ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters. Change 68: Interest relief: loan to buy plant or machinery for partnership use: sections 388 and 389
This change clarifies the scope of section 359(1) of ICTA as including relief for interest on a loan to a partner for capital expenditure on assets used in a property business carried on by the partnership.
Section 359(1) of ICTA provides relief for interest on a loan to a partner who invests the proceeds in assets used by a partnership which is entitled to capital allowances under section 264 of CAA in respect of them. Section 264 gives entitlement to allowances for assets used in a qualifying activity carried on by a partnership. “Qualifying activity” is defined in section 15 of CAA and extends not only to trades and professions (which are clearly within the scope of section 359(1)) but also to other activities, one of which is an ordinary property business.
On the face of it, therefore, partnerships which carry on ordinary property businesses or those other activities come within the scope of this provision. But that view does not sit comfortably with section 359(2) of ICTA, which provides for relief to be apportioned but only where the business use is for the purposes of a trade or profession, not any other activity.
In fact, the reference to section 264 of CAA was substituted by paragraph 27(1)(a) of Schedule 2 to CAA for the previous reference to section 44 of CAA 1968. That section had itself been repealed by CAA 1990, a consolidation Act, but the need to amend section 359(1) of ICTA so as to substitute a reference to CAA 1990 for the reference to CAA 1968 was overlooked. So the text remained unaltered, although the references to the provisions in CAA 1968 were to be read as references to the re-enacted provisions by virtue of section 17(2)(a) of the Interpretation Act 1978.
In this case, the re-enacted provision was section 65 of CAA 1990, which related only to partnerships carrying on a trade (although, by virtue of section 27 of CAA 1990, section 65 of CAA 1990 applied to professions too, and it is clear from the mention of professions in section 359(2) of ICTA that they are within that section). But section 28A of CAA 1990, inserted by FA 1997, treated Schedule A businesses as trades for the purposes of Part 2 of CAA 1990 (including section 65). So it is arguable that section 359(1) of ICTA then applied to assets used in Schedule A businesses.
There is, however, a contrary argument, that the reference in section 359(1) of ICTA to section 44 of CAA 1968 (and hence to section 65 of CAA 1990) should have been read without the gloss on the reference to “trade” given by section 28A of CAA 1990. In general a reference in one enactment to another is to be read as a reference to that other Act as amended or applied by a later enactment, unless there is a clear intention that it should not be so read. (See section 20(2) of the Interpretation Act 1978.)
In this case, it is possible to discern such a contrary intention; FA 1997 did not, for example, amend section 359(2) of ICTA to make it clear that Schedule A businesses were covered by it. And the fact that section 359(1) of ICTA still actually referred to section 44 of CAA 1968, rather than a provision falling into Part 2 of the CAA 1990, is another indication that no intention to gloss this reference should be inferred.
CAA amended section 359(1) of ICTA by substituting a reference to section 264 of CAA for the reference to section 44 of CAA 1968. As mentioned above, this apparently extended section 359(1) of ICTA to all qualifying activities. On either of the views about section 28A of CAA 1990 mentioned above, that would have been a change in the law. But CAA was a Tax Law Rewrite Project Act and as such the starting point must be to assume that it did not change the law, except where such changes were acknowledged. It is considered therefore that a court would lean in favour of an interpretation that did not result in any such change, and accordingly might read section 359(2) of ICTA as imposing a restriction cutting back section 359(1) to its original scope.
In practice, it appears that loans for assets used for ordinary property businesses may have been given relief in some cases, but relief has not been given where the assets are used for the other qualifying activities ostensibly included by the amendment made by CAA.
In view of the uncertainty about the current law, section 359 of ICTA has been rewritten so as to include loans for assets used for trades, professions and ordinary property businesses carried on by partnerships, but not the other qualifying activities in section 15 of CAA. See sections 388(2)(a) and (4) and 389(4).