by the employer, would be deductible in calculating for income tax purposes the employer's profits for any period, and

“scheme manager” means a person who administers an employee benefit scheme (acting in that capacity).

(2) A reference in this section and sections 38 to 43 to a person's employee includes the holder of an office under that person, and “employment” is to be read accordingly.

Business entertainment and gifts

Business entertainment and gifts: general rule

45

(1) The general rule is that no deduction is allowed in calculating the profits of a trade for expenses incurred in providing entertainment or gifts in connection with the trade.

(2) A deduction for expenses which are incurred—

(a) in paying sums to or on behalf of an employee of the person carrying on the trade (“the trader”), or

(b) in putting sums at the disposal of an employee of the trader,

is prohibited by the general rule if (and only if) the sums are paid, or put at the employee's disposal, exclusively for meeting expenses incurred or to be incurred by the employee in providing the entertainment or gift.

(3) The general rule is subject to exceptions—

for entertainment (see section 46), and

for gifts (see section 47).

(4) For the purposes of this section and those two sections—

(a) “employee”, in relation to a company, includes a director of the company and a person engaged in the management of the company,

(b) “entertainment” includes hospitality of any kind, and

(c) the expenses incurred in providing entertainment or a gift include expenses incurred in providing anything incidental to the provision of entertainment or a gift.

Business entertainment: exceptions

46

(1) The prohibition in section 45 on deducting expenses incurred in providing entertainment does not apply in either of cases A and B.

(2) Case A is where—

(a) the entertainment is of a kind which it is the trader's trade to provide, and

(b) the entertainment is provided in the ordinary course of the trade either for payment or free of charge in order to advertise to the public generally.

(3) Case B is where the entertainment is provided for employees of the trader unless—

(a) the entertainment is also provided for others, and

(b) the provision of the entertainment for the employees is incidental to its provision for the others.

Business gifts: exceptions

47

(1) The prohibition in section 45 on deducting expenses incurred in providing gifts does not apply in any of cases A, B, C and D.

(2) Case A is where—

(a) the gift is of an item which it is the trader's trade to provide, and

(b) the item is given away in the ordinary course of the trade in order to advertise to the public generally.

(3) Case B is where the gift incorporates a conspicuous advertisement for the trader unless—

(a) the gift is food, drink, tobacco or a token or voucher exchangeable for goods, or

(b) the cost of the gift to the trader, together with any other gifts (except food, drink, tobacco or a token or voucher exchangeable for goods) given to the same person in the same tax year, exceeds £50.

The Treasury may by order amend the sum for the time being specified in paragraph (b) so as to increase it.

(4) Case C is where gifts are provided for employees of the trader unless—

(a) gifts are also provided for others, and

(b) the provision of the gifts for the employees is incidental to the provision of gifts for the others.

(5) Case D is where the gift is given to—

(a) a charity,

(b) the Historic Buildings and Monuments Commission for England, or

Car or motor cycle hire

48

(1) This section applies if, in calculating the profits of a trade, a deduction is allowed for expenses incurred on the hiring of a car which is not—

(a) a car that is first registered before 1 March 2001,

(b) a car that has low CO₂ emissions,

(d) a qualifying hire car.

(2) The amount of the deduction which would otherwise be allowable is reduced by 15%.

(3) Subsection (4) applies if a deduction is reduced as a result of subsection (2), or a corresponding provision, and subsequently—

(a) there is a rebate (however described) of the hire charges, or

(b) a debt in respect of any of the hire charges is released otherwise than as part of a statutory insolvency arrangement.

(4) The amount that, as a result of the rebate or release—

(a) is brought into account as a receipt of the trade ..., or

(b) is treated as a post-cessation receipt under section 249 (debts released after cessation),

is reduced by 15% .

(4A) In this section “corresponding provision” means—

(a) section 56(2) of CTA 2009 (car ... hire: trade profits and property income), or

(b) section 1251(2) of CTA 2009 (car ... hire: expenses of management), including as applied by section 82(4) of FA 2012. ...

(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Car or motor cycle hire: supplementary

49

(1) In section 48 “car ...” means a mechanically propelled road vehicle other than ...—

(za) a motor cycle (within the meaning of section 185(1) of the Road Traffic Act 1988),

(a) a vehicle of a construction primarily suited for the conveyance of goods or burden of any description, or

(b) a vehicle of a type not commonly used as a private vehicle and unsuitable for such use.

