Income Tax Act 2005

Income Tax (Trading and Other Income) Act 2005

Crown Copyright Acknowledged

Income Tax (Trading and Other Income) Act 2005

An Act to restate, with minor changes, certain enactments relating to income tax on trading income, property income, savings and investment income and certain other income; and for connected purposes.

[24th March 2005]

Be it enacted by the Queen’s most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:—

Part 1

Overview

1-	Overview of Act

(1)

This Act imposes charges to income tax under—

		(a)	Part 2 (trading income),
		(b)	Part 3 (property income),

		(c)	Part 4 (savings and investment income), and
		(d)	Part 5 (certain miscellaneous income).

	(2)	Those charges to tax have effect for the purposes of section 1(1) of ICTA (the general charge to income tax).
	(3)	Exemptions from those charges are dealt with in Part 6 (exempt income) but any Part 6 exemptions which are most obviously relevant to particular types of income are also mentioned in the provisions about those types of income.

	(4)	What is or is not mentioned in those provisions does not limit the effect of Part 6.
	(5)	This Act also contains—

		(a)	provision about rent-a-room relief and foster-care relief (see Part 7),
		(b)	special rules for foreign income (see Part 8),

		(c)	special rules for partnerships (see Part 9), and
		(d)	certain calculation rules and general provisions (see Part 10).

(6)

For abbreviations and defined expressions used in this Act, see section 885 and Schedule 4.

2-	Overview of priority rules

(1)

This Act contains some rules establishing an order of priority in respect of certain amounts which would otherwise—

		(a)	fall within a charge to income tax under two or more Chapters or Parts of this Act, or
		(b)	fall within a charge to income tax under a Chapter or Part of this Act and ITEPA 2003.

(2)

See, in particular—

		section 4 (provisions which must be given priority over Part 2),
		section 261 (provisions which must be given priority over Part 3),
		section 262 (priority between Chapters within Part 3),
		section 366 (provisions which must be given priority over Part 4),
		section 367 (priority between Chapters within Part 4),
		section 575 (provisions which must be given priority over Part 5), and
		section 576 (priority between Chapters within Part 5).

(3)

But the rules in those sections need to be read with other rules of law (whether in this Act or otherwise) about the scope of particular provisions or the order of priority to be given to them.

(4)

Section 171(2) of FA 1993 (profits of Lloyd’s underwriters charged only under Chapter 2 of Part 2 of this Act) is one example of another rule of law.

Part 2

Trading income

Chapter 1

Introduction

2-	Overview of Part 2

(1)

This Part imposes charges to income tax under—

		(a)	Chapter 2 (the profits of a trade, profession or vocation which meet the territorial conditions mentioned in section 6),
		(b)	Chapter 17 (amounts treated as adjustment income under section 228), and
		(c)	Chapter 18 (post-cessation receipts that are chargeable under this Part).

(2)

Part 6 deals with exemptions from the charges under this Part.

(3)

See, in particular, the exemptions under sections 777 (VAT repayment supplements) and 778 (incentives to use electronic communications).

(4)

The charges under this Part apply to non-UK residents as well as UK residents but this is subject to sections 6(2) and (3) and 243(3) and (4) (charges on non-UK residents only on UK income).

(5)

The rest of this Part contains rules relevant to the charges to tax under this Part.

(6)

This section needs to be read with the relevant priority rules (see sections 2 and 4).

4-	Provisions which must be given priority over Part 2

(1)

Any receipt or other credit item, so far as it falls within—

		(a)	Chapter 2 of this Part (receipts of trade, profession or vocation), and
		(b)	Chapter 3 of Part 3 so far as it relates to a UK property business,
			is dealt with under Part 3.

(2)

Any receipt or other credit item, so far as it falls within—

		(a)	this Part, and
		(b)	Part 2, 9 or 10 of ITEPA 2003 (employment income, pension income or social security income),
			is dealt with under the relevant Part of ITEPA 2003.

Chapter 2

Income taxed as trade profits

Charge to tax on trade profits

5-	Charge to tax on trade profits

Income tax is charged on the profits of a trade, profession or vocation.

