Finance Act 1986

• (6) References in the preceding provisions of this paragraph to the time of the acquisition of an interest in land are not affected by paragraph 3 of this Schedule.

17

In any case where—

• (a) a person incurs capital expenditure falling within paragraph 4(1 )(b) above on the acquisition of an asset which is or includes an interest in land, and

• (b) for chargeable periods previous to the chargeable period for which he first becomes entitled in respect of the expenditure to an allowance under paragraph 9 above, the person incurring the expenditure has been allowed, in respect of that land, any deductions under section 134 of the Taxes Act (deductions where premiums etc. taxable),

the expenditure shall be treated for the purposes of this Schedule as reduced by so much of those deductions as would have been excluded by subsection (5) of the said section 134 if the person concerned had been entitled to an allowance under paragraph 9 above (or, as the case may be, section 60 of the Capital Allowances Act 1968) for the previous chargeable periods referred to in sub-paragraph (b) above.

Restriction of disposal receipts

18

• (1) Where a disposal receipt to be brought into account in respect of any expenditure for a chargeable period would, apart from this paragraph, be the disposal value of an interest in land (determined as mentioned in paragraph 10 (3) above), only so much of that disposal value as exceeds the undeveloped market value of the interest shall constitute a disposal receipt for the purposes of Part III of this Schedule.

• (2) Sub-paragraphs (2) and (3) of paragraph 16 above shall apply to determine the undeveloped market value of an interest for the purposes of this paragraph as they would apply in relation to an acquisition of that interest at the time the disposal value falls to be determined.

Assets formerly owned by traders

19

• (1) Subject to sub-paragraph (2) below, paragraph 20 below applies where a person carrying on a trade of mineral extraction (in this paragraph referred to as "the buyer") incurs capital expenditure in acquiring an asset (in this paragraph referred to as "the purchased asset") from another person in circumstances falling within sub-paragraph (3) below.

• (2) This paragraph and paragraph 20 below have effect subject to paragraph 22 below, and neither this paragraph, paragraph 20 nor paragraph 22 below applies if—

• (a) the purchased asset is a mineral asset situated in the United Kingdom; and

• (b) the capital expenditure incurred by the buyer consists of the payment of sums under a contract entered into by him before 16th July 1985.

• (3) Subject to sub-paragraph (5) below, the circumstances referred to in sub-paragraph (1) above are—

• (a) that, in connection with a trade of mineral extraction carried on by him, the other person referred to in sub-paragraph (1) above incurred expenditure on the acquisition or bringing into existence of the purchased asset; or

• (b) that that other person has not incurred expenditure as mentioned in paragraph (a) above but, at any time prior to the buyer's acquisition, the purchased asset was owned by a person who, in connection with a trade of mineral extraction carried on by him, had incurred such expenditure as is mentioned in paragraph (a) above;

and, in a case where the purchased asset is a mineral asset situated in the United Kingdom, the reference in paragraph (b) above to a time prior to the buyer's acquisition does not include any time earlier than 1st April 1986.

• (4) In this paragraph "the previous trader" means—

• (a) where the circumstances are as mentioned in paragraph (a) of sub-paragraph (3) above, the person referred to in that paragraph; and

• (b) where the circumstances are as mentioned in paragraph (b) of that sub-paragraph, the last person who, prior to the buyer's acquisition, incurred such expenditure as is mentioned in paragraph (a) thereof;

and, subject to sub-paragraphs (5) and (6) below, any reference in paragraph 20 below to the previous trader's qualifying expenditure is a reference to so much of the expenditure incurred by him on the acquisition or bringing into existence of the purchased asset as constituted his qualifying expenditure for the purposes of this Schedule.

• (5) Any reference in sub-paragraphs (3) and (4) above to the purchased asset includes a reference—

• (a) to two or more assets which together make up the purchased asset; and

• (b) to an asset from which or, as the case may be, to two or more assets from the combination of which the purchased asset is derived.

• (6) Where the previous trader in fact incurred expenditure on the acquisition or bringing into existence of one or more assets from which the purchased asset is derived, so much of that expenditure as was qualifying expenditure of his for the purposes of this Schedule and as it is just and reasonable to attribute to the purchased asset shall be taken to be the previous trader's qualifying expenditure.

Limitation of expenditure on asset by reference to previous acquisition

20

• (1) In this paragraph "the buyer's expenditure" means the capital expenditure incurred by him as mentioned in paragraph 19(1) above, less any amount of that expenditure which, by virtue of paragraph 16 above, does not constitute qualifying expenditure.

• (2) If the previous trader did not become entitled to an allowance or liable to a balancing charge in respect of his qualifying expenditure, so much of the buyer's expenditure as does not exceed the amount of the previous trader's qualifying expenditure shall be the buyer's qualifying expenditure in respect of the acquisition of the purchased asset.

• (3) If the previous trader became entitled to an allowance or liable to a balancing charge in respect of his qualifying expenditure, so much of the buyer's expenditure as does not exceed the residue of the previous trader's qualifying expenditure shall be the buyer's qualifying expenditure in respect of the acquisition of the purchased asset.

• (4) In relation to the previous trader's qualifying expenditure, the residue referred to in sub-paragraph (3) above is that expenditure—

• (a) less the total of all allowances made to him in respect of that expenditure; and

• (b) plus the amount (if any) on which a balancing charge was made in respect of that expenditure.

• (5) For the purposes of sub-paragraph (4) above, where the previous trader's qualifying expenditure is an amount attributed to the purchased asset on a just and reasonable basis in accordance with paragraph 19(6) above, any allowances and any balancing charge made by reference to a greater amount of expenditure shall be apportioned on the like basis.

• (6) In this paragraph—

• "allowance" means an allowance under paragraph 9 above;

• "balancing charge" means a balancing charge under paragraph 11 above; and

• "the buyer", "the previous trader" and "the purchased asset" have the same meaning as in paragraph 19 above.

Part of expenditure on mineral asset treated as expenditure on mineral exploration and access

21

• (1) This paragraph applies where, in a case falling within subparagraph (1) of paragraph 19 above.—

• (a) the purchased asset is a mineral asset; and

• (b) part of the value of that asset is attributable to expenditure incurred by the previous trader on mineral exploration and access.

• (2) Where this paragraph applies—

• (a) such part of the buyer's expenditure as it is just and reasonable to attribute to the part of the value referred to in sub-paragraph (1)(b) above (being no greater than the amount of the previous trader's expenditure on mineral exploration and access which is properly attributable to that part of the value) shall be treated for the purposes of Parts II and III of this Schedule as expenditure on mineral exploration and access and the remainder shall be treated for those purposes as expenditure on the acquisition of a mineral asset; and

• (b) if under Part II of the Capital Allowances Act 1968 (scientific research) allowances were made to the previous trader in taxing his trade, the existence of these allowances shall not affect the question whether any of his expenditure on the purchased asset was qualifying expenditure.

• (3) In this paragraph "the previous trader" and "the purchased asset" have the same meaning as in paragraphs 19 and 20 above, and "the buyer's expenditure" has the same meaning as in paragraph 20 above.

Oil licences etc.

22

• (1) Where a person carrying on a trade of mineral extraction (in this paragraph referred to as "the buyer") incurs capital expenditure falling within paragraph 4(1)(b) above in acquiring a Petroleum Act licence or any interest in such a licence, only so much of that expenditure as does not exceed the corresponding expenditure of the original licensee shall be the buyer's qualifying expenditure.

• (2) In this paragraph a "Petroleum Act licence" means a licence under the Petroleum (Production) Act 1934 or the Petroleum (Production) Act (Northern Ireland) 1964 authorising the winning of oil, as denned in section 1 of the Oil Taxation Act 1975; and in relation to such a licence, "the original licensee" means the person to whom the licence was granted under the enactment in question.

• (3) In relation to the acquisition of a Petroleum Act licence "the corresponding expenditure" of the original licensee is the amount of the payment made by him (whether before or after the passing of this Act) to the Secretary of State or, in Northern Ireland, to the Department of Economic Development for the purpose of obtaining the licence, and, in relation to an interest in such a licence, that corresponding expenditure is such portion of the amount of that payment as it is just and reasonable to attribute to that interest.

Transfer of mineral assets within a group

23

• (1) Subject to sub-paragraph (2) below, this paragraph applies where a company (in this paragraph referred to as "the transferee") acquires a mineral asset from another company (in this paragraph referred to as "the transferor") and either—

• (a) the transferor has control of the transferee or the transferee has control of the transferor, or

• (b) both the transferor and the transferee are under the control of another person.

• (2) This paragraph does not apply—

• (a) where the acquisition is a sale in respect of which an election is made under paragraph 4 of Schedule 7 to the Capital Allowances Act 1968; nor

• (b) where the mineral asset in question is, or is an interest in, a Petroleum Act licence as denned in paragraph 22 above;

but, subject to paragraph (a) above, this paragraph applies notwithstanding anything in paragraph 2 of the said Schedule 7.

• (3) Subject to sub-paragraph (4) below, so much (if any) of the capital expenditure incurred by the transferee on the acquisition of the mineral asset as exceeds the capital expenditure incurred by the transferor on the acquisition of the mineral asset by him shall be left out of account for the purposes of this Schedule (and, accordingly, if the transferee is carrying on a trade of mineral extraction, shall not be qualifying expenditure).