(1A) In section 48—

“a car that has low CO2 emissions” has the same meaning as in section 104AA of CAA 2001 (special rate expenditure: main rate car);

“electrically propelled” has the meaning given in section 268B of that Act.

(2) In section 48 “a qualifying hire car ...” means a car ... which—

(a) is hired under a hire-purchase agreement ... under which there is no option to purchase,

(b) is hired under a hire-purchase agreement under which there is an option to purchase exercisable on the payment of a sum equal to not more than 1% of the retail price of the car ... when new, or

(d) is leased under a long-funding lease (within the meaning of section 70G of CAA 2001).

(3) For this purpose “hire-purchase agreement” has the meaning given by section 998A of ITA 2007.

(6) In this section ... “new” means unused and not second-hand.

Hiring cars (but not motor cycles) with low carbon dioxide emissions

50

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Patent royalties

51

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest payments

Exclusion of double relief for interest

52

(1) In calculating the profits of a trade, no deduction is allowed—

(a) for any tax year for the interest paid on a debt or liability in respect of which relief is given under section 383 of ITA 2007(see subsection (5) below), or

(b) for any relevant tax year for other interest on the same debt or liability.

(2) A tax year is a relevant one if the interest in respect of which the relief is given could, but for the relief, have been brought into account in calculating the profits of a trade of the tax year.

(3) For the purposes of subsection (1)(b) all interest which—

(a) is capable of being brought into account in calculating the profits of a trade, and

(b) is payable by any person on money advanced to the person on current account,

is treated as interest on the same debt.

(4) It does not matter if the money is advanced—

(a) on one or more accounts, or

(b) by the same or separate banks or other persons.

(5) For the purposes of this section relief under section 383 of ITA 2007 is to be treated as given only when the claim for the relief can no longer be varied (whether on appeal or otherwise).

(6) For a rule excluding relief under section 383 of ITA 2007 if interest on a debt or liability is brought into account in calculating the profits of a trade, see section 387(2) and (3) of that Act .

53

(1) In calculating the profits of a trade, no deduction is allowed for any contribution paid by any person under—

(a) Part 1 of the Social Security Contributions and Benefits Act 1992 (c. 4), or

(b) Part 1 of the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c. 7).

(2) But this prohibition does not apply to an employer's contribution.

(3) For this purpose “an employer's contribution” means—

(a) a secondary Class 1 contribution,

(b) a Class 1A contribution, or

within the meaning of Part 1 of the Social Security Contributions and Benefits Act 1992 or of the Social Security Contributions and Benefits (Northern Ireland) Act 1992.

Penalties , interest and VAT surcharges and interest

Penalties, interest and VAT surcharges

54

(1) In calculating the profits of a trade, no deduction is allowed for any penalty or interest mentioned in the first column of the following table.

(2) This is the table—

Penalty or interest	Description of tax, levy or duty
Interest under any provision of Part 9 of TMA 1970	Income tax, capital gains tax and corporation tax
Interest under section 101 of FA 2009 in connection with sums required to be deducted under section 61 of FA 2004 (construction industry)
Penalty under any of sections 60 to 70 of VATA 1994	Value added tax
Interest under section 101 of FA 2009 in respect of an amount of value added tax
Penalty under any of sections 8 to 11 of FA 1994	Excise duties
Penalty under any of paragraphs 12 to 19 of Schedule 7 to FA 1994	Insurance premium tax
Interest under section 60(8) of FA 1994 or paragraph 21 of Schedule 7 to FA 1994
Penalty under any provision of Part 5 of Schedule 5 to FA 1996	Landfill tax
Interest under section 56(5) of, or paragraph 26 or 27 of Schedule 5 to, FA 1996
Penalty under any provision of Schedule 6 to FA 2000	Climate change levy
Interest under any of paragraphs 70, 81 to 85 , 109 and 123(6) of that Schedule
Penalty under any provision of Part 2 of FA 2001	Aggregates levy
Interest under section 42(6) of, or any of paragraphs 5 to 9 of Schedule 5 to, paragraph 6 of Schedule 8 to and paragraph 5 of Schedule 10 to, FA 2001
Penalty under section 25 or 26 of FA 2003	Customs duties
Penalty under any provision of Part 4 of FA 2003	Stamp duty land tax
Interest under any provision of that Part
Penalty under Schedule 24 to FA 2007	Various taxes and excise duties
Penalty under Schedule 41 to FA 2008	Various taxes and excise duties
Penalty under Schedule 16 to F(No. 2)A 2017	Various taxes

(3) In calculating the profits of a trade, no deduction is allowed for any surcharge under section 59 of VATA 1994.

