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TaxZone Newthwire 58: Schedule A and Schedule D, Case VI

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1st Jan 2005
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TaxZone Newthwire
Issue 58 - 16 August 2004 - Schedule A and Schedule D, Case VI
Available on subscription at:
https://www.accountingweb.co.uk/premium_content/newthwire

Want the Newthwire in a downloadable PDF format? Click here. NOTE. This document is password protected. To open the document choose the read-only option when prompted.
Editorial note

Schedule A income, from 1995/96, comprises mostly rents received
from unfurnished and furnished properties, together with
premiums from leases of less than 50 years' duration.

In some ways Schedule D, Case VI is the Cinderella of the taxing
statutes of income. A generalisation might be that it is the
Schedule that imposes taxes when the Inland Revenue cannot find
another schedule of tax in which the particular item of income
neatly fits. Income from furnished lettings used to be assessed
under this Schedule, but is now assessed under Schedule A, as
are rents generally.

Having said that, the items most commonly assessed under
Schedule D, Case VI include:

# Commissions
# Copyright receipts
# Post cessation receipts
# Artificial land transactions
# Premiums treated as rent

From 1995/96 Schedule A applies to the annual profits arising
from a business carried on for the exploitation, as a source of
rents or other 'receipts', of any estate, interest or rights in
or over land in the United Kingdom. It does not include profits
from the occupation of land, farming and marketing gardening or
mineral rents, royalties etc.

In this wire I will attempt a brief overview of both these
Schedules, giving subscribers basic information that can be
followed up, where necessary, by further research.

Regards,
John T Newth
mailto:[email protected]

Disclaimer
==========
No responsibility for loss occasioned to any person acting or
refraining from action as a result of any information in this
wire is accepted by the author or AccountingWEB. In all cases,
appropriate professional advice should be sought before making
a decision.

Statutory law
=============
The Schedule A charge is outlined in section 15, Taxes Act 1988.
Further provisions relating to the charge are set out in Part II
of the Taxes Act 1988 (sections 21 - 43G). These include
sections 34-36 regarding premiums treated as rent.

Most references to Schedule D, Case VI occur in the Taxes Act
1988. These include:

Sections 56/56A - certificates of deposit.

Section 69 - basis of assessment.

Section 72 - apportionments.

Sections 103/104 - post cessation receipts.

Sections 392 & 396 - Case VI losses.

Sections 775-778 - sale by an individual of income derived form
his personal activities and artificial transactions in land.

Section 786 - transactions associated with loans or credit.

Case law
========
Cases regarding Schedule A are included in Chapter 51 of
Tolley's Tax Cases 2003. Many are historical, but perhaps the
most recent and interesting is:

CIR v John Lewis Properties plc [2003] STC 117
----------------------------------------------
In this case a property holding company assigned to a bank the
right to receive rental income for a five-year period, in return
for a lump sum payment. The Inland Revenue assessed the company
on the basis that the amount received was a Schedule A receipt,
but the company appealed, contending that the amount received
was a capital amount. The court of Appeal, by a 2-1 majority,
allowed the company's appeal.

There are numerous tax cases regarding Schedule D, Case VI
income in Tolley's Tax Cases 2003, and these are summarised at
64.1-64.50. I will refer to some of the most important of these
cases as follows:

Griffiths v Jackson; Griffiths v Pearman [1983] STC 184
-------------------------------------------------------
Two chartered accountants let 180 rooms in Bristol, mainly to
students, on a furnished lettings basis. They contended that the
income should be assessed under Schedule D, Case I as they were
carrying on a business. This was rejected by the court. Schedule
D, Case VI was the correct assessing Schedule. It was a cardinal
principle of tax law that income derived from the exercise of
property rights was not from carrying on a trade.

