Annex 1: Minor Changes in the Law Change 37: Trading income: use period of account instead of tax year as the basis for certain restrictions on relief in connection with a deemed employment payment: section 140
This change clarifies the calculation of the restriction of a deduction for a deemed employment payment and of the cap on expenses for partnerships that are treated as making a deemed employment payment.
Paragraph 18 of Schedule 12 to FA 2000 limits the deduction allowed by paragraph 17 of the Schedule in the case of a business carried on “by a partnership”. The limit is the amount that reduces the profits of the partnership for the tax year to nil. Until 2005, when section 164 of ITTOIA rewrote the income tax rule, the rule was the same for both income tax and corporation tax.
The consequential amendments made by ITTOIA do not affect the wording of the limit, which continues to use “tax year”, an expression which is defined only for income tax purposes (see paragraph 17(4) of Schedule 12 to FA 2000 and section 989 of ITA).
The profits of a trade carried on by a company in partnership are calculated as if the trade were carried on by a single company (see section 114(1) of ICTA, rewritten in this Act as section 1259). It is not sensible that a rule for calculating the profits of a company should apply to the profits of a tax year. Consistent with the rule in section 139, this partnership rule refers to the profits of a period of account.
Section 140(3) of this Act caps the allowable expenses by reference to the steps of the calculation of the deemed employment payment. That calculation is for a tax year (see section 54 of ITEPA). But the expenses are compared with the expenses of the trade carried on by a company in partnership. As with subsection (2), it is unreasonable to require a company to calculate its profits of a tax year. So the comparison is with the expenses for a period of account.
Changes in the period over which profits are calculated could in principle increase or decrease them by small amounts and so affect the amount of tax payable.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.