6-	Territorial scope of charge to tax

	(1)	Profits of a trade arising to a UK resident are chargeable to tax under this Chapter wherever the trade is carried on.
	(2)	Profits of a trade arising to a non-UK resident are chargeable to tax under this Chapter only if they arise—

		(a)	from a trade carried on wholly in the United Kingdom, or
		(b)	in the case of a trade carried on partly in the United Kingdom and partly elsewhere, from the part of the trade carried on in the United Kingdom.

(3)

This section applies to professions and vocations as it applies to trades.

7-	Income charged

	(1)	Tax is charged under this Chapter on the full amount of the profits of the tax year.
	(2)	For this purpose the profits of a tax year are the profits of the basis period for the tax year.

	(3)	For the rules identifying the basis period for a tax year, see Chapter 15.
	(4)	This section is subject to Part 8 (foreign income: special rules).
	(5)	And, for the purposes of section 830 (meaning of “relevant foreign income”), the profits of a trade, profession or vocation arise from a source outside the United Kingdom only if the trade, profession or vocation is carried on wholly outside the United Kingdom.

8-	Person liable

The person liable for any tax charged under this Chapter is the person receiving or entitled to the profits.

Trades and trade profits

9-	Farming and market gardening

	(1)	Farming or market gardening in the United Kingdom is treated for income tax purposes as the carrying on of a trade or part of a trade (whether or not the land is managed on a commercial basis and with a view to the realisation of profits).
	(2)	All farming in the United Kingdom carried on by a person, other than farming carried on as part of another trade, is treated for income tax purposes as one trade.
	(3)	In the case of farming carried on by a firm, this rule is explained by section 859(1).

10-	Commercial occupation of land other than woodlands

	(1)	The commercial occupation of land in the United Kingdom is treated for income tax purposes as the carrying on of a trade or part of a trade.
	(2)	For this purpose the occupation of land is commercial if the land is managed—

		(a)	on a commercial basis, and
		(b)	with a view to the realisation of profits.

(3)

This section does not apply—

		(a)	to farming or market gardening (which is dealt with by section 9),
		(b)	if the land is being prepared for forestry purposes, or
		(c)	if the land comprises woodlands (which is dealt with by section 11).

11-	Commercial occupation of woodlands

	(1)	The commercial occupation of woodlands in the United Kingdom is not a trade or part of a trade for any income tax purpose.
	(2)	For this purpose the occupation of woodlands is commercial if the woodlands are managed—

		(a)	on a commercial basis, and
		(b)	with a view to the realisation of profits.

(3)

See also sections 267 and 768 (which, when read with this section, secure that profits or losses from the commercial occupation of woodlands in the United Kingdom are ignored for income tax purposes).

12-	Profits of mines, quarries and other concerns

	(1)	Profits or losses arising out of land in the case of a concern to which this section applies are calculated as if the concern were a trade.
	(2)	Any profits arising out of the land are charged to income tax as if the concern were a trade carried on in the United Kingdom.
		But this does not impose a charge to tax on a non-UK resident in the case of a concern outside the United Kingdom.

	(3)	Any losses arising out of the land are treated for the purposes of Chapter 1 of Part 10 of ICTA (loss relief) as losses of a trade carried on in the United Kingdom.
	(4)	The concerns to which this section applies are—

		(a)	mines and quarries (including gravel pits, sand pits and brickfields),
		(b)	ironworks, gasworks, salt springs or works, alum mines or works, waterworks and streams of water,
		(c)	canals, inland navigation, docks and drains or levels,

		(d)	rights of fishing,
		(e)	rights of markets and fairs, tolls, bridges and ferries,
		(f)	railways and other kinds of way, and
		(g)	a concern of the same kind as one specified in paragraph (b), (c), (d) or (e).

(5)

This section does not apply to a concern if section 10 (commercial occupation of land other than woodlands) applies to the occupation of the land out of which the profits or losses arise.

13-	Visiting performers

(1)

This section applies if an entertainer, sportsman or sportswoman of a prescribed description (a “performer”)—

		(a)	is non-UK resident in a tax year, and
		(b)	performs a relevant activity in the United Kingdom in the tax year.

