Income Tax (Trading and Other Income) Act 2005 (c. 5)

(The document as of February, 2008)

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the value is determined in accordance with section 176 (sale to unconnected person), 177 (sale to connected person) or 178 (election by connected persons).

(3) But if section 127 (preventing abuse of the herd basis rules) applies--

(a) the value is not determined in accordance with any of those sections, and

(b) the value is instead taken to be that given by section 127 (the price which the animals transferred would have fetched if sold in the open market at the time of the sale).

(4) In any other case, the value is taken to be the amount which the stock would have realised if sold in the open market at the time of the cessation.

176 Sale basis of valuation: sale to unconnected person

(1) The value of trading stock is determined in accordance with this section if--

(a) it is sold to a person who carries on, or intends to carry on, a trade in the United Kingdom and is entitled to deduct the cost of the stock as an expense in calculating the profits of that trade for income or corporation tax purposes, and

(b) the buyer is not connected with the seller.

(2) The value is taken to be the amount in fact realised on the sale.

(3) If the stock is sold together with other assets, so much of the amount realised on the sale as, on a just and reasonable apportionment, is properly attributable to each asset is treated as the amount realised on the sale of that asset.

177 Sale basis of valuation: sale to connected person

(1) The value of trading stock is determined in accordance with this section if--

(b) the buyer is connected with the seller, and

(2) The value is taken to be the amount which would have been realised if the sale had been between independent persons dealing at arm's length.

178 Sale basis of valuation: election by connected persons

(1) The value of trading stock is determined in accordance with this section if--

(b) the buyer is connected with the seller, and

(2) The parties to the sale may make an election under this section if the value of the stock determined under section 177 exceeds both--

(a) its acquisition value, and

(b) the amount in fact realised on the sale.

(3) If an election is made, the value is taken to be--

(a) its acquisition value, or,

(b) if greater, the amount in fact realised on the sale.

(4) An election under this section must be made by both parties on or before the first anniversary of the normal self-assessment filing date for the tax year in which the cessation occurred.

(5) The "acquisition value" of trading stock means the amount which would have been deductible as representing its acquisition value, in calculating the profits of the trade, on the following assumptions--

(a) that the stock had been sold in the course of the trade, immediately before the cessation, for a price equal to the value of the stock determined under section 177, and

(b) that the period for which those profits were to be calculated began immediately before the sale.

(6) If the stock is sold together with other assets, so much of the amount realised on the sale as, on a just and reasonable apportionment, is properly attributable to each asset is treated as the amount realised on the sale of that asset.

179 Connected persons

For the purposes of sections 175 to 178 two persons are connected with each other if any of the following tests is met--

(a) they are connected with each other within the meaning of section 839 of ICTA,

(b) one of them is a firm and the other has a right to a share of the assets or income of the firm,

(d) both of them are firms and some other person has a right to a share of the assets or income of both of them, or

(e) both of them are bodies corporate, or one of them is a firm and the other is a body corporate, and in either case some other person has control over both of them.

180 Cost to buyer of stock valued on sale basis of valuation

(1) This section applies for the purpose of calculating the profits of the trade carried on by the buyer of trading stock.

(2) If the value of the stock is determined in accordance with--

(a) section 175(3) or sections 176 to 178 (sale basis of valuation), or

(b) section 100(1A) to (1C) of ICTA (corresponding corporation tax rules),

the cost of the stock to the buyer is taken to be the value as so determined.

181 Meaning of "sale" and related expressions

(1) In sections 175 to 178 (except in section 178(5)) references to a sale include a transfer for valuable consideration.

(2) In relation to a transfer which is not a sale--

"amount realised on the sale" means the value of the consideration given for the transfer,
"buyer" means the person to whom the transfer is made, and
"seller" means the person who makes the transfer.

Valuation of work in progress

182 Valuation of work in progress on cessation

(1) If--

(a) a person permanently ceases to carry on a profession or vocation, and

(b) the work in progress is valued in calculating the profits of the profession or vocation,

the value must be determined in accordance with section 184 (basis of valuation of work in progress) or 185 (election for valuation at cost).

(2) If there is a change in the persons carrying on a profession, subsection (1) does not apply so long as a person carrying on the profession immediately before the change continues to carry it on after the change.

(3) If an individual carries on a profession alone or a vocation, subsection (1) does not apply if the cessation is because of the individual's death.

