Commentary on Sections Overview Overview Section 25: Reliefs and allowances deductible at Steps 2 and 3: supplementary
105.This section contains rules about the way deductions are made against components of income. It is based on section 835(3), (4) and (5) of ICTA.
106.The main rule, in subsection (2) is that deductions are allowed in the way that results in the greatest reduction of income tax liability.
107.This rule means that where a deduction may be set against more than one component of income or there are two or more deductions available, they are allowed in the way that produces the least income tax liability. The order in which deductions that are allowable against a particular component of income are made under Step 2 cannot affect the liability for the tax year concerned. If there is sufficient income then all deductions are allowed in full. If there is insufficient income then unrelieved income is nil. But the order in which they are made can affect the amount of relief that is available to carry forward or back (in the case of reliefs where that is a possibility).
108.Subsection (3) is a signpost to provisions that modify the rule in subsection (2), in particular in the case of reliefs given only against certain types of income.
109.Subsections (4) and (5) ensure that a deduction is only given to the extent that there is income to absorb the deduction, taking into account deductions already made.
110.Some, but not all, of the source provisions contain the rule that income cannot be reduced below nil, but even where not explicitly mentioned, it has always been the accepted practice that a deduction can only be made from income to the extent that there is income to absorb the deduction. The position is now explicit for all income deductions.
111.A similar point arises in connection with deductions that operate as tax reductions. See the commentary on section 29.