55

(1) In calculating the profits of a trade, no deduction is allowed for expenses incurred—

(a) in making a payment if the making of the payment constitutes a criminal offence, or

(b) in making a payment outside the United Kingdom if the making of a corresponding payment in any part of the United Kingdom would constitute a criminal offence in that part.

(2) In calculating the profits of a trade, no deduction is allowed for expenses incurred in making a payment induced by a demand which constitutes—

(a) the offence of blackmail under section 21 of the Theft Act 1968 (c. 60) (England and Wales),

(b) the offence of extortion (Scotland), or

(c) the offence of blackmail under section 20 of the Theft Act (Northern Ireland) 1969 (c. 16 (N.I.)) (Northern Ireland).

Chapter 5 — Trade profits: rules allowing deductions

Introduction

Professions and vocations

56

Apart from sections 87 to 90 (scientific research and expenses connected with patents, designs and trade marks) and section 97A (cash basis: value of trading stock on cessation of trade), the provisions of this Chapter apply to professions and vocations as they apply to trades.

Pre-trading expenses

57

(1) This section applies if a person incurs expenses for the purposes of a trade before (but not more than 7 years before) the date on which the person starts to carry on the trade (“the start date”).

(2) If, in calculating the profits of the trade—

(a) no deduction would otherwise be allowed for the expenses, but

(b) a deduction would be allowed for them if they were incurred on the start date,

the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).

Incidental costs of obtaining finance

58

(1) In calculating the profits of a trade, a deduction is allowed for incidental costs of obtaining finance by means of—

(a) a loan, or

(b) the issue of loan stock,

if the interest on the loan or stock is deductible in calculating the profits of the trade.

(2) “Incidental costs of obtaining finance” means expenses—

(a) which are incurred on fees, commissions, advertising, printing and other incidental matters, and

(b) which are incurred wholly and exclusively for the purpose of obtaining the finance, providing security for it or repaying it.

(3) Expenses incurred wholly and exclusively for the purpose of—

(a) obtaining finance, or

(b) providing security for it,

are incidental costs of obtaining the finance even if it is not in fact obtained.

(4) But the following are not incidental costs of obtaining finance—

(a) sums paid because of losses resulting from movements in the rate of exchange between different currencies,

(b) sums paid for the purpose of protecting against such losses,

(c) the cost of repaying a loan or loan stock so far as attributable to its being repayable at a premium or having been obtained or issued at a discount, and

(d) stamp duty.

(5) This section needs to be read with —

(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) section 59 (which provides for restrictions in relation to convertible loans and loan stock etc.).

Convertible loans and loan stock etc.

59

(1) No deduction is allowed under section 58 in respect of a loan or loan stock if—

(a) it carries the right of conversion into, or to the acquisition of, shares or other securities, and

(b) the right is exercisable before the end of the period of 3 years from the date when the loan was obtained or the stock issued (“the 3 year period”).

(2) “Other securities” does not include a loan or loan stock—

(a) the interest on which is deductible in calculating the profits of the person's trade, and

(b) which does not carry such a right as is mentioned in subsection (1).

(3) But the restriction imposed by subsection (1) does not apply if the right is not, or is not wholly, exercised before the end of the 3 year period.

(4) In such a case any incidental costs of obtaining finance incurred before the end of the 3 year period are treated as incurred immediately after the end of it.

(5) If the right is exercised within the 3 year period as to part of the loan or loan stock, only the following incidental costs of obtaining finance are treated as incurred.

(6) The costs are those corresponding to the proportion of the loan or loan stock in respect of which the right is not exercised within that period.

Tenants under taxed leases

Tenants under taxed leases: introduction

60

(1) Sections 61 to 67 apply if land used in connection with a trade is subject to a taxed lease.

(2) Section 61 (tenants occupying land for purposes of trade treated as incurring expenses) applies in calculating the profits of a trade carried on by the tenant under the taxed lease for the purpose of making deductions for the expenses of the trade.

(3) But any deduction for an expense under section 61 is subject to the application of any provision of Chapter 4 of this Part.

