hmrc statement of practice.pdf

8/19/2019 HMRC Statement of Practice.pdf

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Statements of Practice

Issued up to 30 January 2012

The Civil Partnership Act (CPA) received Royal Assent on 18/11/2004 and becameeffective from 5 December 2005. The Government’s commitment is that, for all tax purposes, same-sex couples who form a civil partnership will be treated the same as

married couples.As part of this commitment to tax parity, from 5 December 2005 all Extra StatutoryConcessions (ESCs) or Statements of Practice (SoPs) should be taken as extended to

apply equally to civil partners and married couples.


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Introduction

Statements of Practice explain HM Revenue and Customs interpretation of legislation and theway the Department applies the law in practice. They do not affect a taxpayer’s right to argue fora different interpretation, if necessary in an appeal to an independent tribunal.

This guide contains a comprehensive index and the full text of all Statements of Practice issuedup to 30 January 2012 except where they have become obsolete.

The guide is in three parts. Part I is an alphabetical index of the Statements of Practice, grouped

under the following general subject headings.

A. Statements applicable to individuals (Income Tax and interest on tax)

B. Statements applicable to individuals and companies (Income Tax and Corporation Tax)

C. Statements applicable to companies etc. (Corporation Tax and Income Tax)

D. Statements relating to tax on Capital Gains (individuals and companies)

E. Statements relating to Inheritance Tax (also applicable where tax charged is CapitalTransfer Tax)

F. Miscel laneou s

G. Statements of administrative practice and procedure.

Statements which are obsolete are shown in bold type and those which have changed (no matterhow small that change is, unless it is purely a formatting change, e.g. font or alignment) sincethey were last published are shown with square brackets around the number thus [SP3/94].

Part II gives the full text of Statements issued before 18 July 1978, suitably updated exceptwhere a Statement is obsolete, in which case only the title is given in bold type. They are given aletter to correspond with the appropriate subject group A to F above e.g. A1, A2, B1, B2 etc.

Part III gives the full text of Statements issued after 18 July 1978 suitably updated except wherea Statement is obsolete, in which case only the title is given in bold type. They are in numberedannual series having the prefix ‘SP’ e.g. SP1/78, SP6/81, SP10/92 etc.


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Abbreviations

CAA Capital Allowances Act

CGTA Capital Gains Tax Act

CTTA Capital Transfer Tax Act

DLTA Development Land Tax Act

ESC Extra-Statutory Concession

FA Finance Act

F (No 2) A Finance (No 2) Act

ICTA Income and Corporation Taxes Act

IHTA Inheritance Tax Act

ITA Income Tax Act

ITEPA Income Tax (Earnings and Pensions) Act

ITMA Income Tax Management Act

ITTOIA Income Tax (Trading and Other Income) Act

OTA Oil Taxation Act

TCGA Taxation of Chargeable Gains Act

TIOPA Taxation (International and Other Provisions) Act

TMA Taxes Management Act

VATA Value Added Tax Act

References to he, him or his may equally be read as she, her or hers where appropriate.


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Part I Index of Statements

A. Statements applicable to individuals (income tax and interest on tax)

Accountancy expenses - Superseded by SP16/91 A28

Airline pilots - Residence - Incidental duties A10

Approved savings-related share option schemes SP4/83

Assessing tolerance A12

Benefits in kind - Scholarship for employee's children A24

Benefits in kind and VAT A7

Benefits in kind: Cheap loans: Advances for expenses SP7/79

Benefits in kind: Section 64 FA 1976 A15

Business by telephone – Services for non contact centre customers SP2/03

Business by telephone - Inland Revenue contact centres SP3/03

Business by telephone SP2/98

Business by telephone SP8/98

Business by telephone – Customs & Revenue Contact Centres SP1/05

Business by telephone – HMRC Taxes Contact Centres [SP1/10]

Business Expansion Scheme, Enterprise Investment Scheme, CGT

Reinvestment Relief and Venture Capital Trust Scheme: Loans to

investors – Superseded by SP6/98

SP3/94

Capital allowances on machinery and plant: amendment of claim by

an individual trader

A26

Case V Schedule D Losses - Reclassified as ESC B25 A20

Charitable covenants SP4/90

Close companies: Income tax relief for interest on loans applied inacquiring an interest in a close company

SP3/78

Correspondence with married women A23

Covenants in favour of charities: repayment procedure A5

Deceased persons' estates: Discretionary interests in residue SP4/93

Deceased persons' estates: Income received during the

administration period

SP7/80


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Deeds of covenant A1

Delay in rendering tax returns: Interest charge and penalties A14

Delay in rendering tax returns: Interest on overdue tax SP3/88

Delay in rendering tax returns: Interest on overdue tax (TMA 1970,

Section 88)

SP6/89

Earnings for work done abroad A17

Employees resident but not ordinarily resident in the UK: General

earnings under Sections 25 and 26 Income Tax (Earnings and

Pensions) Act 2003 – superseded by SP1/09

SP5/84

Employees resident but not ordinarily resident in the UK: Generalearnings chargeable under Sections 15 and 26 Income Tax (Earnings andPensions) Act 2003 (ITEPA) and application of the mixed fund ruleunder Sections 809Q onwards of the Income Tax Act 2007 (ITA)

SP1/09

Employment Protection Act 1975: Maternity pay SP1/78

Employment Income – VAT A6

Enhanced stock dividends received by trustees of interest in possessiontrusts

SP4/94

Enterprise Investment Scheme and Venture Capital Trust Scheme:

Location of activity – Superseded by SP7/98

SP2/94

Enterprise Investment Scheme. Venture Capital Trusts, Capital GainsReinvestment Relief and Business Expansion Scheme: Loans to investors

– Supersedes SP3/94

SP6/98

Enterprise Investment Scheme. Venture Capital Trusts, Capital

Gains Tax Reinvestment Relief: Location of activity – Supersedes

SP2/94

SP7/98

Exchange rate fluctuations SP2/02

Exchange rate fluctuations – Now SP2/02 SP1/87

Ex-gratia awards made on termination of an office or employment byretirement or death

SP13/91

Flat rate expenses for manual and certain other employees SP13/79

Flat rate expenses for manual and certain other employees SP17/80

Foreign earnings deduction SP18/91

Goods taken by traders for personal consumption A32


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Incentive awards SP6/85

Individuals coming to the UK: Ordinary residence SP3/81

Informal end-of-year adjustments A11

Investigation settlements: Inclusion of interest clause in letters or

offer - Replaced by leaflet IR73, ‘Inland Revenue Investigations.

How Settlements are Negotiated’

SP6/86

Investigation settlements: Retirement annuity relief SP12/79

Investigation settlements: Retirement annuity relief - Superseded by

SP9/91

SP9/80

Life assurance premium relief: Children's policies SP4/79

Life assurance premium relief: Children's policies SP11/79

Living expenses abroad - Schedule D Cases I and II A16

Lorry drivers: Relief for expenditure on meals SP16/80

Maintenance payments under court orders: Retrospective dating SP6/81

Maintenance payments: Payment of school fees SP15/80

Mortgage interest relief: Year of marriage SP10/80

Non-statutory redundancy payments - Superseded by SP1/94 SP1/81

Notification of chargeability to income tax and capital gains tax for

tax years 1995-96 onwards

SP1/96

Offshore funds SP2/86

Partnership mergers and demergers SP9/86

Partnerships - Change in membership A4

Partnerships and retirement annuity relief A18

PAYE Settlement Agreements SP5/96

Payments on account of disability resulting in cessation of employment SP10/81

Payments to a non-resident from UK discretionary trusts or UK estatesduring the administration period: Double Taxation relief

SP3/86

Payments to redundant steel workers SP2/84

Payments made by employers to employees when in full time attendanceat universities and technical colleges

SP4/86


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Pooled cars: Incidental private use SP2/96

Reimbursement of taxpayers' expenses. Replaced By Code of

Practice 1 ‘Mistakes by ’ published on 17 February 1993

A31

Relief for interest on loan used to buy land for partnership or

company business purposes

SP4/85

Relief for interest payments: Loans applied in acquiring an interest in a partnership

A33

Relief for interest payments: Loans for improvement or purchase of land:inherited properties

A34

Reliefs for non-residents: Treatment of wife's income SP7/85

Residence in the UK: Visits extended because of exceptional

circumstances

SP2/91

Residence in the UK: When ordinary residence is regarded as

commencing where the period to be spent here is less than three

years

SP17/91

Schedule E assessments: Repayment supplement A9

Section 313 ICTA: Termination payments made in settlement ofemployment claims

SP3/96

Settlements: Benefit to settlor's future spouse

Self assessment: Finality and Discovery

A30

SP1/06

Settlements: Part XV, ICTA 1988 (formerly Part XVI, ICTA 1970) A2

Solicitors deposit interest A22

Statement clarifying the operation of an existing administrative

practice: Case V Schedule D Losses - Superseded by ESC B25

SP2/80

Stock dividends A8

Tax treatment of directors' fees received by professional partners -

Reclassified as ESC A37

A29

Taxation of car telephones provided by employers SP5/88

Temporary workers engaged through foreign agencies A21

The interaction of Income Tax and Inheritance Tax on assets put intosettlements

SP1/82

Treatment of certain payments to relocated employees SP1/85


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Venture Capital Trusts: Value of ‘gross assets’ – Superseded by

