The following sections do not apply in calculating the profits of a trade on the cash basis—

• section 33 (capital expenditure),

• section 35 (bad and doubtful debts),

• sections 36 and 37 (unpaid remuneration),

• section 43 (employee benefit contributions: profits calculated before end of 9 month period),

• sections 48 to 50B (car hire).

For rules restricting deductions that apply only where profits are calculated on the cash basis, see the following—

• section 33A (cash basis: capital expenditure),

• section 51A (cash basis: interest payments on loans).

This section applies in relation to the calculation of the profits of a trade on the cash basis.

No deduction is allowed for an item of a capital nature incurred on, or in connection with, the acquisition or disposal of a business or part of a business.

No deduction is allowed for an item of a capital nature incurred on, or in connection with, education or training.

The useful life of an asset ends when it could no longer be of use to any person for any purpose as an asset of a business.

An intangible asset is “non-qualifying” unless, by virtue of having a fixed maximum duration, it must cease to exist before the end of 20 years beginning with the date on which the item of a capital nature is incurred.

An intangible asset is “non-qualifying” if it consists of a right, whether conditional or not, to obtain an intangible asset without a fixed maximum duration by virtue of which that asset must, assuming the right is exercised at the last possible time, cease to exist before the end of 20 years beginning with the date on which the item of a capital nature is incurred.

A reference to acquisition, provision, alteration or disposal includes potential acquisition, provision, alteration or (as the case may be) disposal.

In this section—

• “arrangement” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable);

• “building” includes any fixed structure;

• “car” has the same meaning as in Part 2 of CAA 2001 (see section 268A of that Act);

• “financial instrument” has the same meaning as in FRS 105;

• “FRS 105” means Financial Reporting Standard 105 (the Financial Reporting Standard applicable to the Micro-entities Regime), issued by the Financial Reporting Council in July 2015;

• “intellectual property” means—

  1. a

     any patent, trade mark, registered design, copyright or design right, plant breeders' rights or rights under section 7 of the Plant Varieties Act 1997,

  2. b

     any right under the law of a country or territory outside the United Kingdom corresponding or similar to a right within paragraph (a),

  3. c

     any information or technique not protected by a right within paragraph (a) or (b) but having industrial, commercial or other economic value, or

  4. d

     any licence or other right in respect of anything within paragraph (a), (b) or (c);

• “provision” includes creation, construction or acquisition;

• “the trader” means the person carrying on the trade.

If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.

If the debtor is bankrupt or insolvent, the whole of the debt is estimated to be bad for the purposes of subsection (1)(b), except so far as any amount may reasonably be expected to be received on the debt.

No deduction is allowed for the remuneration for the period of account unless it is paid before the end of the period of 9 months immediately following the end of the period of account.

If the remuneration is paid after the end of that 9 month period, a deduction for it is allowed for the period of account in which it is paid.

For the purposes of section 36 an amount charged in the accounts in respect of employees' remuneration includes an amount for which provision is made in the accounts with a view to its becoming employees' remuneration.

In this section and section 36—

• “employee” includes an office-holder and “employment” therefore includes an office, and

• “remuneration” means an amount which is or is treated as earnings for the purposes of ITEPA 2003.

This section applies if, in calculating for income tax purposes the profits of a trade of a person (“the employer”) for a period, a deduction would otherwise be allowable for the period in respect of employee benefit contributions made or to be made (but see subsection (4)).

No deduction is allowed under this section in respect of employee benefit contributions for a period of account which starts more than 5 years after the end of the period of account in which the contributions are made.

Subsection (2) is subject to subsections (1A) and (2AB).

Where subsection (3C) applies, no deduction is allowed for an amount in respect of the contributions for the period except so far as the amount is a qualifying amount (see subsection (3D)).

Subsection (3) is subject to subsections (1A) and (3B).

Where subsection (3C) applies, an amount disallowed under subsection (2) is allowed as a deduction for a subsequent period only so far as it is a qualifying amount.

