TABLE OF CONTENTS

Summary     2

Background     2

This Act - The end of the Schedules for Income Tax     6

The Act     6

Commentary on sections     7

Part 1: Overview     7

Section 1: Overview of Act     7

Section 2: Overview of priority rules     8

Part 2: Trading income     8

Chapter 1: Introduction     8

Section 3: Overview of Part 2     8

Section 4: Provisions which must be given priority over Part 2     9

Chapter 2: Income taxed as trade profits     9

Section 5: Charge to tax on trade profits     9

Section 6: Territorial scope of charge to tax     9

Section 7: Income charged     10

Section 8: Person liable     10

Section 9: Farming and market gardening     11

Section 10: Commercial occupation of land other than woodlands     11

Section 11: Commercial occupation of woodlands     12

Section 12: Profits of mines, quarries and other concerns     12

Section 13: Visiting performers     13

Section 14: Visiting performers: supplementary     14

Section 15: Divers and diving supervisors     14

Section 16: Oil extraction and related activities     14

Section 17: Effect of becoming or ceasing to be a UK resident     14

Section 18: Effect of company starting or ceasing to be within charge to income tax     15

Section 19: Tied premises     15

Section 20: Caravan sites where trade carried on     15

Section 21: Surplus business accommodation     15

Section 22: Payments for wayleaves     15

Section 23: Rent-a-room and foster-care relief     16

Chapter 3: Trade profits: basic rules     16

Section 24: Professions and vocations     16

Section 25: Generally accepted accounting practice     16

Section 26: Losses calculated on same basis as profits     17

Section 27: Receipts and expenses     17

Section 28: Items treated under CAA 2001 as receipts and expenses     17

Section 29: Interest     17

Section 30: Animals kept for trade purposes     17

Section 31: Relationship between rules prohibiting and allowing deductions     18

Chapter 4: Trade profits: rules restricting deductions     18

Section 32: Professions and vocations     18

Section 33: Capital expenditure     18

Section 34: Expenses not wholly and exclusively for trade and unconnected losses     19

Section 35: Bad and doubtful debts     19

Section 36: Unpaid remuneration     19

Section 37: Unpaid remuneration: supplementary     20

Employee benefit contributions     20

Section 38: Restriction of deductions     20

Section 39: Making of "employee benefit contributions"     21

Section 40: Provision of qualifying benefits     21

Section 41: Timing and amount of certain qualifying benefits     21

Section 42: Provision or payment out of employee benefit contributions     21

Section 43: Profits calculated before end of 9 month period     22

Section 44: Interpretation of sections 38 to 44     22

Section 45: Business entertainment and gifts: general rule     22

Section 46: Business entertainment: exceptions     22

Section 47: Business gifts: exceptions     22

Section 48: Car or motor cycle hire     23

Section 49: Car or motor cycle hire: supplementary     23

Section 50: Hiring cars (but not motor cycles) with low carbon dioxide emissions     24

Section 51: Patent royalties     25

Section 52: Exclusion of double relief for interest     25

Section 53: Social security contributions     25

Section 54: Penalties, interest and VAT surcharges     25

Section 55: Crime-related payments     26

Chapter 5: Trade profits: rules allowing deductions     26

Section 56: Professions and vocations     26

Section 57: Pre-trading expenses     26

Section 58: Incidental costs of obtaining finance     26

Section 59: Convertible loans and loan stock etc.     27

Section 60: Tenants under taxed leases: introduction     27

Section 61: Tenants occupying land for purposes of trade treated as incurring expenses     27

Section 62: Limit on deductions if tenant entitled to mineral extraction allowance     28

Section 63: Tenants dealing with land as property employed for purposes of trade     28

Section 64: Restrictions on section 61 expenses: lease premium receipts     29

Section 65: Restrictions on section 61 expenses: lease of part of premises     30

Section 66: Corporation tax receipts treated as taxed receipts     30

Section 67: Restrictions on section 61 expenses: corporation tax receipts     31

Section 68: Replacement and alteration of trade tools     31

Section 69: Payments for restrictive undertakings     32

Section 70: Employees seconded to charities and educational establishments     32

Section 71: Educational establishments     32

Section 72: Payroll deduction schemes: contributions to agents' expenses     33

Section 73: Counselling and other outplacement services     33

Section 74: Retraining courses     33

Section 75: Retraining courses: recovery of tax     34

Sections 76 to 80: Redundancy payments etc     34

Section 76: Redundancy payments and approved contractual payments     34

Section 77: Payments in respect of employment wholly in employer's trade     34

Section 78: Payments in respect of employment in more than one capacity     35

Section 79: Additional payments     35

Section 80: Payments made by the Government     35

Section 81: Personal security expenses     36

Section 82: Contributions to local enterprise organisations or urban regeneration companies     36