• (4) Where the mineral asset acquired by the transferee consists of an interest or right granted by the transferor in a mineral asset acquired by him, the reference in sub-paragraph (3) above to the capital expenditure incurred by the transferor on the acquisition of the mineral asset by him shall be construed as a reference to so much of that expenditure as, on a just apportionment, is referable to the interest or right granted by the transferor.

• (5) If the transferee is carrying on a trade of mineral extraction and the expenditure incurred by him on the acquisition of the mineral asset is expenditure falling within paragraph 16 above, any reference in that paragraph to the time of the acquisition of the interest in land is a reference to the time it was acquired by the transferor or, if there is a sequence of two or more acquisitions each of which falls within subparagraph (1) above, the time at which the interest was acquired by the company which was the transferor under the earliest of those acquisitions.

• (6) If, in a case where sub-paragraph (5) above applies, there is a sequence of two or more acquisitions each of which falls within subparagraph (1) above.—

• (a) any expenditure which one of the companies involved in the sequence is treated as incurring under sub-paragraph (4) of paragraph 16 above shall be treated as incurred by the company which is the transferee from that company and by any subsequent transferee company in the sequence; and

• (b) the reference in sub-paragraph (5) of that paragraph to the person treated by sub-paragraph (4) thereof as incurring expenditure shall be construed as including a reference to any other company which, under paragraph (a) above, is treated as incurring that expenditure.

Assets formerly owned by non-traders

24

Where a person incurs expenditure on mineral exploration and access and, without having carried on a trade of mineral extraction, he sells any assets representing that expenditure, then, if the person who acquires the assets carries on such a trade, only so much of the price paid by him for the assets as does not exceed the amount of the seller's expenditure which is represented by the assets shall be qualifying expenditure for the purposes of this Schedule.

PART V — Amendments of other Enactments

25

• (1) In section 14(1) of the Capital Allowances Act 1968 after the words "of this Act" there shall be inserted "or Schedule 13 to the Finance Act 1986".

• (2) In section 93 of that Act (scientific research: prevention of double allowances) at the end of subsection (1) there shall be inserted "and no allowance under Schedule 13 to the Finance Act 1986 shall be made in respect of any expenditure if it is expenditure in respect of which such a deduction may be allowed."

• (3) In paragraph 4 of Schedule 7 to that Act (election as to sales where one party has control of the other) at the end of sub-paragraph (2) there shall be added—

(d) in the case of assets representing qualifying expenditure, within the meaning of Schedule 13 to the Finance Act 1986, the excess of that expenditure attributable to those assets over the aggregate of— (i) any allowances made under that Schedule to the seller in respect of that expenditure before the sale; and (ii) any disposal receipts which the seller has been required to bring into account by reference to that expenditure by reason of any event occurring before the sale.

26

In section 134 of the Taxes Act (deductions where premiums etc. are taxable) at the end of subsection (5) there shall be added the words "and the reference in this subsection to an allowance under section 60 of the Capital Allowances Act 1968 includes a reference to an allowance under Part III of Schedule 13 to the Finance Act 1986 in respect of expenditure falling within paragraph 4(1)(b) of that Schedule".

27

In section 174(8) of the Taxes Act for the words "Chapter III of Part I of the Capital Allowances Act 1968" there shall be substituted "Schedule 13 to the Finance Act 1986" and for the words "that Act" there shall be substituted "the Capital Allowances Act 1968".

28

In section 56 of the Finance Act 1985 (time when capital expenditure is incurred) at the end of subsection (1) and after the amendment made by section 57(10) of this Act there shall be added

and (f) Schedule 13 to the Finance Act 1986

.

SCHEDULE 14

Interpretation

1

• (1) In this Schedule—

• "mineral asset" and "mineral exploration and access" have the same meaning as in Schedule 13 to this Act;

• "new expenditure" and "old expenditure" have the same meaning as in the principal section;

• "the new code of allowances" means subsections (5) to (7) of the principal section and Schedule 13 to this Act;

• "the old code of allowances" has the same meaning as in the principal section;

• "the principal section" means section 55 of this Act;

• "the relevant day" means, subject to paragraph 2 below, 1st April 1986;

• "trade of mineral extraction" has the same meaning as in Schedule 13 to this Act; and

• "the 1968 Act" means the Capital Allowances Act 1968.

• (2) In relation to any item of old expenditure "outstanding balance" means, subject to the following provisions of this paragraph.—

• (a) in the case of old expenditure falling within section 57 of the 1968 Act, so much of that expenditure as, if the old code of allowances had continued in force, would have been the residue of that expenditure in relation to a writing-down allowance under that section to be made for the chargeable period which, or the basis period of which, begins on the relevant day;

• (b) in the case of old expenditure falling within section 60 of the 1968 Act, the excess referred to in subsection (3) of that section by reference to which, if the old code of allowances had continued in force, a writing-down allowance under that section would fall to be made for the chargeable period referred to in paragraph (a) above; and

• (c) in the case of old expenditure falling within section 61 of the 1968 Act, so much of that expenditure as exceeds any writing-down allowances under that section made in respect of that expenditure for chargeable periods which, or the basis periods of which, ended before the relevant day.

• (3) In determining the residue of expenditure mentioned in paragraph (a) of sub-paragraph (2) above, it shall be assumed that, in the chargeable period or its basis period referred to in that paragraph, no asset representing expenditure which is qualifying expenditure for the purposes of section 57 of the 1968 Act is sold, demolished or destroyed.

• (4) In determining, in relation to the chargeable period referred to in paragraph (a) of sub-paragraph (2) above, the excess mentioned in paragraph (b) of that sub-paragraph—

• (a) no account shall be taken of any capital sum accruing in that chargeable period or its basis period to the person to whom a writing-down allowance would fall to be made as mentioned in that paragraph; and

• (b) it shall be assumed that that person does not cease to work the source in question in that chargeable period or its basis period.

Election to treat certain post March 1986 expenditure as old expenditure

2

• (1) This paragraph applies to expenditure—

• (a) which is incurred in the year ending 31st March 1987 by a person carrying on a trade of mineral extraction; and

• (b) which consists of the payment of sums under a contract entered into before 16th July 1985 by the person incurring the expenditure; and

• (c) in respect of which, but for the provisions of the principal section, an initial allowance would have been made to the person concerned under section 56 of the 1968 Act.

• (2) If the person incurring the expenditure so elects, expenditure to which this paragraph applies shall be treated for the purposes of the principal section and Schedule 13 to this Act as not being new expenditure and the old code of allowances shall continue to apply to it until 31st March 1987.

• (3) An election under this paragraph—

• (a) shall be made in writing to the inspector;

• (b) may not be made more than two years after the end of the chargeable period or its basis period in which the expenditure was incurred; and

• (c) shall be irrevocable;

and if different parts of the expenditure are incurred at different times, only that part of the expenditure which is first incurred on or after 1st April 1986 shall be taken into account for the purposes of paragraph (b) above.

• (4) In relation to expenditure to which an election under this paragraph applies—

• (a) subsections (3) and (4) of the principal section shall have effect as if for any reference to 31st March 1986 or 1st April 1986 there were substituted a reference to 31st March 1987 or 1st April 1987 respectively; and

• (b) in this Schedule "the relevant day" means 1st April 1987.

Outstanding balances: general rules

3

• (1) If there is an outstanding balance in relation to any item of old expenditure, then, subject to the following provisions of this Schedule, for the purposes of the new code of allowances.—

• (a) an amount of expenditure equal to that balance shall be treated as expenditure incurred on the relevant day (and, accordingly, as new expenditure); and

• (b) that amount shall be taken to have been incurred for the same purposes as the item of old expenditure was incurred.

• (2) If any item of old expenditure was incurred for more than one purpose, then, so far as may be necessary for the application of the new code of allowances, the outstanding balance of that expenditure shall be apportioned to those different purposes in such manner as may be just and reasonable and sub-paragraph (1) above shall apply separately in relation to the apportioned parts as if they were referable to different items of old expenditure.

Old expenditure with no outstanding balance

4

• (1) This paragraph applies to old expenditure—

• (a) in respect of which allowances were made under the old code of allowances, and

• (b) in respect of which there is no outstanding balance on the relevant day.

• (2) Where this paragraph applies, the new code of allowances shall have effect as if—

• (a) the whole of the old expenditure had been incurred on the relevant day; and

• (b) under the appropriate provisions of the new code of allowances there had been made allowances equal to that expenditure;

and the provisions of the new code about disposal receipts shall have effect accordingly in relation to events happening on or after the relevant day.

Unrelieved expenditure on mineral exploration and access

5

• (1) This paragraph applies to old expenditure incurred on mineral exploration and access.