SP5/98

SP7/95

Venture Capital Trusts: Default terms in loan agreements SP8/95

Venture Capital Trusts and the Enterprise Investment Scheme:

Value of ‘gross assets’ – Supersedes SP7/95

SP5/98

Venture Capital Trusts, the Enterprise Investment Scheme, the

Corporate Venturing Scheme and Enterprise Management

Incentives - Superseded by SP2/06

SP2/00

Venture Capital Trusts, the Enterprise Investment Scheme, the CorporateVenturing Scheme and Enterprise Management Incentives - SupersedesSP2/00

SP2/06


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Accident insurance policies: Chargeable events and gains on policies oflife insurance

SP6/92

Additional redundancy payments SP11/81

Advance Agreements Unit – superseded by SP2/12 [SP2/07]

Application of foreign exchange and financial instruments legislation

to partnerships which include companies

SP9/94

Business expansion scheme: Overseas activities SP4/87

Business Expansion Scheme: Overseas activities - Superseded by

SP7/86

SP7/83

Capital allowances: Hotels SP9/87

Capital allowances: Machinery and plant: Short-life assets SP1/86

Capital allowances: Notification of expenditure on machinery and plantmade outside the normal time limit

SP6/94

Compensation for acquisition of property under compulsory powers SP8/79

Contributions to retirement benefit schemes on termination of

employment

SP2/81

Discovery assessments SP8/91

Double taxation relief: Business profits: Unilateral relief SP7/91

Exchange rate fluctuations SP3/85

Expenditure on farm drainage SP5/81

Expenditure on producing films and certain similar assets SP9/79

Finance lease rental payments SP3/91

Furnished lettings: Wear and tear allowance - Replaced by ESC B47 A19

Goods sold subject to reservation of title B6

Industrial buildings allowance: Industrial workshops constructed forseparate letting to small businesses

SP4/80

Inward Investment Support [SP2/12]

Liability under Chapter II of Part XIII, ICTA 1988, on gains arising

on life and capital redemption policies and life annuities

SP11/80

Non-statutory lump sum redundancy payments SP1/94


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Offshore trusts SP2/86

Payment of life assurance premiums on which commission is payable

to the policyholder - replaced by SP5/95

SP3/79

Profit-related pay: Use of pool determination formulae SP7/92

Section 124, ICTA 1988: Interest on quoted eurobonds SP8/84

Securities dealt in on the Stock Exchange Unlisted Securities Market:

Status and valuation for tax purposes

SP18/80

Small workshops allowance SP6/80

Stock and work in progress: Changes in accountancy practice

(SSAP9)

B5

Stock and work in progress: Changes in the basis of valuing long

term contract work in progress

B4

Stock relief: completed work in progress of builders B7

Stock relief: Deferment of recovery charges: Definition of net

indebtedness in Paragraph 1(5), Schedule 7, FA 1980

SP8/80

Stock relief: Recovery charges when level of trading is negligible SP4/81

Stock relief: treatment of VAT B2

Stock relief: Withdrawal of claim B3

Stocks and long-term contracts SP3/90

Tax treatment of expenditure on films SP1/98

Tax treatment of expenditure on films and certain similar assets SP2/83

Tax treatment of expenditure on films and certain similar assets SP2/85

Tax treatment of expenditure on films and certain similar asset-

Replaced by SP1/98

SP1/93

Tax treatment of transactions in financial futures and options SP3/02

Tax treatment of transactions in financial futures and options SP14/91

Taxation of commission, cashbacks and discounts SP4/97

Taxation of receipts of insurance and personal pension schemes

commissions – Superseded by SP4/97

SP5/95

Treatment of Investment Managers and their overseas Clients SP1/01


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Treatment of investment managers and their overseas clients

Replaced by SP1/01

SP15/91

Treatment of Value Added Tax B1


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C. Statements applicable to companies, etc . (corporation tax and income tax)

Advance Thin Capitalisation Agreements under the APA Legislation –

Superseded by SP1/12

[SP4/07]

Advance Thin Capitalisation Agreements under the APA Legislation [SP1/12

Advanced Pricing Agreements (APAs) – Superseded by SP2/10 SP3/99

Advance Pricing Agreements (APAs) SP2/10

Application of local currency rules in Finance Act 2000 to partnershipswhich include companies SP2/01

Application of loan relationships, foreign exchange and financial

instruments legislation to partnerships which include companies

SP4/98

Associated companies for small companies' relief and Corporation Taxstarting rate: Holding companies

SP5/94

Authorised unit trusts, approved investment trusts, and open-ended

investment companies: Monthly savings schemes – Superseded by

SP2/99

SP2/97

Building licences granted under the Community Land Act 1975: Stock

relief

SP8/78

Business Expansion Scheme: Overseas activities - Superseded by

SP4/87

SP7/86

Claims to loss relief, capital allowances and group relief outside limit SP5/01

Claims to loss relief under Section 393(1), ICTA 1988 C11

Close companies: General statement C4

Close companies: Non-resident participators: Apportionment SP2/78

Close companies: Paragraph 3(1)(a) Sch 19, ICTA 1988, ‘Reasonable

time’

C3

Close company apportionment SP2/87

Close company apportionment: Member of a trading group SP8/87

Company residence SP1/90

Company residence - Superseded by SP1/90 SP6/83

Company taxation: Interest paid in a foreign currency C9

Corporate Venturing Scheme: applications for advance clearance underPart X, Schedule 15, FA 2000

SP1/00

Company's purchase of own shares: ICTA 1988 SP2/82


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Corporation Tax: A major change in the nature or conduct of a trade SP10/91

Corporation Tax Self Assessment. Enquiries and chargeable gainsValuations

SP1/02

Country-risk debts SP1/83

Definition of Financial Trader for the purposes of S177(1), FA 1994


SP3/95

Definition of Financial Trader for the purposes of paragraph 31 ScheduleFinance act 2002 SP4/02

Demergers: Sections 213-218, ICTA 1988 SP13/80

Double taxation: Dividend income: Tax credit relief SP12/93

Enterprise Investment Scheme, Venture Capital Trusts, CorporateVenturing Scheme and Management Incentives and Capital gains TaxReinvestment Relief – Supersedes SP7/98

SP3/00

General rules as to deductions not allowable: Valuation fees forcompliance with Companies Act 1985, Sch 7 para 1(2)

C10

Group relief: Consortia: S.413(8), ICTA 1988 C6

Group relief: Section 410, ICTA 1988 C7

Group relief: Section 410, ICTA 1988 - Superseded by SP3/93 SP5/80

Group relief: Section 412(1)(c), ICTA 1988 C2

Groups of companies: Arrangements SP3/93

Income Tax: ‘In the ordinary course’ of banking business SP12/91

Income tax: Interest paid in the ordinary course of a bank’s business SP4/96

Insurance companies: Transfers of long term business SP7/93

Interest paid to a bank in the UK on a loan made in foreign currency

Replaced by SP1/95

C5

Interest payable in the United Kingdom SP1/95

Investment trusts investing in authorised unit trusts Superseded by

SP3/97

SP7/94

Investment trusts investing in authorised unit trusts - Superseded by

SP7/94

SP5/91

Investment trusts investing in authorised unit trusts or open-endedinvestment companies

3/97


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Long term insurance business: Computations of profit for tax purposes SP4/95

Lotteries and football pools C1

Mining companies: Expenditure on planning permission applications SP4/78

Monthly savings in investment funds – Supersedes SP2/97 2/99

Non-resident lessors: Section 830, ICTA 1988 SP6/84

Partnerships including companies: Application of loan relationships,foreign exchange and financial instruments legislation – Supersedes

SP9/94

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Payment of tax credits to non-resident companies SP2/95

Relief for Underlying Tax SP3/01

Stamp Duty: Group relief 3/98

Surrender of Advance Corporation Tax SP7/89

Tax treatment of forward currency transactions by investment trusts -


SP1/88

Tax treatment of transactions in financial futures and options -


SP4/88

Taxation of profits of subsidiaries of UK companies C8

Tonnage Tax SP4/00

Trade unions: Provident benefits: Legal and administrative expenses SP1/84

Trade unions: Provident benefits: Legal expenses paid for members -


SP6/78

Transactions within Section 765A, ICTA 1988: Movements of capital between residents of EC member states

Transfer pricing, mutual agreement procedure and arbitration

SP2/92

SP1/11

Valuation of oil disposed otherwise than at arm's length: Paragraph 2,

Schedule 3, Oil Taxation Act 1975

SP14/93


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D. Statements relating to tax on capital gains (individuals and companies)

