Annex 1: Minor Changes in the Law Change 83: Car or motor cycle hire: section 1251 and Schedule 1 Corporation tax: expenses of management
Two rules, which partly overlap, restrict the amount that can be charged to tax when the amount of a deduction for management expenses has been reduced under section 578A(3) of ICTA and a credit reversing the expenses is later brought into account.
If there is a rebate or release of a debt, the “reversal amount” within section 75B(3) of ICTA is “so much of the debit as represents the expenses of management”. The amount which “represents the expenses of management” is restricted under section 578A(3) of ICTA. So the amount treated as the “reversal amount” under section 75B(3) cannot exceed that restricted amount (£75 in the example below).
Section 578A(4) seems to duplicate this restriction. It also imposes a stronger restriction in a case where a rebate represents only part of the original deduction (see below). But in the context of management expenses, section 578A(4) applies only in relation to rebates, not releases of debts.
It is not entirely clear how section 578A(4) of ICTA should be reconciled with the competing rule given by section 75B of ICTA.
Section 1251(4) of this Act makes clear that the restriction is the same as the one made under section 1251(2). The section also makes clear what happens if the rebate or release of a debt represents only part of the original deduction.
It is clear that the charge on the rebate should be restricted by 25% to 45.
It is similarly uncertain how section 578A of ICTA interacts with section 76 of ICTA (expenses of insurance companies). In section 76ZN of ICTA (inserted by Schedule 1 to this Act) subsection (3)(a)(ii) caters for the possibility that the release of a debt for car hire may be a “reversal” within section 76(7) of ICTA. In that case, this rule ensures that the reversal is restricted by the appropriate fraction.