• (2) If, immediately before the relevant day, no allowance had been made in respect of the expenditure under the old code of allowances, and on that day the mineral exploration and access at the source in connection with which the expenditure was incurred has not ceased, and either—

• (a) the person by whom the expenditure was incurred began to carry on a trade of mineral extraction before the relevant day, or

• (b) on or after the relevant day and before mineral exploration and access ceases at the source in question, the person by whom the expenditure was incurred begins to carry on a trade of mineral extraction,

then, subject to sub-paragraph (3) below, paragraph 5 or paragraph 6 of Schedule 13 to this Act or, as the case may be, subsection (5) of the principal section shall apply as if the expenditure were new expenditure and, if the expenditure was in fact incurred after the person concerned began to carry on a trade of mineral extraction, as if he had not begun to carry on that trade until the relevant day.

• (3) Where sub-paragraph (2) above applies to any item of old expenditure which, apart from this sub-paragraph, would not fall to be treated as incurred on or after the relevant day, it shall (as new expenditure) be treated for the purposes of the new code of allowances as incurred on the relevant day.

Old expenditure on acquisition of mineral asset

6

• (1) This paragraph applies to old expenditure incurred on the acquisition of a mineral asset.

• (2) If, immediately before the relevant day, no allowance has been made in respect of the expenditure under the old code of allowances, the expenditure shall be treated for the purposes of the new code of allowances as having been incurred on the relevant day.

• (3) Nothing in sub-paragraph (2) above shall affect the time as at which, under paragraph 16 of Schedule 13 to this Act, the undeveloped market value of an interest is to be determined.

• (4) If sub-paragraph (2) above does not apply in relation to an item of old expenditure to which this paragraph applies.—

• (a) paragraph 16 of Schedule 13 to this Act shall not apply in relation to any amount which, by virtue of paragraph 3(1) above, is to be treated as expenditure incurred on the relevant day (and, accordingly, the whole of any such amount shall be qualifying expenditure for the purposes of the new code of allowances); and

• (b) in determining the amount of any disposal receipt which, by virtue of paragraph 3 or paragraph 4 above, falls to be brought into account in respect of that expenditure under Part III of Schedule 13 to this Act, paragraph 18 of that Schedule shall not apply (so that no deduction shall be made by reference to the undeveloped market value of the land).

Old expenditure on construction of certain works

7

• (1) This paragraph applies to old expenditure which does not fall within paragraph 5 above but which is incurred—

• (a) on the construction of any works in connection with the working of a source of mineral deposits, being works which, when the source is no longer worked, are likely to be of little or no value to the person working it immediately before that time; or

• (b) where a source of mineral deposits is worked under a foreign concession, on the construction of works which, when the concession comes to an end, are likely to become valueless to the person working the source immediately before that time.

• (2) If, immediately before the relevant day, no allowance has been made in respect of the expenditure under the old code of allowances, the expenditure shall be treated for the purposes of the new code of allowances as having been incurred on the relevant day.

Balancing charges: old allowances to be brought into account

8

• (1) In any case where—

• (a) by virtue of any of the preceding provisions of this Schedule, the whole or any part of the outstanding balance of an item of old expenditure is treated for the purposes of Schedule 13 to this Act as qualifying expenditure, and

• (b) a balancing charge falls to be made under paragraph 11 of that Schedule in respect of that expenditure,

then, in determining the amount on which that charge falls to be made, sub-paragraph (2)(b) of the said paragraph 11 shall have effect as if it referred not only to allowances made as mentioned in sub-paragraph (1)(c) of that paragraph but also, subject to sub-paragraph (2) below, to allowances made in respect of the item of old expenditure under the old code of allowances.

• (2) Where the qualifying expenditure in respect of which a balancing charge falls to be made represents part only of the outstanding balance of an item of old expenditure, the reference in sub-paragraph (1) above to allowances made in respect of that item shall be construed as a reference to such part of those allowances as it is just and reasonable to apportion to that part of the balance (having regard to the apportionment of the balance under paragraph 3(2) above).

SCHEDULE 15

Writing-down allowances

1

• (1) If a person having a major interest in any agricultural or forestry land incurs any capital expenditure on the construction of farmhouses, farm or forestry buildings, cottages, fences or other works, then, during a writing-down period of twenty-five years beginning on the first day of the chargeable period related to the incurring of the expenditure, there shall be made to him, subject to the following provisions of this Schedule, writing-down allowances of an aggregate amount equal to that expenditure.

• (2) In any case where—

• (a) capital expenditure is incurred on the construction of any building, fence or other works, but

• (b) when the building, fence or other works comes to be used it is not used for the purposes of husbandry or forestry,

the expenditure shall be left out of account for the purposes of this Schedule and, accordingly, any writing-down allowance made in respect of the expenditure under sub-paragraph (1) above shall be withdrawn and all such assessments and adjustments of assessments shall be made as may be necessary to give effect to that withdrawal.

• (3) In this Schedule a "major interest" in land means—

• (a) the fee simple estate in the land or an agreement to acquire that estate;

• (b) in Scotland, the estate or interest of the proprietor of the dominium utile (or, in the case of property other than feudal property, of the owner) and any agreement to acquire such an estate or interest, and

• (c) a lease.

• (4) If an interest in land is conveyed or assigned by way of security and subject to a right of redemption, then, so long as such a right subsists, the interest held by the creditor shall be treated for the purposes of this Schedule as held by the person having that right.

• (5) Any reference in the following provisions of this Schedule to a writing-down allowance is a reference to an allowance under subparagraph (1) above.

Expenditure qualifying for allowances

2

• (1) No expenditure shall be taken into account for the purposes of this Schedule unless it is incurred for the purposes of husbandry or forestry on the agricultural or forestry land referred to in paragraph 1 above.

• (2) Where capital expenditure is incurred on a farmhouse, one-third only of that expenditure shall be taken into account for the purposes of this Schedule or, if the accommodation and amenities of the farmhouse are out of due relation to the nature and extent of the farm, such proportion thereof not greater than one-third as may be just.

• (3) Where capital expenditure is incurred on any asset other than a farmhouse and the asset is to serve partly the purposes of husbandry or forestry and partly other purposes, such apportionment of the expenditure shall be made for the purposes of this Schedule as may be just.

Meaning of "the relevant interest"

3

• (1) Subject to the provisions of this paragraph, in this Schedule "the relevant interest" means, in relation to any expenditure falling within paragraph 1(1) above, the major interest in the agricultural or forestry land concerned to which the person who incurred the expenditure was entitled when he incurred it.

• (2) Where, when he incurs expenditure falling within paragraph 1(1) above, a person is entitled to two or more major interests in the agricultural or forestry land concerned, and one of those interests is an interest which is in reversion on all the others, that interest is the relevant interest for the purposes of this Schedule.

• (3) A major interest shall not cease to be the relevant interest tor the purposes of this Schedule by reason of the creation of any lease (or other interest) to which the interest is subject; and where the relevant interest is a lease which is extinguished—

• (a) by reason of the surrender thereof, or

• (b) on the person entitled thereto acquiring the interest which is the reversion on the relevant interest,

then, unless a new lease of the land concerned is granted to take effect on the extinguishment of the former lease, the interest into which that lease merges shall thereupon become the relevant interest.

• (4) In the application of this paragraph to Scotland "reversion" means the interest of a landlord in property subject to a lease.

Transfers of relevant interest

4

• (1) In any case where—

• (a) if a person (in this paragraph referred to as "the former owner") continued to be the owner of the relevant interest in any land, he would be entitled to a writing-down allowance in respect of any expenditure, and

• (b) another person (in this paragraph referred to as "the new owner") acquires the relevant interest in the whole or part of that land (whether by transfer, by operation of law or otherwise),

the former owner shall not be entitled to an allowance under this Schedule for any chargeable period of his after that related to the acquisition and the new owner shall be entitled to allowances under this Schedule for the chargeable period of his related to the acquisition and for subsequent chargeable periods falling within the writing-down period.

• (2) If, in a case falling within sub-paragraph (1) above, the date of the acquisition occurs during a chargeable period of the former owner or its basis period, he shall be entitled only to an appropriate portion of an allowance for the chargeable period related to the acquisition and, similarly, if the date of the acquisition occurs during a chargeable period of the new owner or its basis period, he shall be entitled only to an appropriate portion of an allowance for the chargeable period (of his) related to the acquisition.

• (3) Where the new owner acquires the relevant interest in part only of the land concerned, sub-paragraphs (1) and (2) above shall apply to so much only of the allowance as is properly referable to that part of the land as if it were a separate allowance.

• (4) Where paragraph 3(3) above applies and the person who owns the interest into which the lease is merged is not the same as the person who owned the lease, the relevant interest shall be treated for the purposes of this Schedule as acquired by the owner of the interest into which the lease is merged.

• (5) Where the relevant interest is a lease which comes to an end and paragraph 3(3) above does not apply, then, for the purposes of this Schedule.—

• (a) if a new lease is granted to a person who makes any payment to the outgoing lessee in respect of assets representing the expenditure in question, the new lease shall be treated as the same interest as the former lease and, accordingly, the relevant interest shall be treated as acquired by the incoming lessee; and

• (b) if a new lease is granted to the person who was the lessee under the former lease, the new lease shall be treated as the same interest as the former lease; and

• (c) in any other case, the former lease and the interest of the person who was the landlord under the former lease shall be treated as the same interest and, accordingly, the relevant interest shall be treated as acquired by that person.

