|Income Tax (Trading and Other Income) Bill - continued||House of Commons|
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Clause 563: Timing of certain grants of options where related disposals occur later
767. This clause provides that certain grants of options are to be treated as having taken place after other transactions. The purpose is to allow loss relief arising on the grant of an option to be set against a later profit. The clause is based on paragraph 4 of Schedule 5AA to ICTA.
768. Subsection (1) sets out the general rule. There are three conditions that must be satisfied for the rule to apply.
769. Subsections (2) to (4) set out these three conditions. There must be a number of related transactions designed to produce a guaranteed return of which one is the grant of an option. At least one of the other transactions should be entered into after the grant and should be a disposal that is not a grant of an option.
770. Subsection (5) then provides that the grant of the option is deemed to take place at the same time as the next one of those transactions referred to in subsection (4) takes place. As a result, a loss on the grant of an option will coincide with any profit arising on the later transaction. Because losses under Schedule 5AA are allowable against Schedule D Case VI profits they may be carried forward against other Schedule D Case VI profits arising in a later year or set off against other Schedule D Case VI profits of the same year, but not carried back. Since the Schedule D Case VI set-off rule is rewritten, this clause allows that later profit to be reduced by a loss which, but for this clause, could arise in a later year than that profit.
771. Subsection (6) consequently requires that the two timing rules in sections 144(2) and 144A(2) of TCGA, should they apply, take precedence over the timing rule in this clause. But in most cases the two rules will give the same result. (Sections 144(2) and 144A(2) of TCGA treat grants of options and transactions by the grantor to fulfil his obligations as a single transaction.) The purpose of this is to allow the sum received on the grant to fall within the same capital gains computation as arises when the option is exercised, etc. Where it applies for this Chapter, the timing rules in these two sections of TCGA will generally achieve the same results as this clause. But the rules in sections 144(2) and 144A(2) of TCGA will not always apply because certain transactions within this Chapter fall outside them.
Clause 564: Deemed disposal where futures run to delivery or options are exercised
772. This clause provides that futures which are allowed to run to delivery and option contracts which are exercised will be treated as disposals for the purposes of this Chapter if they would not otherwise be disposals under this Chapter. An entry in Part 5 of Schedule 2 to this Bill ensures that these transactions are not disposals if they took place before 6 February 1998. This clause is based on paragraph 4A of Schedule 5AA to ICTA.
773. Subsections (2) and (3) provide the conditions that must apply for there to be a deemed disposal. There must be two or more related transactions (clause 566 explains what is meant by a related transaction). One of these must be the creation or acquisition of a future or option and the other the running to delivery of that future or exercise of that option but which is not already a disposal for the purposes of this Chapter.
774. Under subsection (4) a disposal is deemed to have taken place the moment before the future runs to delivery or the option is exercised and that disposal is deemed to be a disposal provided for in a scheme or arrangement.
775. Both parties to the future or option are affected by the deemed disposal.
776. Under subsection (5) the person whose rights and entitlements have a value immediately before the option is deemed to dispose of that right or those rights for their market value. Thus the same disposal proceeds are deemed to arise as if the person had disposed of the contract to another and a profit or gain had arisen in those circumstances.
777. Under subsections (6) and (7) any other party to the future or option is deemed to have received nothing on the disposal but to have incurred costs equal to the amount the person would have been expected to pay in an arm's length transaction for the release of the person's obligations under the contract.
778. Subsection (8) requires that section 144(2) and (3) of TCGA should be disregarded in applying subsections (1) to (3). This is because under these two subsections of section 144 of TCGA (applicable as a result of clause 562 (when disposals of futures or options occur: general)) the grant and exercise of an option are treated as a single transaction (to enable the premium to be set against the disposal proceeds). But, in order for this clause to apply, subsections (1) to (3) require two related transactions, the creation of the future or option and its running to completion or being exercised, so those two transactions must not be taken to be a single transaction.
Clause 565: Interpretation of section 564
779. This clause provides explanations necessary to understand the previous clause. It is based on paragraph 4A of Schedule 5AA to ICTA.
780. Subsection (3) defines "party" in relation to the future or option in terms of rights, entitlements, obligations and liabilities, ensuring that both "grantors" and "grantees" of both futures and options fall within the definition.
Clause 566: When transactions are related
781. This clause provides an explanation of what is meant by related transactions. The rules given in this clause are necessary for the definition of what constitutes a guaranteed return in clause 559, for the timing of disposals in clause 563 and for applying the provisions on deemed disposals in clause 564. This clause is based on paragraph 6 of Schedule 5AA to ICTA.
