Annex 1: Minor changes in the law made by the Act: Change 6: Relationship between rules prohibiting deductions and rules allowing deductions: sections 31 and 274
This change resolves any conflict between the rules prohibiting a deduction in calculating trade profits and the rules allowing a deduction in calculating trade profits in favour of the rule allowing the deduction. But any conflict is unlikely.
Part 2 of this Act sets out a number of rules that restrict the deductions allowed in the calculation of trade profits. Each of these is a “prohibitive rule”. Sections 34 and 35 are prohibitive rules of general application. The other restrictions apply in more closely defined circumstances.
Part 2 of this Act also sets out a number of rules that allow deductions in the calculation of trade profits. Most of these rules are in Chapter 5 of Part 2 of this Act. Each of these is a “permissive rule”.
In some cases the source legislation for a permissive rule overrides a specific prohibitive rule. See, for example, section 112 of FA 1989 rewritten as section 82 which overrides section 74(1)(a) and (b) of ICTA. In other cases the source legislation provides that a deduction is allowed “notwithstanding anything in section 74 [of ICTA]”. Such a form of words overrides all the restrictive rules in section 74 of ICTA. See, for example, section 82A of ICTA rewritten as section 88. In other cases the source legislation says merely that a deduction is allowed. See, for example, section 77 of ICTA (incidental costs of loan finance) rewritten as section 59.
If the source legislation makes clear that a permissive rule overrides a specific prohibitive rule that limitation is included in the rewrite of the permissive rule. See, for example, section 82 (personal security expenses). In other cases section 31 makes clear that the permissive rule has priority over any prohibitive rule with two exceptions. The exceptions are the restriction on crime-related expenditure and the restriction on the costs of hiring a car or motor cycle.
In the case of crime-related expenditure the order of priority reflects the view that in enacting section 577A of ICTA Parliament intended that there should be no circumstances in which anyone should obtain a tax deduction by making a crime related payment.
In the case of car and motor cycle hire section 578A of ICTA makes clear that the provision restricts the amount of any deduction.
The order of priority given by section 31 will be relevant only if the expenditure is capable of falling within both a permissive rule and a prohibitive rule. This is most likely to happen in the case of one or both of the general restrictions in sections 34 and 35. In these cases the source legislation leaves no uncertainty about the extent to which the prohibitive rule is overridden. The only area of uncertainty is where the restriction is imposed by a provision other than section 74 of ICTA. For example, the restriction that section 577 of ICTA imposes on business expenditure.
It is unlikely there is scope for overlap between a specific permissive rule and a specific prohibitive rule. This is because the terms for either rule to apply are so closely defined. As a question of fact the expenditure will fall into one category or the other. But in the event of any overlap section 31 changes the law by giving priority to the permissive rule.
For example, it is unlikely that expenditure that meets the conditions for section 83 of ICTA (patent fees etc) to apply would also be business expenditure disallowed by section 577 of ICTA. If it does the source legislation is silent on which rule takes priority. Section 31 gives priority to the permissive rule.
Section 274 applies the same order of priority to the profits of a property business.
This change is in taxpayers' favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.