Brewin v McVitie SpC 176
------------------------
A self-employed financial consultant had engaged in business
selling products devised by one major company. On her retirement
she agreed to sell the goodwill to another individual for
8,000 pounds. Subsequently she entered into an arrangement to
sell her practice to another company within the life company's
group, and to continue to run the business for three months.
The consideration for this transaction was 33,415 pounds payable
immediately, 11,138 pounds payable one year later and whatever
sum the company received for sale of the practice less 250
pounds. In the event the company sold the practice to the
original intended purchaser and paid the taxpayer 7,750 pounds.
The Inland Revenue issued assessments for 33,415 pounds under
section 106(1), Taxes Act 1988. The taxpayer appealed,
contending that under section 106(2), the amount received was a
capital receipt. This contention was rejected by the Special
Commissioner, who considered that the only object of the various
transactions must have been tax avoidance. The paying company
also had no business purpose when engaging the taxpayer for the
three-month period.

Gilmore v HM Inspector of Taxes SpC 206
---------------------------------------
An accountant ceased in practice and received a contingency fee
of 50,000 pounds. He then made an election under section 108,
Taxes Act 1988 for these fees to be carried back to his final
year of trading. He also contended that, because of section 63,
Taxes Act 1988, only 25/365 of the 50,000 pounds was assessable
(his accounts year being to 30 April). This contention was
rejected by the Special Commissioner, who held that section 108
did not affect the calculation of the charge under Schedule D,
Case VI.

Other Inland Revenue resources
==============================
Schedule A
- Inland Revenue Property Income Manual

- Inland Revenue leaflets:
IR 87 - Letting Your Home
Including the 'Rent a Room' scheme and letting your present home
while you live elsewhere.

IR 150 - Taxation of Rents

The Inland Revenue Business Income Manual deals with some items
of Case VI in detail as follows:

Case VI generally - BIM 80101-80140

Post-cessation receipts - BIM 80505-80770

Also BIM 82001

Other resources
===============
Other resources available to those who wish to study this
subject are:

Tolley's Income Tax 2003-2004

13.2 - Certificates of deposit

52.8-52.12 - Offshore gains

54.5 - Sale of patent rights

Chapter 61 - Post cessation receipts and expenditure

Chapter 68 - Schedule A - Property Income

71.85 - Subsidies, grants etc

Chapter 74 - Schedule D, Case VI - Miscellaneous income

Tolley's Property Tax Planning - fourth edition

Tolley's Property Taxes 2000-2001

Chapter 2 - Rents

Chapter 3 - Premiums

Chapter 14 - Artificial Transactions in Land

Chapter 22 - Miscellaneous

Tolley's Tax Planning 2001-2002

54.45 - Transactions in Land

Basis of assessment
===================
Schedule A income is computed on the full amount of profits
arising in the year of assessment. The Inland Revenue will no
longer allow any deviation from a strict fiscal year basis
except in the case of certain trading partnerships.

The income tax assessment under Schedule D, Case VI is made on
the profits arising in the year of assessment. In practice if
the income is of a recurrent nature the assessment is often made
on the preceding year's income and may be on Schedule D, Case I
or Case III lines for the opening and closing years. However,
for corporation tax purposes the assessment is on the actual
income in the accounting period.

Assessments under Case VI are not earned income unless
specifically provided, such as post cessation receipts,
distribution of assets of mutual companies, sale of know how and
capitalisation of earnings.

Losses
======
Where a Schedule A loss is suffered it is carried forward
without any limit to be set against the first future profits of
the Schedule A business.

Losses on transactions which, if profitable, would have been
assessable under Schedule D, Case VI can be set off against any
profit or gains charged under Case VI for the same year of
assessment. Alternatively, losses may be carried forward against
future profits assessable under Schedule D, Case VI.

Claims relating to the amount of Schedule D, Case VI losses must
be made within five years after 31 January following the tax
year in which they arose. A further claim for relief for losses
brought forward must be made within five years after 31 January
following the year for which relief is claimed.

