Annex 1: Minor changes in the law made by the Act: Change 7: Align rules for debts proving irrecoverable after trade deemed to have ceased with general rules for bad and doubtful debts: section 35
This change aligns the relief given for bad debts by section 89 of ICTA with the relief given by section 74(1)(j) of ICTA.
Section 113(1) of ICTA provides that where there is a complete change in the persons carrying on a trade the trade is deemed to cease and recommence. (Before Self Assessment the trade was also deemed to cease and recommence on a partial partnership change, unless the partners elected otherwise.)
Section 89 of ICTA provides relief for bad debts where there has been a change in the persons carrying on the trade and the trade is deemed to cease under section 113 of ICTA. It gives relief for bad debts which meet certain conditions and which are assigned to the successor to the trade. Since the trade carried on prior to the change is deemed to be different from the trade carried on after the change section 74(1)(e) of ICTA would otherwise prohibit a deduction for bad debts. The desired effect is to treat the trade as continuing as far as bad debts are concerned.
Although the aim of section 89 of ICTA is the same as that of section 74(1)(j) of ICTA (that is, to give relief for bad trade debts), there are significant differences between the two sections and the nature of the relief given. Specifically:
	section 89 gives relief for debts which are “irrecoverable”, whereas section 74(1)(j) gives relief for debts which are bad or doubtful;
	the requirement for proof that a debt is bad or doubtful in section 74(1)(j) was removed by FA 1996 to assist in the introduction of Self Assessment; section 89 still has this;
	relief in section 89 is specifically related to the period in which the debt becomes in whole or in part irrecoverable; section 74 is silent on this;
	section 74(1)(j) refers to debts released as part of a “relevant arrangement or compromise”; section 89 makes no mention of this; and
	section 89 does not make specific reference to the bankruptcy or insolvency of debtors; this is referred to in section 74(1)(j)(iii).
This Act does not rewrite section 89 of ICTA. Section 89 of ICTA is not needed because the approach adopted in this Act is to focus on the person carrying on the trade rather than the trade. The effect is to extend the more generous provisions of section 74(1)(j) of ICTA to debts within section 89 of ICTA. This simplifies the law by bringing the bad debt relief provisions for income tax payers into one section.
This change is in taxpayers' favour in principle and may in practice benefit some. But the numbers affected and the amounts involved are likely to be small.