Clause 567: Losses
782. This clause gives some rules on losses, when they arise and how they are relievable. It is based on paragraph 1 of Schedule 5AA to ICTA.
783. Subsection (4) gives a link to two sections which will be inserted into TCGA by Part 2 of Schedule 1 to this Bill. They rewrite paragraph 4A(5) to (9) of Schedule 5AA to ICTA. The rules in these two new sections prevent gains which have been charged under this Chapter from being taxed again under TCGA and losses relieved under this Chapter from being relieved again under that Act. Because these rules are properly relevant to the capital gains regime they are rewritten as consequential amendments to TCGA.
Clause 568: Special rule for certain income of trustees
784. This clause provides that certain income arising to trustees is liable to the special rate of tax for accumulation and discretionary trusts. It is based on paragraph 7 of Schedule 5AA to ICTA.
785. The reference in subsection (4) to a superannuation fund to which section 615(3) of ICTA applies has effect for the tax year 2006-07 onwards only. There is a transitional rule in Part 5 of Schedule 2 of this Bill which gives the rules for 2005-06. Changes to the rules on superannuation funds in FA 2004 only apply from 2006-07.
786. Subsection (5) provides that income falling within this clause is treated as if it were income within section 686 of ICTA. Section 686 of ICTA charges income arising to trustees to special rates of tax.
787. Subsection (6) qualifies the meaning of "trustees" for the purposes of this clause. Paragraph 7(3) of Schedule 5AA to ICTA simply refers to section 686 of ICTA but the definition in that section is rewritten in full here.
Clause 569: Anti-avoidance: transfer of assets abroad
788. Sections 739 and 740 of ICTA provide rules to counter the avoidance of income tax by the transfer of assets abroad. They apply where income is payable to a person resident or domiciled outside the United Kingdom but which a person domiciled or resident within the United Kingdom has the power to enjoy. This clause enables sections 739 and 740 of ICTA to apply to profits arising under this Chapter by ensuring that the profits or gains are treated as income payable to a person resident or domiciled outside the United Kingdom. It is based on paragraph 8 of Schedule 5AA to ICTA.
Chapter 13: Sales of foreign dividend coupons
789. This Chapter rewrites the charge to tax in section 18(3B) to (3E) of ICTA on the proceeds of the sale of coupons and warrants attached to foreign securities and shares, where the sale is made through a bank or to a dealer in coupons and both are in the United Kingdom.
Clause 570: Charge to tax under Chapter 13
790. This clause charges to tax income which is treated as arising from foreign holdings where a dividend coupon attached to the holding is (a) sold or otherwise realised by a bank in the United Kingdom or (b) sold to a coupon dealer in the United Kingdom by someone other than a bank or a coupon dealer. The term "foreign holdings" is defined in clause 571. The clause is based on section 18 of ICTA.
791. Subsection (3) sets out the first circumstance in which income is treated as arising from foreign holdings. This is where the UK office of a bank pays over the proceeds of a sale or realisation of dividend coupons or carries those proceeds to an account. Section 18(3B)(a) refers simply to "a bank in the United Kingdom". See Change 103 in Annex 1.
792. Subsection (4) sets out the second circumstance. This is where a person who is neither a bank nor another coupon dealer sells the dividend coupons to a coupon dealer in the United Kingdom. Section 18(3B)(b) of ICTA refers to "a dealer in coupons in the United Kingdom". See Change 103 in Annex 1.
Clause 571: Meaning of "foreign holdings" etc
793. This clause gives the meaning of "foreign holdings" and "dividend coupons" and of words used within these definitions. It is based on section 18 of ICTA.
Clause 572: Income charged
794. This clause sets out the amount charged to tax on income arising from foreign holdings. It is based on section 65 of ICTA.
Clause 573: Person liable
795. This clause states who is liable for any tax charged. It is based on section 59 of ICTA.
Part 5: Miscellaneous income
796. This Part contains the rules relating to miscellaneous income. It consists of income that is charged under Schedule D Cases III, V and VI and non-schedular charges in the source legislation.
797. There is a separate Chapter for each category of income arranged as follows:
Structure of Chapters
798. The basic structure of each Chapter is:
799. 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.
Part 5: Chapter 1: Introduction
Clause 574: Overview of Part 5
800. 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 575: Provisions which must be given priority over Part 5
801. This clause provides rules which determine which Part will take priority in the case of any overlaps in the charging provisions. It is based on sections 18 and 20 of ICTA, and section 9D of TMA.
802. Subsection (1) ensures that if any amount falls within a charge in Part 5 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.