• (6) If, by virtue only of the operation of the preceding provisions of this paragraph and, where appropriate, section 75(2) of the Capital Allowances Act 1968, the total allowances which, apart from this subparagraph, would fall to be made under this Schedule in respect of any expenditure during the writing-down period appropriate to it would be less than the amount of that expenditure, then, for the chargeable period in which that writing-down period ends, the allowance in respect of that expenditure shall be increased to such amount as will secure that the total of the allowances equals the amount of that expenditure.

• (7) This paragraph has effect subject to the following provisions of this Schedule.

Buildings etc. bought unused

5

• (1) This paragraph applies where expenditure falling within paragraph 1(1) above is expenditure on the construction of a building, fence or other works and, before the building, fence or works comes to be used, the relevant interest is sold.

• (2) Where this paragraph applies—

• (a) the expenditure shall be left out of account for the purposes of this Schedule and, accordingly, any writing-down allowance made in respect of the expenditure shall be withdrawn and all such assessments and adjustments of assessments shall be made as may be necessary to give effect to that withdrawal;

• (b) paragraph 4 above shall not apply; and

• (c) the person who buys the relevant interest shall be treated for the purposes of this Schedule as having incurred, on the date when the purchase price becomes payable, expenditure falling within paragraph 1(1) above on the construction of the building, fence or other works.

• (3) The expenditure referred to in sub-paragraph (2)(c) above is whichever is the lesser of—

• (a) the net price paid by the person concerned for the purchase of the relevant interest; and

• (b) the expenditure referred to in sub-paragraph (1) above.

• (4) Where the relevant interest is sold more than once in circumstances falling within sub-paragraph (1) above, sub-paragraphs (2)(c) and (3) above shall have effect only in relation to the last of those sales.

Balancing allowances and charges

6

• (1) If, in respect of any expenditure falling within paragraph 1(1) above, a balancing event occurs in a chargeable period or its basis period and, apart from this paragraph, a person would be entitled to a writing-down allowance in respect of that expenditure for the chargeable period related to that event, no such allowance shall be made but an allowance or charge (in this paragraph referred to as a "balancing allowance" or a "balancing charge") shall, in the circumstances mentioned below, be made for that period to or, as the case may be, on the person entitled to the relevant interest immediately before that event occurs.

• (2) In relation to any expenditure, the amount of any balancing allowance or charge shall be determined in accordance with the following provisions of this paragraph by reference to—

• (a) the residue of that expenditure, that is to say, the amount of that expenditure falling to be taken into account for the purposes of this Schedule less the aggregate of any writing-down allowances made in respect of it (whether or not to the person to or on whom the allowance or charge is to be made); and

• (b) subject to sub-paragraph (3) below, any sale, insurance, salvage or compensation moneys related to the event which gives rise to the balancing allowance or balancing charge.

• (3) If, by virtue of sub-paragraph (2) or sub-paragraph (3) of paragraph 2 above only a portion of any expenditure falls to be taken into account for the purposes of this Schedule, any reference in the following provisions of this paragraph to sale, insurance, salvage or compensation moneys is a reference only to the like portion of those moneys.

• (4) Where there are no sale, insurance, salvage or compensation moneys or where the residue of the expenditure immediately before the balancing event exceeds those moneys, a balancing allowance shall be made of an amount equal to that residue or, as the case may be, to the excess of it over those moneys.

• (5) If the sale, insurance, salvage or compensation moneys exceed the residue of the expenditure immediately before the event, a balancing charge shall be made on an amount equal to that excess.

• (6) Notwithstanding anything in sub-paragraph (5) above, in no case shall the amount on which a balancing charge is made on any person exceed the amount of the writing-down allowances made to him in respect of that expenditure before the balancing event.

• (7) If a balancing event relates to—

• (a) the acquisition of the relevant interest in part only of the land in which it subsisted at the time the expenditure was incurred, or

• (b) only part of the building, fence or other works on the construction of which the expenditure was incurred,

the preceding provisions of this paragraph shall apply to so much of the expenditure as is properly attributable to the part of the land, building, fence or other works concerned, as if it were an item of expenditure separate from the rest.

• (8) This paragraph has effect subject to paragraph 9 below.

Balancing events

7

• (1) Subject to sub-paragraph (2) below, in relation to expenditure (in this paragraph referred to as "the original expenditure") for which, apart from paragraph 6 above, a person (in this paragraph referred to as "the former owner") would be entitled to a writing-down allowance, the following events are balancing events for the purposes of this Schedule—

• (a) the acquisition of the relevant interest by another person (in this paragraph referred to as "the new owner") as mentioned in paragraph 4 above; and

• (b) where any building, fence or other works on the construction of which the expenditure was incurred is demolished, destroyed or otherwise ceases to exist as such.

• (2) An event falling within sub-paragraph (1) above is not a balancing event for the purposes of this Schedule unless an election is made with respect to that event by notice in writing given to the inspector not more than two years after the end of the chargeable period related to the occurrence of the event.

• (3) Where, during the writing-down period applicable to the original expenditure, a balancing event falling within sub-paragraph (1)(a) above occurs, the amount of any writing-down allowances to which the new owner is entitled for chargeable periods which, or the basis periods for which, end after the balancing event shall be determined as if—

• (a) that part of the writing-down period applicable to the original expenditure which falls after the balancing event were itself the writing-down period in which the allowances in respect of that expenditure were to be made; and

• (b) subject to paragraph 9 below, the allowances were in respect of expenditure equal to the residue of the original expenditure (determined under paragraph 6(2)(a) above) immediately before the balancing event less the amount of any balancing allowance made to the former owner or, as the case may be, plus the amount on which any balancing charge was made on him by reason of the balancing event.

• (4) Subject to sub-paragraph (5) below, an election under this paragraph shall be made as follows—

• (a) where the event falls within sub-paragraph (1)(a) above, jointly by the former owner and the new owner; and

• (b) where the event falls within sub-paragraph (1)(b) above, by the former owner.

• (5) No election may be made under this paragraph if any person by whom that election should be made is not within the charge to tax in the United Kingdom; and no election may be made in relation to an acquisition falling within sub-paragraph (1)(a) above if it appears with respect to that acquisition, or with respect to transactions of which that acquisition is one, that the sole or main benefit which (apart from Schedule 7 to the Capital Allowances Act 1968) might have been expected to accrue to the parties or any of them was the obtaining of an allowance, or a greater allowance, under this Schedule.

Exclusion of land values etc.

8

• (1) Any reference in this Schedule to expenditure incurred on the construction of a building does not include any expenditure incurred on the acquisition of, or of rights in or over, any land.

• (2) Without prejudice to any provision of Part I of the Capital Allowances Act 1968 relating to the apportionment of sale, insurance, salvage or compensation moneys, the sum paid on the sale of the relevant interest in a building, fence or other works or any other sale, insurance, salvage or compensation moneys payable in respect of any building, fence or other works shall, for the purposes of this Schedule, be deemed to be reduced by an amount equal to so much thereof as, on a just apportionment, is attributable to assets representing expenditure other than expenditure in respect of which an allowance can be made under this Schedule.

Special provisions as to certain sales

9

• (1) In its application in relation to any sale which is material for the purposes of this Schedule, Schedule 7 to the Capital Allowances Act 1968 (transactions between connected persons etc.) shall have effect with the omission—

• (a) of paragraph 4 (sales without change of control); and

• (b) of any reference to paragraph 4 or any provision thereof in any other paragraph of that Schedule.

• (2) For the purposes of this Schedule and the provisions of the Capital Allowances Act 1968 which are relevant to this Schedule, any transfer of the relevant interest (in relation to any expenditure falling within paragraph 1(1) above) otherwise than by way of sale shall be treated as a sale of the interest for a price other than that which it would have fetched if sold on the open market.

• (3) If Schedule 7 to the Capital Allowances Act 1968 would not, apart from this sub-paragraph, have effect in relation to a transfer treated as a sale by virtue of sub-paragraph (2) above, that Schedule shall have effect in relation to it as if it were a sale falling within paragraph 1(1 )(a) of that Schedule.

Restriction of balancing allowances on sale of buildings

10

• (1) This paragraph has effect where—

• (a) the relevant interest in a building is sold subject to a subordinate interest; and

• (b) a balancing allowance under paragraph 6 above would, apart from this paragraph, fall to be made to the person who is entitled to the relevant interest immediately before the sale (in this paragraph referred to as "the former owner") by virtue of the sale; and

• (c) either—

• (i) the former owner, the person to whom the relevant interest is sold and the grantee of the subordinate interest, or any two of them, are connected with each other within the terms of section 533 of the Taxes Act, or

• (ii) it appears with respect to the sale or to the grant of the subordinate interest, or with respect to transactions including the sale or grant, that the sole or main benefit which, but for this paragraph, might have been expected to accrue to the parties or any of them was the obtaining of an allowance under this Schedule.