This subsection applies where the provision of qualifying benefits out of, or by way of, the contributions gives rise both to an employment income tax charge and to an NIC charge.

An amount in respect of employee benefit contributions is a “qualifying amount” if the relevant tax charges are paid before the end of the relevant period (and are not repaid).

For the purposes of subsections (3C) and (3E), “employment income tax charge” and “NIC charge” have the meaning given by section 40(7).

In calculating for income tax purposes the profits of a trade, the deduction referred to in subsection (3G)(a) is to be treated as a deduction in respect of employee benefit contributions made or to be made (and is to be treated as not being a deduction in respect of employees' remuneration).

See also—

• section 39 (making of “employee benefit contributions”),

• section 40 (provision of qualifying benefits),

• section 41 (timing and amount of certain qualifying benefits),

• section 42 (provision or payment out of employee benefit contributions),

• section 43 (profits calculated before end of 9 month period), and

• section 44 (interpretation of sections 38 to 44).

For this purpose “employee benefit scheme” means a trust, scheme or other arrangement for the benefit of persons who are, or include, present or former employees of the employer F21 or persons linked with present or former employees of the employer .

Section 554Z1 of ITEPA 2003 applies for the purposes of subsection (2) but as if references to A were to a present or former employee of the employer.

Condition A is that the payment or transfer gives rise both to an employment income tax charge and to an NIC charge.

Condition C is that the payment or transfer is made in connection with the termination of the recipient's employment with the employer.

None of the conditions is met if the payment or transfer is by way of loan.

In this section—

• “the Contributions and Benefits Act” means—

  1. a

     the Social Security Contributions and Benefits Act 1992 (c. 4), or

  2. b

     the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c. 7),

• “employment income tax charge” means a charge to tax under ITEPA 2003 (whether on the recipient or on someone else), and

• “NIC charge” means a liability to pay national insurance contributions under section 6 (Class 1 contributions), section 10 (Class 1A contributions) or section 10A (Class 1B contributions) of the Contributions and Benefits Act.

If the provision of a qualifying benefit takes the form of a payment of money, the benefit, so far as Chapter 4 of Part 2 of ITEPA 2003 applies to the money, is provided for the purposes of section 38 when the money is treated as received for the purposes of that Chapter (applying the rules in section 18 of that Act (receipt of money earnings)).

If the provision of a qualifying benefit is a chargeable relevant step which does not involve a sum of money (see section 554Z(10) of ITEPA 2003) and is not covered by subsection (2), the amount provided for the purposes of section 38 is the cost of the relevant step (subject to subsection (5)).

This operates up to the total amount of the contributions reduced by the amount of any benefits or expenses previously provided or paid as mentioned in section 38(2)(a).

For the purposes of section 38(3)(a) any qualifying benefits provided by F6a scheme manager after the receipt by F7the scheme manager of employee benefit contributions are treated as being provided out of the contributions.

This operates up to the total amount of the contributions reduced by the amount of any benefits or expenses previously provided or paid as mentioned in section 38(2)(a) or (3)(a).

For the purposes of this section no account is taken of any other amount received or paid by the F8scheme manager .

This section applies if the profits of the trade are calculated before the end of the 9 month period mentioned in section 38(2).

It must be assumed, in making the calculation, that any benefits, expenses or contributions which are not provided, paid or made when the calculation is made will not be provided, paid or made before the end of that period.

But if the benefits, expenses or contributions are subsequently provided, paid or made before the end of that period, nothing in this section prevents the calculation being revised and any tax return being amended accordingly.

