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| Income Tax (Trading and Other Income) Bill |
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These notes refer to the Income Tax (Trading and Other Income) Bill as introduced in the House of Commons on 30 November 2004 [Bill 9]. These notes are published in three volumes. INCOME TAX (TRADING AND OTHER INCOME) BILL EXPLANATORY NOTES - VOLUME ONE (CLAUSES 1 TO 364) 1. These explanatory notes relate to the Income Tax (Trading and Other Income) Bill as introduced in the House of Commons on 30 November 2004. They have been prepared by the Tax Law Rewrite Project at the Inland Revenue in order to assist readers of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. 2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So if the content of a clause or part of a clause does not seem to require explanation or comment, none is given. 3. The commentary on each clause indicates the main origin or origins of the clause. (A full statement of the origins of each clause is contained in the Bill's Table of Origins.) 4. At the end of the commentary there is supporting material in two annexes.
SUMMARY 5. The purpose of the Income Tax (Trading and Other Income) Bill is to rewrite income tax legislation relating to trading, property and investment income so as to make it clearer and easier to use. [Bill 9—EN] [I] 53/4 6. The Bill does not generally change the underlying law when rewriting it. The only changes to the law which it does make are minor ones which are within the remit of the Tax Law Rewrite Project and the Parliamentary process for the Bill. 7. In the main, such changes are intended to clarify existing provisions, make them consistent or bring the law into line with well established practice. BACKGROUND The Tax Law Rewrite Project 8. In December 1995 the Inland Revenue presented a report to Parliament on the scope for simplifying the United Kingdom tax system (The Path to Tax Simplification). The main recommendation was that United Kingdom direct tax legislation should be rewritten in clearer, simpler language. 9. This recommendation was welcomed, both in Parliament and in the tax community. In his November 1996 Budget statement the then Chancellor of the Exchequer (the Rt Hon Kenneth Clarke MP, QC) announced that the Inland Revenue would propose detailed arrangements for a major project to rewrite direct tax legislation in plainer language. 10. The project team was given the task of rewriting the United Kingdom's existing primary direct tax legislation. The aim is that the rewritten legislation should use simpler language and structure than previous tax legislation. The members of the project are from different backgrounds, including Inland Revenue employees, private sector tax professionals and parliamentary counsel including (as head of the drafting team) a senior member of the Parliamentary Counsel Office. Steering Committee 11. The work of the project is overseen by a Steering Committee, chaired by Lord Howe of Aberavon CH, QC. The membership of the Steering Committee as at 31 October 2004 was:
Consultative Committee 12. The work is also reviewed by a Consultative Committee, representing the accountancy and legal professions and the interests of taxpayers. The membership of the Consultative Committee as at 31 October 2004 was:
Consultation 13. The work produced by the project has been subject to public consultation. This has allowed all interested parties an opportunity to comment on draft clauses. The consultation took the form of a series of Exposure Drafts which published clauses in draft. The relevant ones for this Bill are numbers 1, 2, 4, 8,10 and 13. They were published in July 1997, July 1998, March 1999, October 1999, May 2000 and March 2002 respectively. A draft Bill was published for consultation in March 2004. 14. In addition to formal consultation by way of Exposure Drafts and draft Bill the project also produced papers for the Committees which both informed the Committees and sought their views on particular issues. Draft clauses and explanatory notes were also posted on the Tax Law Rewrite website for comment. 15. Those who responded to one or more of the Exposure Drafts, to the draft Bill or to the draft clauses published on the website include:
Note: this table excludes those who asked for their responses to be treated in confidence. THIS BILL - THE END OF THE SCHEDULES FOR INCOME TAX 16. The Income Tax Act of 1803 charged income under five Schedules, A, B, C, D and E. Schedule F was added in 1965. 17. Three of these Schedules have already gone:
18. This Bill repeals, for income tax purposes, the remaining Schedules A, D and F. Features of the Bill 19. The Bill:
20. Not all the rules that impact upon the calculation of income are rewritten in this Bill. For example, most of the rules in Part 17 of ICTA - Tax Avoidance - remain in ICTA for the time being. THE BILL 21. The Bill has 886 clauses and 4 Schedules. 22. The clauses are arranged as follows:
23. The Schedules are:
