 House of Commons |
Session 2004-05 Publications on the internet Other Bills before Parliament Arrangement of Clauses (Contents) |
| Income Tax (Trading and Other Income) Bill |
|
These Notes refer to the Income Tax (Trading and Other Income) Bill as introduced in the House of Commons on 30 November 2004 Part 4: Savings and investment income INCOME TAX (TRADING AND OTHER INCOME) BILL EXPLANATORY NOTES — VOLUME TWO (CLAUSES 365 TO 886) Part 4: Savings and investment income Overview 1. This Part contains the rules relating to savings and investment income. It consists of income that is charged under Schedule D Cases III, IV, V and VI; Schedule F and non-schedular charges in the source legislation. 2. There is a separate Chapter for each category of income arranged as follows:
Structure of Chapters 3. The basic structure of each Chapter is:
4. This Part does not contain exempt provisions. Signposts to the exemptions most likely to be relevant have been placed in the charge to tax provisions. Chapter 1: Introduction Clause 365: Overview of Part 4 5. This clause sets out the income charged in this Part, the approach to exempt income and where to find the priority rules. It is new. Clause 366 Provisions which must be given priority over Part 4 6. This clause provides rules which determine which Part will take priority in the event of any overlap in the charging provisions. It is based on sections 18, 20 and 95 of ICTA, and section 9D of TMA. 7. Subsection (1) ensures that, if any amount falls within a charge in Part 4 of this Bill and the charge on trade profits, Chapter 2 of Part 2 of this Bill will charge that amount as a trade receipt. This takes account of section 95 of ICTA which sets out the circumstances in which a distribution made by a UK company, or a payment which is representative of such a distribution is brought into account in calculating the profits of a trade. 8. Section 95 of ICTA brings a distribution into account in calculating the trade profits if the recipient is a dealer in relation to that distribution. Subsection (1) instead focuses on the nature of the receipt. See Change 79 in Annex 1. 9. Subsection (1) also reflects the decision to give effect to the Crown Option. See Change 66 in Annex 1. 10. In the case of non-schedular charges it is unlikely that there would be any overlap. But in theory it is possible that, for example, stock dividends (Chapter 5 of Part 4 of this Bill) and gains from contracts for life assurance (Chapter 9 of Part 4 of this Bill) may rank as trade receipts. Taxing such income under Chapter 2 of Part 2 of this Bill accords with the policy and practice of taking trade receipts into account in calculating trade profits and not otherwise. See Change 66 in Annex 1. 11. Subsection (2) ensures that, if any amount falls within a charge in Part 4 of this Bill and the charge on a UK property business, Chapter 3 of Part 3 of this Bill will charge that amount as a receipt of a UK property business. This reflects the priority of Schedule A over Schedule D and is based on section 18(1)(b) of ICTA and Schedule D Cases III(a) and VI. 12. Section 95 of ICTA can have no application to property income and there is no overlap between the current Schedule A and Schedule F. The rule that Schedule F takes priority over Schedule A has not therefore been reproduced. 13. Similarly as there is no overlap between Schedule A and the non schedular charges in section 249 of ICTA (stock dividends rewritten in Chapter 5 of Part 4 of this Bill) and section 421 of ICTA (release of loan to a participator in a close company rewritten in Chapter 6 of Part 4 of this Bill) there is no need to exclude these charges from this priority rule. 14. Subsection (3) ensures that, ITEPA takes priority over Part 4 of this Bill except for the charging provisions in Chapter 3 of Part 4 of this Bill (dividends etc. from UK resident companies) and Chapter 6 of Part 4 of this Bill (release of loan to a participator in a close company). This reflects the priority that ITEPA has over Schedule D in the source legislation. It is based on section 18(1)(b) of ICTA and Schedule D Cases III(a) and VI of ICTA. 15. A new provision section 716A has been added to ITEPA (see Schedule 1) which gives priority to Chapter 3 of Part 4 of this Bill over charges in ITEPA. This takes account of the fact that Schedule F has priority over ITEPA in the source legislation. It is based on section 20(1) and (2) of ICTA. 16. In the source legislation there is a potential charge under section 421 of ICTA (which is rewritten in Chapter 6 of Part 4 of this Bill (release of loan to a participator in a close company)) and section 188 of ITEPA. Section 189 of ITEPA gives priority to section 421 of ICTA. Section 189 of ITEPA will continue to assign priority to the charge