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 is a change in law but not in practice. Change 107: Accrued income profits (exemptions): interest on securities involving accrued income losses: sections 679 and 680
This change alters the way that, in cases where accrued income scheme losses have been sustained on the transfer of securities, relief is given in respect of interest on the securities.
In rewriting section 714(5) of ICTA, instead of providing that that interest is reduced, section 679 simply provides for an exemption in relation to the interest.
This restriction was originally included because of the way interest was then assessed. In the first tax year that a source was acquired, interest was taxed on a current year basis but in later tax years the basis shifted to a previous year basis. The purpose of the restriction in section 714(5)(b) of ICTA was therefore to stop loss relief being given against the interest in a year when the interest was taxed on a previous year basis.
In 1994 interest began to be taxed on a current year basis. So in any tax year income tax will be charged on the income arising in that year only. The restriction is now generally unnecessary.
The one exceptional case where such a restriction is necessary is that of trading partnerships with untaxed income. Under sections 854 and 855 of ITTOIA a second deemed business is treated as set up and commenced when a new partner joins the partnership. This may lead to “overlap” profits when the same interest will be taxed twice. For example:
	P joins an existing trading partnership on 1 January 2007.
	The partnership draws up annual accounts to 31 December.
	Securities are purchased by the partnership cum dividend. The interest period of the securities ends on 31 March 2007.
	P’s basis period for 2006-07 is 1 January 2007 to 5 April 2007.
	P’s basis period for 2007-08 is 1 January 2007 to 31 December 2007.
In this case the interest received on 31 March 2007 forms part of profits for both 2006-07 and 2007-08, but the allowance under section 715(4) of ICTA should only be available in 2006-07, as that is the tax year in which the interest period ends.
But for existing partners of such a partnership, the restriction could result in partners not being entitled to the allowance on the acquisition of a security if the interest period ends after the end of an accounting period. In practice, HMRC allow the relief to be given in these circumstances.
In rewriting section 714(5) of ICTA, rather than including the existing restriction, which is unnecessary in the majority of cases, and then excluding such existing partners from the restriction in appropriate circumstances, section 679(3) prevents any person from being entitled to the exemption for interest in more than one tax year. And it restricts the year when the exemption is given to the tax year in which the interest period ends.