Allowable expenditure: Expenses incurred by personal representatives

and corporate trustees – see SP2/04

SP8/94

Allowable expenditure: Expenditure incurred by Personal representativesand corporate trustees

SP2/04

Asset of negligible value: Time limit for claims - Superseded by ESC

D28

D13

Capital Gains Tax: Exercise of a power of appointment over settled

property

SP7/78

Closure of business followed by sale of assets or liquidation of

company

SP6/79

Company's purchase of own shares: Capital gains treatment of distributionreceived by corporate shareholder

SP4/89

Compulsory acquisition of freehold or extension of lease by tenant SP13/93

Compulsory acquisition of freehold reversion by tenant - Superseded

by SP13/93

SP7/90

Corporation Tax Self Assessment Enquiries and chargeable gainsvaluations

SP1/02

Discovery Assessments SP8/91

Division of a company on a share for share basis SP5/85

Division of a company on a share for share basis - Superseded by

SP5/85

D14

Double taxation relief: Chargeable gains SP6/88

Enhanced stock dividends received by trustees of interest in possessiontrusts

SP4/94

Exercise of a power of appointment or advance over settled property SP7/84

Exercise of a power of appointment over settled property - Superseded

by SP7/84

SP9/81

Exemption of companies’ gains on substantial shareholdings sole or main benefit test – Paragraph 5 Schedule 7AC Taxation of chargeable Gains Act1992

SP5/02

Family company: Sale of assets in anticipation of liquidation SP5/79

Finance Act 1965, Section 29(2) D17

Houses owned by occupants of tied accommodation D8


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Indexation SP3/82

Initial repairs to property: Section 38(1), TCGA 1992 (CGTA 1979,Section 32(1))

D24

Losses on irrecoverable loans in the form of qualifying corporate bonds:Loss on early redemption

SP8/90

Non-resident company: Section 13, TCGA 1992 (Section 15, CGTA 1979) D23

Non-resident trusts SP5/92

Offshore funds SP2/86

Part disposals of land D1

Partnerships D12

Partnerships: Assets owned by individuals D5

Partnerships: Assets owned by partner D11

Partnerships: Extension of Statement of Practice D12 - See also SP1/89 SP1/79

Partnerships: Further extension of SPD12 SP1/89

Rebasing and indexation: Shares held at 31 March 1982 SP5/89

Rebasing elections - Superseded by SP4/92 SP2/89

Relief for losses on loans to traders: Time limit for claims -

Superseded by ESC D36

SP3/83

Relief for owner-occupiers SP14/80

Relief for replacement of business assets: Employees and office holders SP5/86

Replacement of business assets in groups of companies D19

Residence exemption: Separated couples D9

Retirement relief - Change in business during 10 years before disposal D20

Rollover relief for replacement of business assets: Trades carried onsuccessively

SP8/81

Self Assessment enquiries and Capital Gains Tax Valuations SP1/99

Short delay by owner-occupier in taking up residence: Sections 222-

224, TCGA 1992 (Sections 101-103, CGTA 1979) - Replaced by ESC

D49

D4

Superannuation funds D2


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Time limit for an election for valuation on 6 April 1965 under paragraph17, Schedule 2, TCGA 1992 (paragraph 12, Schedule 5, CGTA 1979):Company leaving a group: Section 178, TCGA 1992 (Section 278, ICTA1970)

D21

Transfer of a business to a company - Superseded by ESC D22 D22

Treatment of VAT D7

Unquoted shares or securities held on 6 April 1965 SP14/79

Value shifting: Section 30, TCGA 1992 (Section 26, CGTA 1979) D18


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E. Statements relating to Inheritance Tax (also applicable where the tax charged is CapitalTransfer Tax), and Estate Duty

Age of majority E8

Associated operations E4

Business property relief: ‘Buy and sell’ agreements SP12/80

Charities E13

Close companies E5

Close companies - Group transfers E15

Death benefits under superannuation arrangements SP10/86

Deduction for reasonable funeral expenses SP7/87

Employee trusts E11

Estate Duty: Calculation of duty payable on a chargeable event affectingheritage objects previously granted conditional exemption

SP11/84

Excluded property E9

Incidence of tax E17

Interests in possession D16

Leases for life E10

Missives of sale E16

Orders in matrimonial proceedings E12

Partial disclaimers of residue E18

Pools etc syndicates E14

Power for trustees to allow a beneficiary to occupy a dwelling house SP10/79

Power to augment income E6

Powers of advancement E2

Powers of appointment E1

Protective trusts E7

Superannuation schemes E3

The interaction of Income Tax and Inheritance Tax on assets put intosettlements

SP1/82


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Treatment of income of discretionary trusts SP8/86


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F. Miscellaneous

Artificial separation of business activities F4

Close companies: Apportionment of income and the consequentials

for Capital Gains Tax: Close companies in liquidation - Superseded

by ESCs A36 and D12

F3

Development Land Tax: Double taxation conventions SP4/84

Development Land Tax: Negotiations on liability SP2/79

Double Taxation relief: Status of the UK’s double taxation conventionswith the former USSR and with newly independent states

SP4/01

Double Taxation relief: Status of the UK’s double taxation

conventions with the former Socialist Federal Republic of Yugoslavia

– Superseded by SP3/07

SP3/04

Double Taxation relief: Status of the UK's double taxation conventionswith the former Socialist Federal Republic of Yugoslavia - SupersedesSP3/04

SP3/07

Double Taxation relief: Status of UK/USSR convention for the

avoidance of double taxation – Superseded by SP4/01

SP3/92

Stamp Duty and VAT: Interaction SP11/91

Stamp Duty and VAT: Interaction - Superseded by SP11/91 SP6/91

Stamp Duty: Convertible loan stock SP3/84

Stamp Duty: Conveyance in consideration of a debt SP5/78

Stamp duty: Conveyances and leases of building plots - Superseded

by SP8/93

SP10/87

Stamp duty: Conveyances and transfers of property subject to a debt -Section 57, Stamp Act 1891

SP6/90

Stamp Duty – Disadvantaged Areas Relief SP1/03

Stamp Duty Land Tax : Disadvantaged Area Relief SP1/04

Stamp Duty: New buildings SP8/93

Stamp Duty: Treatment of securities dealt in on the Stock Exchange

Unlisted Securities Market

SP9/84

The construction industry tax deduction scheme: Carpet fitting SP12/81

United Kingdom branches of foreign banks - Superseded by Section

67, FA 1982

F2


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United Kingdom/Czechoslovakia Double Taxation Convention SP5/93

United Kingdom/Yugoslavia Double Taxation ConventionSuperseded by SP3/04

SP6/93

VAT Strategy: Input Tax deduction without a valid VAT invoice SP1/07


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G. Statements of administrative practice and procedure

Acceptance of property in lieu of Inheritance Tax, Capital Transfer Taxand Estate Duty

SP6/87

Accountancy expenses arising out of accounts investigations SP16/91

Accountants' working papers SP5/90

Accounts on a cash basis A27

Allowable expenditure: Expenses incurred by personal

representatives – Superseded by SP8/94

SP7/81

Allowable expenditure: Expenses incurred by personal representativesand corporate trustees – see SP2/04

SP8/94

Allowable expenditure: Expenditure incurred by Personalrepresentatives and corporate trustees

SP2/04

Barristers - The cash basis A3

Business tax computations rounded to nearest £1,000 SP15/93

Capital Gains Tax: Rebasing elections SP4/92

Civil tax penalties and criminal prosecution cases SP2/88

Company liquidations: Shareholders' CGT D3

Completion of return forms by attorneys A13

Corporation Tax Pay and File: Claims to capital allowances and

group relief made outside the normal time limit

SP11/93

Corporation Tax Pay and File: Corporation Tax returns SP9/93

Corporation Tax Pay and File: Special arrangements for groups of

companies

SP10/93

Directors' and employees' emoluments: Extension of time limits for

relief on transition to receipts basis of assessment

SP1/92

Foreign bank accounts SP10/84

Furnished lettings: Wear and tear allowance - Replaced by ESC

B47

A19

Guidance notes for migrating companies: Notice and arrangements for payment of tax

SP2/90

Independent taxation: Mortgage interest relief: Time limit for marriedcouples' allocation of interest elections

SP8/89


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Inheritance Tax: The use of substitute forms SP2/93

Investigation settlements: Retirement annuities and personal pensionrelief

SP9/91

Legal entitlement and administrative practices SP6/95

Legal entitlement and administrative practices - Superseded by

SP6/95

SP1/80

Limitations of Inland Revenue advice to taxpayers - Replaced byInland Revenue Code of Practice No 10 ‘Information and advice’

published in May 1995

F1

Part disposals of land D1

Partnerships: Circumstances in which late elections will be accepted SP9/92

Replacement of business assets: Time limit D6

Repayment of tax to charities on covenanted and other income SP3/87

Section 707, ICTA 1988: Cancellation of tax advantages from certaintransactions in securities: Procedure for clearance in advance

