|Income Tax (Trading and Other Income) Bill - continued||House of Commons|
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Clause 413: Person liable
228. This clause states who is liable for any tax charged and is based on section 249(4) to (6) of ICTA.
229. Subsection (2) deals with individuals who are beneficially entitled to the stock dividend income. Such individuals could include outright owners, a beneficiary of a bare trust or one with an interest in possession, or the beneficial owner under a nominee arrangement.
230. Subsection (3) indicates that the trustees of an accumulation and discretionary trust are the persons liable if:
231. Subsection (4) deals with stock dividend income arising to personal representatives during the administration of a deceased person's estate. As personal representatives are not charged to tax under Chapter 5 of this Bill they are not "persons liable". This means that they are not treated as having paid income tax under clause 414 but see further the commentary on clause 680.
232. Subsections (5) and (6) deal with joint ownership of share capital and are based on section 249(3) of ICTA.
Clause 414: Income tax treated as paid
233. This clause explains how a person's income tax liability is satisfied (in whole or in part). It is based on section 249(4) and (6) of ICTA.
234. Under subsection (1), the taxpayer is treated as having paid income tax at the dividend ordinary rate (Schedule F ordinary rate in the source legislation) on the amount charged to tax. The words "and where trustees are so liable .. the income is treated as if it were chargeable to tax at that rate" are based on section 249(6)(b) of ICTA and have been retained because they were considered significant in Howell and another v Trippier 2004 8 EWCA Civ 885.
8 STC  1245
235. Subsection (2) provides that the tax treated as paid is not repayable. This applies even if the person liable is a non-taxpayer.
236. Subsections (3) to (5) ensure that individual taxpayers cannot be given credit for income tax on more than the amount charged to income tax. So, for example, if the individual's total income is reduced by deductions (for example, personal allowances) such that the stock dividend income is only partially brought into charge to tax, credit will only be given for so much of the stock dividend income as is so taxed.
237. Section 249(6)(c) of ICTA applies the provisions of section 249(4)(a) to (c) of ICTA to trustees but with the substitution of "income" for "total income" in subparagraph (a). But the concept of "total income" applies to trustees so it is not clear why this substitution was made. Section 835(4) of ICTA which deals with deductions and total income envisages two types of deductions:
238. Section 249(4)(a) of ICTA is concerned with deductions to be made from a person's total income, that is, deductions falling in the second category. But trustees are not entitled to deductions falling in this second category. So even if "income" is substituted for "total income", the stock dividend income will not be reduced because there are no deductions specifically from stock dividend income.
239. Section 249(4)(c) of ICTA deals with tax rates and treats the stock dividend income as not brought into charge to tax for the purposes of sections 348 and 349 of ICTA. Section 249(4)(c) of ICTA is not rewritten in this Chapter. But rather than leaving it "stranded" in section 249 of ICTA, it is rewritten in amendments to sections 1A and 348 and 349 of ICTA (see Schedule 1 to this Bill).
Chapter 6: Release of loan to participator in close company
Clause 415: Charge to tax under Chapter 6
240. This clause is based on sections 421(1) and 422(5) and (6) of ICTA. It imposes a charge to tax if a close company lends money to a participator and subsequently releases or writes off all or part of the debt.
241. "Close company" and "participator" are defined in the interpretative provisions of Part 6 of ICTA (see sections 414 and 417 of that Act). Broadly, a close company is a UK resident company controlled by five or fewer participators (or any number of participators who are also directors of the company). A UK resident company may also be close if on the winding-up of the company more than half of the assets of the company would be distributed to five or fewer participators (or any number of participators who are also directors of the company). "Participator" is given a very wide meaning and includes any person having a share or interest in the capital or income of the company.
242. Subsection (1) sets out the circumstances giving rise to the charge to tax. The expressions "releases", "writes off", "debt", "loan" and "advance" have been preserved from the source legislation. There is no compelling reason to change any of these words and they need to be preserved to maintain the link with section 419 of ICTA.
