Annex 1: Minor Changes in the Law Change 49: Property income: lease premiums etc: limiting the reductions in receipts under section 228 and the deductions for expenses under section 232: sections 227, 228, 229, 230, 231 and 235
This change concerns the way section 37(9) of ICTA is rewritten for corporation tax.
It brings the income tax and corporation tax codes back into line.
Section 37(9) of ICTA provides:
Those words do not fit well with the rest of section 37 of ICTA and their effect on the rest of that section is not entirely clear. The italicised words “An amount” in section 37(9) of ICTA must refer to the amount chargeable on the superior interest (“ACSI” – see section 37(1) of ICTA) because the reliefs under section 37(2) and (4) of ICTA depend on ACSI. But the italicised words “shall not be deducted under this section” are not, strictly speaking, appropriate since neither of section 37(2) or (4) of ICTA is explicitly expressed as providing a deduction.
In construing section 37(9) of ICTA it is relevant to consider the rationale underlying the rest of section 37 of ICTA. Sections 34, 35 and 37 of ICTA broadly deal with one person (landlord/assignor) who, in relation to a lease, receives a sum from another person (tenant/assignee). Sections 34 and 35 of ICTA may treat a property business receipt (of amount X) as arising to the landlord/assignor. Section 37 of ICTA sets out two ways in which the tenant/assignee (or a successor) may obtain relief, effectively as a property business expense, in respect of X.
The rationale for section 37(9) of ICTA is that the total relief for the tenant/assignee (or successors) under section 37(2) and (4) must not exceed X (as reduced by relief that the tenant/assignee (or successor) has obtained in respect of X under other provisions such as section 87 of ICTA).
Section 235 makes this rationale explicit for corporation tax. The same change was made for income tax in section 295 of ITTOIA (see Change 73 in ITTOIA).
Section 37(2) and (4) of ICTA is also difficult to construe because neither subsection explicitly says how section 37(9) of ICTA affects the relief for which it provides.
Sections 227(5), 228(3), 229(4), 230(1), (5) and (6) and 231(4) make explicit the effect that section 37(9) of ICTA has on section 37(2) and (4) of ICTA. This is facilitated by the use (in section 228(3)) of the concept of the “unused amount” of a taxed receipt (corresponding to ACSI in ICTA). And providing that, in relation to a taxed receipt, relief under each of section 228, (corresponding to section 37(2) of ICTA) and section 231 (corresponding to section 37(4) of ICTA) must not result in that relief (taken with other relief under those, and other, provisions) of more than the taxed receipt. The same change was made for income tax in sections 287 to 292 of ITTOIA (see Change 73 in ITTOIA).
Section 235 restricts total relief to the taxed receipt in question. A tenant/assignee (or successor) is entitled to relief only if the taxed receipt in question has an “unused amount”. Each relief, in relation to the taxed receipt in question, reduces the unused amount of that taxed receipt and therefore the relief available in future to the tenant/assignee (or successor) by reference to that taxed receipt. Making this explicit is, in principle, favourable to a tenant/assignee and unfavourable to a successor because the tenant/assignee’s relief arises before that of the successor.
This change is adverse to some taxpayers and favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.