183 Meaning of "work in progress"

(1) In this Chapter "work in progress" means services performed in the ordinary course of the profession or vocation--

(a) the performance of which is wholly or partly completed at the time of the cessation, and

(b) for which it would be reasonable to expect that a charge would be made if there were no cessation and, in the case of partly completed services, their performance were fully completed,

and includes any article produced, and any material used, in the performance of any such services.

(2) In this Chapter references to the transfer of work in progress include the transfer of any benefits and rights which accrue, or might reasonably be expected to accrue, from the performance of any such services.

184 Basis of valuation of work in progress

(1) If the work in progress is transferred for money or other valuable consideration to a person who--

(a) carries on, or intends to carry on, a profession or vocation in the United Kingdom, and

(b) is entitled to deduct the cost of the work as an expense in calculating the profits of that profession or vocation for income or corporation tax purposes,

the value of the work is taken to be the amount paid or other consideration given for the transfer.

(2) In any other case, the value of the work is taken to be the amount which would have been paid for a transfer of the work at the time of the cessation as between independent parties dealing at arm's length.

(3) These rules are subject to any election under section 185 (election for valuation at cost).

185 Election for valuation at cost

(1) The person who was carrying on the profession or vocation immediately before the cessation may elect that--

(a) the value of work in progress brought into account in calculating the profits of the period immediately before the cessation is to be the actual cost of the work, and

(b) the amount by which any sums received for the transfer of the work exceed the actual cost of the work is to be treated as a post-cessation receipt (see Chapter 18).

(2) An election under this section must be made on or before the first anniversary of the normal self-assessment filing date for the tax year in which the cessation occurred.

Supplementary

186 Determination of questions by Commissioners

(1) Any question arising under--

(a) section 175(3) or sections 176 to 178 (sale basis of valuation of trading stock), or

(b) section 184(1) (valuation of work in progress transferred for valuable consideration),

must be determined by the General or Special Commissioners in the same way as an appeal.

(2) If the same General Commissioners have jurisdiction in relation to each of the persons whose trade, profession or vocation is concerned (including any company within the charge to corporation tax), the question must be determined by those Commissioners.

(3) But this does not apply if all parties concerned agree that the question should be determined by the Special Commissioners.

(4) In any other case, the question must be determined by the Special Commissioners.

Chapter 13 Deductions from profits: unremittable amounts

187 Professions and vocations

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

188 Application of Chapter

(1) This Chapter applies if--

(a) an amount received by, or owed to, a person carrying on a trade ("the trader") is brought into account as a receipt in calculating the profits of the trade,

(b) the amount is paid or owed in a territory outside the United Kingdom, and

(2) An amount received is unremittable if it cannot be transferred to the United Kingdom merely because of foreign exchange restrictions.

(3) An amount owed is unremittable if it cannot be paid in the United Kingdom and--

(a) it temporarily cannot be paid in the territory in which it is owed merely because of foreign exchange restrictions, or

(b) it can be paid in that territory but, if it were paid there, the amount paid would not be transferable to the United Kingdom merely because of foreign exchange restrictions.

(4) "Foreign exchange restrictions" are restrictions imposed by any of the following--

(a) the laws of the territory where the amount is paid or owed,

(b) executive action of its government, and

189 Relief for unremittable amounts

(1) If--

(a) the trader has profits from the trade in a period of account, and

(b) an unremittable amount has been brought into account as a receipt for that period,

a deduction of the amount is allowed from those profits (but see subsection (5)).

(2) If the trader has profits from the trade in a period of account and the total of--

(a) any unremittable amounts brought into account as receipts for that period, and

(b) any amount carried forward under this subsection or subsection (3) from the previous period of account,

exceeds the amount of those profits, the excess may be carried forward to the next period of account.

(3) If the trader does not have profits from the trade in a period of account and an unremittable amount has been brought into account as a receipt for that period, the total of--

(a) any unremittable amounts brought into account as receipts for that period, and

(b) any amount carried forward under this subsection or subsection (2) from the previous period of account,

may be carried forward to the next period of account.

(4) If an amount is carried forward under this section to a period of account in which the trader has profits from the trade, a deduction of the amount is allowed from those profits (but see subsection (5)).

(5) The total amount deducted under this section from the profits from a trade in a period of account must not exceed the amount of the profits.

