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

(The document as of February, 2008)

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Amounts received following earlier cessation

98 Acquisition of trade: receipts from transferor's trade

(1) This section applies if --

(a) a person ("the transferor") permanently ceased to carry on a trade at any time,

(b) at that time the transferor transferred to another person ("the transferee") the right to receive sums arising from the carrying on of the trade, and

(2) Sums--

(a) which the transferee receives as a result of the transfer, and

(b) which are not brought into account in calculating the profits of the transferor's trade for income or corporation tax purposes for any period before the cessation,

are brought into account in calculating the profits of the transferee's trade in the period of account in which they are received.

(3) Any sums mentioned in subsection (1)(b) which are received after the transferor has permanently ceased to carry on the trade are not post-cessation receipts (see Chapter 18).

Reverse premiums

99 Reverse premiums

(1) For the purposes of sections 101 and 102 a payment or other benefit is a reverse premium--

(a) if conditions A to C are met, and

(b) it is not excluded by section 100.

(2) Condition A is that a person ("the recipient") receives the payment or other benefit by way of inducement in connection with a transaction being entered into by--

(a) the recipient, or

(b) a person connected with the recipient.

(3) Condition B is that the transaction (the "property transaction") is one under which--

(a) the recipient, or

(b) the person connected with the recipient,

becomes entitled to an estate, interest or right in or over land.

(4) Condition C is that the payment or other benefit is paid or provided by--

(a) the person ("the grantor") by whom the estate, interest or right is granted or was granted at an earlier time,

(b) a person connected with the grantor, or

100 Excluded cases

(1) A payment or other benefit is not a reverse premium so far as it is brought into account under section 532 of CAA 2001 (the general rule excluding contributions) to reduce the recipient's expenditure qualifying for capital allowances.

(2) A payment or other benefit received in connection with a property transaction is not a reverse premium if--

(a) the person entering into the transaction is an individual, and

(b) the transaction relates to premises occupied or to be occupied by the individual as the individual's only or main residence.

(3) A payment or other benefit is not a reverse premium so far as it is consideration for the transfer of an estate or interest in land which constitutes the sale in a sale and lease-back arrangement.

(4) A "sale and lease-back arrangement" means any such arrangement as is described in section 779(1) or (2) or 780(1) of ICTA.

101 Tax treatment of reverse premiums

(1) A reverse premium is treated for income tax purposes as a receipt of a revenue nature.

(2) If the recipient enters into the property transaction for the purposes of a trade carried on (or to be carried on) by the recipient, the reverse premium is brought into account in calculating the profits of the trade.

(3) If subsection (2) does not apply, the reverse premium is charged to income tax in accordance with section 311 (reverse premium taxed as property business receipt).

102 Arrangements not at arm's length

(1) This section applies if--

(a) two or more of the parties to the property arrangements are connected persons, and

(b) the terms of those arrangements are not such as would reasonably have been expected if those persons had been dealing at arm's length.

(2) The terms of the property arrangements meet the condition in subsection (1)(b) if they differ to a significant extent from the terms which, at the time the arrangements were entered into, would be regarded as normal and reasonable--

(a) in the market conditions then prevailing, and

(b) between persons dealing with each other at arm's length in the open market.

(3) The whole amount or value of the reverse premium brought into account under section 101 is brought into account in the first relevant period of account.

(4) "The first relevant period of account" means the period of account in which the property transaction is entered into.

(5) But if the recipient enters into the property transaction for the purposes of a trade--

(a) which is not then carried on by the recipient, but

(b) which the recipient subsequently starts to carry on,

"the first relevant period of account" means the first period of account in which the recipient carries on the trade.

103 Connected persons and property arrangements

For the purposes of this section and sections 99 to 102--

(a) persons are treated as connected with each other if they are connected (for which see section 878(5)) at any time during the period when the property arrangements are entered into, and

(b) "the property arrangements" means the property transaction and any arrangements entered into in connection with it (whether before it, at the same time as it or after it).

Assets of mutual concerns

104 Distribution of assets of mutual concerns

(1) This section applies if--

(a) a deduction has been allowed in calculating the profits of a trade for a payment to a mutual concern for the purposes of its mutual business,

(b) the concern is being or has been wound up or dissolved,

(c) a person ("the recipient") who is carrying on the trade, or was doing so at the time of the payment, receives money or money's worth representing the concern's assets, and

(d) the assets in question represent profits of the mutual business conducted by the concern.