243. The tax charge under subsection (1) is subject to clause 418 (see subsection (2)). This prevents double taxation under this Chapter and Chapter 5 of Part 5 of this Bill.
244. Subsections (3) and (4) rewrite section 422(5) and (6) of ICTA. If a loan is made by a company ("B") which is controlled by a close company ("A"), in circumstances where section 419 of ICTA would not otherwise apply, section 422(1) of ICTA treats the loan as made by A (so section 419 of ICTA applies). If B releases or writes off the loan, section 422(5) of ICTA effectively treats A as having released or written off the loan (so section 421 of ICTA applies). Further, section 419(2) of ICTA gives "loan" an extended meaning. So, if a person incurs a debt to a close company or a debt due from a person to a third party is assigned to a close company, the close company is treated as having made a loan. This extended meaning of loan is applied to B by section 422(6) of ICTA.
Clause 416: Income charged
245. This clause sets out the amount charged to tax and is based on section 421(1) of ICTA.
Clause 417: Person liable
246. This clause states who is liable for any tax charged.
247. Subsection (1) explains that it is the person to whom the loan or advance was made unless that person has died or the loan or advance was made to trustees of a trust which has come to an end (subsection (2)).
248. There is no reference, here or in the source legislation, to the position where the burden of the debt has been passed to a third party. This is because it is not possible in law for a debtor to assign a debt. Any transfer of debt must be made by way of novation, which would involve the existing debtor being released from the debt and the new debtor taking on a new debt. In such a case, therefore, a charge to tax under section 421 of ICTA would arise on the release of the existing debtor. The interpretation is based on the cases of Collins v Addies and Greenfield v Bains (1992), 65 TC 190 CA 9.
9 STC  445; STC  746
Clause 418: Relief where borrowers liable as settlors
249. This clause is based on sections 421(3) and 677(3) of ICTA. Together these provisions prevent double taxation on the release or writing off of a loan where a sum in respect of the loan is treated as the borrower's income in his or her capacity as settlor of a settlement.
250. Section 677 of ICTA charges a settlor to income tax where the trustees of the settlement directly or indirectly make a capital payment to the settlor. A charge to income tax is only made if, and to the extent that, the payment can be matched against income retained within the settlement.
251. So, it is possible that in respect of a particular tax year the borrower is liable to income tax in his or her capacity as settlor on a sum in respect of a loan and is also liable to tax under section 421 of ICTA in respect of amounts released or written off. Likewise, it is possible that the borrower has been liable to income tax in an earlier tax year in his or her capacity as settlor on a sum in respect of a loan or under section 421 of ICTA in respect of amounts released or written off.
252. Section 421(3) of ICTA provides relief for sums which fall to be included as income under section 677 of ICTA. It suggests that section 677 of ICTA takes precedence:
This section shall not have effect in relation to a loan or advance made to a person if any sum falls in respect of the loan or advance to be included in his income by virtue of section 677, except so far as the amount released or written off exceeds the sums previously falling to be so included (without the addition for income tax provided for by subsection (6) of that section).
253. But section 677(3) of ICTA provides:
Where any amount is included in a person's income by virtue of section 421 in respect of any loan or advance, there shall be a corresponding reduction in the amount (if any) afterwards falling to be so included in respect of it by virtue of this section.
254. This suggests that section 421 of ICTA takes precedence.
255. The purpose of these provisions (which were introduced in the same Finance Act) is to prevent the same sum being taxed both under section 421 of ICTA and section 677 of ICTA. It is believed that "afterwards falling to be so included" in section 677(3) of ICTA is a reference to later tax years. So, for the purposes of section 677 of ICTA amounts charged in earlier tax years under section 421 of ICTA will be taken into account, but within the same tax year section 677 of ICTA will take precedence. This would mean that "previously falling to be so included" in section 421(3) of ICTA would include amounts charged to tax under section 677 of ICTA in the same and earlier tax years.