190 Restrictions on relief

(1) No deduction is allowed under section 189 in relation to an amount so far as--

(a) it is used to finance expenditure or investment outside the United Kingdom, or

(b) it is applied outside the United Kingdom in another way.

(2) No deduction is allowed under section 189 in relation to an amount owed so far as a deduction is allowed in respect of it under section 35 (bad and doubtful debts).

(3) No deduction is allowed under section 189 in relation to an amount owed so far as a payment under a contract of insurance has been received in relation to it.

(4) No deduction is allowed under section 189 in relation to an amount brought into account in calculating profits if relief under section 842 (unremittable income) may be claimed in relation to that amount.

191 Withdrawal of relief

(1) This section applies if--

(a) some or all of an unremittable amount has been deducted from profits under section 189, and

(b) any of the following events occurs.

(2) The events are that--

(a) the amount or part of it ceases to be unremittable,

(b) the amount or part of it is used to finance expenditure or investment outside the United Kingdom,

(d) the amount or part of it is exchanged for, or discharged by, an amount that is not unremittable,

(e) a deduction is allowed in respect of the amount or part of it under section 35 (bad and doubtful debts), and

(f) if the amount is an amount owed, a payment under a contract of insurance is received in relation to the amount or part of it.

(3) The amount or the part of it in question is brought into account as a receipt in calculating the profits of the trade for the period of account in which the event occurs, but only so far as--

(a) it has been deducted from profits under section 189, and

(b) it has not already been brought into account as a receipt in calculating the profits of the trade as a result of this section.

(4) If the event is the receipt of a payment under a contract of insurance, the amount brought into account as a receipt must not exceed the amount of the payment.

Chapter 14 Disposal and acquisition of know-how

192 Meaning of "know-how" etc.

(1) In this Chapter "know-how" means any industrial information or techniques likely to assist in--

(a) manufacturing or processing goods or materials,

(b) working a source of mineral deposits (including searching for, discovering or testing mineral deposits or obtaining access to them), or

(2) For this purpose--

"mineral deposits" includes any natural deposits capable of being lifted or extracted from the earth and for this purpose geothermal energy is treated as a natural deposit, and
"source of mineral deposits" includes a mine, an oil well and a source of geothermal energy.

(3) For the purposes of this Chapter any consideration received for giving, or wholly or partly fulfilling, an undertaking which--

(a) is given in connection with a disposal of know-how, and

(b) restricts, or is designed to restrict, any person's activities in any way,

is treated as consideration received for the disposal of the know-how.

(4) It does not matter whether or not the undertaking is legally enforceable.

(5) For the purposes of this Chapter references to a sale of know-how include an exchange of know-how and any provision of this Chapter referring to a sale has effect with the necessary modifications.

(6) Those modifications include, in particular, reading references to the proceeds of sale and to the price as including the consideration for the exchange.

193 Disposal of know-how if trade continues to be carried on

(1) This section applies if--

(a) a person carrying on a trade receives consideration for the disposal of know-how which has been used in the trade,

(b) the person continues to carry on the trade after the disposal, and

(c) neither section 194 (disposal of know-how as part of disposal of all or part of a trade) nor section 195 (seller controlled by buyer etc.) applies.

(2) The amount or value of the consideration is treated for all purposes as a trading receipt, except so far as it is brought into account under section 462 of CAA 2001 (disposal values).

(3) If the know-how is sold together with other property, the net proceeds of the sale of the know-how are treated as being so much of the net proceeds of the sale of all the property as, on a just and reasonable apportionment, is attributable to the know-how.

(4) For this purpose all property sold as a result of one bargain is treated as sold together even though--

(a) separate prices are, or purport to be, agreed for separate items of that property, or

(b) there are, or purport to be, separate sales of separate items of that property.

(5) Any question about the way in which a sum is to be apportioned under this section must be determined in accordance with section 563(2) to (6) of CAA 2001 (procedure for determining certain questions affecting two or more persons) if it materially affects two or more taxpayers.

(6) For this purpose a question materially affects two or more taxpayers if at the time when the question falls to be determined it appears that the determination is material to the liability to tax (for whatever period) of two or more persons.

194 Disposal of know-how as part of disposal of all or part of a trade

(1) This section applies if --

(a) a person carrying on a trade receives consideration for the disposal of know-how which has been used in the trade, and

(b) the know-how is disposed of as part of the disposal of all or part of the trade.