(2) If the recipient is carrying on the trade at the time the money or money's worth is received, the amount or value of the money or money's worth is brought into account as a receipt in calculating the profits of the trade.

(3) If the recipient--

(a) is not carrying on the trade at the time the money or money's worth is received, but

(b) was doing so at the time of the payment to the mutual concern,

the amount or value of the money or money's worth is treated as a post-cessation receipt (see Chapter 18).

(4) For the purposes of this section money or money's worth represents assets of a mutual concern if it--

(a) forms part of the assets of the concern,

(b) forms part of the consideration for the transfer of the assets of the concern as part of a scheme of amalgamation or reconstruction which involves its winding up, or

(c) consists of the consideration for a transfer or surrender of a right to receive anything falling within paragraph (a) or (b) and does not give rise to a charge to income tax on the person receiving it otherwise than as a result of this section.

(5) If a transfer or surrender of a right to receive anything which--

(a) forms part of the assets of a mutual concern, or

(b) forms part of the consideration for the transfer of the assets of a mutual concern,

is not at arm's length, the person making the transfer or surrender is treated as receiving consideration equal to the value of the right.

(6) In this section references to a mutual concern are to a body corporate which has at any time carried on a trade which consists of or includes the conduct of mutual business (whether or not confined to the members of the body corporate).

(7) For the purposes of this section a trade does not consist of or include the conduct of mutual business if all the profits of the trade are chargeable to income or corporation tax.

Industrial development grants

105 Industrial development grants

(1) This section applies if a person carrying on a trade receives a payment by way of a grant under--

(a) section 7 or 8 of the Industrial Development Act 1982 (c. 52), or

(b) Article 7, 9 or 30 of the Industrial Development (Northern Ireland) Order 1982 (S.I. 1982/1083 (N.I. 15)).

(2) The payment is brought into account as a receipt in calculating the profits of the trade unless--

(a) the grant is designated as made towards the cost of specified capital expenditure,

(b) the grant is designated as compensation for the loss of capital assets, or

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

Proceeds of insurance etc.

106 Sums recovered under insurance policies etc.

(1) This section applies if--

(a) a deduction is allowed for a loss or expense in calculating the profits of a trade,

(b) a person carrying on the trade recovers a sum under an insurance policy or a contract of indemnity in respect of the loss or expense, and

(2) The sum is brought into account as a receipt in calculating the profits of the trade (but only up to the amount of the deduction).

Chapter 7 Trade profits: gifts to charities etc.

107 Professions and vocations

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

108 Gifts of trading stock to charities etc.

(1) This section applies if a person carrying on a trade ("the donor") gives an article for the purposes of--

(a) a charity, a registered club or a body listed in subsection (4), or

(b) a designated educational establishment (see section 110),

and the article is one manufactured, or of a class or description sold, by the donor in the course of the trade.

(2) In calculating the profits of the trade, no amount is required to be brought into account as a receipt in consequence of the disposal of the article.

(3) In this section "registered club" has the meaning given by paragraph 1 of Schedule 18 to FA 2002 (relief for community amateur sports clubs).

(4) The bodies referred to in subsection (1)(a) are--

(a) the Trustees of the National Heritage Memorial Fund,

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

(d) the Trustees of the Natural History Museum, and

(e) the National Endowment for Science, Technology and the Arts.

(5) This section needs to be read with section 109 (receipt by donor or connected person of benefit attributable to certain gifts).

109 Receipt by donor or connected person of benefit attributable to certain gifts

(1) This section applies if a person carrying on a trade ("the donor") makes a gift in relation to which--

(a) section 108 applies, or

(b) section 63(2) of CAA 2001 applies (gifts to charities etc. of plant or machinery used in the trade),

and the donor, or a person connected with the donor, receives a benefit which is in any way attributable to the making of the gift.

(2) An amount equal to the value of the benefit--

(a) is brought into account in calculating the profits of the trade, as a receipt of the trade arising on the date on which the benefit is received, or

(b) if the donor has permanently ceased to carry on the trade before that date, is treated as a post-cessation receipt (see Chapter 18).