24. Tables of Origins and Destinations have also been prepared. The Table of Destinations shows the destination not only of repealed provisions but of all provisions rewritten in the Bill. Glossary 25. The commentary uses a number of abbreviations. They are listed below. CAA the Capital Allowances Act 2001 ESC Extra-statutory concession FA 1971 Finance Act 1971 (and similarly FA 1985 and so on) F(No 2)A Finance (No 2) Act ICTA the Income and Corporation Taxes Act 1988 ICTA 1970 the Income and Corporation Taxes Act 1970 ITA 1918 the Income Tax Act 1918 (and similarly ITA 1945) ITEPA the Income Tax (Earnings and Pensions) Act 2003 TCGA the Taxation of Chargeable Gains Act 1992 TMA the Taxes Management Act 1970 VAT value added tax COMMENTARY ON CLAUSES Part 1: Overview Clause 1: Overview of Act 26. This clause summarises the charges to tax and other matters covered in the Bill. It is new. 27. The charges are grouped in the four Parts listed in subsection (1). 28. The clause also provides, in subsection (2), the link to the general charge to Income Tax in section 1(1) of ICTA. 29. Subsection (3) explains that exemptions from the charges are located in a separate Part but there are signposts in the charging Parts to the exempt provisions most likely to apply to a particular charge. Clause 2: Overview of priority rules 30. This clause provides an overview of the clauses in the Bill containing the rules for deciding which charge takes priority where two charges could apply. It is new. The priority rules are located at the start of each Part immediately after the opening "overview" clause. 31. Subsection (3) recognises that it is necessary to look at the scope of the charging provisions as well as the priority rules. It is also a pointer to ITEPA and to case law. Part 2: Trading income Overview 32. This Part contains the rules relating to trading income. The Part charges:
33. The structure of the Part is to:
34. The rules in Chapters 3 to 14, dealing with profits of the trade, determine the profit of the period of account. Once the profit for tax purposes of the period of account has been calculated:
35. Two particular charges are located in Chapters 17 and 18. 36. References to "profits or gains" in the source legislation which relate only to income are rewritten in this Part omitting the reference to "gains". This continues the tidying up of such references started in section 46(3) of and Schedule 7 to FA 1998. Chapter 1: Introduction Clause 3: Overview of Part 2 37. This clause provides an overview of the trading income Part. It is new. 38. The clause includes a signpost to the exemptions in Part 6 of this Bill. The exemptions that are in practice most likely to be relevant are indicated in subsection (3). Clause 4: Provisions which must be given priority over Part 2 39. This clause sets out the priority rules that apply when a receipt or other credit item might otherwise fall within more than one head of charge. 40. Subsection (1) applies where there might otherwise be overlap between the charge on the profits of a trade and the charge on the profits of a UK property business. It is based on section 18 of ICTA. 41. Subsection (2) deals with potential overlap with ITEPA. It is based on section 18 of ICTA. In the source legislation Schedule D is the residual Schedule. So the charge in ITEPA on employment income, and other income formerly within Schedule E, has priority over the charge on profits of a trade (Schedule D in the source legislation). There is no potential overlap between pension and social security income in ITEPA that was formerly within Schedule D and the charge on profits of a trade. Chapter 2: Income taxed as trade profits Overview 42. This Chapter:
Clause 5: Charge to tax on trade profits 43. This clause charges the profits of a trade, profession or vocation to tax. It is based on section 18(1) and (3) of ICTA. 44. Part 2 of Schedule 4 to this Bill defines "trade" by reference to section 832(1) of ICTA. Section 832(1) of ICTA defines trade so as to include every "manufacture, adventure or concern in the nature of trade". This brings within the meaning of trade an isolated transaction (or a small number of transactions) which, while in the nature of trade, is not sufficiently extensive to amount to a trade. Clause 6: Territorial scope of charge to tax 45. This clause sets out the territorial limits of the charge on trade profits. It is based on section 18(1)(a)(i) and (ii) of ICTA. 46. Trades within Schedule D Case I are those "carried on in the United Kingdom or elsewhere". That expression appears wide enough to include trades carried on wholly abroad. But Colquhoun v Brooks (1889), 2 TC 490 HL explained that the charge under Schedule D Case I covers only trades carried on at least partly in the United Kingdom. Trades carried on wholly abroad are within Schedule D Case V. 47. The distinction between Schedule D Cases I and V is important because only a person who is resident in the United Kingdom is chargeable on trade profits under both Cases. A person who is not resident in the United Kingdom is chargeable on trade profits only under Schedule D Case I. The abbreviated descriptions "UK resident" and "non-UK resident" are defined in clause 878(1). 48. Subsection (1) sets out the position for a person resident in the United Kingdom: the charge to tax covers all trade profits, wherever the trade is carried on. 49. Subsection (2) sets out the position for a person not resident in the United Kingdom: the charge to tax is restricted to profits from a trade carried on at least partly in the United Kingdom. In the case of a trade carried on partly in the United Kingdom, the charge is further restricted to the profits from the part of the trade carried on in the United Kingdom. Clause 7: Income charged 50. This clause sets out the amount charged to tax. It is based on section 60(1) and (2) of ICTA (United Kingdom trades) and sections 65(3) and 68(1) of ICTA (foreign trades). See Change 1 in Annex 1. 