Annex 1: Minor Changes in the Law Change 97: Repeal of section 74(1)(k) of ICTA: disallowance of deduction for average loss: Schedule 1
This change omits the prohibition of a deduction for “any average loss beyond the actual amount of loss after adjustment” in section 74(1)(k) of ICTA.
It brings the income tax and corporation tax codes back into line.
The rule in section 74(1)(k) of ICTA applies to the practice in shipping and aviation of sharing between all parties with a financial interest in a vessel and its cargo the financial loss incurred where part of a vessel or its cargo is jettisoned, lost or damaged in an attempt to save the vessel, the crew and passengers or the rest of the cargo.
The term “average loss” refers to the share of the loss allocated to each party. The term “actual amount of loss after adjustment” reflects the possibility that loss adjusters will be involved in determining the actual loss for insurance purposes.
The loss after adjustment may not be known for some years after the loss has occurred. Under section 74(1)(k) of ICTA, the tax position for the accounting period in which the loss occurred should strictly be kept open until the adjusted figure is known.
Generally accepted accountancy practice in such cases is to make a provision in the accounts for the period in which the loss occurs and review the provision in later years so that over time the total deduction matches the loss suffered. Dispensing with section 74(1)(k) allows the taxpayer to follow generally accepted accountancy practice by bringing the timing of the deduction into line with the accounts.
This change will not alter the amount charged to tax. The most it will do is affect the timing of that tax liability. In a small minority of cases this could mean a different rate of tax being applied, according to circumstances. Any overall tax effect is likely to be negligible.