ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice. Change 154: Charges on income etc: calculation of modified net income: section 1025
This change specifies that certain adjustments are to be made to the amount of a person’s net income in measuring income for particular purposes. The amount after these adjustments is the person’s “modified net income”.
The concept applies mainly to the deduction allowed for annual payments and patent royalties under Chapter 4 of Part 8 (see sections 448(4) and 449(5)).
But it also applies to:
	the similar rules that determine the deductibility or otherwise of the deemed payments to unit holders made by an unauthorised unit trust under Chapter 9 of Part 9 (see section 505(7)); and
	the rules that apply in respect of gift aid to certain non-resident donors and to donors who elect for a gift to be treated as made in the preceding tax year (see section 427(2)).
The link between the purposes concerned is that the issue in each case is whether there is sufficient income for a payment to be regarded (under the source legislation) as having been paid “out of” the income of the year.
In determining the amount of a person’s net income for a tax year under section 23 (which rewrites the relevant parts of section 835 of ICTA), it is necessary to:
	take into account all claims and adjustments which affect the measure of income; and
	make a deduction for all reliefs that are deducted from or set against income.
But it is not appropriate for all claims that have their origins in a different year to be taken into account in measuring income of the year concerned. That is because the source legislation is concerned with establishing whether, in fact, the taxpayer had sufficient taxable income “out of” which the payment could have been made.
In these cases, this change provides that certain adjustments that have their origins in a different year are disregarded in calculating the income of the year concerned.
The change does not apply to reliefs that are carried forward from an earlier year – it is well established that these do reduce the pot of income “out of” which payments can be regarded as having being made. But the position in relation to a claim or adjustment that has its origin in a later year is not explicit.
The new rule in the calculation of charged income for the purposes of relief for charges and gift aid is to disregard all adjustments (whether an increase or a decrease) that have their origins in a later year and to which Schedule 1B to TMA applies.
These adjustments are:
	carry-back of losses under sections 64(2), 72(2), 89(2) and 132(1) (based on sections 380, 381, 388 and 574 of ICTA): see paragraph 2 of Schedule 1B to TMA;
	relief for fluctuating profits of farming etc and of creative artists under Chapter 16 of Part 2 of ITTOIA: see paragraph 3 of Schedule 1B to TMA;
	carry-back of post cessation receipts under section 257 of ITTOIA: see paragraph 5 of Schedule 1B to TMA; and
	any adjustment that would have been out of time but for the extension of the deadline for claiming other reliefs as a result of a claim for fluctuating profits of farmers or creative artists: see paragraph 4 of Schedule 1B to TMA.