256. So this clause:
257. Subsections (2) to (6) set out the steps to be taken to determine whether tax is charged under clause 415. In particular, subsections (2) and (3) require the "total amount previously charged" (that is, sums taxed under clause 633 either in previous tax years or in the same tax year and amounts taxed under this Chapter) to be compared with the "total amount released". Only if the total amount released exceeds the total amount previously charged, is tax charged under this Chapter.
258. Any amount that is charged to tax under clause 415 is grossed up at the dividend ordinary rate (Schedule F ordinary rate in the source legislation) in the usual way (see subsection (3)).
259. Subsection (5) provides that, when calculating the amount that has already been charged under clause 633, only the net amount is taken into account, not the amount produced by the grossing up required under clause 640(1).
Clause 419: Loans and advances to persons who die
260. This clause deals with who is liable for any tax charged where the original debtor has died and the loan is released or written off during the administration of the estate, or at some later point. It is based on section 421(2) of ICTA.
261. If the conditions in subsection (1) are met, subsection (2) confirms that there is no charge under clause 415. Instead, the amount that would have been charged under clause 415 is treated as forming part of the aggregate income of the estate and may be charged under Chapter 6 of Part 5 of this Bill or section 701(8) of ICTA.
262. If subsection (2) does not apply, subsection (3) will (so that tax is charged under this Chapter).
Clause 420: Loans and advances to trustees of trusts that have ended
263. This clause is based on section 421(2) of ICTA and applies where a loan has been made to trustees of a trust and the loan is released or written off after the trust has come to an end.
Clause 421: Income tax treated as paid
264. This clause explains how a person's income tax liability is satisfied (in whole or in part). It is based on section 421(1)(b) of ICTA
265. Under subsection (1), the person liable is treated as having paid income tax at the dividend ordinary rate (Schedule F ordinary rate in the source legislation) on the gross amount released or written off.
266. If the debt is released or written off during the administration of a deceased person's estate, the personal representatives are not charged to tax under this Chapter but the amount of income that would otherwise be so charged forms part of the aggregate income of the estate for the purposes of Chapter 6 of Part 5 of this Bill or section 701(8) of ICTA. As personal representatives are not charged to tax under this Chapter they are not "persons liable". This means that they are not treated as having paid income tax under this clause (but see the commentary on clause 680). "Personal representatives" is defined in clause 878.
267. Subsection (2) provides that the tax treated as paid is not repayable. This applies even if the person is a non-taxpayer.
268. Subsections (3), (4) and (5) ensure that an individual cannot be given credit for income tax on more than the amount of the loan released or written off which is charged to tax.
269. Section 421(1)(c) of ICTA deals with tax rates and treats the amount charged to tax as not brought into charge to tax for the purposes of sections 348 and 349 of ICTA. Section 421(1)(c) is not rewritten in this Chapter. But rather than leaving it "stranded" in section 421 of ICTA it is rewritten in amendments to sections 1A of ICTA and 348 and 349 of ICTA (see Schedule 1).
Chapter 7: Purchased Life Annuity Payments
270. Annuity payments made under a purchased life annuity are annual payments and taxable under the source legislation by section 18 of ICTA under Schedule D Case III (if from a UK source) or Schedule D Case V (if from a source outside the United Kingdom). However, because of the special exemption that applies to payments made under a purchased life annuity (see the commentary on Chapter 7 of Part 6 of this Bill) and because such payments are generally regarded as investment income, a specific charge has been carved out of the main annual payments charge (which is in Chapter 7 of Part 5 of this Bill). And, the priority rules, set out in clause 575(3), ensure that annuity payments made under a purchased life annuity are taxed under Chapter 7 of Part 4 of this Bill and not under Chapter 7 of Part 5 of this Bill.
271. In line with the approach of bringing together all exemptions in one Part, the exemption for part of the purchased life annuity payment is in Chapter 7 of Part 6 of this Bill.
Clause 422: Charge to tax on purchased life annuity payments
272. This clause is based on section 18(1) and Schedule D Case III and Case V in section 18(3) of ICTA. It charges to tax annuity payments made under a purchased life annuity.