in Chapter 6 of Part 4 of this Bill. 17. Subsection (4) provides that an amount can be used in calculating a chargeable event gain under Chapter 9 of this Part (gains from contracts for life insurance etc.) although it may also be used in calculating income under another provision in this Bill. This is because the calculation of gains under Chapter 9 of this Part uses different principles from those used in other charges. However, clause 527 ensures that the gain calculated under Chapter 9 is reduced by the amount charged elsewhere, to avoid a double charge on the same amount. Clause 367 Priority between Chapters within Part 4 18. This clause provides rules which determine which Chapter will take priority in the case of any overlaps in the charging provisions within Part 4 of this Bill. It is based on sections 18 and 20 of ICTA and Schedule 15 of FA 1996. 19. Usually, by their nature, the particular amounts charged in Part 4 of this Bill can fall only within one Chapter so there is no need to make any special provision. This clause covers a couple of exceptions. 20. Subsection (1) provides the priority rule for two charging clauses which are based on Schedule D Case III and Cases IV and V. Chapter 8 (profits from deeply discounted securities) has priority so that premiums continue to be taxed under the special rules for deeply discounted securities (previously relevant discounted securities) rather than under the general charge on interest which includes "all discounts". 21. Subsection (2) is concerned with the priority between Chapter 3 (dividends etc. from UK resident companies) and the other Chapters in Part 4 of this Bill. Chapter 3 is based on section 20(2) of ICTA which provides specifically for Schedule F to take priority over the other Schedules. But subsection (3) provides for two exceptions to this basic rule. Dividends paid by building societies and by industrial and provident societies are treated as interest. Clause 368: Territorial scope of Part 4 charges 22. This clause provides that income within Part 4 of this Bill is only charged to tax if it is from the United Kingdom or, if from outside the United Kingdom, it arises to a UK resident. 23. It is based on section 18(1) of ICTA. 24. Under section 18(1)(a) of ICTA income from any kind of property arising to a resident of the United Kingdom is chargeable to tax wherever that property is situated, while such income is chargeable on a non-resident only when it is from property within the United Kingdom. 25. Section 18(1)(b) of ICTA, which charges tax in respect of "all interest of money, annuities and other annual profits or gains not charged under Schedule A or ITEPA and not specially exempted from tax", does not mention the residence status of the person on whom the income or profits are chargeable. 26. The exact scope of section 18(1)(b) of ICTA and its relation to the rules in section 18(1)(a) of ICTA is not entirely clear. Section 18(1) of ICTA appeared in broadly its present form in the Income Tax Act 1853, borrowing wording from the Income Tax Act 1842. The 1842 Act is famously impenetrable but the provisions from which the words have been borrowed (sections 100 and 102) may be read as having territorial restrictions. It is difficult to believe that the 1853 provision that is now section 18(1)(b) of ICTA was not intended to share the same territorial restrictions as the provision that is now section 18(1)(a) of ICTA. 27. Profits charged under Schedule D Case VI may fall within section 18(1)(a) of ICTA where they represent income from any kind of property. But the Income Tax Acts also charge certain specific profits or gains, which would not otherwise be chargeable to income tax, under Case VI and when they are not specified as income from property they fall more comfortably under section 18(1)(b) of ICTA as "annual profits or gains". 28. In practice the same territorial restrictions are applied to Case VI profits falling within section 18(1)(b) of ICTA as within section 18(1)(a) of ICTA. This is both by analogy with the Case VI charge on income as well as under a general rule of law on territoriality mentioned below. 29. Where non-schedular charges do not contain a territorial restriction, in practice the same territorial restrictions are applied as for section 18(1)(a) of ICTA. Again, this is both by analogy with the schedular charges and under a general rule of law on territoriality. 30. The Schedule F charge on dividends and other distributions from UK companies contains its own territorial restriction, namely where the income arises from a company incorporated in the United Kingdom. 