Annex 1: Minor changes in the law made by the Act: Change 78: Deduction of management expenses of owner of mineral rights: omission of condition that expenses are “necessarily” incurred: section 339
This change deals with the omission of the requirement that the allowable expenses of managing mineral rights are necessarily incurred.
Section 121(1) of ICTA makes provision for expenses of management and supervision to be deducted from amounts chargeable to income tax in respect of mineral rents and royalties. The section requires that the expenses are disbursed “wholly, exclusively and necessarily”.
Section 121(1) of ICTA is rewritten as section 339. 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 can be sensibly applied to income taxed under Schedule D Case VI. It is most unlikely that the “necessarily” restriction is applied in practice and this section recognises this by omitting “necessarily”.
This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.