	(2)	If a payment or transfer connected with the relevant activity is made, the performer is treated for income tax purposes as performing the relevant activity in the course of a trade, profession or vocation carried on in the United Kingdom.
	(3)	It does not matter whether the payment or transfer is made to the performer or anyone else.
	(4)	Subsection (2) does not apply—

		(a)	so far as the performer would otherwise be performing the relevant activity in the course of a trade, profession or vocation carried on in the United Kingdom, or
		(b)	if the relevant activity is performed in the course of an employment or office.

(5)

If a payment or transfer connected with the relevant activity is made to —

		(a)	a person other than the performer, and
		(b)	that person is of a prescribed description,
			the payment or transfer is treated for income tax purposes as made instead to the performer in the course of a trade, profession or vocation carried on in the United Kingdom.

(6)

Subsection (5) does not apply in such circumstances as may be prescribed.

(7)

If—

		(a)	income tax is chargeable on profits arising from payments or transfers (made to any person), and
		(b)	the payments or transfers are connected with the relevant activity,
			the tax is charged as if the payments or transfers were received in the course of a separate trade, profession or vocation (distinct from any other trade, profession or vocation carried on by the performer).

(8)

In this section and section 14—

		“payment” means a payment from which income tax is to be deducted under section 555(2) of ICTA,
		“prescribed” means prescribed by regulations,
		“regulations” means regulations made by the Treasury,
		“relevant activity” means an activity of a prescribed description, and
		“transfer” means a transfer in respect of which income tax is to be accounted for under section 555(3) of ICTA,
		and a payment or transfer is connected with a relevant activity if it has a connection of the prescribed kind with that activity.

14-	Visiting performers: supplementary

(1)

Regulations may provide—

		(a)	for the deduction, in calculating any profits of the performer arising from the payment or transfer, of expenses incurred by other persons in relation to the payment or transfer,
		(b)	that any liability to income tax (whether of the performer or anyone else) which would, apart from section 13(5), arise in relation to the payment or transfer is not to arise (or is to arise so far as prescribed).

(2)

Regulations may provide—

		(a)	for the apportionment of profits between different trades, professions or vocations of the performer,
		(b)	for the apportionment between different tax years of the profits arising from relevant activities of the performer,
		(c)	for losses made in any trade, profession or vocation of the performer to be deducted from or set off against the profits of another trade, profession or vocation of the performer,
		(d)	that prescribed provisions of the Income Tax Acts about losses, or about expenses, are not to apply (or are to apply with prescribed modifications) in prescribed circumstances relating to the performer.

(3)

References in this section to a trade, profession or vocation of the performer include references to the separate one referred to in section 13(7) as well as to any other carried on by the performer.

(4)

Regulations may—

		(a)	make provision generally for giving effect to section 13, and
		(b)	make different provision for different cases or descriptions of cases.

15-	Divers and diving supervisors

(1)

This section applies if—

		(a)	a person performs the duties of employment as a diver or diving supervisor in the United Kingdom or in any area designated by Order in Council under section 1(7) of the Continental Shelf Act 1964 (c. 29),
		(b)	the duties consist wholly or mainly of seabed diving activities, and
		(c)	any employment income from the employment would otherwise be chargeable to tax under Part 2 of ITEPA 2003.

(2)

The performance of the duties of employment is instead treated for income tax purposes as the carrying on of a trade in the United Kingdom.

(3)

For the purposes of this section the following are seabed diving activities—

		(a)	taking part as a diver in diving operations concerned with the exploration or exploitation of the seabed, its subsoil and their natural resources, and
		(b)	acting as a diving supervisor in relation to any such diving operations.

16-	Oil extraction and related activities

	(1)	If a person carries on any oil-related activities as part of a trade, those activities are treated for income tax purposes as a separate trade, distinct from all other activities carried on by the person as part of the trade.
	(2)	For this purpose the following are oil-related activities—

		(a)	oil extraction activities, and
		(b)	any activities consisting of the acquisition, enjoyment or exploitation of oil rights.

(3)

“Oil extraction activities” and “oil rights” have the meaning given by section 502(1) of ICTA.