SP3/80

Separate taxation of wife's earnings: Sections 187-288, ICTA 1988 -

Extension of time limits A25

Small companies' rate of Corporation Tax and corporation Tax startingrate

SP1/91

Tax returns SP4/91

Tax returns: The use of substitute forms SP5/87

Termination of life interest in settled property (Sections 71 and 72,TCGA 1992)

D10

The Electronic Lodgement Service 1/97

Time limit for an election for valuation on 6 April 1965 under paragraph17, Schedule 2, TCGA 1992 (paragraph 12, Schedule 5, CGTA 1979):Company leaving a group: Section 178, TCGA 1992 (Section 278,ICTA 1970)

D21

Unit trust and investment trust monthly savings schemes

superseded by SP2/97

SP3/89

Use of schedules in making personal tax returns SP5/83

Valuation of assets in respect of which Capital Gains Tax gifts holdoverrelief is claimed

SP8/92


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Part II. Statements issued before 18 July 1978

The statements are grouped under the following general subject headings:




D. Statements relating to tax on Capital Gains (individuals and companies)

E. Statements relating to Inheritance Tax (also applicable where tax charged is CapitalTransfer Tax)

F. Miscel laneou s


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A1. Deeds of covenant

A guidance booklet about tax repayment claims on deeds of covenant is available from HMRevenue and Customs - Centre for Non-Residents, St John's House, Merton Road, Bootle,Merseyside, L69 9BB.

A2. Settlements: Part XV, ICTA 1988 (Formerly Part XVI ICTA 1970)

A3. Barristers: The cash basis - Obsolete. See now S48, FA 1998

A4. Partnerships: Change in membership

A5. Covenants in favour of charities: Repayment procedure

New repayment procedures were introduced on 1 July 1992. A booklet explaining them isavailable from - HM Revenue and Customs Centre for Non-Residents, St John's House, MertonRoad, Bootle, Merseyside L69 9BB

A6. Employment Income: VAT

The introduction of VAT on 1 April 1973 affected, in some instances, the amount of theemoluments chargeable to income tax under Schedule E, and the amount to which the PAYE

procedure should be applied. The main circumstances in which this situation will arise aresummarised below, and it is anticipated that all of the relevant information will be available to the

employer in the records which he will maintain for general VAT purposes.

1. Expenses incurred by employees etc and reimbursed by their employer The amount to be entered by an employer on his return of expenses payments on Forms P9D andP11D, or by an employee etc when claiming a deduction for expenses, should include any amount

paid in respect of VAT, which is reimbursed, whether or not the employer may subsequentlyrecover all or part of that VAT by repayment or set-off.

2. Benefits etc Where a director or employee is liable to income tax in respect of payments made to him or onhis behalf by his employer or in respect of expenses incurred by the employer in providing himwith a benefit the liability is on the full amount of the expenditure incurred, inclusive of VAT.This is so whether or not the employer may subsequently recover all or part of the VAT byrepayment or set-off.

3. Sums paid for services to certain professional persons Section 94 (4), VATA 1994 provides that a person who, in the course of carrying on a trade,

profession or vocation, accepts an office, other than a public office, is subject to VAT in respectof any services supplied by him as the holder of the office.

Where the earnings payable to such a person are subject to tax as employment income, deductibleunder PAYE, and also to VAT, the earnings to which PAYE is applied should not include VATelement of any payment.

A7. Benefits in kind and VAT


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A8. Stock dividends

There are special rules when share capital is issued to an individual, personal representative ortrustee of an accumulation or discretionary trust in the form of a stock dividend (Sections 249 to251 ICTA 1988). Such issues are usually made as an alternative to a cash dividend. The recipientis treated as having received income which has borne an amount of income tax. The amount ofthat income is the sum of either the relevant cash dividend or the market value of the sharecapital, plus the tax which the income is treated as having borne. For this purpose the amount ofthe cash dividend is used unless that amount is substantially greater or substantially less than themarket value of the share capital (Section 251(2)(a)). In interpreting ‘substantially greater or

substantially less’, the practice of HM Revenue and Customs is generally to use the market valueof the share capital when that value exceeds the amount of the cash dividend by 15 per cent ormore of the market value of the share capital, or when that value is less than the amount of thecash dividend by 15 per cent or more of the market value of the share capital. However, HMRevenue and Customs is normally prepared to use the amount of the cash dividend when thedifference between the market value of the share capital and the cash dividend is no more thanone or two percentage points greater than 15 per cent. In other cases, the amount of the cashdividend is used.

A9. Schedule E assessments 1995/96 and earlier: Repayment supplement – Obsolete

A10. Airline pilots: Residence: Incidental duties – withdrawn with effect from 6 April

2009

A11. Informal end of year adjustments

A12. Assessing tolerance

A13. Completion of return forms by attorneys

Section 8(2) TMA 1970 requires that every return should include ‘a declaration by the personmaking the return to the effect that the return is to the best of his knowledge correct andcomplete’. For tax years before the introduction of income tax self assessment (1995/6 andearlier) Section 42(5) of that Act provided for a ‘declaration’ by the person making the claim.

The Commissioners for Her Majesty’s Revenue and Customs consider that the obligation to makedeclarations under these Sections is within the class of statutory duties which the person makingthe return of income, or the claim, cannot delegate. Accordingly, it is the normal practice to insistthat the return of income or claim should be signed by the taxpayer or claimant personally, andnot by his attorney.

However, HM Revenue and Customs- HM Revenue and Customs recognise that there may bedifficulties where, owing to the age or physical infirmity of the taxpayer, he is unable to copeadequately with the management of his affairs or where for the same reason the taxpayer's generalhealth might suffer if he were troubled for a personal signature. In such special circumstances theRevenue will be willing to consider the matter sympathetically and where possible accept thesignature of an attorney who has full knowledge of the taxpayer's affairs.

A14. Delay in rendering tax returns: Interest charge and penalties

A15. Benefits in kind: Section 64 FA 1976


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A16. Living expenses abroad: Schedule D Cases I and II

Where an individual who is resident in the UK and assessable under Case I or II of Schedule D inrespect of a trade, profession or vocation (either alone or in partnership) spends time abroad on

business, the costs of living abroad personal to him will not be disallowed under Section 74(1)(a)or (b) ICTA 1988 if the absence abroad is for the purpose of the trade, profession or vocation.Private expenditure e.g. on holidays taken in the course of a business trip will not be allowed.Living expenses are regarded as including the cost of accommodation, food and drink attributableto the individual, trader or partner. If he is accompanied by his family or other dependants thecosts attributable to them will not be allowed.

A17. Earnings for work done abroad

A18. Partnerships and retirement annuity relief

A19. Furnished lettings: Wear and tear allowance - Replaced by ESC B47

A20. Case V Schedule D Losses - Re-classified as ESC B25

A21. Temporary workers engaged through foreign agencies

A22. Solicitors' deposit interest

A23. Correspondence with married women

A24. Benefits in kind: Scholarship for employees' children

A25. Separate taxation of wife's earnings: Section 287-288, ICTA 1988: Extension of timelimits – Obsolete

A26. Capital allowances on machinery and plant: Amendment of claim by an individual

trader - Rendered Obsolete by the introduction of self-assessment

A27. Accounts on a cash basis - Obsolete. See now S 42 ff FA98 -

A28. Accountancy expenses - Superseded by SP16/91

A29. Tax treatment of directors' fees received by professional partnerships - Reclassified

as ESC A37.

A30. Settlements: Benefit to settlor's future spouse

A31. Reimbursement of taxpayers' expenses - Replaced By Code of Practice 1 ‘Mistakes

by HM Revenue and Customs’ published on 17 February 1993.

A32. Goods taken by traders for personal consumption

The case of Sharkey v Wernher 1955 36TC 275 establishes the principle that where a trader takesstock from his business for private use or enjoyment or disposes of stock otherwise by sale in thenormal course of trade, the transfer should be dealt with for taxation purposes as if it were a saleat market value. Inspectors of Taxes have been authorised to take a reasonably broad view inapplying this principle.

The decision is not considered to apply to:


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a. services rendered to the trader personally or to his household which should be dealt within accordance with Section 74(1)(b) ICTA 1988;

b. the value of meals provided for proprietors of hotels, boarding houses, restaurants etc andmembers of their families which should also be dealt with on the basis that Section74(1)(b) ICTA applies;

c. expenditure incurred by a trader on the construction of an asset which is to be used as afixed asset in the trade.

A33. Relief for interest payments: Loans applied in acquiring an interest in a partnership(ICTA 1970, Section 59; FA 1969 Section 21; FA 1974, Schedule I paragraphs 11

and 12; ICTA 1988, Sections 362 and 363).