(4) In this section and sections 61 to 67 the following expressions have the same meaning as in Chapter 4 of Part 3 (profits of property businesses: lease premiums etc.)—

“receipt period” (see section 288(6)),

“taxed lease” (see section 287(4)),

“taxed receipt” (see section 287(4)), and

“unreduced amount” (see section 290(2)).

(5) Section 290(3) and (4) (unreduced amount of taxed receipt under section 277 as a result of section 278) applies for the purposes of sections 61 to 65.

(6) In sections 64 to 67 references to a reduction under section 288 below or section 228 of CTA 2009 by reference to a taxed receipt have the same meaning as in Chapter 4 of Part 3 (see section 290(6)).

(7) In the application of sections 64 to 67 to Scotland—

(a) references to a lease being granted out of a taxed lease are to the grant of a sublease of land subject to the taxed lease, and

(b) references to the lease so granted are to be read as references to the sublease.

Tenants occupying land for purposes of trade treated as incurring expenses

61

(1) The tenant under the taxed lease is treated as incurring an expense of a revenue nature in respect of the land subject to the taxed lease for each qualifying day.

(2) If there is more than one taxed receipt, this section applies separately in relation to each of them.

(3) A day is a “qualifying day”, in relation to a taxed receipt, if it is a day—

(a) that falls within the receipt period of the taxed receipt, and

(b) on which the tenant occupies the whole or part of the land subject to the taxed lease for the purposes of carrying on a trade.

(4) If on the qualifying day the tenant occupies the whole of the land subject to the taxed lease for the purposes of the trade, the amount of the expense for the qualifying day by reference to the taxed receipt is given by the formula—

$$ATRP$A is the unreduced amount of the taxed receipt, and TRP is the number of days in the receipt period of the taxed receipt.$

(5) If on the qualifying day the tenant occupies part of the land subject to the taxed lease for the purposes of the trade, the amount of the expense for the qualifying day by reference to the taxed receipt is given by the formula—

$$F×ATRP$where—F is the fraction of the land that is so occupied calculated on a just and reasonable basis, andA and TRP have the same meaning as in subsection (4).$

(5A) No expense is to be determined under this section by reference to the taxed receipt if section 292(4B) or (4C) applies.

(6) This section is subject to section 62 (limit on deductions if tenant entitled to mineral extraction allowance).

Limit on deductions if tenant entitled to mineral extraction allowance

62

(1) This section applies if the tenant under the taxed lease has become entitled, in respect of expenditure on the acquisition of an interest in the land subject to the taxed lease, to an allowance for a tax year under Part 5 of CAA 2001 (mineral extraction allowances) in respect of expenditure falling within section 403 of that Act (qualifying expenditure on acquiring a mineral asset).

(2) If the allowance is in respect of the whole of the expenditure, no deduction is allowed for expenses under section 61 for a qualifying day falling within that or a later tax year.

(3) If the allowance is in respect of only part of the expenditure (“the allowable part”) the amount of the deduction for expenses under section 61 for a qualifying day falling within that or a later tax year is calculated by multiplying the amount that, apart from this section, would be the amount of the deduction for the qualifying day by—

$$WE-APWE$where—WE is the whole of the expenditure, andAP is the allowable part of the expenditure.$

Tenants dealing with land as property employed for purposes of trade

63

(1) This section applies if the tenant under the taxed lease—

(a) does not occupy the land subject to the taxed lease, or a part of it, but

(b) deals with the tenant's interest in the land, or the part of it, as property employed for the purposes of carrying on a trade.

(2) Section 61 applies as if the land or the part of it were occupied by the tenant for the purposes of the trade.

(3) But the tenant is not treated as incurring an expense in respect of the land for a qualifying day as a result of this section so far as the tenant is treated as incurring an expense under section 292 (tenants under taxed leases treated as incurring expenses) in respect of the land for the day in calculating the profits of the tenant's property business.

(4) This section is subject to sections 64 and 65 (restrictions on section 61 expenses where the additional calculation rule is relevant).

Restrictions on section 61 expenses: lease premium receipts

64

(1) This section applies if a lease has been granted out of the taxed lease and—

(a) in calculating the amount of a receipt of a property business under Chapter 4 of Part 3 (profits of property businesses: lease premiums etc) in respect of the lease, there is a reduction under section 288 (the additional calculation rule) by reference to the taxed receipt, or

(b) in calculating the amount of a receipt of a property business under Chapter 4 of Part 4 of CTA 2009 (profits of a property business: lease premiums etc) in respect of the lease, there is a reduction under section 228 of that Act (the additional calculation rule) by reference to the taxed receipt.