(2) If the person disposing of the know-how is within the charge to income tax, the consideration is treated for income tax purposes as a capital receipt for goodwill.

(3) If the person acquiring the know-how--

(a) is within the charge to income tax, and

(b) provided the consideration,

the consideration is treated for income tax purposes as a capital payment for goodwill.

(4) But the consideration is not treated for income tax purposes as a capital payment for goodwill if, before the acquisition, the trade was carried on wholly outside the United Kingdom.

(5) If the person disposing of the know-how is within the charge to income tax--

(a) that person, and

(b) the person acquiring the know-how (whether or not within the charge to income tax),

may jointly elect for this section not to apply (but see section 195).

(6) The election must be made within two years of the disposal.

(7) If--

(a) an election is made under subsection (3) of section 531 of ICTA (corresponding corporation tax provision), and

(b) the person making the acquisition mentioned in that subsection is within the charge to income tax,

the persons making the election under that subsection are treated as also making an election under this section (even though the person disposing of the know-how is not within the charge to income tax).

195 Seller controlled by buyer etc.

(1) This section applies if a disposal of know-how is by way of sale and--

(a) the seller is a body of persons over which the buyer has control,

(b) the buyer is a body of persons over which the seller has control, or

(2) In such a case--

(a) section 193 does not apply, and

(b) no election may be made under section 194.

(3) For the purposes of this section "body of persons" includes a firm.

Chapter 15 Basis periods

Introduction

196 Professions and vocations

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

Accounting date

197 Meaning of "accounting date"

(1) In this Chapter "accounting date", in relation to a tax year, means--

(a) the date in the tax year to which accounts are drawn up, or

(b) if there are two or more such dates, the latest of them.

(2) This is subject to--

(a) section 211(2) (middle date treated as accounting date), and

(b) section 214(3) (date treated as accounting date if date changed in tax year in which there is no accounting date).

The normal rules

198 General rule

(1) The general rule is that the basis period for a tax year is the period of 12 months ending with the accounting date in that tax year.

(2) This applies unless a different basis period is given by one of the following sections--

section 199 (first tax year),
section 200 (second tax year),
section 201 (tax year in which there is no accounting date),
section 202 (final tax year),
section 209 or 210 (first accounting date shortly before end of tax year),
section 212 (tax year in which middle date treated as accounting date),
section 215 (change of accounting date in third tax year), and
section 216 (change of accounting date in later tax year).

199 First tax year

(1) The basis period for the tax year in which a person starts to carry on a trade--

(a) begins with the date on which the person starts to carry on the trade, and

(b) ends with 5th April in the tax year.

(2) But if a person starts and permanently ceases to carry on a trade in the same tax year, the basis period for the tax year is that given by section 202(2).

200 Second tax year

(1) The basis period for the second tax year in which a person carries on a trade is determined as follows.

(2) If in that tax year--

(a) the accounting date falls less than 12 months after the date on which the person starts to carry on the trade, and

(b) the person does not permanently cease to carry on the trade,

the basis period is the period of 12 months beginning with the date on which the person starts to carry on the trade.

(3) If in that tax year--

(a) the accounting date falls 12 months or more after the date on which the person starts to carry on the trade, and

(b) the person does not permanently cease to carry on the trade,

the basis period is that given by the general rule in section 198.

(4) If in that tax year--

(a) there is no accounting date, and

(b) the person does not permanently cease to carry on the trade,

the basis period is the same as the tax year.

(5) If in that tax year the person permanently ceases to carry on the trade, the basis period is that given by section 202(1).

201 Tax year in which there is no accounting date

(1) If a person carries on a trade in a tax year and--

(a) there is no accounting date in the tax year, and

(b) the person does not start or permanently cease to carry on the trade in the tax year,

the basis period for the tax year is the period of 12 months beginning immediately after the end of the basis period for the previous tax year.

(2) But this is subject to--

(a) section 200 (second tax year), and

(b) sections 215 and 216 (change of accounting date in third tax year or later tax year).

202 Final tax year

(1) The basis period for the tax year in which a person permanently ceases to carry on a trade--

(a) begins immediately after the end of the basis period for the previous tax year, and

(b) ends with the date on which the person permanently ceases to carry on the trade.

(2) But if a person starts and permanently ceases to carry on a trade in the same tax year, the basis period--

(a) begins with the date on which the person starts to carry on the trade, and

(b) ends with the date on which the person permanently ceases to carry on the trade.

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