The –commissioners for Her Majesty’s Revenue and Customs are advised that the above provisions extend to salaried partners in a professional firm who are allowed independence ofaction in handling the affairs of clients and generally so to act that they will be indistinguishablefrom general partners in their relations with clients.

A34. Relief for interest payments: Loans for purchase or improvement of land: Inherited

properties (ICTA 1970, Section 57; FA 1969 Section 19; FA 1972, Section 75 and

Schedule 9; FA 1974, Section 19 and Schedule 1; ICTA 1988, Sections 353 and 354).

Where a property subject to mortgage passes from A to B under a will or on intestacy, then if Awas entitled to tax relief for the mortgage interest B will also be so entitled; and B will also beentitled (while he remains the owner of the property) to relief for the interest on a fresh loan,whether secured on the property or not, so far as applied in paying off the inherited mortgage. If,

however, A was not entitled to relief for the mortgage interest (because the mortgage moneyswere not used for a qualifying purpose), B will not be entitled to relief either for that interest orfor interest on a fresh loan raised to pay off the mortgage.


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B1. Treatment of VAT

A. Income Tax and Corporation Tax

1. A person carrying on a business who is not a taxable person for VAT.

This broadly covers persons whose output is wholly exempt from VAT and those whose taxable

output (including that which is zero-rated) does not exceed a certain limit each year. (This limitis increased periodically.)

Such persons will suffer VAT on much of their business expenditure. Where an item ofexpenditure is allowable as a deduction in computing income for income tax or corporation tax

purposes, the VAT related to that expenditure will also be allowable. If the expenditure qualifiesfor capital allowances, those allowances will be based on the cost inclusive of the related VAT.

2. A taxable person for VAT whose output is wholly taxable (whether at the standardrate of VAT or zero-rated)

There is no essential difference for this purpose between taxable and zero-rated output. It isexpected that in general a VAT account will be kept on the lines recommended in the HMCustoms and Excise Notice No. 700 setting VAT on outputs against VAT on inputs andaccounting for (or reclaiming) the difference. In computing income for direct tax purposes inthese circumstances it would be correct to take into account both income and expenditureexclusive of the related VAT. VAT on inputs is set off whether it relates to capital or revenue

expenditure and it would follow that capital allowances would be determined upon the costexclusive of VAT. There are certain categories of VAT on inputs which are non-deductible -notably that relating to the cost of motor-cars and entertaining. This VAT will no doubt beincluded in the accounts of the business as part of the expenditure to which it relates. So far asthe motor-cars are concerned capital allowances will be computed on the cost inclusive of theVAT and the entertaining expenditure which is not allowed as a deduction for direct tax purposeswill be the expenditure inclusive of VAT. If a trading debt becomes bad it may well include theVAT related to the sale. To the extent that this tax has been accounted for to HM Customs &Excise and cannot be recovered from them, the full amount of the debt including VAT may beallowed as a trading expense for direct taxation purposes.

Where a trader does not maintain a separate VAT account the adjustments to be made incomputing income and capital allowances for direct taxation purposes would be such as toachieve the corresponding result.

3. A partly exempt person.

As explained in HM Customs and Excise Notice No. 706, a taxable person whose output is partlyexempt and partly taxable may set off only part of his VAT on inputs against his VAT on outputs.In such a case the computation of income for direct tax purposes will follow the general

principles set out in 1 and 2 above. The VAT on inputs which cannot be set off may comprise twoelements:

(a) that which is non-deductible because it relates to motor-cars or to business entertainment;and

(b) that which is referable to the exempt output.


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The treatment for direct tax purposes of non-deductible VAT on inputs under (a) will be the sameas for a wholly taxable person, as explained above. VAT on inputs within (b) should be allocatedto the categories of expenditure giving rise to it, and its treatment in computing income for directtax purposes will be the same as the treatment of the expenditure to which it relates.

In many cases the extent to which a partly exempt person ultimately bears VAT on goods andservices supplied to him will be determined in accordance with a working arrangement with HMCustoms and Excise (such as the special schemes for retailers set out in Notice No. 727). Itfollows that some approximation may be necessary in allocating the VAT ultimately borne to the

various items of expenditure to which it was related. Inspectors of Taxes will be prepared toconsider any reasonable arrangements for allocation which follow the general principles set outabove.

In certain circumstances traders may also decide that the cost of keeping records of some items ofVAT on inputs is excessive in relation to the ultimate set-off to be obtained and will not make anyclaim. Where a trader ultimately bears additional VAT in consequence this may be treated asa part of the relevant expense or capital outlay for direct tax purposes.

B. Capital Gains Tax

If VAT has been suffered on the purchase of an asset but that VAT is available for set-off in the purchaser's VAT account, the cost of the asset for capital gains tax purposes will be the costexclusive of VAT. Where no VAT set-off is available, the cost will be inclusive of the VAT

borne. Where an asset is disposed of, any VAT chargeable will be disregarded in computing thecapital gain.

B2. Stock relief: Treatment of VAT

B3. Stock relief: Withdrawal of claim

B4. Stock and work in progress: Changes in the basis of valuing long term contract

work in progress

B5. Stock and work in progress: Changes in accountancy practice (SSAP9)

B6. Goods sold subject to reservation of title

Certain traders sell goods on special terms whereby they retain the title to the goods until payment is made. The accountancy bodies have advised their members that, for accountancy purposes, if the circumstances indicate that the reservation of title is regarded by the parties ashaving no practical relevance except in the event of the insolvency of the buyer, the goods should,notwithstanding the strict legal position, normally be treated as purchases in the accounts of the

buyer and sales in the accounts of the supplier.

HM Revenue and Customs- HM Revenue and Customs has agreed that for sales subject toreservation of title the above recommended accountancy treatment will be accepted for tax

purposes provided that both parties to the contract follow it.

The sale of goods subject to reservation of title as described above is to be distinguished from thesupply of goods as consignment stocks e.g. on a sale or return basis. Goods supplied asconsignment stocks are normally to be treated as stock in the hands of the supplier until disposedof by the consignee.


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B7. Stock relief: Completed work in progress of builders


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C1. Lotteries and football pools

Where a football pool or small lottery is to be run by a supporters club or other society on the basis that a stated percentage or fraction of the cost of each ticket will be given to a club or bodyconducted and established wholly or mainly for one or more of the purposes specified in Section5(1) of the Lotteries and Amusements Act 1976, HM Revenue and Customs will accept that thedonation element as stated in the cost of each ticket may be excluded in computing for tax

purposes the profits of the trade of promoting the pool or lottery.

A football pools run by a supporters' club had its appeal against tax assessment upheld by theSpecial Commissioners. When this question was raised in Parliament on 14 December 1956, MrHenry Brooke said:

‘The football pool in this case was organised on the basis that a specified percentage of the sumreceived from each competitor would be paid as a gift to the football club. The SpecialCommissioners have held that this donation element formed no part of the receipts to be takeninto account in computing for income tax purposes the profits of the trade of promoting the pool.This decision will be accepted by the Revenue as governing all cases where a football pool orsmall lottery is run by a supporters' club or other society on the basis that a stated percentage orfraction of the cost of each ticket or chance will be given to a club or body established andconducted wholly or mainly for one or more of the purposes specified in subsection (1) of Section1 of the Small Lotteries and Gaming Act 1956.’

C2. Group relief: Section 412(1)(c) ICTA 1988

C3. Close companies: Paragraph 3(1)(a) Schedule 19 ICTA 1988 ‘reasonable time’

C4. Close companies: General statement

C5. Interest paid to a bank in the UK on a loan made in foreign currency - Replaced by

SP1/95

C6. Group relief: Section 403C ICTA 1988

Under Section 403C ICTA 1988 a consortium member's share in a consortium company for anyaccounting period is measured by reference to the lowest of the member's percentage interests inthe share capital, profits and assets of the consortium company. Where any of those percentageshas varied the legislation says that the average percentage over the accounting period concernedshould be taken. In determining that average percentage, HM Revenue and Custom’s practice isthat a weighted average taking into account the length of time involved should be used.

C7. Group relief: Section 410 ICTA 1988

C8. Taxation of profits of subsidiaries of UK companies

C9. Company taxation: Interest paid in foreign currency

C10. General rules as to deductions not allowable: Valuation fees for compliance with

Companies Act 1985, Schedule 7, Paragraph 1(2)


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Costs incurred by companies for the purpose of valuations made to comply with Schedule 7,Paragraph 1(2) of the Companies Act 1985 are regarded as allowable expenses under Sections74(1)(a) and 75(1) of ICTA 1988.

C11. Claims to loss relief under section 393(1) ICTA 1988


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D. Statements relating to tax on Capital Gains (individual and companies)

D1. Part disposals of land

To save work for taxpayers and their advisers where part of an estate is disposed of (e.g. on thesale of a field) The Commissioners for Her Majesty’s Revenue and Customs will accept that thecost of the part can be calculated on the alternative basis set out in this note instead of under thegeneral rule which requires the unsold part to be valued in order to apportion the total cost of theestate. Instructions about the alternative basis have been issued to Inspectors of Taxes who will

be glad to give information about its application to particular cases.