In this section and sections 65 and 67 the receipt that is so reduced is referred to as a “lease premium receipt”.

(2) Subsections (3) to (5) provide for the application of section 61 as a result of section 63 for a qualifying day that falls within the receipt period of the lease premium receipt.

(3) The tenant under the taxed lease is treated as incurring an expense under section 61 as a result of section 63 for the qualifying day by reference to the taxed receipt only if the daily amount of the taxed receipt exceeds the daily reduction of the lease premium receipt.

(4) If the condition in subsection (3) is met, the amount of that expense for the qualifying day by reference to the taxed receipt is equal to that excess.

(5) If the qualifying day falls within the receipt period of more than one lease premium receipt, the reference in subsection (3) to the daily reduction of the lease premium receipt is to be read as a reference to the total of the daily reductions of each of the lease premium receipts whose receipt period includes the qualifying day.

(6) In this section—

the “daily amount” of the taxed receipt is given by the formula—$ATRP$where—A is the unreduced amount of the taxed receipt, andTRP is the number of days in the receipt period of the taxed receipt, and

the “daily reduction” of a lease premium receipt is given by the formula—$ARRRP$where—AR is the reduction under section 288 below or section 228 of CTA 2009 by reference to the taxed receipt, andRRP is the number of days in the receipt period of the lease premium receipt.

(7) Section 65 explains how this section operates if the lease does not extend to the whole of the premises subject to the taxed lease.

Restrictions on section 61 expenses: lease of part of premises

65

(1) This section applies if—

(a) section 64 applies, and

(b) the lease granted out of the taxed lease does not extend to the whole of the premises subject to the taxed lease.

(2) Subsections (3) to (5) apply for a qualifying day that falls within the receipt period of the lease premium receipt.

(3) Sections 61, 63 and 64 apply separately in relation to the part of the premises subject to the lease and to the remainder of the premises.

(4) If—

(a) more than one lease that does not extend to the whole of the premises subject to the taxed lease has been granted out of the taxed lease, and

(b) the qualifying day falls within the receipt period of two or more lease premium receipts that relate to different leases,

sections 61, 63 and 64 apply separately in relation to each part of the premises subject to a lease to which such a lease premium receipt relates and to the remainder of the premises.

(5) Where sections 61, 63 and 64 apply in relation to a part of the premises, A becomes the amount calculated by multiplying the unreduced amount of the taxed receipt by the fraction of the premises constituted by the part.

(6) This fraction is calculated on a just and reasonable basis.

Corporation tax receipts treated as taxed receipts

66

Section 296 (corporation tax receipts treated as taxed receipts applies for the purposes of sections 60 to 67.

Restrictions on section 61 expenses: corporation tax receipts

67

(1) This section provides for the application of section 61 as a result of section 63 if—

(a) a lease has been granted out of the taxed lease,

(b) in calculating the amount of a corporation tax receipt in respect of the lease, there is a reduction under section 37(2) or (3) of ICTA by reference to the amount chargeable on the superior interest for the purposes of that section, and

(2) Sections 61 and 63 to 65 apply as follows—

(a) the corporation tax receipt is treated as if it were a lease premium receipt for the purposes of sections 64 and 65,

(b) references in those sections to the reduction under section 288 by reference to the taxed receipt are, in relation to the corporation tax receipt, to the reduction under section 37(2) or (3) of ICTA by reference to the amount chargeable on the superior interest, and

(i) in the case of a corporation tax receipt as a result of section 34 of ICTA, the period treated in calculating the amount of the receipt as being the duration of the lease, and

(ii) in the case of a corporation tax receipt as a result of section 35 of ICTA, the period treated in calculating the amount of the receipt as being the duration of the lease remaining at the date of the assignment.

(3) There is a corporation tax receipt in respect of a lease if—

(a) there is a receipt of a Schedule A business or an overseas property business (within the meaning of section 70A(4) of ICTA) as a result of section 34 or 35 of ICTA (treatment of premiums etc. as rent and assignments for profit of lease granted at an undervalue) in respect of the lease for an accounting period ending after 5th April 2005 but before 1st April 2009, or

(b) there would be such a receipt, but for the operation of section 37(2) or (3) of ICTA (reductions in certain receipts under section 34 or 35 of ICTA).

