Income Tax (Trading and Other Income) Act 2005

[F196A[F2Capital receipts under, or after leaving, cash basis]U.K.

[F3(1)This section applies in relation to a trade carried on by a person in two cases—

(a)Case 1 (see subsections (2) to (3A)), and

(b)Case 2 (see subsections (3B) to (3E)).

(2)Case 1 is a case in which conditions A and B are met.

(3)Condition A is that the person receives disposal proceeds or a capital refund in relation to an asset at a time when an election under section 25A (cash basis for trades) has effect in relation to the trade.

For the meaning of “disposal proceeds” and “capital refund” see subsections (3F) and (3G).

(3A)Condition B is that—

(a)an amount of capital expenditure (see subsection (3H)) relating to the asset has been brought into account in calculating the profits of the trade on the cash basis, or

(b)an amount of capital expenditure relating to the asset which—

(i)has been incurred (or treated as incurred) by the person before the tax year for which the person last entered the cash basis, and

(ii)is cash basis deductible in relation to that tax year (see section 96B(4)),

has been brought into account in calculating the profits of the trade for a tax year for which no election under section 25A had effect in relation to the trade.

(3B)Case 2 is a case in which—

(a)condition C is met, and

(b)condition D or E is met.

(3C)Condition C is that disposal proceeds or a capital refund arise to the person in relation to an asset at a time—

(a)when no election under section 25A has effect in relation to the trade, and

(b)which is after a time when such an election had had effect in relation to the trade.

(3D)Condition D is that an amount of capital expenditure relating to the asset—

(a)has been paid at a time when an election under section 25A had effect in relation to the trade,

(b)has been brought into account in calculating the profits of the trade on the cash basis, and

(c)on the assumption that an election under section 25A had not had effect at the time the expenditure was paid, would not have been qualifying expenditure.

(3E)Condition E is that an amount of capital expenditure relating to the asset has been brought into account in calculating the profits of the trade for a tax year—

(a)for which no election under section 25A had effect in relation to the trade, and

(b)which is before the tax year for which the person last entered the cash basis.

The reference in this subsection to expenditure brought into account does not include a reference to expenditure brought into account under CAA 2001 (see section 96B(5)) [F4except to the extent that it is expenditure in respect of which a capital allowance is made under Part 2A of that Act].

(3F)“Disposal proceeds” means—

(a)any proceeds arising from the disposal of an asset or any part of it,

(b)any proceeds arising from the grant of any right in respect of, or any interest in, the asset, or

(c)any amount of damages, proceeds of insurance or other compensation received in respect of the asset.

See also subsections (4) and (5) for circumstances in which a person is to be regarded as disposing of an asset.

(3G)“Capital refund” means an amount that is (in substance) a refund of capital expenditure relating to an asset.

(3H)“Capital expenditure” means expenditure of a capital nature incurred, or treated as incurred, on or in connection with—

(a)the provision, alteration or disposal of an asset, or

(b)the potential provision, alteration or disposal of an asset.

(3I)The disposal proceeds or capital refund mentioned in condition A or (as the case may be) condition C are to be brought into account as a receipt in calculating the profits of the trade.

(3J)In a case where only part of the total capital expenditure incurred, or treated as incurred, by the person in relation to the asset has been brought into account in calculating the profits of the trade (whether or not on the cash basis), the amount brought into account under subsection (3I) is proportionately reduced.

The reference in this subsection to expenditure brought into account includes a reference to expenditure brought into account under CAA 2001 (see section 96B(5)).

(3K)Subsection (3I) does not apply if the whole of the amount which would otherwise be brought into account under that subsection—

(a)has already been brought into account as a receipt in calculating the profits of the trade under this section,

(b)is brought into account as a receipt in calculating the profits of the trade under any other provision of this Part (except section 240D(3) (assets not fully paid for)), or

(c)is brought into account under any Part of CAA 2001 as a disposal value.

(3L)If part of the amount which would otherwise be brought into account under subsection (3I) has already been or is brought into account as mentioned in subsection (3K), subsection (3I) applies in relation to the remainder of that amount.]

(4)If—

(a)at any time the person ceases to use the asset or any part of it for the purposes of the trade, but

(b)the person does not dispose of the asset (or that part) at that time,

the person is to be regarded for the purposes of this section as disposing of the asset (or that part) at that time for an amount equal to the market value amount.

(5)If at any time there is a material increase in the person's non-business use of the asset or any part of it, the person is to be regarded for the purposes of this section as disposing of the asset (or that part) at that time for an amount equal to the relevant proportion of the market value amount.

(6)For the purposes of subsection (5)—

(a)there is an increase in a person's non-business use of an asset (or part of an asset) if—

(i)the proportion of the person's use of the asset (or that part) that is for the purposes of the trade decreases, and

(ii)the proportion of the person's use of the asset (or that part) that is for other purposes (the “non-business use”) increases;

(b)“the relevant proportion” is the difference between—

(i)the proportion of the person's use of the asset (or part of the asset) that is non-business use, and

(ii)the proportion of the person's use of the asset (or that part) that was non-business use before the increase mentioned in subsection (5).

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