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EXPLANATORY NOTE CLAUSE X86 AND SCHEDULE 23: TAX TREATMENT OF ACQUISITION, DISPOSAL OR REVALUATION OF CERTAIN RIGHTS SUMMARY This Clause and Schedule enable tax relief to be given for the cost of buying certain telecommunication licences, in particular the third generation mobile telecommunication licences, and also for the cost of acquiring, on or after 21st March 2000, capacity on telecommunications cables, called IRUs (indefeasible rights of use). Receipts from the disposal of these rights will be taxable.
At present these rights are regarded as capital assets, and the acquisition cost would not qualify for a deduction. The cost does not, however, qualify for capital allowances. The Clause and Schedule will remedy the gap by providing that they will be treated as revenue items, and relieved over the life of the rights. Any receipts for disposal of all or part of such rights will be taxed as trading receipts.
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DETAILS OF THE CLAUSE
Clause 84 introduces Schedule 23 and defines the rights covered by provisions of the Schedule. These are
Schedule 23 Paragraph 1 repeats the definition of the rights covered by the Schedule. Paragraph 2(1) provides that expenditure on acquisition of such rights or receipts from disposal of them shall be treated for tax as revenue items, if that is a proper accounting treatment in accordance with normal accounting practice, and provided they are taken into account in determining profit or loss for accounting purposes in the taxpayer’s statutory accounts.
4. Paragraph 2(2) and 2(3) ensure that the amounts allowed as a deduction or brought into charge as disposal receipts also include amounts in relation to any extensions or restrictions of rights. 5. Paragraph 3 ensures that where an item is, under normal accountancy practice, revalued, the effects are taken into account for tax, either as a deduction or a charge, whether or not the revaluation may be, or is actually, taken into account by the taxpayer in determining its profit or loss. 6. Paragraph 4 provides that where the taxpayer is a member of a group of companies the accounting policies and methods of applying those policies for tax purposes in respect of these licences or IRUs must not be more cautious than the policies used for the same items in any of the consolidated group accounts which are required to be prepared. This ensures that the UK taxpayer cannot secure more tax relief by depressing the value of the rights for UK tax purposes as compared with a higher value shown at a different level in the group. "Group of companies" and "consolidated group accounts" are defined in Paragraph 4(4). 7. Paragraph 5 defines the terms "normal accounting practice" and "statutory accounts" for the purposes of this provision, and clarifies that "for tax purposes" means for the purpose of calculating trading profits under Case 1 of Schedule D. 88.. Paragraph 6 provides the transitional arrangements in relation to IRUs. The new rules do not apply to IRUs acquired before 21 March 2000. Nor do they apply to IRUs acquired after that date, directly or indirectly, from an associate or associated company, both of which are defined. 9. Similar commencement and transitional rules are not required for the mobile phone licences. These are being issued under a specific auction, as described in the Clause and Paragraph 1 of the Schedule, and the provisions can therefore only apply to those licences and not any earlier ones.
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BACKGROUND NOTE
The Government announced in the 1999 Budget that the cost of acquiring licences to operate third generation mobile spectrum would be allowed for tax purposes, but that the legislation would be in the 2000 Finance Bill. The Government has since announced the details of the spectrum auction (DTI Information Note P/2000/116 — 18 February 2000 (www.spectrumauctions.gov.uk)). The Clause also covers any other non-broadcasting licences which are auctioned under Section 3 of the Wireless Telegraphy Act 1998.
In order to compete in the international market for telecommunications, all telecommunications companies need to acquire capacity on cables. Large operators tend to build and install these cables themselves, whilst smaller companies purchase capacity by buying Indefeasible Rights of Usage (IRUs) — broadly equivalent to long leases. These IRUs are attractive as the cost of building or installing a cable is prohibitive for smaller operators. The direct investment in the cable by the large operator qualifies for tax relief under the capital allowances regime. However the investment in the IRU by the smaller operator receives no tax relief until the expiry of the IRU, which can be up to 25 years later, and then only as a capital loss. Telecommunication licences and IRUs are both intangible assets. At present these rights are regarded as capital assets, and the acquisition cost would not qualify for a deduction. The cost does not, however, qualify for capital allowances. The Clause and Schedule remedy that by allowing them to be treated as revenue items, following commercial accounting practice. Receipts from the disposal of these rights will be taxable. This will level the playing field in matching relief enjoyed in other tax administrations and assist in opening up the online world to competition. ________________________________________________ |
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