Section 78: Relationship between Rules Prohibiting and Allowing Deductions
Summary
1.Section 78 provides for changes to income tax and corporation tax provisions governing the relationship between the rules prohibiting and those allowing deductions from profits of a trade or property business. In cases involving tax avoidance arrangements, the order of priority in determining if a deduction is allowable will be reversed so that a prohibitive rule will have priority over a permissive rule. These changes have effect from 21 December 2012.
Details of the Section
2.Subsection 1 adds new subsections (1A) and (4) to section 31 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005 (trade profits: relationship between rules prohibiting and allowing deductions).
3.New subsection (1A) provides that in determining if a deduction is allowable in cases involving relevant tax avoidance arrangements, the order of priority is reversed so that a prohibitive rule will have priority over a permissive rule. This means that no deduction will be due if a prohibitive rule applies, notwithstanding that a deduction would otherwise be due under a permissive rule.
4.New subsection (4) defines relevant tax avoidance arrangements for the purposes of new subsection (1A).
5.Subsection 2 adds equivalent subsections to section 274 of ITTOIA 2005 (property businesses: relationship between rules prohibiting and allowing deductions).
6.Subsection 3 adds equivalent subsections to section 51 of the Corporation Tax Act (CTA) 2009 (trade profits: relationship between rules prohibiting and allowing deductions).
7.Subsection 4 adds equivalent subsections to section 214 of CTA 2009 (property businesses: relationship between rules prohibiting and allowing deductions).
8.Subsections (5) and (6) provide commencement rules.
9.Subsection (7) defines “an unconditional obligation” for the purposes of subsection (6).
Background
10.The Government has become aware of avoidance activity that seeks to exploit the priority rules for deductions from profits and intended to generate artificial loss relief for use by companies to reduce their corporation tax profits. This avoidance activity puts at risk substantial amounts of revenue.
11.It was announced on 21 December 2012 that legislation would be introduced, with effect from that date, to counter this avoidance by inserting targeted anti-avoidance rules in the income tax and corporation tax provisions governing the relationship between rules prohibiting and allowing deductions from profits of a trade or property business.