803. It also reflects the decision to give effect to the Crown Option. See Change 66 in Annex 1.
804. Subsection (2) ensures that if any amount falls within a charge in Part 5 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.
805. Particular types of income which, in the source legislation are charged to tax under Schedule D Case III have been given separate charges to tax in Parts 4 and 5 of this Bill. As the general annual payments charge in Chapter 7 of Part 5 of this Bill takes effect only if an amount is not otherwise charged to income tax there can be no overlap between this charge and the ex-Case III changes in Part 4 of this Bill.
806. Subsection (3), therefore, provides a rule where there could potentially be an overlap between Chapters within Parts 4 and 5 of this Bill. It ensures that the interest charge in Chapter 2 of Part 4 takes priority over any of the charges in Part 5 that are based on Schedule D Case VI. This maintains the priority in the source legislation of Case III over Case VI which charges amounts that do not fall under any other Case of Schedule D.
807. It also provides the priority between Chapter 3 of Part 4 of this Bill (dividends etc. from UK resident companies) and Part 5 of this Bill. This rewrites the effect of section 20(2) of ICTA which provides specifically for Schedule F to take priority over the other Schedules.
808. Subsection (4) ensures that if any amount falls within a charge in Part 5 and any of the charging provisions in ITEPA that ITEPA has priority. This reflects the priority of ITEPA over Schedule D and is based on section 18(1)(b) and Schedule D Case VI.
809. The non-schedular charges rewritten in Part 5 of this Bill (beneficiaries' income from estates in administration: UK estates) and (settlements: amounts treated as income of the settlor) do not have the potential to overlap with Chapter 2 of Part 2 of this Bill (trade profits) or Chapter 3 of Part 3 of this Bill (UK property business) or any of the charges in Part 4 of this Bill or ITEPA. There is therefore no need to exclude these charges from the priority rules.
Clause 576: Priority between Chapters within Part 5
810. This clause provides rules which determine which Chapter will take priority in the case of any overlaps in the charging provisions within Part 5 of this Bill. It is new.
811. Usually, by their nature, the particular amounts charged in Part 5 of this Bill can fall only within one Chapter so there is no need to make any special provision. In addition, as the general annual payments charge in Chapter 7 of Part 5 of this Bill takes effect only if an amount is not otherwise charged to income tax there can be no overlap between this charge and the ex-Case III changes in Part 5 of this Bill.
812. This clause provides the one priority rule required for this Part. Where amounts fall within Chapter 2 (receipts from intellectual property) and Chapter 3 (films and sound recordings: non-trade businesses), Chapter 3 has priority over receipts from intellectual property which do not amount to annual payments. Although both charges are based on Schedule D Case VI, priority has been given to Chapter 3 to ensure that these amounts continue to benefit from the special deductions rules set out in clauses 612and 613 of that Chapter.
Clause 577: Territorial scope of Part 5 charges
813. This clause provides that income within Part 5 of this Bill is only charged to tax if it is from a source in the United Kingdom or, if from a source outside the United Kingdom, it arises to a UK resident.
814. It is based on section 18(1) of ICTA.
815. The comments made in the commentary on clause 368 on the absence of a charge to tax on income from outside the United Kingdom arising to non-residents apply here also. See in particular the specific comments on subsections (1), (2) and (3) of that clause, the use of the term "source" and how it is proposed to include within that clause income without a source.
816. Subsection (4) serves to exclude, for example, clause 587 (charge to tax on income from sales of patent rights) from the scope of this rule since that clause has its own rules on territorial scope.
Chapter 2: Receipts from intellectual property
817. This Chapter incorporates three charges to income tax in respect of intellectual property. The Chapter includes a charge to income tax on royalties and other receipts from intellectual property arising both within and outside the United Kingdom. In this context, intellectual property includes patents, trade marks, registered designs and design rights, copyright, performer's rights or plant breeder's rights. The Chapter also charges to income tax capital sums arising from the disposal of know-how in certain circumstances and capital sums from the sale of patent rights.
818. The following are excluded from the scope of this Chapter:
819. Sections 536 (taxation of royalties where owner abroad), 537 (public lending right) and 537B (taxation of design royalties where owner abroad) of ICTA are not rewritten. These provisions all relate to deduction of tax at source under section 349(1) of ICTA and will be rewritten together with the rewrite of section 349 of ICTA itself.
Clause 578: Contents of Chapter
820. This introductory clause sets out the three income tax charges imposed by the Chapter. It is new.
821. Subsection (2) contains a signpost to clause 727 which provides for a limited exemption from income tax for annual payments made by individuals. So payments of royalties which are made by individuals and arise in the United Kingdom will be outside the scope of this clause if the conditions in clause 727 are met. This subsection also contains a signpost to clause 758 which contains another exemption for certain interest and royalty payments.
