Annex 1: Minor changes in the law made by the Act: Change 60: Averaging: clarify the rule that a claim cannot be made in commencement or cessation year: section 222
This change ensures that a claim cannot be made in the year in which an individual partner commences or ceases to carry on a qualifying trade in partnership.
Section 96(4)(b) of ICTA provides that no claim is to be made in respect of any tax year “in which the trade is (or by virtue of section 113(1) [of ICTA] is treated as) set up and commenced or permanently discontinued.” Section 113 of ICTA applies where there is a complete change in the persons carrying it on. However, it does not apply where there is a partial change, for example, when one partner leaves a firm while the others continue.
Before Self Assessment (when the rule applied only to farmers) the same rule clearly operated for farming carried on by a sole trader and farming carried on by persons in partnership. This is because a claim for averaging could be made only in respect of the profits of a sole trader or of a firm. But under Self Assessment profits are calculated as if the firm were an individual and each partner’s share in the profits of the firm is then determined. The rules for determining partners’ basis periods are then applied as if they were sole traders.
The intention under Self Assessment is to treat sole traders and individual partners in the same way, so that individual partners cannot make an averaging claim in relation to the year in which they start or cease to carry on a qualifying trade in partnership. It is generally accepted that the legislation achieves this result. But the words of section 96 of ICTA leave some doubt. The references to “his profits from that trade” in subsection (1) and to “a year of assessment in which the trade is … set up and commenced” in subsection (4)(b) might suggest that these references are to the partnership trade as a whole, rather than to the deemed trade carried on by the individual partner.
Section 222(4) of this Act contains the rule that an averaging claim may not be made in a tax year in which the taxpayer starts or permanently ceases to carry on the qualifying trade. This rule will apply whether the taxpayer is a sole trader or in partnership. So there is no ambiguity in the rule: it is in line with the original intention and with how it is applied in practice.
This change is adverse to some taxpayers in principle. But it is in line with the original legislation before amendment and with the intention of the amended legislation. And it is expected to have no practical effect as it is in line with current practice.