Annex 1: Minor changes in the law made by the Act: Change 71: Applying the additional calculation rule to receipts in respect of sums payable for variation or waiver of term of lease: sections 281, 287, 288, 289 and 294
This change applies the provisions of Chapter 4 of Part 3 of this Act for reducing the amount of certain receipts under that Chapter to receipts in respect of sums payable as consideration for the variation or waiver of a term of a lease.
Under section 34(1), (5), (6) and (7) of ICTA if a sum becomes payable by a tenant as consideration for the variation or waiver of any of the terms of a lease, the landlord is treated as receiving a proportion of that sum as rent or, if the sum is payable to a person connected with the landlord that person is treated as receiving the same amount as a receipt of a Schedule A business. (See Change 70.)
When certain conditions are met, section 37(1) to (3) of ICTA provides that the amount treated as received under section 34 or 35 of ICTA is to be replaced by a smaller amount calculated under section 37 of ICTA. One of the conditions is that there must be an amount treated as a receipt of a Schedule A business by virtue of section 34 or 35 of ICTA in respect of “the head lease”. Another of the conditions is in section 37(2)(b) of ICTA, which provides that the amount to be reduced under section 37 of ICTA must be an amount treated as received under section 34 of ICTA in respect of the grant of a lease out of the headlease or under section 35 of ICTA in respect of the assignment of the headlease.
Section 37(1) to (3) of ICTA does not appear to allow a reduction in an amount treated as received under section 34 of ICTA in respect of a sum payable by the tenant as consideration for the variation or waiver of a term of a lease because such an amount is not received in respect of the “grant” of a lease as required by section 37(2)(b) of ICTA. But relief under section 37(2) and (3) of ICTA is, in practice, allowed in respect of amounts treated as received under section 34 of ICTA in respect of sums paid as consideration for the variation or waiver of a term of a lease.
Section 37(1) to (3) of ICTA is rewritten in sections 287 to 290 in which it is referred to as “the additional calculation rule”. So:
	section 281(5) provides that, if the additional calculation rule applies, the amount given by the formula in section 281(4) is to be reduced by the amount calculated in accordance with section 288;
	section 287(1) includes receipts under section 281 in the list of receipts in relation to which the additional calculation rule applies; and
	sections 288(2) (which sets out the additional calculation rule) and 289(2) (which adapts the additional calculation rule where the sublease does not extend to the whole of the leased premises) both refer to section 281.
Section 295 restricts total relief to the amount of the taxed receipt after any deductions under section 61. So if, as a result of this change, a tenant receives relief in respect of a sum payable as consideration for the variation or waiver of a term of a lease, this may reduce the amount of relief available to a subsequent tenant.
This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.