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Tax Bulletin - It's Official

19 December 2001
Issue: 3838 / Categories:

Excerpts from the Revenue's fifty-sixth Tax Bulletin.

Taxability of trade debt written back

Accounting periods starting after 31 December 2001

Excerpts from the Revenue's fifty-sixth Tax Bulletin.

Taxability of trade debt written back

Accounting periods starting after 31 December 2001

The Revenue no longer considers that the decision in the 1932 tax case British Mexican Petroleum Co Ltd v Jackson 16 TC 570, is applicable in determining the tax treatment of trade debt written back. That case concerned a release of trade debt which was credited to balance sheet reserves in rather unusual circumstances. Modern accountancy practice is that a write-back of trade debt must always be credited to the profit and loss account to produce accounts which show a true and fair view. The Revenue now considers that the correct computation of profits chargeable to tax under Schedule D, Cases I and II should include the credit to profit and loss account of a trade debt write back.

This change of interpretation will be applied for accounting periods starting after 31 December 2001.

Section 94, Taxes Act 1988 only applies when there is a release of a debt. It does not apply if the creditor merely writes off the debt, fails to invoice or demand payment, or fails to present a cheque for payment. A debt is not deemed to be released because the debtor is bankrupt or in liquidation.

The 'release' of a debt must involve a contractual agreement. Where this is under seal, no consideration is necessary. All other releases must involve the debtor giving consideration for the release. The consideration may be in non-monetary form, for example shares.

For such accounting periods, no tax computation adjustment should be made to the accounts of a trade, profession or vocation which show a credit to the profit and loss account for trade debt written-back unless the debt is released as part of a voluntary arrangement (for which see paragraph 381 of the Inspector's Manual).

A trade debt is a debt which has been allowed as a deduction for tax purposes. It does not include debts incurred for capital or non-allowable expenditure. Loan relationships of companies have separate legislation in Finance Act 1996.

Previous accounting periods

For accounting periods which started on or before 31 December 2001, where a trade debt is wholly or partly released by the creditor the amount released is to be treated as a receipt of the trade, profession or vocation when it is released, unless it is released as part of a voluntary arrangement (see section 94, Taxes Act 1988). Where a trade debt is written back to the profit and loss account but is not released, a tax computation adjustment should be made to deduct the amount.

Surcharge on late paid tax

In the February 2001 issue of Tax Bulletin the Revenue said that it was seeking an authoritative view from the courts regarding surcharge for those who pay tax late. The statutory rule is that any tax 'remaining unpaid on the day following the expiry of 28 days from the due date' attracts surcharge equal to five per cent of the unpaid tax.

The Revenue's published view was that surcharge applies if any tax remains unpaid at any time on the 29th day. Typically the 29th day is 1 March or 29 February in a leap year. But on a number of occasions it had been argued that 'remains unpaid on the day' means throughout the 29th day so that tax paid on that day does not attract the surcharge.

This matter was considered by the High Court on 29 October 2001 in Thompson v Minzly. The judge found for the Revenue. Any tax remaining unpaid at any time on the day following the expiry of 28 days from the due date attracts surcharge.

For 2001 only, the Revenue had relaxed its practice, while it obtained the authoritative view from the courts. Having now obtained that view, the relaxation is withdrawn for 2002 and later years. In the typical case of a return issued on or before 31 October, all of the tax will need to be paid by 28 February to avoid surcharge. Similarly any tax remaining unpaid at any time on 1 August will attract the second surcharge.

Pension schemes: Loss of tax approval

Section 61, Finance Act 1995 introduced section 591C, Taxes Act 1988 which contains a special 40 per cent tax charge on the value of funds held by certain occupational pension schemes that lose their tax approved status on or after 2 November 1994.

Some schemes made unauthorised changes to their trust deeds and rules in order to engineer loss of tax approval. Typically, loss of tax approval was followed by the trustees lending all or a large part of the scheme funds to the sponsoring employer; or by paying the scheme assets to the members as a lump sum rather than as a pension for life.

The special tax charge under section 591C aims to discourage schemes from acting in ways that are contrary to the pensions purpose for which they were given tax approval.

The legislation focuses on pension schemes which either:

* have fewer than 12 members, or

* in the year before tax approval ceased, had as a member a person who was a controlling director of a sponsoring employer.

Schemes which are outside these categories will not be subject to the special tax charge if they lose their tax approval.

The special tax charge applies to the market value of the scheme assets immediately before the date of cessation of tax approval. Market value has the same meaning as for capital gains tax purposes. There is, however, an exception for loans to connected persons. In these cases, the value of the loan is the amount outstanding (including any unpaid interest) regardless of whether the loan would (or could) be repaid or other factors that would normally be taken into account in determining market value.

Liability for paying the tax rests with the pension scheme administrator as defined in section 611AA, Taxes Act 1988. The scheme trustees are normally the administrator unless they have appointed someone else to be responsible for the statutory duties under the tax approval legislation. Section 606 sets out the fallback position if the administrator defaults: in such cases responsibility for complying with the administrator's duties reverts to the trustees (where they had appointed someone else) or, ultimately, to the sponsoring employer. The pensioneer trustee is not normally liable to the special tax charge.

Travel expenses of non-domiciled employees

Section 195, Taxes Act 1988 applies to the travelling expenses of employees who are not domiciled in the United Kingdom but perform the duties of an employment in this country. It permits a deduction from emoluments chargeable to tax under either Case I or Case II of Schedule E in circumstances where section 198, Taxes Act 1988 would not apply.

The Revenue has been asked about the requirement in section 195(6) that 'the employee is in the United Kingdom for a continuous period of 60 days or more'.

From the date of the 56th Tax Bulletin, the Revenue is prepared to accept that, for the purposes of section 195(6) only, employees satisfy the 60 days rule where –

* they spend at least two-thirds of their working days in the United Kingdom over a period of 60 days or more; and

* they are present in the United Kingdom for the purpose of performing the duties of their employment both at the start and at the end of this period.

This will apply to any self assessment made from now on or to any self assessment that can be amended within the usual time limits.

This approach will also apply to liability to Class 1 National Insurance contributions as paragraph 5 of Part VIII of Schedule 3 to the Social Security (Contributions) Regulations 2001 was aligned with section 195 with effect from 6 April 2001.

The Bulletin includes three examples to show how the new approach may work in practice.

The foregoing are extracts from longer articles published in the Tax Bulletin which is Crown Copyright, and to which reference should be made for details of the full text. For information regarding subscription, contact Bryan Kearney, Room S15, West Wing, Somerset House, Strand, London, WC2R 1LB, tel: 020 7438 6373. It is also available free of charge on

Issue: 3838 / Categories:
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