Section 83: Meaning of "local enterprise organisation"     37

Section 84: Approval of local enterprise agencies     37

Section 85: Supplementary provisions with respect to approvals     37

Section 86: Meaning of "urban regeneration company"     37

Section 87: Expenses of research and development     37

Section 88: Payments to research associations, universities etc     38

Section 89: Expenses connected with patents     38

Section 90: Expenses connected with designs or trade marks     38

Section 91: Payments to Export Credits Guarantee Department     38

Section 92: Expenses connected with foreign trades     39

Section 93: Allocation of expenses     39

Section 94: Family expenses     40

Chapter 6: Trade Profits: Receipts     40

Section 95: Profession and vocations     40

Section 96: Capital receipts     40

Section 97: Debts incurred and later released     41

Section 98: Acquisition of trade: receipts from transferor's trade     41

Section 99: Reverse premiums     42

Section 100: Excluded cases     42

Section 101: Tax treatment of reverse premiums     42

Section 102: Arrangements not at arm's length     42

Section 103: Connected persons and property arrangements     42

Section 104: Distribution of assets of mutual concerns     43

Section 105: Industrial development grants     43

Section 106: Sums recovered under insurance policies etc.     44

Chapter 7: Trade profits: gifts to charities etc.     44

Section 107: Professions and vocations     44

Section 108: Gifts of trading stock to charities etc.     44

Section 109: Receipt by donor or connected person of benefit attributable to certain gifts     45

Section 110: Meaning of "designated educational establishment"     45

Chapter 8: Trade profits: Herd basis rules     45

Section 111: Election for application of herd basis rules     46

Section 112: Meaning of "animal", "herd", "production herd" etc.     46

Section 113: Other interpretative provisions     47

Section 114: Initial cost of herd and value of herd     47

Section 115: Addition of animals to herd     47

Section 116: Replacement of animals in herd     47

Section 117: Amount of receipt if old animal slaughtered under disease control order     48

Section 118: Sale of animals from herd     48

Section 119: Sale of whole or substantial part of herd     49

Section 120: Acquisition of new herd begun within 5 years of sale     49

Section 121: Section 120: sale outside farmer's control     49

Section 122: Replacement of part sold begun within 5 years of sale     50

Section 123: Section 122: sale outside farmer's control     50

Section 124: Herd basis elections     50

Section 125: Five year gap in which no production herd kept     51

Section 126: Slaughter under disease control order     51

Section 127: Preventing abuse of the herd basis rules     51

Section 128: Information if election made     52

Section 129: Further assessment etc. if herd basis rules apply     52

Chapter 9: Trade profits: films and sound recordings     52

Section 130: Expenditure to which this Chapter applies     52

Section 131: Meaning of "film" and related expressions     52

Section 132: Meaning of "original master version" and "certified master version"     53

Section 133: Meaning of "relevant period"     53

Section 134: Expenditure treated as revenue in nature     53

Section 135: Films and sound recordings: production or acquisition expenditure     54

Section 136: Application of provisions about certified master versions     54

Section 137: Certified master versions: preliminary expenditure     54

Section 138: Certified master versions: production or acquisition expenditure     55

Section 139: Certified master versions: production expenditure on limited-budget films     55

Section 140: Certified master versions: acquisition expenditure on limited-budget films     55

Section 141: Meaning of "total production expenditure"     56

Section 142: When expenditure is incurred     56

Section 143: Election for sections 134 to 140 not to apply     56

Section 144: Meaning of "genuinely intended for theatrical release"     56

Chapter 10: Trade profits: certain telecommunication rights     56

Section 145: Professions and vocations     57

Section 146: Meaning of "relevant telecommunication right"     57

Section 147: Expenditure and receipts treated as revenue in nature     57

Section 148: Credits or debits arising from revaluation     57

Chapter 11: Trade Profits: Other specific trades     58

Section 149:Taxation of amounts taken to reserves     58

Section 150: Conversion etc. of securities held as circulating capital     59

Section 151: Exchanges of gilts for gilts strips     60

Section 152: Consolidation of gilt strips     60

Section 153: Meaning of "gilt-edged security" and "strip"     61

Section 154: Regulations for determining market value of securities or strips     61