51. Subsection (2) makes the link to basis periods. Although the charge to tax under subsection (1) is on the profits of the tax year, traders calculate commercial profit by reference to their period of account. The basis period rules identify the profits that are taxed as the profits of the tax year. 52. In most cases the basis of assessment for the profits of a foreign trade is the same as that for a trade carried on wholly or partly in the United Kingdom. So the charge is on the full amount of the profits of the tax year (subsection (1)). 53. In the case of Irish income, section 68 of ICTA has two special rules. 54. First, section 68(3)(b) of ICTA allows the inspector to direct that the income should be assessed on the basis of an average of a period. And the subsection allows the Commissioners to review the inspector's decision. This rule is a relic of the tax system before Self Assessment. It is not rewritten. 55. Second, section 68(3) of ICTA provides that the income is computed as if it had arisen in the United Kingdom. In practice this rule puts Irish trading income on the same basis as other foreign trading income. So this second special rule for Irish income is not rewritten. Clause 8: Person liable 56. This clause states who is liable for any tax charged. It is based on section 59(1) of ICTA. 57. This Bill does not rewrite section 59(2) of ICTA. Section 59(2) of ICTA provides that income tax charged "in respect of any of the concerns mentioned in section 55 [of ICTA] shall be assessed and charged on the person carrying on the concern, or on the agents or other officers who have the direction or management of the concern or receive the profits thereof". 58. Section 55 of ICTA provides that the profits arising from certain concerns such as mines and quarries shall be taxed under Schedule D Case I. Section 55 of ICTA is rewritten as clause 12. 59. The origins of section 59(1) and (2) of ICTA can be traced back to the Income Tax Act 1842. There is no longer any reason to maintain the distinction between the two subsections. 60. Section 59(2) of ICTA identifies two classes of person on whom the profits of a section 55 concern should be taxed. These are:
61. Both these classes of person are likely to be covered by the section 59(1) test that they are "receiving or entitled to the profits". But if they are not, there is no reason why a wider category of persons should be liable in respect of section 55 concerns than are liable in respect of any other trades. 62. Also, applying the "person receiving or entitled" test to the profits of a section 55 concern would not include persons who would not be chargeable through the application of section 59(2) of ICTA. Clause 9: Farming and market gardening 63. This clause has two functions. First, it treats all farming or market gardening carried on in the United Kingdom as a trade. Second, it treats all farming carried on in the United Kingdom by a particular person as a single trade. It is based on section 53(1) and (2) of ICTA. 64. Subsection (1) deals with the first function. In most cases there will be no doubt that farming is a trade on first principles. Like clause 10 this clause can trace its origins back to the time when there was a charge to income tax under Schedule B on the occupation of land. Farming was originally charged under Schedule B. The purpose of section 53 of ICTA and its predecessor provisions was to take the charge on farming out of Schedule B and into Schedule D. With the abolition of Schedule B that function is now spent. 65. But section 53 of ICTA does make clear that even uncommercial farming is treated as a trade. This clause preserves that effect. 66. Subsection (2) deals with the second function of the clause. It provides that all farming carried on by a person in the United Kingdom is treated as a single trade. Farming carried on as part of another trade is not included in the single trade of farming. 67. The restriction of subsection (2) to farming in the United Kingdom is derived from the definition of "farming" in section 832(1) of ICTA. 68. Section 53(2) of ICTA uses the expression "particular person or partnership or body of persons" to make clear that that the single trade rule applies also to a firm and to a body of trustees. It follows that farming carried on by a person as a member of a firm or a body of trustees is separate from any farming carried on by that person alone. 69. This clause does not rewrite this rule as it applies to firms. That is dealt with in clause 859. 70. Nor does this clause rewrite the reference to "body of persons" in section 53(2) of ICTA. It is generally understood that a body of persons acting as trustee, or in some other representative or fiduciary capacity, is not the same entity for tax purposes as one of those persons acting on their own behalf. So, for instance, section 15(1)1(3) of ICTA refers only to "a particular person or partnership"; there is no need to refer to a "body of persons". Retaining a reference to a "body of persons" in clause 9 would cast doubt on the meaning of clauses where the phrase is not used. 71. The definition of "farming" and "market gardening" is in clause 876. |
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