ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.
Change 119: Sales of occupation income: restriction on exemption for sales as going concerns: meaning of “income or receipts”: section 785
This change clarifies the meaning of “income and receipts” for the purposes of the restriction under section 775(5) of ICTA on the exemption for sales of going concerns from the charge under section 775 of ICTA. The restriction on the exemption applies where the value of the going concern is attributable to a material extent to prospective income or profits for which full consideration will not be received.
Section 775 of ICTA (sale by individual of income derived from his personal activities) is directed against arrangements whereby individuals seek to sell their earnings in return for capital sums which escape income tax. If it applies, section 775 taxes the capital sum received for the sale as income.
Section 775(4) of ICTA gives an exemption for sales of going concerns. For example, it is common for existing partners in a professional firm to be paid a capital sum by a new partner in return for a share in the partnership. Section 775(4) provides that section 775 does not apply so far as the value of what is disposed of is attributable to its value as a going concern. So it ensures that section 775 does not catch normal commercial arrangements such as this.
Section 775(5) of ICTA is directed against attempts to abuse this exemption. If (for example) the taxpayer transfers into an existing business the copyright of a book which he or she has written, and obtains a capital sum for the disposal of the business as a going concern, the exemption is restricted. To the extent that the value of the business is attributable to the going concern, it falls within section 775(4). But to the extent that the value of the business is attributable to the copyright, section 775(5) takes the capital sum out of section 775(4) and taxes it as income.
Section 775(5) of ICTA reads:
“If the value of the profession, vocation or business as a going concern is derived to a material extent from prospective income or receipts derived directly or indirectly from the individual’s activities in the occupation, and for which, when all capital amounts are disregarded, the individual will not have received full consideration, whether as a partner in a partnership or as an employee or otherwise, subsection (4) above shall not exempt the part of a capital amount so derived.”
Section 775(3)(b) of ICTA provides that the expression “income or receipts” includes “payments for any description of copyright or licence or franchise or other right deriving its value from the activities, including the past activities, of the individual.”
But the scope of this inclusion section is uncertain. On the one hand, section 775(3) of ICTA begins “In this section …”, implying that it extends to section 775(5). On the other, section 775(3)(b) begins “references in subsection (1) above”, implying that it does not. It is unclear which takes priority.
It is considered that, as a matter of normal usage, the expression “income or receipts derived directly or indirectly from the individual’s activities in the occupation” in section 775(5) of ICTA is apt to include “payments for any description of copyright or licence or franchise or other right deriving its value from the activities, including the past activities, of the individual.” Therefore in so far as section 775(3)(b) applies to section 775(5) it is merely declaratory.
Section 785 rewrites section 775(5) of ICTA on the basis that section 775(3)(b) applies to it.
This is a change in the law, in that it will prevent taxpayers from maintaining the contrary view.