Section 155: Levies and repayments under FISMA 2000     61

Section 156: Purchase or sale of woodlands     61

Section 157: Relief in respect of mineral royalties     62

Section 158: Lease premiums etc.: reduction of receipts     62

Section 159: Ministers of religion     62

Section 160: Alternative basis of calculation in early years of practice     63

Section 161: Mineral exploration and access     63

Section 162: Payments by persons liable to pool betting duty     64

Section 163: Deduction for deemed employment payment     64

Section 164: Special rules for partnerships     65

Section 165: Deduction for site preparation expenditure     65

Section 166: Allocation of site preparation expenditure     66

Section 167: Site preparation expenditure: supplementary     66

Section 168: Site restoration payments     66

Section 169: Cemeteries and crematoria: introduction     66

Section 170: Deduction for capital expenditure     67

Section 171: Allocation of ancillary capital expenditure     67

Section 172: Exclusion of expenditure met by subsidies     68

Chapter 12: Trade profits: valuation of stock and work in progress     68

Section 173: Valuation of trading stock on cessation     68

Section 174: Meaning of "trading stock"     69

Section 175: Basis of valuation of trading stock     69

Section 176: Sale basis of valuation: sale to unconnected person     69

Section 177: Sale basis of valuation: sale to connected person     69

Section 178: Sale basis of valuation: election by connected persons     70

Section 179: Connected persons     70

Section 180: Cost to buyer of stock valued on sale basis of valuation     70

Section 181: Meaning of "sale" and related expressions     71

Section 182:Valuation of work in progress on cessation     71

Section 183: Meaning of "work in progress"     71

Section 184: Basis of valuation of work in progress     71

Section 185: Election for valuation at cost     71

Section 186: Determination of questions by Commissioners     72

Chapter 13: Deductions from profits: unremittable amounts     72

Section 187: Professions and vocations     72

Section 188: Application of Chapter     72

Section 189: Relief for unremittable amounts     73

Section 190: Restrictions on relief     73

Section 191: Withdrawal of relief     74

Chapter 14: Disposal and acquisition of know-how     74

Section 192: Meaning of "know-how" etc.     75

Section 193: Disposal of know-how if trade continues to be carried on     75

Section 194: Disposal of know-how as part of disposal of all or part of a trade     75

Section 195: Seller controlled by buyer etc.     76

Chapter 15: Basis periods     76

Section 196: Professions and vocations     77

Section 197: Meaning of "accounting date"     77

Section 198: General rule     77

Section 199: First tax year     77

Section 200: Second tax year     77

Section 201: Tax year in which there is no accounting date     77

Section 202: Final tax year     78

Section 203: Apportionment etc. of profits to basis periods     78

Section 204: Meaning of "overlap period" and "overlap profit"     78

Section 205: Deduction for overlap profit in final tax year     78

Section 206: Restriction on bringing losses into account twice     78

Section 207: Treatment of business start-up payments received in an overlap period     78

Section 208: When the late accounting date rules apply     79

Section 209: Rule if there is an accounting date     80

Section 210: Rules if there is no accounting date     80

Section 211: Treating middle date as accounting date     80

Section 212: Consequence of treating middle date as accounting date     81

Section 213: Circumstances in which middle date not treated as accounting date     81

Section 214: When a change of accounting date occurs     81

Section 215: Change of accounting date in third tax year     82

Section 216: Change of accounting date in later tax year     82

Section 217: Conditions for basis period to end with new accounting date     82

Section 218: Commercial reasons for change of accounting date     83

Section 219: The year after an ineffective change of accounting date     83

Section 220: Deduction for overlap profit on change of accounting date     83

Chapter 16: Averaging profits of farmers and creative artists     84

Section 221: Claim for averaging of fluctuating profits     84

Section 222: Circumstances in which claim may be made     85

Section 223: Adjustment of profits     85

Section 224: Effect of adjustment     85

Section 225: Effect of later adjustment of profits     86

Chapter 17: Adjustment income     86

Section 226: Professions and vocations     86

Section 227: Application of Chapter     86

Section 228: Adjustment income and adjustment expense     87

Section 229: Income charged     87

Section 230: Person liable     87

Section 231: Calculation of the adjustment     88

Section 232: Treatment of adjustment income     88

Section 233: Treatment of adjustment expense     88

Section 234: No adjustment for certain expenses previously brought into account     88

Section 235: Cases where adjustment not required until assets realised or written off     89

Section 236: Change from realisation basis to mark to market     89

Section 237: Election for spreading if section 236 applies     89

Section 238: Spreading on ending of exemption for barristers and advocates     89