• (2) For the purposes of paragraph 6 above the net proceeds to the former owner of the sale—

• (a) shall be taken to be increased by an amount equal to any premium receivable by him for the grant of the subordinate interest; and

• (b) where no rent, or no commercial rent, is payable in respect of the subordinate interest, shall be taken to be what those proceeds would have been if a commercial rent had been payable and the relevant interest had been sold in the open market (increased by any amount to be added under paragraph (a) of this sub-paragraph);

but the net proceeds of sale shall not by virtue of this sub-paragraph be taken to be greater than such amount as will secure that no balancing allowance falls to be made.

• (3) Where sub-paragraph (2) above operates, in relation to a sale, to deny or reduce a balancing allowance in respect of any expenditure, paragraph 7(3) above shall have effect as if that balancing allowance had been made or, as the case may be, had not been reduced.

• (4) In this paragraph—

• "subordinate interest" means any interest in or right over the building in question (whether granted by the former owner or by somebody else);

• "premium" includes any capital consideration except so much of any sum as corresponds to any amount of rent or profits falling to be computed by reference to that sum under section 80 of the Taxes Act (premium treated as rent or Schedule D profits);

• "capital consideration" means consideration which consists of a capital sum or would be a capital sum if it had taken the form of a money payment;

• "rent" includes any consideration which is not capital consideration;

• "commercial rent" means such rent as may reasonably be expected to have been required in respect of the subordinate interest in question (having regard to any premium payable for the grant of the interest) if the transaction had been at arm's length.

• (5) Where the terms on which a subordinate interest is granted are varied before the sale of the relevant interest, any capital consideration for the variation shall be treated for the purposes of this paragraph as a premium for the grant of the interest, and the question whether any and, if so, what rent is payable in respect of the interest shall be determined by reference to the terms as in force immediately before the sale.

Manner of making allowances and charges

11

• (1) Except as provided below, any allowance or charge made to or on any person under this Schedule shall be made to or on him in taxing his trade; and any reference in the following provisions of this paragraph to an allowance or charge of any description is a reference to an allowance or charge under this Schedule.

• (2) Any allowance which falls to be made to a person for a chargeable period in which he is not carrying on a trade shall be made by way of discharge or repayment of tax.

• (3) Any allowance which, under this paragraph, is to be made by way of discharge or repayment of tax shall be available primarily against agricultural income and forestry income and income which is the subject of a balancing charge.

• (4) Effect shall be given to a balancing charge to be made on a person for a chargeable period in which he is not carrying on a trade.—

• (a) if it is a charge to income tax, by making the charge under Case VI of Schedule D; and

• (b) if it is a charge to corporation tax, by treating the amount on which the charge is to be made as agricultural income or forestry income.

SCHEDULE 16

PART I — Amendments of Finance Act 1980, Sections 64 to 68

1

• (1) In section 64, subsection (1) (exclusion of first-year allowances etc.) shall be omitted.

• (2) In subsection (2)(a) of that section—

• (a) the words "a first-year allowance could have been made to the lessee" shall be omitted; and

• (b) after the words "in doing so" there shall be inserted "that expenditure would have fallen to be included, in whole or in part, in his qualifying expenditure for any chargeable period for the purposes of subsections (2), (2A) and (3) of section 44 of the Finance Act 1971 (writing-down allowances)".

• (3) In subsection (6A) of that section for the words "first-year allowance" there shall be substituted "writing-down allowance of an amount determined without regard to section 70(2) of the Finance Act 1982".

• (4) In subsection (8) of that section (the requisite period) at the beginning there shall be inserted "subject to subsection (8A) below" and for the word "four", in each place where it occurs, there shall be substituted "ten".

• (5) After subsection (8) of that section there shall be inserted the following subsection—

(8A) If the circumstances are such that machinery or plant is used for a qualifying purpose, subsection (8) above shall have effect as if each reference therein to ten years were a reference to four years

.

• (6) Subsection (10) of that section shall be omitted.

• (7) In subsection (11) of that section—

• (a) for the words from the beginning to "expenditure", in the first place where it occurs, there shall be substituted "Where expenditure is incurred";

• (b) for the words "if it" there shall be substituted "which"; and

• (c) for the words "plant; and so" there shall be substituted "plant, so".

2

• (1) In section 65 (writing-down allowances etc. in case of leased assets) in subsection (1) for the words from the beginning to "leasing" there shall be substituted "Where section 70 of the Finance Act 1982 applies to expenditure on the provision of machinery or plant for leasing".

• (2) In subsection (6) of that section the words from the beginning to "1971; but" shall be omitted and for the words "that Schedule" there shall be substituted "Schedule 8 to the Finance Act 1971".

3

Sections 66 and 67 shall be omitted.

4

• (1) In section 68 (joint lessees), at the end of subsection (1) there shall be added "and—

• (a) at least one of the joint lessees is a person falling within paragraphs (a) and (b) of subsection (1) of section 70 of the Finance Act 1982; and

• (b) the leasing is not permitted leasing as denned in paragraph 7 of Schedule 16 to the Finance Act 1986".

• (2) In subsection (2) of that section—

• (a) for the words from the beginning to "shall not apply" there shall be substituted "If;

• (b) the words "but if shall be omitted; and

• (c) for the words "it shall be regarded as used for a qualifying purpose" there shall be substituted "the expenditure on the provision of the machinery or plant shall be treated as not falling within subsection (1) of the said section 70".

• (3) In subsection (3) of that section—

• (a) the words from "a first-year" to "in respect of shall be omitted;

• (b) after the words "machinery or plant", where they first occur, there shall be inserted "is treated as not falling within subsection (1) of section 70 of the Finance Act 1982";

• (c) for the words "and sections 65 and 66" there shall be substituted "the said section 70 and section 65 above"; and

• (d) in paragraph (b) after the word "expenditure" there shall be inserted "(falling within subsection (1) of the said section 70)" and after the word "plant" there shall be inserted "used otherwise than for a qualifying purpose".

• (4) Subsections (4) to (8) of that section shall be omitted.

PART II — Amendments of Finance Act 1982, Section 70 and Schedule 11

5

• (1) In section 70, in subsection (1) (application of section to foreign leasing which is not short-term leasing) for the words "not short-term leasing" there shall be substituted "neither short-term leasing nor the leasing of a ship, aircraft or transport container which is used for a qualifying purpose by virtue of subsections (5) to (7) of section 64 of the Finance Act 1980".

• (2) In subsection (2)(a) of that section (reference to section 65 of the Finance Act 1980) for the words in parenthesis there shall be substituted "(as amended by Part I of Schedule 16 to the Finance Act 1986)".

• (3) Subsection (3) of that section shall be omitted.

• (4) In subsection (4) of that section.—

• (a) the words "first-year allowances" shall be omitted; and

• (b) for the words "as mentioned in subsection (5)(b) above" there shall be substituted "such that the machinery or plant in question is used otherwise than for a qualifying purpose, within the meaning of section 64 of the Finance Act 1980".

• (5) In subsection (5) of that section—

• (a) the words "a first-year allowance" shall be omitted; and

• (b) for the words "section 66 of the Finance Act 1980" there shall be substituted "paragraph 8 of Schedule 16 to the Finance Act 1986".

• (6) For subsection (6) of that section there shall be substituted the following subsection—

(6) For the purposes of subsection (5) above, the allowances that have been made in respect of expenditure on any item of machinery or plant shall be determined as if that item were the only item of machinery or plant in respect of which section 44 of the Finance Act 1971 had effect.

• (7) In subsection (7) of that section after the words "Finance Act 1980" there shall be inserted "(as amended by Part I of Schedule 16 to the Finance Act 1986)".

• (8) In subsection (9) of that section.—

• (a) for the words from "as, in a case" to "1980" there shall be substituted "as it has in section 64 of the Finance Act 1980 (as amended by Part I of Schedule 16 to the Finance Act 1986)";

• (b) the words "and the provisions of Schedule 11 to this Act" shall be omitted; and

• (c) at the end there shall be added

and (c) as if the reference in subsection (5) of that section to a first-year allowance were a reference to a writing-down allowance

.

6

In Schedule 11, paragraphs 3, 5 and 6 shall be omitted.

PART III — Supplementary Provisions as to Assets Leased Outside the United Kingdom

Interpretation

7

• (1) In this Part of this Schedule—

• (a) "the principal section" means section 70 of the Finance Act 1982;

• (b) a "non-resident" means such a person as is referred to in paragraphs (a) and (b) of subsection (1) of the principal section;

• (c) "normal writing-down allowance" means a writing-down allowance of an amount determined without regard to subsection (2) of the principal section;

• (d) "permitted leasing" means short-term leasing or the leasing of a ship, aircraft or transport container which is used for a qualifying purpose by virtue of subsections (5) to (7) of section 64 of the Finance Act 1980; and

• (e) "short-term leasing" has the meaning assigned to it by section 64(3) of the Finance Act 1980;

and other expressions have the same meaning as in the principal section.

• (2) Where new expenditure has been incurred by any person, any reference in this Part of this Schedule to the new expenditure having qualified for a normal writing-down allowance is a reference to the expenditure having fallen to be included, in whole or in part, in that person's qualifying expenditure for any chargeable period for the purposes of subsections (2), (2A) and (3) of section 44 of the Finance Act 1971, as that section has effect with respect to expenditure which does not fall within subsection (1) of the principal section.