In this section and sections 38 to 43—

• “accident benefit scheme” means an employee benefit scheme under which benefits may be provided only by reason of a person's disablement, or death, caused by an accident occurring during the person's service as an employee of the employer,

• “employee benefit contribution” is to be read in accordance with section 39(1),

• “employee benefit scheme” has the meaning given by section F31 39(2) to (4) ,

• “the employer” is to be read in accordance with section 38(1),

• “employer-financed retirement benefits scheme” has the same meaning as in Chapter 2 of Part 6 of ITEPA 2003 (see section 393A of that Act), F62 but ignoring section 393B(2)(a) and (c) of that Act

• “qualifying benefits” is to be read in accordance with section 40,

• “qualifying expenses” includes any expenses of the third party (other than the provision of benefits to employees of the employer)—

  1. a

     which are incurred in operating the employee benefit scheme, and

  2. b

     which, if incurred by the employer, would be deductible in calculating for income tax purposes the employer's profits for any period, and

• F9“scheme manager” means a person who administers an employee benefit scheme (acting in that capacity).

A reference in this section and sections 38 to 43 to a person's employee includes the holder of an office under that person, and “employment” is to be read accordingly.

The general rule is that no deduction is allowed in calculating the profits of a trade for expenses incurred in providing entertainment or gifts in connection with the trade.

The general rule is subject to exceptions—

• for entertainment (see section 46), and

• for gifts (see section 47).

The prohibition in section 45 on deducting expenses incurred in providing entertainment does not apply in either of cases A and B.

The prohibition in section 45 on deducting expenses incurred in providing gifts does not apply in any of cases A, B, C and D.

The amount of the deduction which would otherwise be allowable is reduced by F3315%.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

In section 48—

• “a car that has low CO2 emissions” has the same meaning as in section 104AA of CAA 2001 (special rate expenditure: main rate car);

• “electrically propelled” has the meaning given in section 268B of that Act.

For this purpose “hire-purchase agreement” has the meaning given by section 998A of ITA 2007.

In this section F70... “new” means unused and not second-hand.

Section 48 does not apply to expenses incurred by a person (“the taxpayer”) on the hiring of a car if condition A or B is met.

For the purposes of this section, where arrangements for the hiring of a car include arrangements for the provision of a replacement car in the event that the first car is not available, the first car and any replacement car are to be treated as if they were the same car.

In this section (and section 50B) “arrangements” includes any arrangements, scheme or understanding of any kind, whether or not legally enforceable and whether involving a single transaction or two or more transactions.

This section only applies where one or more of the persons mentioned in subsection (1)(a) or (b) incurs the expenses under commercial arrangements (and such a person is referred to below as a “commercial lessee”).

In calculating the profits of a trade on the cash basis, no deduction is allowed for the interest paid on a loan.

This is subject to section 57B.

A tax year is a relevant one if the interest in respect of which the relief is given could, but for the relief, have been brought into account in calculating the profits of a trade of the tax year.

For the purposes of this section relief under F11section 383 of ITA 2007 is to be treated as given only when the claim for the relief can no longer be varied (whether on appeal or otherwise).

For a rule excluding relief under F11section 383 of ITA 2007 if interest on a debt or liability is brought into account in calculating the profits of a trade, see F12section 387(2) and (3) of that Act .

But this prohibition does not apply to an employer's contribution.

In calculating the profits of a trade, no deduction is allowed for any penalty or interest mentioned in the first column of the following table.

This is the table—

F59In calculating the profits of a trade, no deduction is allowed for any surcharge under section 59 of VATA 1994.

Section 33A(3) of CAA 2001 provides that no deduction is allowed in respect of certain expenditure on an integral feature of a building or structure (within the meaning of that section).

But section 33A(3) of CAA 2001 does not apply in calculating the profits of a trade on the cash basis.

“Rental rebate” means any sum payable to the lessee that is calculated by reference to the termination value of the asset.

Where the asset is acquired by the lessor in a transaction in relation to which an election is made under section 266 of CAA 2001 (election where predecessor and successor are connected persons), this section applies as if the successor had been the lessor at all material times and everything done to or by the predecessor had been done to or by the successor.

This section does not apply to a long funding finance lease (see section 148C).