Items within the charge
=======================
Schedule A

# Unfurnished lettings
# Furnished lettings
# Furnished Holiday Lettings (see Newthwire No. 15)

Schedule D, Case VI

# Accrued Income Scheme (Bondwashing)
# Commissions
# Copyright receipts
# Post cessation receipts
# Artificial land transactions
# Certificates of deposit

Deductions from lettings
========================
The following amounts may be deducted in computing profits of a
Schedule A business:

# Loan interest, to the extent that it is incurred wholly and
exclusively for the purposes of the letting business.

# Capital allowances on plant and machinery. This does not apply
in the case of a dwelling house let as a furnished letting. In
such a case furniture and furnishings may be dealt with on the
renewals basis. An alternative Inland Revenue concession is to
allow as depreciation 10% of the rents received as reduced by
council tax and water rates or material payments for services
borne by the landlord but normally a tenant's burden.

Where he 10% deduction is claimed, no further allowance is given
for the cost of renewing furniture of furnishings, nor for
fixtures such as cookers, dishwashers, or washing machines
which, in unfurnished accommodation, the tenant would normally
provide personally. However, the cost of renewing fixtures which
are an integral part of the building (e.g. baths, toilets,
washbasins) may be claimed in addition, provided that they are
revenue repairs to the fabric.

# In general the provisions of section 74 (1)(a), Taxes Act 1988
apply to Schedule A income, so that business expenses wholly and
exclusively incurred in connection with the letting are
allowable against rents. These will include agent's commission,
repairs and maintenance, insurance and cleaning and window
cleaning. The provision of utility services in some instances
will be incurred, as well as accountancy charges, and, in larger
cases, motor and travelling expenses and salaries. Normal
administration expenses such as telephone, postage, computer
charges are also claimable.

# Please see Newthwire No. 15 for the position regarding
furnished holiday lettings.

Rent a room relief
==================
Where a householder takes in a domestic lodger a special relief
is available for an individual receiving sums for the use of
furnished accommodation, or for other services such a meals,
cleaning, laundry etc. Instead of a computation under Schedule
A/Schedule D, Case I, the householder can elect to claim rent a
room relief. The effect of this is that, if the amount received
is 4,250 pounds or less, the assessment is treated as nil. Where
the amount slightly exceeds 4,250 pounds, the excess will be
taxed (without any deduction for expenses). It must be
emphasised that the exemption applies to the gross amounts
received before the deduction of expenses.

Premiums treated as rent
========================
A premium received by a landlord under a lease not exceeding 50
years is treated as additional rental, the date the lease is
granted. The amount assessable is the premium less 1/50th for
each full year (minus one) during the lease's duration. The
amount calculated is taken into account in full in computing
Schedule A profits for the tax year in which it is treated as
received.

Example 1
---------
A taxpayer grants a 16-year lease of premises for a payment of
30,000 pounds. The amount chargeable on him for that year is:

Ammount (Pounds)
Premium 30,000

Less ((16 - 1)/50) x 30,000 pound 9,000

Chargeable 21,000

Special provisions apply where the payer of the premium
subsequently grants a sub-lease to another tenant on payment of
a premium. The same calculation is made, but with an additional
deduction of the 'appropriate fraction' of the amount chargeable
on the 'superior landlord'.

Example 2
---------
If, after 5 years, the payer of the premium in Example 1 grants
a sub-lease of 11 years for which he receives a premium of
40,000 pounds, the amount chargeable on him is:

Ammount (Pounds)
Premium 40,000

Less ((11 - 1)/50) x 40,000 pound 8,000

32,000
Less appropriate fraction of amount
Chargeable on superior landlord
11/16 x 21,000 pounds 14,438
Chargeable 17,562

The payer of a premium is entitled to claim additional rent at
an annual rate based on the amount charged to the recipient. In
Example 1 this would be 1/16th x 21,000 pounds = 1,312 for each
year of the tenancy. Where a sub-lease is granted the
'additional rent' is restricted to the appropriate fraction not
used to reduce the charge on the later premium. In Example 2 the
appropriate fraction is used entirely, so that no additional
rent is available.