Under the alternative basis the part disposed of will be treated as a separate asset and any fair andreasonable method of apportioning part of the total cost to it will be accepted - e.g. a reasonablevaluation of that part at the acquisition date. Where the market value at 6 April 1965 or 31 March1982 is to be taken as the cost, a reasonable valuation of the part at that time will similarly beaccepted.

The cost of the part disposed of will be deducted from the total cost of the estate (or balance ofthe total cost) to determine the cost of the remainder of the estate; thus the total of the separateamounts adopted for the parts will not exceed the total cost. The cost attributed to each part mustalso be realistic in itself.

The taxpayer can always require that the general rule should be applied (except in cases alreadysettled on the alternative basis). If he chooses the general rule it will normally be necessary toapply this rule to all subsequent disposals out of the estate; but where the general rule has beenapplied for a part disposal before the introduction of the alternative basis and it produced a result

broadly the same as under the alternative basis, the alternative basis may be used for subsequent

part disposals out of the estate.

So long as disposals out of an estate acquired before 6 April 1965 are dealt with on the alternative basis, each part disposal will carry a separate right to elect for acquisition at market value on 6April 1965. Similarly where part is sold with development value the mandatory valuation at 6April 1965 will apply only to that part. Even where the part is to be treated as acquired at marketvalue on 6 April 1965 or 31 March 1982, however, it will still be necessary to agree how much ofthe actual cost should be attributed to the part disposed of: first, to ensure that any allowable lossdoes not exceed the actual loss, and second, to produce a balance of total cost for subsequentdisposals.

The alternative basis will not apply to part disposals between 6 April 1967 and 22 July 1970where development value was involved; and in other cases the Commissioners for Her Majesty’sRevenue and Customs reserve the right to apply the general rule if they are not satisfied that theapportionments claimed are fair and reasonable.

Taxpayers who wish to adopt the alternative basis will still be able to claim under existing

statutory provisions that certain small disposals out of an estate should be deducted from costinstead of being assessed. The disposal proceeds will then be deducted from the total cost (or

balance of total cost) available for subsequent disposals.

D2. Superannuation funds

D3. Company liquidations: Shareholders' CGT

1. During the liquidation of a company the shareholders often receive more than onedistribution. For capital gains tax each distribution, other than the final one, is a part disposal ofhis shares by the shareholder, and the residual value of the shares has to be ascertained in order to


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attribute a proportion of the cost of the shares to the distribution (unless the Inspector of Taxesaccepts that the distribution is ‘small’ and can therefore be deducted from cost). It has beenrepresented to The Commissioners for Her Majesty’s Revenue and Customs that the making andformal agreement of these valuations is holding up the agreement of liabilities and that little ifany change in the total tax is involved in the majority of cases.

2. Where the shares of a company are unquoted at the date of the first or later interimdistribution, therefore, the Commissioners for Her Majesty’s Revenue and Customs are preparedto authorise Inspectors of Taxes to accept any valuation by the taxpayer or his agent of theresidual value of the shares at the date of the distribution, if the valuation appears reasonable andif the liquidation is expected to be completed within two years of the first distribution (and doesnot in fact extend much beyond that period). The valuation need not include a discount fordeferment; and if the distributions are complete before the capital gains tax assessment is made,the Revenue will accept that the residual value of shares in relation to a particular distribution isequal to the actual amount of the subsequent distributions. In the normal way the Revenue willnot raise the question of capital gains tax on an interim distribution until after 2 years from thecommencement of the liquidation unless the distribution, together with any previous distributions,exceeds the total cost of the shares.

3. Where time apportionment (shares acquired before 6 April 1965) applies to a case withinthe scope of this practice, the Commissioners for Her Majesty’s Revenue and Customs are

prepared to calculate the gain on each distribution by applying the time apportionment fraction asat the date of the first distribution without further adjustment under paragraph 16(8) Schedule 2TCGA 1992 (paragraph 11(8) Schedule 5 CGTA 1979).

D4. Short delay by owner occupier in taking up residence: Sections 222-224 TCGA 1992

(Sections 101-103 CGTA 1979) - Replaced by ESC D49

D5. Partnerships: Assets owned by individuals

D6. Replacement of business assets: Time limit

Where new town corporations and similar authorities acquire by compulsory purchase land fordevelopment and then immediately grant a previous owner a lease of the land until they are readyto commence building, the Commissioners for Her Majesty’s Revenue and Customs will be

prepared to extend the time limit for rollover relief under Sections 152-158 TCGA 1992 to 3years after the land ceases to be used by the previous owner for his trade, provided that there is aclear continuing intention that the sale proceeds will be used to acquire qualifying assets;assurances will be given in appropriate cases subject to the need to raise a protective assessmentif the lease extends beyond the statutory 6 year time limit for making assessments.This practice may be applied to all cases where the capital gains tax computations have not beensettled at 17 January 1973.

D7. Treatment of VAT

If VAT has been suffered on the purchase of an asset but that VAT is available for set-off in the purchaser's VAT account, the cost of the asset for CGT will be the cost exclusive of VAT.Where no VAT set-off is available, the cost will be inclusive of the VAT borne. Where an assetis disposed of, any VAT chargeable will be disregarded in computing the capital gain.

D8. Houses owned by occupants of tied accommodation

D9. Residence exemption: Separated couples


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D10. Termination of an interest in possession in settled property (Sections 71 and 72,

TCGA 1992)

1. Where an interest in possession in part of settled property terminates and the part can properly be identified with one or more specific assets, the –Commissioners for Her Majesty’sRevenue and Customs will accept that the deemed disposals and reacquisitions under Section 71and 72 Taxation of Chargeable Gains Act 1992 apply to those specific assets, and not to any partof the other assets comprised in the settled property. Corresponding treatment will apply where,within a reasonable period (normally three months) immediately following the termination,specific assets are appropriated by the trustees to give effect to the termination. In either case, thetreatment must be consistent with that adopted for Inheritance Tax purposes.

2. In particular, Inspectors will be prepared to agree with the trustees lists of assets properlyidentifiable with the termination of an interest in possession, and any such agreement will beregarded as binding on the Revenue and the trustees.

3. This practice applies on any act or event which terminates an interest in possessionwhether voluntarily or involuntarily.

D11. Partnership: Assets owned by a partner

Provided that the other conditions of Sections 152-158 TCGA 1992 (Sections 115-121 CGTA1979) are satisfied, relief is available to the owner of assets which are let to a trading or

professional partnership of which he is a member and which are used for the purposes of the partnership trade or profession.

D12. Partnerships

This statement of practice was originally issued by The Commissioners for Her Majesty’sRevenue and Customs on 17 January 1975 following discussions with the Law Society and theAllied Accountancy Bodies on the Capital Gains Tax treatment of partnerships. This statementsets out a number of points of general practice which have been agreed in respect of partnershipsto which TCGA92/S59 applies.

The enactment of the Limited Liability Partnership Act 2000, has created, from April 2001, theconcept of limited liability partnerships (as bodies corporate) in UK law. In conjunction with this,new Capital Gains Tax provisions dealing with such partnerships have been introduced throughTCGA92/S59A. TCGA92/S59A (1) mirrors TCGA92/S59 in treating any dealings in chargeableassets by a limited liability partnership as dealings by the individual members, as partners, forCapital Gains Tax purposes. Each member of a limited liability partnership to which S59A (1)applies has therefore to be regarded, like a partner in any other (non-corporate) partnership, asowning a fractional share of each of the partnership assets and not an interest in the partnershipitself.

This statement of practice has therefore been extended to limited liability partnerships whichmeet the requirements of TCGA92/S59A (1), such that capital gains of a partnership fall to becharged on its members as partners. Accordingly, in the text of the statement of practice, allreferences to a ‘partnership’ or ‘firm’ include reference to limited liability partnerships to whichTCGA92/S59A (1) applies, and all references to ‘partner’ include reference to a member of alimited liability partnership to which TCGA92/S59A (1) applies.

For the avoidance of doubt, this statement of practice does not apply to the members of a limitedliability partnership which ceases to be ‘fiscally transparent’ by reason of its not being, or its nolonger being, within TCGA92/S59A (1).


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1. VALUATION OF A PARTNER’S SHARE IN A PARTNERSHIP ASSET

Where it is necessary to ascertain the market value of a partner's share in a partnership asset forCapital Gains Tax purposes, it will be taken as a fraction of the value of the total partnershipinterest in the asset without any discount for the size of his share. If, for example, a partnershipowned all the issued shares in a company, the value of the interest in that holding of a partnerwith a one-tenth share would be one-tenth of the value of the partnership's 100 per cent holding.