31. Guidance is, however, available from case law. Since Colquhoun v Brooks (1889), 2 TC 490 HL the courts have followed Lord Herschell's judgement that (page 499): The Income Tax Acts, however, themselves impose a territorial limit, either that from which the taxable income is derived must be situate in the United Kingdom or the person whose income is to be taxed must be resident there. 32. Whether Lord Herschell's words referred to the statutory rules of the time or to a general statement of the law, it is as the latter that they have been subsequently applied by the courts. For example in Perry v Astor (1935), 19 TC 255 HL Lord Russell of Killowen states (page 280): There must, of course, be the necessary limitation which is inherent in all our Income Tax legislation, namely, that what is taxed under or by virtue of this provision can only be either (1) income which is here, or (2) income of a person resident here. 33. Additionally there is the general principle of United Kingdom law that, unless the contrary intention appears, an enactment is taken as not applying to matters outside the United Kingdom. 34. Subsections (1) and (2) are drafted in terms of the "source" of the income. Although section 18 of ICTA refers to profits or gains from "property", the usual statutory term elsewhere in the Income Tax Acts and in case law for the same concept is "source" and this has been adopted as the more familiar and modern term. 35. However, while the term "source" may apply to the majority of receipts chargeable to income tax it does not apply to all such receipts. "Source" is something from which income arises and not all sums charged to income tax are by nature income. "Source" may not be the appropriate term where the amount charged to tax represents a profit on a transaction which is not by nature income and would not be charged to income tax without a specific charge. Indeed, the chargeable profit may arise on the disposal of an income source. This restricted meaning of "source" is supported by Lord Hoffmann's judgement in Walker v Centaur Clothes Group Ltd (2000), 72 TC 379 1 HL and a more detailed discussion of this topic may be found in the commentary on Chapter 1 of Part 8 of this Bill. 1STC [2000] 32436. It has therefore been necessary to consider how to express the territorial scope in cases where there is no natural source of income. 37. Subsection (3) is broadly worded to catch such income. Where the connection such income has to the United Kingdom is comparable to the connection that income with a source in the United Kingdom has to the United Kingdom, then it is treated for the purposes of this clause as income from a source in the United Kingdom. Chapter 2: Interest Overview 38. This Chapter charges to tax interest and income that is treated as interest. Clause 369: Charge to tax on interest 39. This clause charges all interest to tax, whether from a source within or outside the United Kingdom. It is based on Schedule D Cases III(a), IV and V in section 18 of ICTA. 40. Subsection (1) sets out the charge to tax. 41. This clause does not reproduce the separate charging provision in section 18(3)(c) of ICTA for "income from securities which is payable out of the public revenue of the United Kingdom or Northern Ireland". All the income which would fall into this category can be charged to tax under other provisions of the Bill. 42. Neither has the clause reproduced the words "of money whether yearly or otherwise" in section 18(3) Case III (a) of ICTA. 43. The cases of Re Euro Hotel (Belgravia) Ltd (1975), 51 TC 293 2 HC and Riches v Westminster Bank Ltd (1947), 28 TC 159 HL demonstrate that the reference to "of money" is to the debt upon which the interest itself is payable rather than the interest. Since the words "of money" add nothing to "interest" they have been dropped. 2 STC [1975] 682.44. The words "yearly or otherwise" follow the historical recognition by tax legislation of a distinction between yearly interest and short interest. Although the separate charging rules for these two types of interest were merged in 1918 the reference to "yearly or otherwise" was retained. The distinction between yearly and short interest is still relevant in some areas, for example the deduction of tax provisions in section 349(2) of ICTA, but as the words do not add anything to the charge to tax on "any interest.." in section 18(3)(a) of ICTA, they have not been reproduced in this clause. 45. The words in section 18(3) Case III (a) of ICTA "whether such payment is payable within or out of the United Kingdom" have not been reproduced. The place of payment is only one of a number of factors derived from case law which may be taken into account in determining the source of interest. 