Any Answers
===========
There have been a number of Any Answers queries on the site
regarding property income. A selection of these are summarised
as follows:

Schedule A
----------
On 10 October 2001 Mark Banham queried the position where a
company leases a building and then sub-lets. Is the rental
income and expenditure assessed under Schedule A or under
Schedule D with its normal trade?

Phil Rees considered that if it were a pure sub-let, then
Schedule A applies. If the company provides services such as
reception, secretarial services etc, then the transaction
possibly amounts to a trade. Strictly speaking it is not part of
the company's existing trade, but a separate one in those
circumstances.
https://www.accountingweb.co.uk/item/60168/786/784/785

Schedule A loss
---------------
Suresh queried a Schedule A loss, in his query of 9 November
2001. A Schedule A loss had been made in 1997/98, but was
overlooked when the 1999 and 2000 tax returns were submitted.
Was there any way that relief could now be claimed?

Phil Rees provided reassurance in this case. If the Schedule A
source of profits had continued after 1997/98, all that was
required was to amend the subsequent tax returns or use the
error and mistake provisions under section 33, TMA 1970. The
loss brought forward should be set off against the first
available Schedule A profit. If no Schedule A profits have
occurred since 1997/98, then the loss can continue to be carried
forward.
https://www.accountingweb.co.uk/item/63089/786/784/785

Furnished lettings
------------------
Knuckles asked, in a query date 7 January 2002, when claiming
the concessionary 10% wear and tear allowance, whether this
included the replacement of carpets. Or can their replacement be
claimed in addition?

Once again Phil Rees provided the answer. The costs of replacing
integral items such as baths, sinks, toilets etc are claimable
in addition to the 10% allowance, but not moveable items such as
cooker, freezer, curtains and carpets.
https://www.accountingweb.co.uk/item/68286/786/784/785

Mortgage interest relief - Schedule A
-------------------------------------
Ma Gallagher is renting half her house. Is mortgage interest
still available to set against Schedule A income (26 June 2002)?

Phil Rees continued his valuable insights into this subject. The
answer is 'yes', but there may be an argument with the Inland
Revenue regarding proportions. Is it really half the house? A
claim must also be made on a fiscal year basis, so that a
certificate from the lender must be obtained. A 31 December
statement is not sufficient.
https://www.accountingweb.co.uk/item/84642/786/784/785

Offset of Schedule A rental loss
--------------------------------
Chris Rhodes asked whether Schedule A losses can be offset
against the capital gain made on a property, in a query dated 22
August 2002?

Michael Haig stated that the answer was 'no' except in the case
of a company. Company Schedule A losses are much more flexible
than personal Schedule A losses. Capital gains can be set off
against in-year and brought forward Schedule A losses.
https://www.accountingweb.co.uk/item/88937/786/784/785

Capital allowances under Schedule A business
--------------------------------------------
Was it possible for a company that lets property furnished to
claim capital allowances on furniture, asked Khurrum Kahn, in
his query of 31 October 2002?

Both Michael Haig and Michael Gallagher confirmed that a claim
could be made, provided that the property is not let as a
residence. If it is a flat above a shop there are conditions. If
it is a dwelling house the 10% wear and tear allowance can be
claimed, or renewals basis. There may also be other items other
than furniture on which allowances can be claimed.
https://www.accountingweb.co.uk/item/95251/786/784/785

Schedule A
----------
A client of Sarah Kedgely owns a limited company that is
considering the purchase of investment properties. Would
mortgage interest be allowable against the Schedule A income?
Confirmation is also needed that Schedule A losses can be
relieved sideways and forward but not backwards. (14 April 2004)

Michael Webster provided some very valuable advice in this case.
The point about losses is correct. As regards mortgage interest,
in a company situation it is a non-trading loan relationship
deficit. This is actually quite useful, as the loss rules for
such deficits are very flexible. This includes the facility to
claim only partial relief for an NTLR deficit.
https://www.accountingweb.co.uk/item/125329/786/784/785

Ask a question
==============
Readers with a current case should post their query in Any
Answers.

JOHN T NEWTH
https://www.accountingweb.co.uk/premium_content/newthwire

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