2. DISPOSALS OF ASSETS BY A PARTNERSHIP

Where an asset is disposed of by a partnership to an outside party each of the partners will betreated as disposing of his fractional share of the asset. In computing gains or losses the proceedsof disposal will be allocated between the partners in the ratio of their share in asset surpluses atthe time of disposal. Where this is not specifically laid down the allocation will follow the actualdestination of the surplus as shown in the partnership accounts; regard will of course have to be

paid to any agreement outside the accounts. If the surplus is not allocated among the partners but,for example, put to a common reserve, regard will be had to the ordinary profit sharing ratio inthe absence of a specified asset-surplus-sharing ratio. Expenditure on the acquisition of assets bya partnership will be allocated between the partners in the same way at the time of the acquisition.This allocation may require adjustment, however, if there is a subsequent change in the

partnership sharing ratios (see paragraph 4).

3. PARTNERSHIP ASSETS DIVIDED IN KIND AMONG THE PARTNERS

Where a partnership distributes an asset in kind to one or more of the partners, for example ondissolution, a partner who receives the asset will not be regarded as disposing of his fractionalshare in it. A computation will first be necessary of the gains which would be chargeable on the

individual partners if the asset has been disposed of at its current market value. Where this resultsin a gain being attributed to a partner not receiving the asset the gain will be charged at the timeof the distribution of the asset. Where, however, the gain is allocated to a partner receiving theasset concerned there will be no charge on distribution. Instead, his Capital Gains Tax cost to becarried forward will be the market value of the asset at the date of distribution as reduced by theamount of his gain. The same principles will be applied where the computation results in a loss.

4. CHANGES IN PARTNERSHIP SHARING RATIOS

An occasion of charge also arises when there is a change in partnership sharing ratios includingchanges arising from a partner joining or leaving the partnership. In these circumstances a

partner who reduces or gives up his share in asset surpluses will be treated as disposing of part ofthe whole of his share in each of the partnership assets and a partner who increases his share will

be treated as making a similar acquisi tion. Subject to the qualifications mentioned at 6 and 7 below the disposal consideration will be a fraction (equal to the fractional share changing hands)of the current balance sheet value of each chargeable asset provided there is no direct payment ofconsideration outside the partnership. Where no adjustment is made through the partnershipaccounts (for example, by revaluation of the assets coupled with a corresponding increase ordecrease in the partner's current or capital account at some date between the partner's acquisitionand the reduction in his share) the disposal is treated as made for a consideration equal to hisCapital Gains Tax cost and thus there will be neither a chargeable gain nor an allowable loss atthat point. A partner whose share reduces will carry forward a smaller proportion of cost to setagainst a subsequent disposal of the asset and a partner whose share increases will carry forward alarger proportion of cost.

The general rules in TCGA92/S42 for apportioning the total acquisition cost on a part-disposal ofan asset will not be applied in the case of a partner reducing his asset-surplus share. Instead, thecost of the part disposed of will be calculated on a fractional basis.


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8. ANNUITIES PROVIDED BY PARTNERSHIPS

A lump sum which is paid to a partner on leaving the partnership or on a reduction of his share inthe partnership represents consideration for the disposal by the partner concerned of the whole or

part of his share in the partnership assets and will be subject to the rules in 6 above. The sametreatment will apply when a partnership buys a purchased life annuity for a partner, the measureof the consideration being the actual costs of the annuity.

Where a partnership makes annual payments to a retired partner (whether under covenant or not)the capitalised value of the annuity will only be treated as consideration for the disposal of his

share in the partnership assets under TCGA92/S37 – (3), if it is more than can be regarded as areasonable recognition of the past contribution of work and effort by the partner to the partnership. Provided that the former partner had been in the partnership for at least ten years anannuity will be regarded as reasonable for this purpose if it is no more than two-thirds of hisaverage share of the profits in the best three of the last seven years in which he was required todevote substantially the whole of this time to acting as a partner. In arriving at a partner's share ofthe profits regard will be had to the partnership profits assessed before deduction of any capitalallowances or charges. The ten year period will include any period during which the partner was amember of another firm whose business has been merged with that of the present firm. For lesser

periods the following fractions will be used instead of two-thirds:

Complete years in partnership Fraction

1 – 5 1/60 for each year6 8/607 16/608 24/60

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Where the capitalised value of an annuity is treated as consideration received by the retired partner, it will also be regarded as allowable expenditure by the remaining partners on theacquisition of their fractional shares in partnership assets from him.

9. MERGERS

Where the members of two or more existing partnerships come together to form a new one, theCapital Gains Tax treatment will follow the same lines as that for changes in partnership sharingratios. If gains arise for reasons similar to those covered in 5 and 6 above, it may be possible forroll-over relief under TCGA92/S152 to S158 to be claimed by any partner continuing in the

partnership insofar as he disposes of part of his share in the assets of the old firm and acquires ashare in other assets put into the ‘merged’ firm. Where, however, in such cases the considerationgiven for the shares in chargeable assets acquired is less than the consideration for those disposedof, relief will be restricted under TCGA92/S153.

10. SHARES ACQUIRED IN STAGES

Where a share in a partnership is acquired in stages wholly after 5 April 1965, the acquisitioncosts of the various chargeable assets will be calculated by pooling the expenditure relating toeach asset. Where a share built up in stages was acquired wholly or partly before 6 April 1965the rules in TCGA92/SCH2/PARA18, will normally be followed to identify the acquisition costof the share in each asset which is disposed of on the occasion of a reduction in the partnership'sshare; that is, the disposal will normally be identified with shares acquired on a ‘first in, first out’

basis. Special consideration will be given, however, to any case in which this rule appears to produce an unreasonable result when applied to temporary changes in the shares in a partnership,


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for example those occurring when a partner's departure and a new partner's arrival are out of step by a few months.

11. ELECTIONS UNDER TCGA92/SCH2/PARA4

Where the assets disposed of are quoted securities eligible for a pooling election under paragraph4 of TCGA92/SCH2, partners will be allowed to make separate elections in respect of shares orfixed interest securities held by the partnership as distinct from shares and securities which theyhold on a personal basis. Each partner will have a separate right of election for his proportion ofthe partnership securities and the time limit for the purposes of Schedule 2 will run from the

earlier of –

a) the first relevant disposal of shares or securities by the partnership

and

b) the first reduction of the particular partner's share in the partnership assets after 19 March1968.

12. PARTNERSHIP GOODWILL AND TAPER RELIEF

This paragraph applies where the value of goodwill which a partnership generates in the conductof its business is not recognised in its balance sheet and where, as a matter of consistent practice,no value is placed on that goodwill in dealings between the partners. In such circumstances, the

partnership goodwill will not be regarded as a ‘fungible asset’ (and, therefore, will not be withinthe definition of ‘securities’ in section TCGA92/S104 (3) for the purpose of Capital Gains Taxtaper relief under TCGA92/S2A. Accordingly, on a disposal for actual consideration of any

particular partner’s interest in the goodwill of such a partnership, that interest will be treated asthe same asset (or, in the case of a part disposal, a part of the same asset) as was originallyacquired by that partner when first becoming entitled to a share in the goodwill of that

partnership.

The treatment described in the preceding paragraph will also be applied to goodwill acquired forconsideration by a partnership but which is not, at any time, recognised in the partnership balancesheet at a value exceeding its cost of acquisition nor otherwise taken into account in dealings

between partners. However, such purchased goodwill will continue to be treated for the purposeof computing capital gains tax taper relief as assets separate from the partnership’s self-generatedgoodwill. On a disposal or part disposal for actual consideration of an interest in such purchasedgoodwill by any particular partner, that interest shall be treated for taper relief purposes asacquired either on the date of purchase by the partnership or on the date on which the disposing

partner first became entitled to a share in that goodwill, whichever is the later.

D13. Asset of negligible value: Time limit for claims - Superseded by ESC D28

D14. Division of a company on a share for share basis - Superseded by SP5/85

D15. Accommodation let by owner-occupier - Superseded by SP14/80

D16. Interests in possession

D17. Finance Act 1965 Section 29(2)

D18. Value shifting: Section 30 TCGA 1992 (Section 26 CGTA 1979)


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The Revenue Law Committee of the Law Society raised with the Commissioners for HerMajesty’s Revenue and Customs a problem arising out of the widely drawn provisions of Section30, which problem was causing concern among those dealing with agricultural properties.

The Committee pointed out that there are instances where a farmer who owns the land he farmsmay decide to retire and may wish to hand over the farming business, possibly to his son, whileraising capital for himself. He therefore enters into two transactions:

(a) lease of the farm at a rack-rent to his son on normal agricultural terms; and

(b) sale of the freehold, subject to the lease to the son, to an outside investor, often aninstitutional buyer.

The market price paid by the institutions is for the tenanted value of the property and this is thevalue on which the retiring farmer pays capital gains tax. He will undoubtedly have reduced thevalue of his asset by the grant of the tenancy and as a result paid capital gains tax on a tenantedrather than vacant possession value basis.