Recovery of excess relief

8

• (1) Where new expenditure incurred by any person in providing machinery or plant has qualified for a normal writing-down allowance and the machinery or plant is at any time in the requisite period used for the purpose of being leased to a non-resident, otherwise than by permitted leasing.—

• (a) an amount equal to the excess relief shall, in relation to the person to whom the machinery or plant then belongs, be treated as if it were a balancing charge to be made on him for the chargeable period for which, or in the basis period for which, the machinery or plant is first so used; and

• (b) for the purposes of section 44 of the Finance Act 1971 (as it has effect with respect to expenditure which does not fall within subsection (1) of the principal section), an amount equal to the unused expenditure shall, in relation to that person, be treated as if it were a disposal value to be brought into account for the chargeable period referred to in paragraph (a) above; and

• (c) section 44 of the Finance Act 1971 (as it has effect as mentioned in paragraphs (a) to (e) of subsection (2) of the principal section) shall apply as if a sum equal to the aggregate of the amounts in paragraphs (a) and (b) above were qualifying expenditure of that person for the next chargeable period and, for the purpose of subsequently bringing any disposal value into account, as if the machinery or plant had always been used for the purposes of the separate trade.

• (2) The excess relief is the excess, if any, of—

• (a) any normal writing-down allowances made in respect of the new expenditure for the chargeable period related to the incurring of the expenditure and any subsequent chargeable period up to and including that mentioned in sub-paragraph (1)(a) above, over

• (b) the maximum writing-down allowance or allowances that could have been made in respect of the expenditure for those chargeable periods if no normal writing-down allowance had been or could have been made.

• (3) The unused expenditure is the amount by which the new expenditure incurred in providing the machinery or plant exceeds the allowances referred to in sub-paragraph (2)(a) above.

• (4) For the purposes of sub-paragraph (2) above, the normal writing-down allowances that were made in respect of new expenditure on any item of machinery or plant shall be determined as if that item were the only item of machinery or plant in relation to which the said section 44 had effect.

• (5) Where the person to whom any machinery or plant belongs at a time when it is first used for the purpose of being leased to a nonresident, otherwise than by permitted leasing, has acquired it as a result of a transaction which was, or a series of transactions each of which was, between connected persons and a normal writing-down allowance in respect of expenditure on the provision of the machinery or plant has been made to any of those persons—

• (a) sub-paragraph (2) above shall have effect as if it referred to that allowance and to the expenditure in respect of which it was made;

• (b) for the purposes of that sub-paragraph any consideration paid or received on a disposal of the machinery or plant between connected persons shall be disregarded; and

• (c) if a balancing allowance or balancing charge is made in respect of the machinery or plant there shall be made such adjustments of the total relief falling to be taken into account under paragraph (a) of that sub-paragraph as are just and reasonable in the circumstances;

but this sub-paragraph does not apply where section 154(2), section 155(1) or section 252(2) of the Taxes Act or sub-paragraphs (a) and (b) of paragraph 13 of Schedule 8 to the Finance Act 1971 (succession to trades), applied on the occasion of the transaction or transactions in question.

• (6) Where the person to whom any machinery or plant belongs at such a time as is mentioned in sub-paragraph (5) above acquired it as there mentioned and—

• (a) new expenditure incurred on the provision of the machinery or plant by any of the connected persons would have qualified for a normal writing-down allowance but such an allowance was not claimed or was disclaimed; and

• (b) a balancing allowance is made to any of those persons in respect of that expenditure,

this paragraph shall with the necessary modifications apply as it applies where a normal writing-down allowance has been made.

• (7) If at any time in the requisite period a ship is used for the purpose of being leased to a non-resident, otherwise than by permitted leasing, then, without prejudice to the other provisions of this paragraph.—

• (a) no allowance shall be made in respect of it under sub-paragraph (5)(c) of paragraph 8A of Schedule 8 to the Finance Act 1971 for the chargeable period in which it is first so used or for any subsequent chargeable period;

• (b) nothing in sub-paragraphs (8) and (9) of that paragraph shall affect the operation of sub-paragraph (1) above; and

• (c) section 44 of that Act (as it has effect in accordance with section 65 of the Finance Act 1980) shall apply as if the amount of any allowance in respect of the ship which has been postponed under the said paragraph 8A and not made were qualifying expenditure for the next chargeable period after that in which the ship is first so used.

• (8) Section 533 of the Taxes Act (connected persons) applies for the purposes of this paragraph.

Joint lessees

9

• (1) Without prejudice to the operation of paragraph 8 above, the provisions of this paragraph have effect where new expenditure is incurred on the provision of machinery or plant which is leased as mentioned in subsection (1) of section 68 of the Finance Act 1980, and any reference in the following provisions of this paragraph to section 68 is a reference to that section.

• (2) Where, by virtue of subsection (2) of section 68, the whole or part of the new expenditure has qualified for a normal writing-down allowance and, at any time in the requisite period while it is leased as mentioned in that subsection—

• (a) no lessee uses the machinery or plant for the purposes of a trade or trades the profits or gains of which are chargeable to income tax or corporation tax, and

• (b) subsection (5) of the principal section does not apply at that time and has not applied at any earlier time,

paragraph 8 above and paragraph 10(2) below shall have effect as if the separate item of machinery or plant referred to in subsection (3)(a) of section 68 had at that time begun to be used for the purpose of being leased to a non-resident, otherwise than by permitted leasing.

• (3) Where the whole or part of any new expenditure has qualified for a normal writing-down allowance and the machinery or plant is subsequently leased in the requisite period as mentioned in subsection (1) of section 68, sub-paragraph (2) above shall apply as if the whole of the expenditure had qualified for a normal writing-down allowance by virtue only of subsection (2) of that section.

• (4) Where, by virtue of subsection (2) of section 68, the whole or part of the new expenditure has qualified for a normal writing-down allowance and, at the end of the requisite period, the machinery or plant in question is leased as mentioned in subsection (1) of that section but sub-paragraph (2) above has not had effect, then, if it appears that the extent to which the machinery or plant has been used for the purposes of such a trade or trades as are referred to in that subparagraph is less than that which was taken into account in determining the amount of the new expenditure which qualified for a normal writing-down allowance.—

• (a) paragraph 8 above shall have effect as if a part of the expenditure corresponding to the reduction in the extent of such use were expenditure on the provision of a separate item of machinery or plant used for the purpose of leasing to a nonresident, otherwise than by permitted leasing, on the last day of the requisite period; and

• (b) any disposal value subsequently brought into account in respect of the machinery or plant under section 44 of the Finance Act 1971 shall, instead of being apportioned in accordance with subsection (3) of section 68, be apportioned by reference to the extent of such use as determined at the end of that period.

Information

10

• (1) Where new expenditure is incurred on the provision of machinery or plant and, before the expenditure has qualified for a normal writing-down allowance, it is used for leasing to a non-resident and that leasing is permitted leasing, a claim by a person other than a company for a writing-down allowance which takes account of that expenditure and a return by a company of profits in the computation of which a deduction is made on account of such an allowance shall be accompanied by a certificate to that effect, setting out the description of permitted leasing.

• (2) If, after any new expenditure has qualified for a normal writing-down allowance, the machinery or plant in question is at any time in the requisite period used for the purpose of being leased to a nonresident, otherwise than by permitted leasing, the person to whom it belongs at that time shall give written notice of that fact to the inspector.

• (3) Subject to sub-paragraph (6) below, notice under sub-paragraph (2) above shall be given within three months after the end of the chargeable period or its basis period in which the machinery or plant is first used for leasing as mentioned in that sub-paragraph.

• (4) A certificate or notice given by any person under sub-paragraph (1) or sub-paragraph (2) above by reference to any chargeable period or its basis period shall specify the non-resident to whom the machinery or plant has been leased and shall specify all the items of machinery or plant (if more than one) in respect of which the person in question is required to give a certificate or notice under this paragraph by reference to that period.

• (5) Subject to sub-paragraph (6) below, where new expenditure is incurred on the provision of machinery or plant which is leased as mentioned in section 68(1) of the Finance Act 1980, the lessor shall, within three months after the end of the chargeable period or its basis period in which the machinery or plant is first so leased, give written notice to the inspector specifying—

• (a) the names and addresses of the persons to whom the asset is jointly leased;

• (b) the portion of the new expenditure which is properly attributable to each of those persons; and

• (c) so far as it is within his knowledge, which of those persons is resident in the United Kingdom.

• (6) If, at the end of the three months referred to in sub-paragraph (3) or sub-paragraph (5) above, the person required to give a notice under that sub-paragraph does not know and cannot reasonably be expected to know that any item of machinery or plant in respect of which he is required to give such a notice has been used or leased as mentioned in the sub-paragraph in question, he shall in respect of that item give the notice within thirty days of his coming to know that it has been so used or leased.

• (7) In the Table in section 98 of the Taxes Management Act 1970 (penalties) at the end of the second column there shall be added—

Paragraph 10 of Schedule 16 to the Finance Act 1986

.