Clause 423: Meaning of "purchased life annuity"
273. This clause rewrites the definition of "purchased life annuity" in section 657(1) of ICTA.
Clause 424: Income charged
274. Clause 424 sets out the amount charged to tax on annuity payments and is based on section 64 and section 65(1) of ICTA. The amount charged may be reduced if the exemption in clause 717 (exemption for part of purchased life annuity payments) applies.
275. The words "without any deduction" in section 64 of ICTA have not been reproduced. They are considered unnecessary. There are no provisions in the source legislation allowing deductions from Schedule D Case III income and one of the defining characteristics of an annual payment is that it represents pure income profit in the hands of the recipient. See further the commentary on clause 370. In the case of annuity payments arising from a source outside the United Kingdom, subsection (2) makes subsection (1) subject to the special rules for foreign income in Part 8 of this Bill (see further the commentary on Part 8).
Clause 425: Person liable
276. This clause is based on section 59(1) of ICTA and states who is liable for any tax charged. The phrase "receiving or entitled to" has been retained because it is generally understood and has been widely interpreted by the courts. See further the commentary on clause 371.
Clause 426: Annuity payments received after deduction of tax
277. This clause provides that if income tax has been deducted by the payer of the annuity, the recipient is treated as having paid that income tax. It is based on section 348(1)(d) of ICTA and case law.
278. The policy has been adopted that only those tax deduction rules which both relate to the recipient and to amounts of tax treated as paid, will be rewritten in this Bill. So, section 348(1)(c) of ICTA, for example, is not rewritten.
279. Under section 348(1)(d) of ICTA, tax deducted from annual payments under section 348(1)(b) of ICTA is treated as paid by the recipient. Case law extends this proposition to tax deducted under sections 348(2) and 349 of ICTA. This clause fills the legislative gap currently filled by case law.
280. Section 348(1) of ICTA deals with annual payments within Schedule D Case III (other than interest) which are payable wholly out of profits or gains brought into charge to income tax. Under section 348(1)(b) of ICTA the payer is entitled, but not obliged, to deduct and retain out of the annual payment a sum representing income tax. Under section 348(1)(c) of ICTA the recipient has to allow the tax to be deducted by the payer. The recipient is charged to tax on the full amount of the payment (that is, the actual payment received plus the tax deducted) but is treated as having paid income tax equal to the amount of the sum deducted (see section 348(1)(d) of ICTA).
281. Sections 348(2) and 349 of ICTA provide for certain other payments also to be made after deduction of tax, but there is no equivalent provision to say that the tax deducted should be treated as tax paid by the recipient. Various tax cases, however, extend the effect of section 348(1)(d) of ICTA to these provisions.
282. In Allchin v Corporation of South Shields (1943), 25 TC 445 HL, Viscount Simon LC said (on page 461):
If and in so far as the annual payment is not payable and paid out of profits or gains brought into charge, the person making the payment is bound to deduct from it Income Tax at the current rate and to account to the Crown for the amount deducted. In effect, the payer in such a case acts as collector for the Crown of the tax due from the recipient. The requirement that the recipient must allow the deduction and treat the payer as acquitted of liability in respect of this amount is not repeated in Rule 21, but must be implied.
283. The final sentence quoted clearly follows the text of section 348(1)(c) of ICTA and effectively extends it to section 349 cases. The words of section 348(1)(d) of ICTA are not mentioned but the obiter words, "In effect, the payer in such a case acts as collector for the Crown of the tax due from the recipient", amount to the same thing because it follows from them that once deduction has occurred, the recipient has paid his or her tax.
284. In Stokes v Bennett (1953), 34 TC 337 HC, a divorced wife received maintenance payments, "free of tax", under a UK court order from her former husband who was not resident in the United Kingdom. There was no evidence that tax was deducted from the payments and no such tax was accounted for to the Inland Revenue. Also, there was no evidence that the husband received income which was subject to UK income tax. The wife was taxed under Schedule D Case III on the amounts received.
285. It was held in the High Court, however, that the wife should be treated as having received sums from which tax had been deducted and no further assessments could therefore be made. As the order was for an amount to be paid "free of tax", and because the husband had paid the same amounts as the free of tax amounts (rather than the grossed up amounts), the court thought that the correct inference was that he had deducted tax.