46. The clause charges interest to tax whether or not it arises within the United Kingdom. Whether interest arises from a source outside the United Kingdom will, as explained, depend on a number of factors. Some of these are considered in Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA (1970), 46 TC 472 HL. 47. For individuals, unless a particular charge specifies otherwise, interest arising from a source outside the United Kingdom is taxed under Schedule D Case IV if it arises from securities outside the United Kingdom but otherwise under Case V. This treatment is confirmed by Lord Manton's Trustees v Steele (1927), 11 TC 549 CA and Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA (1970), 46 TC 472 HL. 48. Not all the income within this Chapter can have a foreign source and in some cases it would be most unusual for interest from a source outside the United Kingdom to arise. This is so with building society dividends and share interest from an industrial and provident society. In other cases it may be impossible for such income to have a foreign source. The following paragraphs look at foreign source income in relation to particular categories of income treated as interest under this Chapter. Building Societies 49. Under section 66 of FA 1988 a society incorporated under the Building Societies Act 1986 will be resident in the United Kingdom through incorporation. As long as dividends are paid by a UK resident company they have a UK source under the principle in Bradbury v The English Sewing Cotton Company Ltd (1923), 8 TC 481 HL. 50. But a society may be non-resident where it satisfies a residence test in the territory of a treaty partner and the treaty awards residence to that other territory. Section 249 of FA 1994 will then apply to treat the society as non-resident. Theoretically dividends paid by a building society may therefore arise from a source outside the United Kingdom. This would be most unlikely, however, since a building society may only be incorporated under the Building Societies Act 1986 if its principal office is in the United Kingdom. With the place of incorporation and the principal office in the United Kingdom a residence test is unlikely to be satisfied in another territory. Open-ended Investment Companies 51. The definition of an open-ended investment company in section 468(10) of ICTA carries a limitation that the company should be incorporated in the United Kingdom. Section 468(10) of ICTA is inserted in section 468 of ICTA by paragraph 10(4) (Open-ended Investment Companies (Tax) Regulations 1997 SI 1997/1154). All open-ended investment companies within the definition in section 468(10) of ICTA are therefore subject to the company residence rule in section 66 of FA 1988 ("regarded for the purposes of the Taxes Acts as resident"). Open-ended investment company interest distributions treated as made by a UK resident company will be UK source income. Section 249 of FA 1994 could in theory also apply to make such companies non-resident (as explained in connection with industrial and provident societies). In that case interest distributions made will be treated as dividends from non-resident companies. Authorised Unit Trusts 52. It is possible for an authorised unit trust to be a non-UK entity. But section 468(1) of ICTA provides that the Tax Acts shall have effect as if the trustees of the authorised unit trust were a company resident in the United Kingdom. Although the application of section 468(1) of ICTA is by reference to the trustees' income (and relief for capital expenditure), the treatment of the trustees as a UK resident company carries through for the purposes of taxing interest distributions treated as made to unit holders. That is because section 468L(2) of ICTA provides that the Tax Acts shall have effect as if such interest distributions were made "by the company referred to in section 468(1)". As these distributions are treated as made by such a company, that is a UK resident company, they can only be UK source income. Industrial and Provident Societies 53. Under section 66 of FA 1988 a society registered under the Industrial and Provident Societies Acts will be resident in the United Kingdom through incorporation. A society may, however, be non-resident where it also satisfies a residence test in the territory of a treaty partner of the United Kingdom and the treaty awards residence to that other territory. Section 249 of FA 1994 will then apply to treat the society as non-resident. 54. Section 486(4) of ICTA provides that share or loan interest is chargeable under Schedule D Case III. Theoretically therefore payments by a registered society may arise outside the United Kingdom but be charged under Schedule D Case III and not able to benefit from treatment specific to Schedule D Cases IV and V. For the sake of consistency this clause treats such income arising outside the United Kingdom as relevant foreign income and therefore able to benefit from the special rules in Part 8 of this Bill. See Change 131 in Annex 1. 