110 Meaning of "designated educational establishment"

(1) For the purposes of section 108 "designated educational establishment" means an educational establishment designated, or within a category designated, in regulations made--

(a) for England and Scotland, by the Secretary of State,

(b) for Wales, by the National Assembly for Wales, and

(2) The regulations may make different provision for different areas.

(3) If any question arises as to whether an educational establishment is within a category designated in the regulations, the Inland Revenue must refer the question for decision--

(a) in the case of an establishment in England or Scotland, to the Secretary of State,

(b) in the case of an establishment in Wales, to the National Assembly for Wales, and

(4) The power of the Secretary of State or the National Assembly for Wales to make regulations under this section is exercisable by statutory instrument.

(5) A statutory instrument containing any regulations made by the Secretary of State under this section is subject to annulment in pursuance of a resolution of the House of Commons.

(6) Regulations made under this section by the Department of Education--

(a) are a statutory rule for the purposes of the Statutory Rules (Northern Ireland) Order 1979 (S.I. 1979/1573 (N.I. 12)), and

(b) are subject to negative resolution within the meaning of section 41(6) of the Interpretation Act (Northern Ireland) 1954 (c. 33 (N.I.)).

Chapter 8 Trade profits: herd basis rules

Introduction

111 Election for application of herd basis rules

(1) A person who keeps or has kept a production herd for the purposes of a trade may make an election under this Chapter (a "herd basis election").

(2) In calculating the profits of the trade, animals which are part of a production herd in relation to which a herd basis election has effect--

(a) are not treated as trading stock (see section 30), but

(b) are treated instead in accordance with sections 114 to 123 ("the herd basis rules").

(3) This Chapter is expressed in terms of farmers but applies to any person who keeps or has kept a production herd for the purposes of a trade, whether or not the trade is farming.

(4) References in this Chapter to keeping a production herd are to keeping it for the purposes of the trade.

112 Meaning of "animal", "herd", "production herd" etc.

(1) In this Chapter--

(a) "animal" means any animal or other living creature,

(b) "herd" includes a flock and any other collection of animals (however named), and

(c) "production herd" means, in relation to a farmer, a herd of animals of the same species (irrespective of breed) kept by the farmer wholly or mainly for the products obtainable from the living animal which the animals produce for the farmer to sell.

(2) For this purpose "the products obtainable from the living animal" means--

(a) the young of the animal, or

(b) any other product obtainable from the animal without slaughtering it.

(3) For the purposes of this Chapter the general rule is that immature animals kept in a production herd are not part of the herd.

(4) There is an exception to this rule if--

(a) the nature of the land on which the herd is kept means that animals which die or cease to be part of the herd can be replaced only by animals bred and reared on the land,

(b) the immature animals in question are bred in the herd and are maintained in the herd for the purpose of replacing other animals, and

(5) In that case the immature animals are part of the herd for the purposes of this Chapter, but only so far as they are required to prevent a fall in the numbers of the herd.

(6) References in this Chapter to an animal being added to a herd include references to an immature animal that is not part of the herd reaching maturity.

(7) This Chapter applies--

(a) in relation to animals kept singly as it applies in relation to herds, and

(b) in relation to shares in animals as it applies in relation to animals themselves.

113 Other interpretative provisions

(1) This section applies for the purposes of this Chapter.

(2) A production herd kept by a farmer is of the same class as another production herd only if--

(a) the animals kept in both herds are of the same species (irrespective of breed), and

(b) the products produced for the farmer to sell (for which the herds are wholly or mainly kept) are of the same kinds in both herds.

(3) References to the sale of an animal include references to its death or destruction.

(4) References to the sale proceeds of an animal include references to--

(a) money received from an insurer because of the animal's death or destruction,

(b) compensation money received because of the animal's death or destruction, and

(5) Female animals become mature--

(a) in the case of laying birds, when they first lay, and

(b) in any other case, when they produce their first young.

(6) 20% or more of a herd is a substantial part of the herd, but a lesser percentage than 20% is capable of being a substantial part of the herd depending on the circumstances of the case concerned.

The herd basis rules

114 Initial cost of herd and value of herd

(1) In calculating the profits of the trade, no deduction is allowed for the initial cost of the herd.

(2) In calculating the profits of the trade, the value of the herd is not brought into account.

