Annex 1: Minor Changes in the Law Change 7: Trading and property income: relationship between rules prohibiting deductions and rules allowing deductions: sections 51 and 214
This change resolves any conflict between the rules prohibiting a deduction in calculating trade profits and the rules allowing a deduction in calculating trade profits in favour of the rule allowing the deduction. But any conflict is unlikely.
The change brings the income tax and corporation tax codes back into line.
Parts 3 and 20 of this Act set out a number of rules that restrict the deductions allowed in the calculation of trade profits. Each of these is a “prohibitive rule”.
Part 3 of this Act also sets out a number of rules that allow deductions in the calculation of trade profits. Most of these rules are in Chapter 5 of Part 3 of this Act. Each of these is a “permissive rule”.
In some cases the source legislation for a permissive rule overrides a specific prohibitive rule. In other cases the source legislation provides that a deduction is allowed “notwithstanding anything in section 74 [of ICTA]”. Such a form of words overrides all the restrictive rules in section 74 of ICTA. See, for example, section 82A of ICTA rewritten as section 87. In other cases the source legislation says merely that a deduction is allowed.
Section 51 makes clear that the permissive rule has priority over any prohibitive rule with the four exceptions set out in subsection (1)(b) of the section.
In the case of car and motor cycle hire section 578A of ICTA makes clear that the provision restricts the amount of any deduction.
In the cases of unpaid remuneration and employee benefit contributions section 43 of FA 1989 and paragraph 1 of Schedule 24 to FA 2003 impose a timing rule that naturally overrides any permissive rule. And, in an instance where a conflict may arise, section 86 of ICTA (seconded employees) allows the deduction only “to the like extent” as if the employee had not been seconded.
In the case of crime-related expenditure the order of priority reflects the view that in enacting section 577A of ICTA Parliament intended that there should be no circumstances in which anyone should obtain a tax deduction by making a crime- related payment.
The order of priority given by section 51 is relevant only if the expenditure is capable of falling within both a permissive rule and a prohibitive rule. This is most likely to happen in the case of the general restriction in section 54. In these cases the source legislation leaves no uncertainty about the extent to which the prohibitive rule is overridden. The only area of uncertainty is where the restriction is imposed by a provision other than section 74 of ICTA. For example, the restriction that section 577 of ICTA imposes on business expenditure.
There is rarely scope for overlap between a specific permissive rule and a specific prohibitive rule. This is because the terms for either rule to apply are so closely defined. As a question of fact the expenditure will fall into one category or the other. But in the event of any overlap section 51 changes the law by giving priority to the permissive rule.
For example, it is unlikely that expenditure that meets the conditions for section 83 of ICTA (patent fees etc) to apply would also be business expenditure disallowed by section 577 of ICTA. If it does the source legislation is silent on which rule takes priority. Section 51 gives priority to the permissive rule.
Section 214 applies the same order of priority to the profits of a property business.
If there is any doubt in the source legislation about which rule takes priority this change resolves the doubt in favour of the rule that allows the deduction.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.