55. Section 18(3)(b) of ICTA charges "all discounts" to tax under Case III. Although these words could be read as embracing discounts that arise outside the United Kingdom, it has long been the practice to charge discounts with a foreign source under Schedule D Cases IV or V. There is however little direct authority in case law for this approach, although it is fully accepted by the commentaries. Clause 370: Income charged 56. This clause sets out the amount of interest charged to tax on sources both within and outside the United Kingdom. It is based on sections 64, 65 and 68 of ICTA. 57. Subsection (1) sets out the amount of interest charged to tax. This is the full amount of interest arising in the tax year. 58. Section 64 of ICTA sets out the basis of assessment for income chargeable under Schedule D Case III. It requires that income tax should be computed "..on the full amount of the income..without any deduction". There are no specific provisions allowing deductions from Schedule D Case III income and it is not clear what such deductions would represent. There are no rules allowing expenditure in earning Schedule D Case III income. The words "full amount of the income" carry some weight in suggesting that the amounts chargeable are without deduction. 59. In relation to certain sources of income falling within Schedule D Case III, for example interest on savings bank deposits or private loans, the phrase "without any deduction" will not usually have any significance, as interest in such cases necessarily represents net income. There may, however, be such items as costs of collection but these cannot be deducted. Likewise in the case of discounts no set off can be made for losses incurred where the assessment is made under Schedule D Case III. 60. The charging provision for Schedule F in section 20(1) of ICTA, which charges "all dividends and other distributions..of a company resident in the United Kingdom" does not state that the dividends are without any deduction. The words would be superfluous since no provision exists to give deductions from dividends from UK companies. 61. For these reasons it is thought that the words are superfluous in the context of Schedule D Case III and they have therefore been omitted. 62. The omission of these words also affects the following 'income charged' clauses in this Bill which are based on Schedule D Case III, clause 424 (Chapter 7 of Part 4 of this Bill, purchased life annuities) and 684 (Chapter 7 of Part 5 of this Bill, annual payments not otherwise charged). In each case the income charged is expressed as: "Tax is charged under this Chapter on the full amount of the [annuity payments] [annual payments] arising in the tax year". 63. The word "arising" has been the subject of a number of tax cases. "Arising" includes received and also credited to a bank account (Parkside Leasing v Smith (1984), 58 TC 282 3 HC). However, "arising" has a wider meaning than this. For example, it was held in Dunmore v McGowan (1978), 52 TC 307 4 CA, to include the "swelling of a person's assets", even where the person had no immediate right of access to the income. In view of the wide meaning given to "arising", and the fact that it is a term with which practitioners are familiar, the word has been retained. 3 STC [1985] 63.4 STC [1978] 217. 64. Subsection (2) makes subsection (1) subject to the rules in Part 8 of this Bill. This enables income that is non-UK source and which would have been charged under Schedule D Cases IV or V to obtain the benefit of the special rules for such income. Clause 371: Person liable 65. This clause states who is liable for any tax charged. It is based on section 59(1) of ICTA. 66. Section 59 of ICTA gives the person chargeable as the person "receiving or entitled to" the income. 67. The phrase "receiving or entitled to" has been considered at length by the courts, although no clear definition of it has emerged. In early cases the courts placed greater emphasis on the concept of receipt than on entitlement - see, for example, Dewar v Commissioners of Inland Revenue (1935), 19 TC 561 CA. Later, equal importance was attached to each part of the phrase - see, for example, Aplin v White (1973), 49 TC 93 5 HC. The most recent cases, such as MacPherson v Bond (1985), 58 TC 579 6 HC, and Peracha v Miley (1990), 63 TC 444 7 CA, have hinged on whether or not any benefit has accrued to the taxpayer. 5STC [1973] 322.6STC [1985] 678. 7STC [1990] 512. 68. As the phrase is well established in case law, it is retained in the rewritten legislation. It is not, however, considered appropriate to include any further explanation of the phrase because of its wide interpretation by the courts. |
| |
| © Parliamentary copyright 2004 | Prepared: 3 December 2004 |