Annex 1: Minor Changes in the Law Change 54: Property income: deduction of management expenses of owner of mineral rights: omission of condition that expenses are “necessarily” incurred: section 272
This change concerns the omission of the requirement that the allowable expenses of managing mineral rights are incurred “necessarily”.
It brings the income tax and corporation tax codes back into line.
Section 121(3) of ICTA makes provision for expenses of management and supervision to be deducted from amounts chargeable to corporation tax in respect of mineral rents and royalties. The section requires that the expenses are disbursed “wholly, exclusively and necessarily”.
Section 121(3) of ICTA is rewritten as section 272. That section does not reproduce the condition that the expenses must be “necessarily” incurred. There is no evidence as to how this test is applied in practice but it is not obvious how it could be enforced. The extensive body of case law on the meaning of expenses being incurred “necessarily” applies to income formerly taxed under Schedule E (now taxed as employment income under ITEPA). That case law establishes that each and every holder of the office or employment would have to incur the expense.
That is not a test that could be sensibly applied to income taxed under Schedule D Case VI. It is not a test that could be sensibly applied to income taxed under Part 4 of this Act. It is most unlikely that the “necessarily” restriction can be applied in practice and this section recognises this by omitting “necessarily”.
This change removes a potential obstacle to a successful claim for relief.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.