Starting and ceasing to trade

16-	Effect of becoming or ceasing to be a UK resident

(1)

This section applies if—

		(a)	an individual carries on a trade wholly or partly outside the United Kingdom otherwise than in partnership, and
		(b)	the individual becomes or ceases to be UK resident.

(2)

The individual is treated for income tax purposes—

		(a)	as permanently ceasing to carry on the trade at the time of the change of residence, and
		(b)	so far as the individual continues to carry on the trade, as starting to carry on a new trade immediately afterwards.

(3)

But subsection (2) does not prevent a loss made before the change of residence from being set off under section 385 of ICTA against profits arising after the change.

(4)

This section applies to professions and vocations as it applies to trades.

(5)

In the case of a trade carried on by a firm, see sections 852(6) and (7) and 854(5).

18-	Effect of company starting or ceasing to be within charge to income tax

	(1)	This section applies if a company starts or ceases to be within the charge to income tax under this Chapter in respect of a trade.
	(2)	The company is treated for the purposes of this Part—

		(a)	as starting to carry on the trade when it starts to be within the charge, or
		(b)	as permanently ceasing to carry on the trade when it ceases to be within the charge.

Trading income and property income

19-	Tied premises

(1)

This section applies if —

		(a)	in the course of carrying on a trade a person (“the trader”) supplies, or is concerned in the supply of, goods sold or used on premises occupied by another person,
		(b)	the trader has an estate or interest in the premises,
		(c)	the estate or interest is dealt with as property employed for the purposes of the trade, and
		(d)	receipts and expenses in connection with the premises would otherwise be brought into account in calculating the profits of a property business of the trader.

	(2)	Both the receipts and expenses are instead brought into account in calculating the profits of the trade.
	(3)	Any apportionment of receipts or expenses that is necessary because—

		(a)	the receipts or expenses do not relate only to the premises, or
		(b)	the above conditions are met only in relation to part of the premises,
			is to be made on a just and reasonable basis.

20-	Caravan sites where trade carried on

(1)

This section applies if—

		(a)	a person (“the trader”) carries on material activities connected with the operation of a caravan site,
		(b)	the activities are, or are part of, a trade, and
		(c)	receipts from, and expenses of, lettings of caravans or pitches for caravans on the site would otherwise be brought into account in calculating the profits of a property business of the trader.

	(2)	The trader may instead bring both the receipts and expenses into account in calculating the profits of the trade.
	(3)	But if the conditions in subsection (1)(a) and (b) are met for only part of a tax year, subsection (2) applies only to the receipts and expenses that would otherwise be brought into account in calculating the profits of the property business for that part of the tax year.
	(4)	In this section—

“caravan site” means—

		(a)	land on which a caravan is stationed for the purposes of human habitation, and
		(b)	land which is used in conjunction with land on which a caravan is so stationed, and

“letting” includes a licence to occupy.

21-	Surplus business accommodation

(1)

This section applies if—

		(a)	a person (“the trader”) carrying on a trade obtains receipts from a letting of business accommodation that is temporarily surplus to requirements (see subsections (3) and (4)),
		(b)	the accommodation is not held as trading stock,
		(c)	the receipts are in respect of part of a building of which another part is used to carry on the trade,

		(d)	the receipts are relatively small, and
		(e)	the receipts, and the expenses of the letting, would otherwise be brought into account in calculating the profits of a property business of the trader.

	(2)	The trader may instead bring both the receipts and expenses into account in calculating the profits of the trade.
	(3)	Accommodation is temporarily surplus to requirements only if—

		(a)	it has been used within the last 3 years to carry on the trade or acquired within the last 3 years,
		(b)	the trader intends to use it to carry on the trade at a later date, and
		(c)	the letting is for a term of not more than 3 years.

	(4)	If accommodation is temporarily surplus to requirements at the beginning of a period of account, it continues to be temporarily surplus to requirements until the end of that period.
	(5)	If under this section any of the receipts from and expenses of a letting are brought into account in calculating the profits of the trade, all subsequent receipts from and expenses of the letting must be dealt with in the same way (but only so long as this section continues to apply).

	(6)	In this section “letting” includes a licence to occupy.
	(7)	This section applies to professions and vocations as it applies to trades.