PART IV — Amendment of Finance Act 1980, Section 69

11

In section 69 (writing-down allowances etc. for cars) for the words from "any vehicle" onwards there shall be substituted

any mechanically propelled vehicle other than— (a) a vehicle of a construction primarily suited for the conveyance of goods or burden of any description; (b) a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used; (c) a vehicle to which paragraph 10 of Schedule 8 to the Finance Act 1971 applies (expensive motor cars); and (d) subject to subsection (2) below, a vehicle provided wholly or mainly for hire to, or for the carriage of, members of the public in the ordinary course of a trade. (2) Subsection (1)(d) above applies to a vehicle only if— (a) the following conditions are satisfied— (i) the number of consecutive days for which it is on hire to, or used for the carriage of, the same person will normally be less than 30; and (ii) the total number of days for which it is on hire to, or used for the carriage of, the same persoji in any period of 12 months will normally be less than 90; or (b) it is provided for hire to a person who will himself use it wholly or mainly for hire to, or the carriage of, members of the public in the ordinary course of a trade and in a manner complying with the conditions in paragraph (a) above. (3) For the purposes of subsection (2) above, persons who are connected with each other shall be treated as the same person; and that subsection does not affect vehicles provided wholly or mainly as mentioned in section 64(12) above.

SCHEDULE 17

1

• (1) The following shall be inserted at the end of paragraph 8 of Schedule 23 to the Finance Act 1985 (trustees)—

(4) Sub-paragraph (1) above does not apply where the annual profits or gains are treated as received by the investment manager of a common investment fund for the time being designated as mentioned in section 413(1) of the Taxes Act (funds in court). (5) Where the income or part of the income derived in a year of assessment from such a common investment fund or its investments consists of interest on securities, the income or part (as the case may be) shall for the purposes of section 413(1)(a) of the Taxes Act be calculated by treating it as the amount it would be apart from section 74(5) of this Act, but reduced by an amount (if any) equal to the excess of A over B. (6) In sub-paragraph (5) above— - A is the total amount of allowances to which, by virtue of section 74(4) of this Act, the investment manager of the fund is entitled in the year of assessment in respect of all securities comprised in the fund, and - B is the total amount of annual profits or gains which, by virtue of section 74(2) of this Act, he is treated as receiving in the year of assessment in respect of those securities.

• (2) Paragraph 8 shall be treated as having been enacted with subparagraphs (4) to (6).

2

• (1) Paragraph 15 of that Schedule (transfer of unrealised interest) shall be amended as follows.

• (2) For sub-paragraph (5) there shall be substituted—

(5) Section 75 of this Act applies for the purposes of this paragraph as if in subsection (1) the reference to section 73(2)(a) or (3)(a) were to sub-paragraph (2) or (3) above and references to the year of assessment in which the interest period ends were to the year in which the settlement day falls, and as if in subsection (2) the reference to section 73(2)(b) or (3)(b) were to sub-paragraph (4) above.

• (3) After sub-paragraph (7) there shall be inserted—

(7A) Where sub-paragraph (4) above applies, section 33 of the Capital Gains Tax Act 1979 shall be disregarded in computing for capital gains tax purposes the gain accruing to the transferee if he disposes of the securities, but an amount equal to the amount of the unrealised interest shall be excluded from the sums mentioned in paragraph 33(5) below.

• (4) This paragraph applies where securities are transferred after 18th March 1986.

3

• (1) The following shall be inserted after paragraph 15 of that Schedule—

(15A) (1) This paragraph applies to securities other than securities falling within sub-paragraph (2) or (4) below. (2) Securities fall within this sub-paragraph if their terms of issue provide that throughout the period from issue to redemption (whenever redemption might occur) they are to carry interest at a rate which falls into one, and one only, of the following categories— (a) a fixed rate which is the same throughout the period; (b) a rate which bears to a standard published base rate the same fixed relationship throughout the period; (c) a rate which bears to a published index of prices the same fixed relationship throughout the period. (3) In sub-paragraph (2)(c) above "published index of prices" means the retail prices index (within the meaning of section 24 of the Finance Act 1980) or any similar general index of prices which is published by, or by an agent of, the government of any territory outside the United Kingdom. (4) Securities fall within this sub-paragraph if they are deep discount securities and the rate of interest for each (or their only) interest period is equal to or less than the yield to maturity. (5) In sub-paragraph (4) above "deep discount securities" and "yield to maturity" have the same meanings as in Schedule 9 to the Finance Act 1984; and for the purposes of that sub-paragraph the rate of interest for an interest period is, in relation to securities, the rate of return (expressed as a percentage) attributable to the interest applicable to them for the interest period. (6) Sub-paragraphs (7) to (11) below apply if securities to which this paragraph applies are transferred at any time between the time they are issued and the time they are redeemed. (7) If the securities are transferred without accrued interest they shall be treated for the purposes of this Chapter as transferred with accrued interest. (8) The person entitled to the securities immediately before they are redeemed shall be treated for the purposes of this Chapter as transferring them with accrued interest on the day they are redeemed. (9) Where there is a transfer as mentioned in sub-paragraph (6) above or by virtue of sub-paragraph (8) above, section 73 of this Act shall be construed as if the following were substituted for subsections (2)(b) and (3) to (8)— (3) In subsection (2)(a) above "the accrued amount" means such amount (if any) as an inspector decides is just and reasonable; and the jurisdiction of the General Commissioners or the Special Commissioners on any appeal shall include jurisdiction to review such a decision of the inspector. (10) Sub-paragraph (11) below applies where there is a transfer by virtue of sub-paragraph (8) above and the settlement day in relation to the transfer falls after the end of a period which would (by virtue of paragraph 3(3) and (4) above and apart from this paragraph) be the only or last interest period in relation to the securities. (11) For the purposes of this Chapter the period beginning with the day following that interest period and ending with the settlement day shall be treated as an interest period in relation to the securities; and paragraph 3(4) above shall not apply to it. (15B) (1) This paragraph applies where, because of any failure to fulfil the obligation to pay interest on securities, the value (on a day mentioned in paragraph 3(6) or (7)(a) above, as the case may be) of the right to receive the interest payable on them on that day is less than the interest so payable. (2) Paragraph 3(6) or (7)(a), as the case may be, shall be construed as if" the reference to that interest were to an amount equal to that value. (15C) (1) Where securities are transferred as mentioned in paragraph 15(1) above and, because of any failure to fulfil the obligation to pay interest on them, the value (on the day of the transfer) of the right to receive the unrealised interest is less than the amount of the unrealised interest, paragraph 15 above shall have effect as modified by sub-paragraphs (2) to (6) below. (2) In sub-paragraphs (2) and (3) for "the unrealised interest" there shall be substituted "amount A". (3) For sub-paragraph (4) there shall be substituted— (4) Where the transferee receives an amount by way of the unrealised interest (amount B) and that amount falls to be taken into account in computing tax charged for the chargeable period in which it is received, it shall for the purposes of the Tax Acts be treated as reduced by an amount (amount C) equal to— (a) nil, if amounts have been previously received by the transferee by way of the unrealised interest and their aggregate is equal to or greater than the value (on the day of the transfer to the transferee) of the right to receive the unrealised interest, (b) amount B, if that value is equal to or greater than amount B (aggregated with other amounts previously so received, if any), (c) that value, if no amount has been previously so received and that value is less than amount B, or (d) so much of that value as exceeds the aggregate of amounts previously so received, in any other case. (4) In sub-paragraph (7) for "the amount of the unrealised interest" there shall be substituted "amount A". (5) In sub-paragraph (7A) for "the amount of the unrealised interest" there shall be substituted "amount C". (6) The following shall be substituted for sub-paragraph (8)— (8) In this paragraph 'amount A' means, in a case where the transferor acquired the securities by a transfer on or after 28th February 1986 with the right to receive unrealised interest.— (a) an amount equal to amount D less amount E, or (b) if amount D is equal to or less than amount E, nil. (9) In this paragraph 'amount A' means, in a case not falling within sub-paragraph (8) above, an amount equal to amount D. (10) In this paragraph 'amount D' is an amount equal to the value (on the day of the transfer by the transferor) of the right to receive the unrealised interest. (11) In this paragraph 'amount E' means, in a case where the transferor (as transferee) has received in respect of the securities an amount or amounts falling within sub-paragraph (4) above.— (a) an amount equal to amount F less the total received, or (b) if amount F is equal to or less than the total received, nil. (12) In this paragraph 'amount E' means, in any other case, an amount equal to amount F. (13) In this paragraph 'amount F' means an amount equal to the value (on the day of the transfer to the transferor) of the right to receive the unrealised interest. (14) In determining for the purposes of this paragraph which securities of a particular kind a person has transferred, he is to be taken to have transferred securities of that kind which he acquired later before securities of that kind which he acquired earlier. (15) Where the unrealised interest is payable in a currency other than sterling— (a) any amount received by way of the interest is for the purposes of this paragraph the sterling equivalent on the day it is received of the amount it would be apart from this sub-paragraph, and (b) the value (on the day of a transfer) of the right to receive the interest is for the purposes of this paragraph the sterling equivalent (on that day) of the value it would be apart from this sub-paragraph; and for this purpose the sterling equivalent is to be calculated by reference to the London closing rate of exchange for the day concerned.

• (2) In consequence of sub-paragraph (1) above, in paragraph 4(4) of that Schedule after "14" there shall be inserted ", 15A(8)".