Section 239: Election to accelerate charge under section 238     90

Section 240: Liability of personal representatives if person liable dies     90

Chapter 18: Post-cessation receipts     90

Section 241: Professions and vocations     90

Section 242: Charge to tax on post-cessation receipts     90

Section 243: Extent of charge to tax     90

Section 244: Income charged     91

Section 245: Person liable     91

Section 246: Basic meaning of "post-cessation receipt"     91

Section 247: Other rules about what counts as post-cessation receipts     91

Section 248: Debts paid after cessation     91

Section 249: Debts released after cessation     92

Section 250: Receipts relating to post-cessation expenditure     92

Section 251: Transfer of rights if transferee does not carry on trade     92

Section 252: Transfer of trading stock or work in progress     92

Section 253: Lump sums paid to personal representatives for copyright etc.     93

Section 254: Allowable deductions     93

Section 255: Further rules about allowable deductions     93

Section 256: Treatment of post-cessation receipts     94

Section 257: Election to carry back     94

Chapter 19: Miscellaneous and supplementary     94

Section 258: Changes in trustees and personal representatives     94

Section 259: Meaning of "statutory insolvency arrangement"     94

Section 262: Priority between Chapters within Part 3     95

Section 291: Deductions for expenses under section 292     110

Section 297: Taking account of reductions in corporation tax receipts     113

Section 302: Claim for repayment of tax payable by virtue of section 285     114

Chapter 5: Profits of property businesses: other rules about receipts and deductions     116

Section 308: Furnished lettings     116

Section 309: Rent-a-room relief     116

Section 310: Acquisition of business: receipts from transferor's UK property business     116

Section 311: Reverse premiums     117

Section 312: Deduction for expenditure on energy saving items     117

Section 313: Restrictions on relief     118

Section 314: Regulations     118

Section 315: Deduction for expenditure on sea walls     119

Section 316: Transfer of interest in premises     119

Section 317: Ending of lease of premises     120

Section 318: Transfer involving company within the charge to corporation tax     120

Section 319: Relief in respect of mineral royalties     121

Section 320: Nature of item apportioned on sale of estate or interest in land     121

Section 321: Mutual business     122

Chapter 6: Commercial letting of furnished holiday accommodation     122

Section 322: Introduction     123

Section 323: Meaning of "commercial letting of furnished holiday accommodation"     123

Section 324: Meaning of "relevant period" in sections 325 and 326     123

Section 325: Meaning of "qualifying holiday accommodation"     124

Section 326: Under-used holiday accommodation: averaging elections     124

Section 327: Capital allowances and loss relief     124

Section 328: Earned income and relevant UK earnings for pension purposes     125

Chapter 7: Adjustment income     125

Section 329: Application of Chapter     126

Section 330: Adjustment income and adjustment expense     126

Section 331: Income charged     126

Section 332: Person liable     126

Section 333: Treatment of adjustment income     126

Section 334: Treatment of adjustment expense     126

Chapter 8: Rent receivable in connection with a UK section 12(4) concern     126

Section 335: Charge to tax on rent receivable in connection with a UK section 12(4) concern     126

Section 336: Meaning of "rent receivable in connection with a UK section 12(4) concern".     127

Section 337: Income charged     128

Section 338: Person liable     128

Section 339: Deduction for management expenses of owner of mineral rights     128

Section 340: Relief in respect of mineral royalties     128

Section 341: Meaning of "mineral lease or agreement" and "mineral royalties"     128

Section 342: Extended meaning of "mineral royalties" etc. in Northern Ireland     129

Section 343: Power of Board to determine what counts as "mineral royalties"     129

Chapter 10: Post-cessation receipts     130

Section 349: Charge to tax on post-cessation receipts     131

Section 354: Other rules about what counts as a "post-cessation receipt"     131

Section 355: Transfer of rights if transferee does not carry on UK property business     131

Section 356: Application to Schedule A businesses     132

Chapter 11: Overseas property income     132

Section 357: Charge to tax on overseas property income     132

Chapter 12: Supplementary     132

Section 361: Changes in trustees and personal representatives     132

Section 362: Effect of company starting or ceasing to be within charge to income tax     133

Section 363: Overseas property businesses and overseas land: adaptation of rules     133

Section 364: Meaning of "lease" and "premises"     133

1.     These explanatory notes relate to the Income Tax (Trading and Other Income) Act which received Royal Assent on 24 March 2005. They have been prepared by the Tax Law Rewrite Project at the Inland Revenue in order to assist the reader in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So where a section or part of a section does not seem to require any explanation or comment, none is given.

3.     The commentary on each section indicates the main origin or origins of the section. (A full statement of the origins of each section is contained in the Act's Table of Origins.)

4.     At the end of the commentary there is supporting material in two annexes.

• Annex 1 contains details of the minor changes in the law made by the Act.

• Annex 2 contains a table of destinations for the Extra-Statutory Concessions to which this Act gives statutory effect.