The Commissioners for Her Majesty’s Revenue and Customs have now confirmed that in the precise circumstances mentioned above they would take the view that Section 30 cannot andshould not apply and accordingly that they do not regard that section as giving rise to anincreased charge to capital gains tax when a farmer enters into the two transactions mentioned.

D19. Replacement of business assets in groups of companies

To obtain the benefit of Section 175 TCGA 1992, the company making the gain during thereplacement of business assets by a group of companies must be a member of a group and the

company carrying out the complementary transaction must be a member of the same group, asdefined by Section 170(2) TCGA 1992, when the transaction is carried out.

The Consultative Committee of Accountancy Bodies raised with HM Revenue and Customs the problem of defining the membership of a group of companies for the purpose of replacement of business assets bearing in mind that the replacement acquisition may take place at any timewithin a period beginning twelve months before and ending three years after the disposal (or suchlonger period as the Commissioners for Her Majesty’s Revenue and Customs may be notice inwriting allow).

The Revenue take the view that to obtain the benefit of s175 the company making the gain or thequalifying replacement must be a member of a group and the company carrying out thecomplementary transaction must be a member of the same group when that transaction is carriedout. The concept of ‘same group’ is as defined in Section 170(10) TCGA 1992.

Thus, if company A makes a gain at a time when it is a member of the X group of companies thenthat gain may only be rolled over against an acquisition by company B if at the time of that

acquisition company B is a member of the X group.

Therefore, company B need not have been a member of the group at the time that company Amade the disposal but must be a member of the group by the time that company B makes itsacquisition. Similarly, company A must be a member of the group at the time that it makes itsdisposal but need not be a member of the group at the time that company B makes thecorresponding acquisition.

D20. Retirement relief: Change in business during 10 years before disposal


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D21. Time limit for an election for valuation on 6 April 1965 under Paragraph 17,

Schedule 2, TCGA 1992 (Paragraph 12 Schedule 5 CGTA 1979): Company leaving a

group: Sections 178 and 179 TCGA 1992 (Section 278 ICTA 1970)

The time limit for the making of an election for valuation on 6 April 1965 under Paragraph 17Schedule 2 TCGA 1992 is two years from the end of the year of assessment or accounting periodwithin which the disposal took place, or such further time as The Commissioners for HerMajesty’s Revenue and Customs may allow. The Commissioners for Her Majesty’s Revenue andCustoms will exercise their discretion under paragraph 17(3) to extend the time limit asappropriate where a company ceases to be a member of a group of companies and as a result achargeable asset acquired from another member of the group within the past six years is deemedto have been disposed of (and reacquired) immediately after the acquisition (Sections 178 and179 TCGA 1992).

D22. Transfer of business to a company - Superseded by ESC D22

D23. Non-resident company: Section 13, TCGA 1992

Where a United Kingdom participator in a non-resident company which would be a closecompany if resident in the United Kingdom is chargeable to capital gains tax on a proportion of acapital gain accruing to that company, tax credit relief may be given against United Kingdomcapital gains tax for the appropriate proportion of any overseas tax payable by the company in thecountry where it is resident in respect of its gain under Section 277 TCGA 1992; alternatively,under Section 278 TCGA 1992, the appropriate proportion of the overseas tax may be deductiblein computing the participator's gains to the extent that the overseas tax has not qualified for reliefunder Section 277 TCGA 1992.

D24. Initial repairs to property: Section 38(1), TCGA 1992

Expenditure on initial repairs to a property (including expenditure on decorations), undertaken inorder to put it into a fit state for letting and not allowable for the purposes of Schedule A, isregarded as allowable expenditure for capital gains tax purposes under Section 38(1) TCGA1992.


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E. Statements relating to Inheritance Tax (also applicable where tax charged is Capital

Transfer Tax) and Estate Duty

El. Powers of appointment

1. It is not necessary for the interests of individual beneficiaries to be defined. They can forinstance be subject to powers of appointment. In any particular case the exemption will dependon the precise terms of the trust and power concerned, and on the facts to which they apply. Ingeneral, however, the official view is that the conditions do not restrict the application of Section71 IHTA 1984 to settlements where the interests of individual beneficiaries are defined and

indefeasible.

2. The requirement of Section 71(1)(a) IHTA 1984 is that one or more persons will, on or before attaining a specified age not exceeding twenty five, become beneficially entitled to, or toan interest in possession in, the settled property or part of it. It is considered that settled propertywould meet this condition if at the relevant time it must vest for an interest in possession in somemember of an existing class of potential beneficiaries on or before that member attains 25. Theexistence of a special power of appointment would not of itself exclude Section 71 if neither theexercise nor the release of the power could break the condition. To achieve this effect might,however, require careful drafting.

3. The inclusion of issue as possible objects of a special power of appointment wouldexclude a settlement from the benefit of Section 71 if the power would allow the trustees to

prevent any interest in possession in the settled property from commencing before the beneficiaryconcerned attained the age specified. It would depend on the precise words of the settlement andthe facts to which they had to be applied whether a particular settlement satisfied the conditionsof Section 71(1). In many cases the rules against perpetuity and accumulations would operate to

prevent an effective appointment outside those conditions. However the application of Section 71is not a matter for a once-for-all decision. It is a question that needs to be kept in mind at alltimes when there is settled property in which no interest in possession subsists.

4. Also, a trust which otherwise satisfies the requirement of Section 71(1)(a) would not bedisqualified by the existence of a power to vary or determine the respective shares of members ofthe class (even to the extent of excluding some members altogether) provided the power isexercisable only in favour of a person under 25 who is a member of the class.

Annex To SPE1

Practical illustrations of Section 71 IHTA 1984. The examples set out below are based on asettlement for the children of X contingently on attaining 25, the trustees being required toaccumulate the income so far as it is not applied for the maintenance of X's children.

Example A

The settlement was made on X's marriage and he has as yet no children.

Section 71 IHTA 1984 will not apply until a child is born and that event will give rise toa charge for tax under Section 65 IHTA 1984.

Example B

The trustees have power to apply income for the benefit of X's unmarried sister.

Section 71 IHTA 1984 does not apply because the conditions of subsection(1)(b) are not met.


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Example C

X has power to appoint the capital not only among his children but also among his remoter issue.

Section 71 IHTA 1984 does not apply (unless the power can be exercised only in favourof persons who would thereby acquire interests in possession on or before attaining age25). A release of the disqualifying power would give rise to a charge for tax underSection 65 IHTA 1984. Its exercise would also give rise to a charge under Section 65IHTA 1984.

Example D

The trustees have an overriding power of appointment in favour of other persons.

Section 71 IHTA 1984 does not apply (unless the power can be exercised only in favourof persons who would thereby acquire interests in possession on or before attaining age25). A release of the disqualifying power would give rise to a charge for tax underSection 65 IHTA 1984. Its exercise would also give rise to a charge under Section 65IHTA 1984.

Example EThe settled property has been revocably appointed to one of the children contingently on hisattaining 25 and the appointment is now made irrevocable.

If the power to revoke prevents Section 71 IHTA 1984 from applying (as it would forexample, if the property thereby became subject to a power of appointment as at C or Dabove), tax will be chargeable under Section 65 IHTA 1984 when the appointment ismade irrevocable.

Example FThe trust to accumulate income is expressed to be during the life of the settlor.

As the settlor may live beyond the 25th birthday of any of his children, the trust does notsatisfy the condition in subsection (1)(a) and Section 71 IHTA 1984 does not apply.

E2. Powers of advancement

E3. Superannuation schemes

1. This Statement clarifies the inheritance tax liability of benefits payable under pensionschemes.

2. No liability to inheritance tax arises in respect of benefits payable on a person's deathunder a normal pension scheme except in the circumstances explained immediately below. Nordoes a charge to inheritance tax arise on payments made by the trustees of a superannuationscheme within Section 151 IHTA 1984 in direct exercise of discretion to pay a lump sum death

benefit to any one or more of a member's dependants. It is not considered that pending theexercise of the discretion the benefit should normally be regarded as relevant property comprisedin a settlement so as to bring it within the scope of IHTA 1984 Part III. The protection of Section151 IHTA 1984 would not of course extend further if the trustees themselves then settled the

property so paid.

3. Benefits are liable to inheritance tax if:

(a) they form part of the freely disposable property passing under the will or intestacy of adeceased person. This applies only if the executors or administrators have a legallyenforceable claim to the benefits: if they were payable to them only at the discretion of


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the trustees of the pension fund or some similar persons they are not liable to inheritancetax);

or

(b) the deceased had the power, immediately before the death, to nominate or appoint the benefits to any person including his dependants.

4. In these cases the benefits should be included in the personal representatives’ account(schedule of the deceased’s assets) which has to be completed when applying for a grant of

probate or letters of administration. The inheritance tax (if any) which is assessed on the personalrepresen

hmrc statement of practice.pdf

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