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Eclipse 35 leads to clarification of non-trade businesses

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HMRC has published a note to clarify the taxation of non-trade businesses under ITTOIA 2005 Part 5 Chapter 3. This follows the decision of the Upper Tribunal in Eclipse 35 [2013] UKUT 0639 (TCC), which confirmed that a partnership was conducting a non-trade business of the exploitation of films.

The note explains that ITTOIA 2005 s 610 charges to tax ‘the full amount of income arising in the tax year’. HMRC’s view is that the charge is on income actually received in the tax year. This view is based on case law on the taxation of profits under Schedule D Case VI, and on the meaning of the phrase ‘income arising’, as it appeared in Schedule D Cases III, IV and V.

Under s 612, expenses incurred wholly and exclusively for the purpose of generating the income are deductible, provided that they are attributable to the generation of that income. Accordingly, for an expense to be deductible, there needs to be a correlation between the expense and the income received in the relevant year.

For the avoidance of doubt, the note confirms that there is no requirement to calculate the amount of income that is subject to charge, in accordance with generally accepted accounting principles. Amongst other reasons, that is because s 609 charges to tax income from activities that do not amount to a trade with, the consequence that ITTOIA 2005 s 25 does not apply.