115 Addition of animals to herd

(1) This section applies for the purpose of calculating the profits of the trade if an animal is added to the herd, unless it replaces another animal in the herd.

(2) No deduction is allowed for the cost of the animal.

(3) If, immediately before it was added to the herd, the animal was part of the farmer's trading stock, the balancing amount is brought into account as a receipt.

(4) "The balancing amount" means--

(a) in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity, and

(b) in any other case, the sum of the initial cost of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity.

116 Replacement of animals in herd

(1) This section applies for the purpose of calculating the profits of the trade if--

(a) an animal ("the old animal") is sold from the herd or otherwise ceases to be part of the herd, and

(b) it is replaced in the herd by another animal ("the new animal").

(2) The sale proceeds (if any) of the old animal are brought into account as a receipt.

(3) But this needs to be read with--

(a) section 117 (amount of receipt if old animal slaughtered under disease control order),

(b) section 120 (acquisition of new herd begun within 5 years of sale), and

(4) Except so far as otherwise allowable, a deduction is allowed under this section for the cost of the new animal.

(5) But if the new animal is of better quality than the old animal, the amount of the deduction must not exceed the amount that it would have been necessary to spend to replace the old animal with an animal of the same quality.

117 Amount of receipt if old animal slaughtered under disease control order

(1) This section applies for the purposes of section 116.

(2) If--

(a) the old animal was slaughtered under a disease control order, and

(b) the new animal is of worse quality than the old animal,

the amount brought into account as a receipt under section 116 must not exceed the equivalent amount for the new animal.

(3) For this purpose "a disease control order" means an order made under the law relating to the diseases of animals by--

(a) central government,

(b) a devolved authority,

(d) another public authority.

(4) If, immediately before it was added to the herd, the new animal was part of the farmer's trading stock, "the equivalent amount for the new animal" means--

(a) in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity, and

(b) in any other case, the sum of the initial cost of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity.

(5) Otherwise "the equivalent amount for the new animal" means the cost of the new animal.

118 Sale of animals from herd

(1) This section applies for the purpose of calculating the profits of the trade if an animal is sold from the herd unless--

(a) it is replaced in the herd by another animal (see section 116), or

(b) it is sold as part of the sale of the whole or a substantial part of the herd that takes place all at once or over a period not longer than 12 months (see section 119).

(2) A profit arising from the sale is brought into account as a receipt.

(3) A deduction is allowed for a loss arising from the sale.

(4) The amount of the profit or loss is the difference between the sale proceeds of the animal and the deductible amount for the animal.

(5) "The deductible amount for the animal" means--

(a) in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity,

(b) in the case of an animal acquired by the farmer for valuable consideration, the sum of the initial cost to the farmer of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity, and

(c) in the case of an animal acquired by the farmer but not for valuable consideration, the sum of the market value of the animal when acquired and the cost (if any) incurred by the farmer in rearing the animal to maturity.

119 Sale of whole or substantial part of herd

(1) This section applies for the purpose of calculating the profits of the trade if, either all at once or over a period not longer than 12 months, the herd or a substantial part of the herd is sold unless--

(a) section 120 applies (acquisition of new herd begun within 5 years of sale), or

(b) section 122 applies (replacement of part sold begun within 5 years of sale),

but paragraph (a) is subject to subsection (5) of section 120 (so far as that section provides for a case in which this section is to apply).

(2) A profit arising from the sale is not brought into account as a receipt.

(3) No deduction is allowed for a loss arising from the sale.

120 Acquisition of new herd begun within 5 years of sale

(1) This section applies for the purpose of calculating the profits of the trade if--

(a) either all at once or over a period not longer than 12 months, the herd ("the old herd") is sold, and

(b) the farmer acquires or starts to acquire another production herd of the same class ("the new herd") within 5 years of the sale.

(2) Section 116 (replacement of animals in herd) applies as if a number of animals equal to--

(a) the number of animals in the old herd, or

(b) if smaller, the number of animals in the new herd,

had been sold from the old herd and replaced in that herd (but see section 121 (sale for reasons outside farmer's control)).

(3) For the purposes of section 116, the sale proceeds of an animal that is treated as a result of subsection (2) above as if it had been--

(a) sold from the old herd, and

(b) replaced in that herd by another animal ("the new animal"),

are not brought into account as a receipt until the new animal is acquired.

(4) If--

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