Annex 1: Minor changes in the law made by the Act: Change 73: Limiting the reductions in receipts under section 288 and the deductions for expenses under section 292: sections 287, 288, 289, 290, 291, 292 and 295
This change concerns the way section 37(9) of ICTA is rewritten.
Section 37(9) of ICTA provides:
“An amount or part of an amount shall not be deducted under this section more than once from any sum, or from more than one sum, and shall not in any case be so deducted if it has been otherwise allowed as a deduction in computing the income of any person for tax purposes.”
The effect that section 37(9) has on the rest of section 37 of ICTA is not entirely clear. There are no references to it in the rest of the section. It is simply added at the end of the section. And the wording of section 37(9) of ICTA does not fit in well with the rest of the section.
It appears that when section 37(9) of ICTA refers to “an amount or part of an amount”, it must be referring to the amount, or any part of the amount, chargeable on the superior interest, as defined in section 37(1) of ICTA because it is this amount which determines the extent to which relief is given under section 37(2) and (4) of ICTA.
But the amount or part amount is not, strictly speaking, deducted under section 37 of ICTA at all:
	in the case of a later chargeable amount, section 37(2) and (3) of ICTA substitute a reduced amount for the amount of the later chargeable amount calculated under section 34 or 35 of ICTA; and
	under section 37(4) of ICTA a tenant is treated as paying rent, corresponding to the amount of rent the landlord is treated as receiving under section 34 or 35 of ICTA.
So while the calculation of the reduced amount of the later chargeable amount and the amount of notional rent paid depend on a part of the amount chargeable on the superior interest, no amount is “deducted” under section 37 of ICTA.
In construing section 37(9) of ICTA it is relevant to consider the rationale underlying the rest of section 37 of ICTA.
Under section 34(1) of ICTA, where there is a premium in respect of a lease and a premium in respect of a sublease granted out of that lease, the landlord under the lease and the landlord under the sublease (the tenant under the lease) will both be treated as receiving an additional amount of rent. Part or all of the premium in respect of the sublease will represent value already taxed as income in the hands of the landlord.
The purpose of section 37(2) and (3) of ICTA is to reduce the amount treated as paid under section 34(1) of ICTA in respect of the premium for the sublease by reference to the amount treated as paid under section 34(1) of ICTA in respect of the premium for the lease. It follows from this that the total amount of the reductions should be limited to the amount treated as received as rent under section 34(1) of ICTA in respect of the premium for the lease. This limit is provided by section 37(9) of ICTA.
The rationale underlying section 37(4) of ICTA is that if an amount is treated under section 34 or 35 of ICTA as rent in the hands of the recipient, the person by whom it is paid (the tenant) should also be treated as paying rent. So it is logical that the amount that the recipient is treated as receiving should be the same as the amount that the tenant is treated as paying. Generally this will be achieved by section 37(4) of ICTA, but there are circumstances in which the amount the tenant is treated as paying under section 37(4) of ICTA could exceed the amount the landlord or other person is treated as receiving under section 34 or 35 of ICTA.
It appears that the purpose of section 37(9) of ICTA is to limit the reductions in later chargeable amounts under section 37(2) and (3) of ICTA, and the amounts the tenant is treated as paying as rent under section 37(4) of ICTA, by reference to the amount chargeable on the superior interest to an amount equal to that amount. So section 295, which is based on section 37(9) of ICTA, is worded as a limit.
Section 37(9) of ICTA is difficult to construe because it does not say how it interrelates with the rest of section 37 of ICTA. Sections 287 to 290 attempt to make the relationship clear. So:
	section 290(1) defines the “unused amount” of the taxed receipt, which under section 37(9) of ICTA is the part of the amount chargeable on the superior interest that has not been “deducted”;
	sections 287(5) and 288(3) ensure that there cannot be a reduction by reference to a taxed receipt (“the amount chargeable on the superior interest”) in calculating the amount of a receipt if the taxed receipt does not have an unused amount. In the terminology of section 37(9) of ICTA, this would be if the whole of the amount chargeable on the superior interest had already been “deducted”; and
	section 289(4) ensures that the reduction required under section 288 by reference to a taxed receipt cannot exceed the unused amount. In the terminology of section 37(9) of ICTA, this ensures that “deductions” exceeding the amount chargeable on the superior interest cannot be made.
Section 291(4) imposes a similar limit on deductions for expenses under section 292. Sections 291 and 292 are based on section 37(4) of ICTA.
Section 295 restricts total relief to the amount of the taxed receipt. A tenant is entitled to relief only if the taxed receipt by reference to which the relief could be given has an “unused amount”. So by reducing the unused amount of the taxed receipt, the relief which each tenant receives by reference to a taxed receipt may reduce the amount of relief to which a later tenant is entitled.
This change is adverse to some taxpayers and favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.