Annex 1: Minor changes in the law made by the Act: Change 53: Enterprise allowance: include in trade profits: section 207
This change involves including enterprise allowance in the calculation of trade profits.
The former Enterprise Allowance scheme provided financial assistance for unemployed people starting their own businesses. The payments are now more commonly known as business start-up allowances. These may be in variable amounts including lump sums in certain circumstances.
The original Enterprise Allowance scheme provided only for weekly payments of £40. When the scheme was changed in 1991-92 the special treatment in section 127 of ICTA applied only to business start-up payments of the sort (known as “enterprise allowance”) that had been paid under the original scheme. Any lump sum business start-up payments are not of that sort. So this section does not apply to lump sum payments.
Without section 127 of ICTA the allowances would be taxed as trade profits. With the former prior year basis of assessment some profits of the first year of trading were taxed more than once. As the allowance is usually paid for the first year this might be the case for the allowance. Section 127 of ICTA was introduced to avoid this. It does so by taxing the allowance under Schedule D Case VI instead of Schedule D Case I or II, circumventing the basis period rules.
Even under the current year basis of assessment there may still be an overlap period when trading commences. So section 207(2) of this Act ensures that the allowance is taxed only once, by being included in the profits of only the first of two basis periods.
In some cases this change may lead to a delay in the assessment of the allowances. This is because they will be taken into account in a basis period of the trade rather than in the tax year in which they are received.
It will no longer be possible to set Schedule D Case VI losses against the allowances. But trading losses brought forward and terminal losses may become available against the allowances.
As the allowances will be included in the calculation of trade profits, there is no need to rewrite section 127(3) of ICTA, which treats the allowances in appropriate cases as relevant earnings.
The charge to national insurance contributions is unchanged because contributions are specifically charged on the allowances by section 15(4) of the Social Security Contributions and Benefits Act 1992. This specific charge is no longer needed and is therefore repealed.
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.