• (3) The reference in paragraph 15A(6) to a time of transfer is to a time falling after 18th March 1986; and sub-paragraph (2) above applies accordingly.

• (4) Paragraphs 15B and 15C apply where securities are transferred after 18th March 1986.

4

• (1) The following shall be inserted after paragraph 32 of that Schedule—

(32A) (1) Sub-paragraphs (2) and (3) below apply where securities are transferred and the interest which falls due on them at the end of the interest period in which the settlement day falls is subject to arrangements under section 343 of the Taxes Act or to the provisions of regulations under subsection (1A) of that section; but those sub-paragraphs do not apply where the interest is subject to the provisions of those regulations and would on being paid (to whatever person) be a gross payment within the meaning of those regulations. (2) Section 73(4) of this Act shall be construed as if the following were substituted for paragraphs (a) and (b)— (a) if the securities are transferred under an arrangement by virtue of which the transferee accounts to the transferor separately for the consideration for the securities and for an amount equal to the grossed up equivalent of the interest (if any) accruing to the settlement day, an amount equal to that amount, and (b) in any other case, an amount equal to the accrued proportion of the grossed up equivalent of the interest applicable to the securities for the period. (3) Section 73(5) of this Act shall be construed as if the following were substituted for paragraphs (a) and (b)— (a) if the securities are transferred under an arrangement by virtue of which the transferor accounts to the transferee for an amount equal to the grossed up equivalent of the interest (if any) accruing from the settlement day to the next interest payment day, an amount equal to that amount, and (b) in any other case, an amount equal to the rebate proportion of the grossed up equivalent of the interest applicable to the securities for the period. (4) Where the unrealised interest mentioned in paragraph 15 above is subject to arrangements under section 343 of the Taxes Act or to the provisions of regulations under subsection (1A) of that section, that paragraph shall be construed as if in subparagraphs (2), (3), (7) and (7A) "the unrealised interest" read "the grossed up equivalent of the unrealised interest"; but this does not apply where the unrealised interest is subject to the provisions of those regulations and would on being paid (to whatever person) be a gross payment within the meaning of those regulations. (5) In calculating the grossed up equivalent of interest for the purposes of section 73(4)(i) and (5)(i) of this Act and paragraph 15(2), (3), (7) and (7A) above (as substituted or amended as mentioned in this paragraph) the interest shall, in a case where it is subject to the provisions of regulations under section 343(1 A) of the Taxes Act, be treated as if it would, on being paid, not be a gross payment within the meaning of those regulations. (6) For the purposes of the provisions of this Chapter mentioned in sub-paragraph (5) above the grossed up equivalent of interest is to be calculated by adding to the interest a sum found by applying the following formula— $SI+S=R$ . (7) In sub-paragraph (6) above— - S is the sum to be found, - I is the interest, and - R is the basic rate of income tax (expressed as a fraction) for the year of assessment in which the interest is payable. (32B) (1) This paragraph applies where a sum is both interest mentioned in section 74(5) of this Act, paragraph 9(4) above or paragraph 39(4) below and dividends or interest in the case of which section 343(2)(b) or (3)(c) of the Taxes Act applies. (2) In calculating the deduction of income tax as mentioned in section 343(2)(b) or (3)(c) any reduction mentioned in section 74(5), paragraph 9(4) or paragraph 39(4) shall be disregarded. (3) The amount which is treated as reduced as mentioned in section 74(5), paragraph 9(4) or paragraph 39(4) shall be the amount the person concerned is treated as receiving by virtue of section 343(2)(b) or (3)(c) (rather than the interest which falls due). (32C) (1) The effect of section 61(3) of the Finance Act 1986 (transfer for purposes of stock lending not taken into account in computing trade's profits or losses) shall be disregarded in construing section 75(1)(a) and (2)(a) of this Act. (2) Where securities are transferred in circumstances such that by virtue of section 61(4) of the Finance Act 1986 any disposal and acquisition are disregarded for the purposes of capital gains tax, section 73(2) and (3) of this Act and paragraph 15 above do not apply.

• (2) Paragraph 32A applies where securities are transferred after 18th March 1986.

• (3) Paragraph 32B applies where interest falls due after 18th March 1986.

5

• (1) In paragraph 43 of that Schedule (manufactured dividends) for paragraph (c) of sub-paragraph (1) there shall be substituted—

(c) any contract under which the securities are transferred to the seller, or the contract mentioned in paragraph (b) above, is one in the case of which section 477 of the Taxes Act (manufactured dividends) has effect and in relation to which the seller is the dividend manufacturer.

• (2) In sub-paragraphs (2) and (3) of paragraph 43 after the word "contract" (in each place) there shall be inserted the words "mentioned in sub-paragraph (1)(b) above".

• (3) This paragraph applies where the contract in relation to which the seller is the dividend manufacturer is made after 18th March 1986.

6

• (1) In paragraph 44 of that Schedule (information) in subparagraph (2) for the word "jobber" there shall be substituted the words "market maker".

• (2) After sub-paragraph (5) of paragraph 44 there shall be inserted—

(5A) In this paragraph "market maker", in relation to securities, means a person who— (a) holds himself out at all normal times in compliance with the rules of The Stock Exchange as willing to buy and sell securities of the kind concerned at a price specified by him, and (b) is recognised as doing so by the Council of The Stock Exchange.

• (3) Sub-paragraphs (1) and (2) above apply in relation to transactions on or after the day of The Stock Exchange reforms.

• (4) The Board may by regulations provide that—

• (a) sub-paragraphs (2) and (3) of paragraph 44 and paragraph (a) of sub-paragraph (5A) (as inserted by sub-paragraph (2) above) shall have effect as if references to The Stock Exchange were to any recognised investment exchange or to any of those exchanges specified in the regulations, and

• (b) paragraph (b) of sub-paragraph (5A) shall have effect as if the reference to the Council of The Stock Exchange were to the investment exchange concerned.

• (5) In sub-paragraph (4) above "recognised investment exchange" means a recognised investment exchange within the meaning of the Financial Services Act 1986.

• (6) Regulations under sub-paragraph (4) above shall apply in relation to transactions effected on or after such day, after the day of The Stock Exchange reforms, as is specified in the regulations.

• (7) The power to make regulations under sub-paragraph (4) above shall be exercisable by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons.

• (8) In this paragraph "the day of The Stock Exchange reforms" means the day on which the rule of The Stock Exchange that prohibits a person from carrying on business as both a broker and a jobber is abolished.

SCHEDULE 18

Sale and re-purchase of securities

1

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

Purchase and sale of securities

2

• (1) In section 471 of the Taxes Act (purchase and sale of securities) the following shall be substituted for subsection (6)(c)—

(c) 'securities' includes stocks and shares, except securities which are securities for the purposes of Chapter IV of Part II of the Finance Act 1985 (accrued income scheme etc.).

• (2) Sub-paragraph (1) above applies where the first buyer purchases after 18th March 1986; and section 475(6) of the Taxes Act and paragraph 42 of Schedule 23 to the Finance Act 1985 shall cease to have effect where the first buyer purchases after that date.

3

• (1) In section 472 of the Taxes Act (dealers in securities) the following shall be substituted for subsection (2)—

(2) Subsection (1) of this section shall not apply if the subsequent sale is carried out by the first buyer in the ordinary course of his business as a market maker in securities of the kind concerned.

• (2) At the end of that section there shall be inserted—

(6) For the purposes of subsection (2) of this section a person is a market maker in securities of a particular kind if he— (a) holds himself out at all normal times in compliance with the rules of The Stock Exchange as willing to buy and sell securities of that kind at a price specified by him, and (b) is recognised as doing so by the Council of The Stock Exchange.

• (3) This paragraph applies where the subsequent sale is carried out by the first buyer on or after the day of The Stock Exchange reforms.

4

• (1) The Board may by regulations provide for all or any of the following—

• (a) that section 472(2) of the Taxes Act (as substituted by paragraph 3(1) above) shall not apply unless the subsequent sale is carried out in compliance with further conditions specified in the regulations;

• (b) that section 472(6) of that Act (as inserted by paragraph 3(2) above) shall have effect as if the reference to The Stock Exchange in paragraph (a) were to any recognised investment exchange or to any of those exchanges specified in the regulations, and as if the reference to the Council of The Stock Exchange in paragraph (b) were to the investment exchange concerned;

• (c) that for section 475(3) and (5) of that Act (which refer to The Stock Exchange Daily Official List) there shall be substituted such provisions as the Board think fit to take account of recognised investment exchanges.

• (2) The regulations shall apply where the subsequent sale is carried out by the first buyer on or after such day, after the day of The Stock Exchange reforms, as is specified in the regulations.

Manufactured dividends

5

• (1) Section 477 of the Taxes Act (manufactured dividends) shall be amended as follows—

• (a) in subsection (1), in paragraph (a), for the words "the seller is required to pay to the purchaser" there shall be substituted the words "one of the parties to the contract (the dividend manufacturer) is required to pay to the other";

• (b) in that subsection, in paragraph (b) and the words following it, for the word "seller" (in each place) there shall be substituted the words "dividend manufacturer";