(4) References to a reduction under section 37(2) or (3) of ICTA in a corporation tax receipt by reference to the amount chargeable on the superior interest are to the difference between—

(a) the amount of the corporation tax receipt before the operation of section 37(2) or (3) of ICTA, and

(b) the amount of the corporation tax receipt after the operation of that subsection,

so far as attributable to the amount chargeable on the superior interest for the purposes of section 37 of ICTA.

...

Replacement and alteration of trade tools

68

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Payments for restrictive undertakings

69

(1) In calculating the profits of a trade, a deduction is allowed for a payment—

(a) which is treated as earnings of an employee by virtue of section 225 of ITEPA 2003 (payments for restrictive undertakings), and

(b) which is made, or treated as made for the purposes of section 226 of that Act (valuable consideration given for restrictive undertakings), by the person carrying on the trade.

(2) The deduction is allowed for the period of account in which the payment—

(a) is made, or

(b) is treated as made for the purposes of section 226 of ITEPA 2003.

Seconded employees

Employees seconded to charities and educational establishments

70

(1) This section applies if a person carrying on a trade (“the employer”) makes the services of a person employed for the purposes of the trade available to—

(a) a charity, or

(b) an educational establishment,

on a basis that is stated and intended to be temporary.

(2) In calculating the profits of the trade, a deduction is allowed for expenses of the employer that are attributable to the employee's employment during the period of the secondment.

(3) In this section—

“educational establishment” means—in England and Wales, any of the bodies mentioned in section 71(1),in Scotland, any of the bodies mentioned in section 71(2),in Northern Ireland, any of the bodies mentioned in section 71(3), andany other educational body which is for the time being approved for the purposes of this section by the Secretary of State or, in Northern Ireland, the Department of Education, and

“the period of the secondment” means the period for which the employee's services are made available to the charity or educational establishment.

Educational establishments

71

(1) A body in England and Wales is an educational establishment for the purposes of section 70 if it is—

(a) a local authority (but only to the extent that the services of the employee are made available to the authority for the purposes of, or in connection with, the education functions of the authority),

(b) an educational institution maintained or otherwise supported, in the exercise of their education functions, by a local authority,

(c) an independent school within the meaning of the Education Act 1996 (c. 56) registered under section 161 of the Education Act 2002 (c. 32), ...

(ca) an alternative provision Academy that is not an independent school within the meaning of the Education Act 1996,

(d) an institution within the further education sector, or the higher education sector, within the meaning of the Further and Higher Education Act 1992 (c. 13), or

(e) a 16 to 19 Academy.

(2) A body in Scotland is an educational establishment for the purposes of section 70 if it is—

(a) an education authority within the meaning of the Education (Scotland) Act 1980 (c. 44),

(b) an educational establishment within the meaning of the Education (Scotland) Act 1980 managed by an education authority within the meaning of that Act,

(d) an independent school within the meaning of the Education (Scotland) Act 1980,

(e) a central institution within the meaning of the Education (Scotland) Act 1980,

(f) an institution within the higher education sector within the meaning of section 56(2) of the Further and Higher Education (Scotland) Act 1992 (c. 37), or

(g) a college of further education within the meaning of section 36(1) of the Further and Higher Education (Scotland) Act 1992.

(3) A body in Northern Ireland is an educational establishment for the purposes of section 70 if it is—

(a) an education and library board within the meaning of the Education and Libraries (Northern Ireland) Order 1986 (S.I. 1986/594 (N.I. 3)),

(b) a college of education, a grant-aided school or an independent school within the meaning of the Education and Libraries (Northern Ireland) Order 1986, or

(c) an institution of further education within the meaning of the Further Education (Northern Ireland) Order 1997 (S.I. 1997/1772 (N.I. 15)).

(4) In subsection (1) “local authority” and “education functions” have the same meaning as in the Education Act 1996 (see section 579(1) of that Act).

Contributions to agents' expenses

Payroll deduction schemes: contributions to agents' expenses

72

(1) This section applies if—

(a) a person carrying on a trade (“the employer”) is liable to make payments to an individual,

(b) income tax falls to be deducted from those payments as a result of PAYE regulations, and

(c) the employer withholds sums from those payments in accordance with an approved scheme and pays the sums to an approved agent.

(2) In calculating the profits of the employer's trade, a deduction is allowed for expenses incurred by the employer in making a payment to the agent for expenses which—

(a) have been incurred, or

(b) are to be incurred,

by the agent in connection with the agent's functions under the scheme.