22-	Payments for wayleaves

(1)

This section applies if—

		(a)	a person (“the trader”) carries on a trade on some or all of the land to which a wayleave relates,
		(b)	rent is receivable, or expenses are incurred, by the trader in respect of the wayleave, and
		(c)	apart from any rent or expenses in respect of a wayleave, no other receipts or expenses in respect of any of the land are brought into account in calculating the profits of any property business of the trader.

(2)

If—

		(a)	the trader would otherwise be liable to tax under Chapter 9 of Part 3 in respect of the rent for the wayleave (rent receivable for UK electric-line wayleaves), or
		(b)	expenses would otherwise be brought into account in calculating the profits charged under that Chapter,
			the trader may instead bring both the rent and expenses into account in calculating the profits of the trade.

(3)

If—

		(a)	rent for the wayleave would otherwise be brought into account in calculating the profits of a property business of the trader, or
		(b)	expenses incurred by the trader in respect of the wayleave would otherwise be so brought into account,
			the trader may instead bring both the rent and expenses into account in calculating the profits of the trade.

(4)

In this section “rent” includes—

		(a)	a receipt mentioned in section 266(3), and
		(b)	any other receipt in the nature of rent.

(5)

In this section “wayleave” means an easement, servitude or right in or over land which is enjoyed in connection with—

		(a)	an electric, telegraph or telephone wire or cable,
		(b)	a pipe for the conveyance of any thing, or
		(c)	any apparatus used in connection with such a pipe.

(6)

The reference to the enjoyment of an easement, servitude or right in connection with an electric, telegraph or telephone wire or cable includes (in particular) its enjoyment in connection with—

		(a)	a pole or pylon supporting such a wire or cable, or
		(b)	apparatus used in connection with such a wire or cable.

(7)

This section applies to professions and vocations as it applies to trades.

Rent-a-room and foster-care relief

23-	Rent-a-room and foster-care relief

	(1)	The rules for calculating the profits of a trade carried on by an individual are subject to Chapter 1 of Part 7 (rent-a-room relief).
	(2)	That Chapter provides relief on income from the use of furnished accommodation in the individual’s only or main residence (see, in particular, sections 792 and 796).

	(3)	The rules for calculating the profits of a trade, profession or vocation carried on by an individual are subject to Chapter 2 of Part 7 (foster-care relief).
	(4)	That Chapter provides relief on income from the provision by the individual of foster care (see, in particular, sections 813, 816, 822 and 823).

Chapter 3

Trade profits: basic rules

24-	Professions and vocations

Apart from section 30 (animals kept for trade purposes), the provisions of this Chapter apply to professions and vocations as they apply to trades.

25-	Generally accepted accounting practice

	(1)	The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for income tax purposes.
	(2)	This does not—

		(a)	require a person to comply with the requirements of the Companies Act 1985 (c. 6) or the Companies (Northern Ireland) Order 1986 (S.I. 1986/1032 (N.I. 6)) except as to the basis of calculation, or
		(b)	impose any requirements as to audit or disclosure.

	(3)	This section is subject to section 160 (barristers and advocates in early years of practice).
	(4)	This section does not affect provisions of the Income Tax Acts relating to the calculation of the profits of Lloyd’s underwriters.

26-	Losses calculated on same basis as profits

	(1)	The same rules apply for income tax purposes in calculating losses of a trade as apply in calculating profits.
	(2)	This is subject to any express provision to the contrary.

27-	Receipts and expenses

	(1)	In the Income Tax Acts, in the context of the calculation of the profits of a trade, references to receipts and expenses are to any items brought into account as credits or debits in calculating the profits.
	(2)	There is no implication that an amount has been actually received or paid.
	(3)	This section is subject to any express provision to the contrary.

28-	Items treated under CAA 2001 as receipts and expenses

The rules for calculating the profits of a trade need to be read with—

		(a)	the provisions of CAA 2001 which treat charges as receipts of a trade, and
		(b)	the provisions of CAA 2001 which treat allowances as expenses of a trade.

1 2 3 4

Contents

Part 1

Part 2

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 7

Chapter 8

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