286. As there was no evidence that the payments were out of taxed income, it was a case within what is now section 349 of ICTA, rather than section 348 of ICTA. Deduction of tax was presumed to have occurred and Lord Simon's dicta from Allchin v Corporation of South Shields were applied so that the requirement that the recipient must allow the deduction and treat the payer as acquitted of his liability had to be implied. It followed that the wife could not sue her husband for the tax because she would be met with the defence that he was acquitted of his liability. Therefore the wife fell to be treated as the recipient of an amount that had borne tax. Collection of the tax was a matter between the payer and the Crown. The husband had become in effect an agent for the Crown, as the collector for the Crown of the tax due from (and in effect paid by) the wife. This is tantamount to the provision in section 348(1)(d) of ICTA.
287. Section 349 of ICTA is regarded as applying to annual payments made under United Kingdom court orders etc. not wholly out of profits or gains bought into charge to income tax even where the payer is not UK resident.
288. In Grosvenor Place Estates Ltd v Roberts (1960), 39 TC 433 CA, the National Coal Board failed to deduct tax from certain payments which were not made out of profits or gains brought into charge to tax. The recipient company was taxed on the full amount of the payments. On appeal the company contended that as the National Coal Board was obliged to deduct tax no assessment could be made on the recipient. It was held, however, that the recipient could be assessed to tax where the payer failed to deduct tax, notwithstanding the express rights of the Inland Revenue to assess the payer. Donovan LJ said (on page 453):
The power and duty of the General Commissioners to make assessments upon annual payments charged with tax under Schedule D where such payments are made out of profits or gains not brought into charge to tax still remains. This does not involve liability to double taxation, once by deduction at source and again by assessment upon the same income. It is true there is nothing in the Act expressly prohibiting such an injustice, but the prohibition is implicit in its provisions, as the Courts have frequently said.
289. In effect this means that section 349 of ICTA impliedly contains the provision in section 348(1)(d) of ICTA, that the deduction is treated as tax paid by the payee.
Chapter 8: Profits from deeply discounted securities
290. This Chapter rewrites the provisions in Schedule 13 to FA 1996 that deal with "relevant discounted securities". FA 2003 introduced various changes to Schedule 13, principally repealing reliefs for losses and allowances for expenditure, but with transitional rules for securities held since before 27 March 2003. Since these losses and allowances continue to apply for securities held since that date it was considered more helpful to set out the law relating to them in this Chapter rather than relegate them to Schedule 2 to this Bill.
Clause 427: Charge to tax on profits from deeply discounted securities
291. This clause charges to tax profits on deeply discounted securities which arise when the security is disposed of (for whatever reason) or, in certain circumstances, is treated as being disposed of. It also ensures that gains which would not otherwise be income are treated as such. The clause is based on paragraph 1 of Schedule 13 to FA 1996.
292. Although Schedule 13 to FA 1996 refers to a "relevant discounted security", the Bill uses the term "deeply discounted security". This seems a more appropriate term to reflect both the nature of the security and the nature of the tax charge while distinguishing this regime from the "deep gain securities" regime of Schedule 11 to FA 1989.
Clause 428: Income charged
293. This clause sets out the amount charged to tax on profits that arise on a disposal of securities that are within or outside the United Kingdom. It is based on sections 64, 65 and 68 of ICTA and on paragraph 1 of Schedule 13 to FA 1996.
294. Paragraph 1(1) of Schedule 13 to FA 1996 provides that profits arising from a security out of the United Kingdom are chargeable under Schedule D Case IV. This allows the assessment rules for Case IV income in section 65 of ICTA to apply.
295. Subsection (3)(a) treats such profits as arising from a source outside the United Kingdom. This links to the definition of "relevant foreign income" in clause 830, thus attracting the special rules for such income in Part 8 of this Bill.
296. Subsection (3)(b) then makes the rule in subsection (1) subject to the rules in Part 8 of this Bill for such profits.
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