(2A) In calculating the profits of the employer's trade on the cash basis, subsection (2) has effect as if paragraph (b) were omitted.

(3) In this section “approved agent” and “approved scheme” have the same meaning as in section 714 of ITEPA 2003.

Counselling and retraining expenses

Counselling and other outplacement services

73

(1) In calculating the profits of a trade, a deduction is allowed for counselling expenses if—

(a) the person carrying on the trade (“the employer”) incurs the expenses,

(b) the expenses are incurred in relation to a person (“the employee”) who holds or has held an office or employment under the employer for the purposes of the trade, and

(2) In this section “counselling expenses” means expenses incurred—

(a) in the provision of services to the employee in connection with the cessation of the office or employment,

(b) in the payment or reimbursement of fees for such provision, or

(3) In this section “the relevant conditions” means—

(a) conditions A to D for the purposes of section 310 of ITEPA 2003 (employment income exemptions: counselling and other outplacement services), and

(b) in the case of travel expenses, condition E for those purposes.

Retraining courses

74

(1) In calculating the profits of a trade, a deduction is allowed for retraining course expenses if—

(a) the person carrying on the trade (“the employer”) incurs the expenses,

(b) they are incurred in relation to a person (“the employee”) who holds or has held an office or employment under the employer for the purposes of the trade, and

(2) In this section—

“retraining course expenses” means expenses incurred in the payment or reimbursement of retraining course expenses within the meaning given by section 311(2) of ITEPA 2003, and

“the relevant conditions” means—the conditions in subsections (3) and (4) of section 311 of ITEPA 2003 (employment income exemptions: retraining courses), andin the case of travel expenses, the conditions in subsection (5) of that section.

Retraining courses: recovery of tax

75

(1) This section applies if—

(a) an employer's liability to tax for a tax year is determined on the assumption that a deduction for expenditure is allowed under section 74, and

(b) the deduction would not otherwise have been allowed.

(2) If, subsequently—

(a) the condition in section 311(4)(a) of ITEPA 2003 is not met because of the employee's failure to begin the course within the period of one year after ceasing to be employed, or

(b) the condition in section 311(4)(b) of ITEPA 2003 is not met because of the employee's continued employment or re-employment,

an assessment of an amount or further amount of tax due as a result of the condition not being met may be made under section 29(1) of TMA 1970.

(3) Such an assessment must be made before the end of the period of 6 years immediately following the end of the tax year in which the failure to meet the condition occurred.

(4) If subsection (2) applies, the employer must give an officer of Revenue and Customs a notice containing particulars of—

(a) the employee's failure to begin the course,

(b) the employee's continued employment, or

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Income Tax (Trading and Other Income) Act 2005

Part 1 — Overview

Counselling and other outplacement services

1

Contents of Chapter

2

Part 2 — Trading income

Chapter 1 — Introduction

Relief for policies and contracts with European Economic Area insurers

3

Exempt sum: term dependent solely on duration of life

4

Chapter 2 — Income taxed as trade profits

Charge to tax on trade profits

Charge to tax on trade profits

5

Territorial scope of charge to tax

6

Income charged

7

Person liable

8

Trades and trade profits

Farming and market gardening

9

Commercial occupation of land other than woodlands

10

Commercial occupation of woodlands

11

Profits of mines, quarries and other concerns

12

Visiting performers

13

Visiting performers: supplementary

14

Divers and diving supervisors

15

Oil extraction and related activities

16

Starting and ceasing to trade

Effect of becoming or ceasing to be a UK resident

17

Effect of company starting or ceasing to be within charge to income tax

18

Trading income and property income

Tied premises

19

Caravan sites where trade carried on

20

Surplus business accommodation

21

Payments for wayleaves

22

Rent-a-room and qualifying care relief

Rent-a-room and foster-care relief

23

Chapter 3 — Trade profits: basic rules

Professions and vocations

24

Generally accepted accounting practice

25

Losses calculated on same basis as profits

26

Receipts and expenses

27

Items treated under CAA 2001 as receipts and expenses

28

Interest

29

Animals kept for trade purposes

30

Relationship between rules prohibiting and allowing deductions

31

Chapter 4 — Trade profits: rules restricting deductions

Introduction

Professions and vocations

32

Capital expenditure

Capital expenditure

33