1. This clause and Schedule 6 charge as a revenue receipt reverse premiums to which a person becomes entitled on or after 9 March 1999. Reverse premiums are inducements to take a lease made by landlords to potential tenants.

2. Such sums were often considered taxable before a recent decision of the Privy Council.

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3. Subsection (1) gives effect to Schedule 6 .

4. Subsection (2) provides that the rules in Schedule 6 will apply to a reverse premium received on or after 9 March 1999, unless the recipient was entitled to it before that date.

5. Subsection 3 explains that the exclusion of existing entitlement relates only to arrangements made before 9 March 1999, and not to any made on or after that date.

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6. Paragraphs 1(1)(a), (b) and (2) define a reverse premium as a money payment or other benefit received by any person as an inducement to take a lease or other interest or right in or over land. The definition extends to any such inducement provided to anyone connected with the person who takes the interest.

7. Paragraph (1)(1)(c) restricts the definition of reverse premium by reference to the identity of the person who provides it. A reverse premium is chargeable under the Schedule only if provided by the person who grants the interest in land, or someone connected with the grantor, or a nominee or other person acting at the direction of the grantor, or of a person connected with the grantor.

8. Paragraph 2(1) prescribes that a reverse premium shall be treated as a revenue receipt.

9. Paragraph 2(2) applies where the recipient is a trader, or carrying on a profession or vocation, and takes the interest in land for the purposes of the trade, profession or vocation. In this situation, the reverse premium is treated as a receipt of the trade, profession or vocation.

10. Paragraph 2(3) provides that if the recipient is not within paragraph 2(2), the reverse premium shall be treated as a receipt of a rental business within Schedule A.

11. One effect of paragraphs 2(2) and (3) is to provide a timing rule for the charge. As a receipt of either a trade or a rental business, a reverse premium will be spread in accordance with accepted principles of commercial accounting, normally over the period of the lease, or to the date of the first rent review, whichever is shorter.

12. Paragraph 3 contains a specific timing rule which may override the treatment applied by paragraphs 2(2) or (3). It is an anti-avoidance measure, intended to prevent exploitation of timing differences by the grant of a lease to a connected person on clearly uncommercial terms - say, a 25 year lease with no provision for rent review.

13. Paragraph 3(1) provides that the whole reverse premium shall be charged to tax in the first relevant period of account if:

two or more parties to any "relevant arrangements" are connected; and

those arrangements are unlikely to have been made by parties

acting at arm’s length.

"Relevant arrangements" are defined in Paragraph 7(2) of the Schedule - see paragraph 26 of these notes.

14. Paragraph 3(2) explains the "first relevant period of account". The primary definition is the period of account in which the interest in land is taken.

15. Paragraph 3(3) refines that general definition to meet the case where a person gets a reverse premium for taking an interest in premises from which he intends to trade, but before trading begins. In those circumstances, the "first relevant period of account" is the one in which trading starts.

16. Paragraph 3(4) contains further explanation of the concept of arrangements unlikely to have been made by parties acting at arm’s length. These are arrangements which parties acting at arm’s length in the open market conditions then prevailing would not normally and reasonably be expected to make.

17. Paragraph 3(5) defines "period of account" as the period for which the accounts of the person chargeable are prepared.

18. Paragraph 4 contains special rules for life assurance companies.

19. Paragraph 4(1) explains that the timing provisions for bringing reverse premiums into charge in paragraphs 2 and 3 are modified where a reverse premium is received by a company carrying on life assurance business.

20. Paragraph 4(2) preserves the special rules that apply for bringing investment income and gains into account in any computation made in accordance with the rules of Case I of Schedule D. This ensures that paragraph 2(2) will not require the premium to be brought in as a trading receipt where the rules in section 83 FA 1989 would defer it, and bring it into account in a later period.

21. Paragraph 4(3) gives a special rule where a premium is received by a company whose life assurance business is taxed on the I (income) minus E (expenses) basis, which is the usual basis for such companies. Instead of treating a premium which relates to the premises from which the company conducts its business (such as a branch office) as a trading or Schedule A receipt, the amount of the premium that is referable to the company’s basic life assurance and general annuity business is deducted from the expenses the company can set against its income from that business.

22. Paragraph 4(4) defines some of the specialist terms used - they have the same meaning as in life assurance provisions of the Taxes Act.

23. Paragraph 5 provides that no charge under this legislation will arise on a reverse premium payable for taking an interest in property which is to be the recipient’s only or main residence.

24. Paragraph 6 puts beyond doubt that any consideration received for the grant or assignment of an interest in land as the first leg of a sale and leaseback transaction is not a "reverse premium".

25. Paragraph 7(1) applies to this legislation the definition of connected persons in section 839 of the Taxes Act.

26. Paragraph 7(2) (with 1(1)(b)) defines "relevant arrangements" as the grant or conveyance of an interest in land on provision of a reverse premium, and any arrangements made in connection with it, whether earlier, simultaneously, or later.

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BACKGROUND NOTE

27. A conventional "premium" is a sum payable by a tenant to a landlord as consideration for the grant of a lease. Unless it is paid to a trader dealing in or developing land, it is likely to be a capital sum, not chargeable to income tax on first principles. Where, however, a premium is received for the grant of a lease of 50 years or less, it, or a proportion of it, is chargeable as income of a rental business under specific legislation dating back to 1963.

28. In recent years, "reverse premiums" have become a more and more common feature of the property market. A reverse premium is a sum a landlord pays, or some other benefit provided, to a potential tenant as an inducement to accept a lease. Until now, there has been no specific legislative provision dealing with the tax consequences of a reverse premium, so the correct tax treatment depended on general principles. If it were paid, as is often the case, by a person carrying on a trade of dealing in or developing land, it may be deducted in computing the payer’s taxable trading income. The Revenue used to think a corresponding charge might arise on the recipient, depending on the precise nature of the arrangements made, and all the circumstances of the case.

29. The judgement of the Privy Council in the New Zealand case of CIR v Wattie last year has cast considerable doubt on that Revenue view. Decisions of the Judicial Committee of the Privy Council are of persuasive authority in UK courts. The judgement in this case, moreover, indicates that UK law is the same as New Zealand’s in all relevant respects.

30. The purpose of the clause and Schedule is to impose a charge to income tax on certain reverse premiums. It does so by prescribing that any inducement given by the grantor of a lease or other interest in land is revenue in the recipient’s hands for all the purposes of the Taxes Acts.

31. A "reverse premium" is not confined to a lump sum cash payment. It may include but is not limited to:

a rent free period

a contribution to tenant’s costs (such as fitting out, start-up or relocation)

assumption by a landlord of a lessee’s liabilities (such as any continuing obligation to pay rent under the old lease, or the payment of any capital sum to terminate it).

In the case of a rent-free period this does not involve the imputation of a notional charge.

32. The timing of the charge will follow accepted principles of commercial accounting. These are laid down in Abstract 12 issued by the Urgent Issues Task Force of the Accounting Standards Board (or, for some smaller businesses, the Financial Reporting Standard for Small Entities). The effect, very broadly, will be to spread the premium over the period of the lease, or to the first rent review, whichever is the shorter.