Clause 579: Charge to tax on royalties and other income from intellectual property
822. This clause charges to tax royalties and other income from intellectual property. It is based on section 18 of ICTA.
823. The clause sets out a new provision creating a specific charge to tax on royalties and other income from intellectual property. The source legislation uses general principles to tax such income. In the source legislation, income from intellectual property is charged:
The new charge covers income currently charged under the heads mentioned above, except that trading income derived from intellectual property is to be taxed not under clause 579 but under Part 2 of this Bill. The rules set out in the clause are not intended to widen or restrict the scope of the charges under Schedule D in the source legislation.
824. The charge embraces royalties which are UK source annual payments (Schedule D Case III in the source legislation), overseas income from intellectual property (Schedule D Case V in the source legislation) and casual profits of an income nature from the exploitation of intellectual property outside the course of a trade (Schedule D Case VI in the source legislation). The charges relating to capital sums arising from the disposal of know-how in certain circumstances and capital sums arising from the sale of patent rights are dealt with further on in this Chapter.
825. Subsection (1) contains the charge on royalties and other income from intellectual property. Royalties are mentioned specifically, even though they are covered by the words "income from intellectual property", since most of the income within the scope of this clause is likely to be royalties. However, no attempt has been made to define the term "royalties". The source legislation does not do so. Although definitions have been suggested by the courts they are not appropriate to include here as the word "royalties" has only been used to assist the courts to determine whether a payment or receipt is of a revenue or capital nature.
826. Subsection (2) defines intellectual property for the purposes of this clause. Intellectual property is an area of rapid change. Because of this, it is not possible to define intellectual property by way of an exhaustive list. Subsection (2)(b) therefore charges United Kingdom source royalties and other income from rights which correspond to or are similar to those listed in subsection (2)(a). Subsection (2)(c) covers rights under foreign law which correspond to or are similar to those listed in subsection (2)(a). Also within the scope of the charge is income from any information or technique not protected by a right within subsection (2)(a), (b) or (c) of this clause. So subsection (2)(d) provides the flexibility to bring within the scope of the clause income derived from new types of intellectual property as changes occur in this field.
Clause 580: Income charged under section 579
827. This clause sets out the amount charged to tax under clause 579 in respect of royalties and other income from intellectual property. It is supplemented by the detailed calculation rules for certain income in clause 582. The clause is based on sections 64, 65, 68 and 69 of ICTA.
828. Subsection (4) contains a signpost to section 527 of ICTA (relating to the spreading of patent royalties etc. over several years). Section 527 deals with relief in terms of a reduction in the income tax charge. It will be rewritten in with other similar relieving provisions.
Clause 581: Person liable for tax under section 579
829. This clause states who is liable for any tax charged under clause 579 in respect of royalties and other income from intellectual property It is based on section 59 of ICTA.
Clause 582: Deductions in calculating certain income charged under section 579
830. This clause sets out the rules for the deduction of certain expenses from income charged under clause 579 other than annual payments (charged under Schedule D Case III in the source legislation) or foreign income charged on the remittance basis in accordance with clause 832. It applies to income charged under both Schedule D Case V and Case VI in the source legislation. It is new.
831. There is no express provision in the legislation for deductions of expenditure from Schedule D Case VI income, although it is implied by the word "profits" in section 69 of ICTA (Case VI assessments) and by section 392 of ICTA (Case VI losses). This view has been upheld by the courts (see Curtis Brown v Jarvis (1929), 14 TC 744 HC). Expenditure admissible relating to income arising in the United Kingdom within the scope of the clause would not cease to be admissible in respect of the same type of income arising outside the United Kingdom. However, under section 64 of ICTA (Case III assessments) no deduction is permitted from income within the Schedule D Case III charge so this clause specifically does not apply to annual payments.
832. Subsections (2) to (4) contain general rules about the expenditure which may be deducted. The rules are broadly based on those for deduction of expenses in calculating trade profits. In particular subsection (2) allows only expenses wholly and exclusively incurred in generating income. The intention here is to allow expenses that would be available in computing profits under Schedule D Case V or VI, and not to widen or restrict the scope of deductible expenses.
833. Subsection (6) provides that the deduction of patent expenses under clause 600 is additional to the relief due under this clause. But where relief is given under clause 582, no relief can then be given for the same expenditure as patent expenses - see subsection (5) of clause 600.
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