Clause 607: Questions about apportionments affecting two or more persons

912.     This clause contains a signpost to section 563 of CAA which sets out the body of Commissioners responsible for determining any question about the way in which a sum is to be apportioned under clause 606 where the relevant apportionment affects two or more persons. It is based on section 532 of ICTA and section 563 of CAA.

913.     Section 532 provides that section 524 of ICTA (dealing with the sale of patent rights) and section 531 of ICTA (dealing with the disposal of know-how) are to be treated as if those provisions had been contained in CAA.

Clause 608: Meaning of "capital sums" etc.

914.     This clause contains a signpost to section 4 of CAA which defines "capital expenditure" and "capital sums". It is based on section 532 of ICTA and section 4 of CAA.

915.     Section 532 of ICTA provides that section 524 to 529 and 531 to 533 of ICTA are to be treated as if those provisions had been contained in CAA.

Chapter 3: Films and sound recordings: non-trade businesses

Overview

916.     This Chapter deals with income arising from the exploitation of films and sound recordings - and the special allocation rules available to the producers and acquirers of films and sound recordings - where the activities carried on do not amount to a trade.

917.     The special allocation rules rewritten in Chapter 9 of Part 2 of this Bill for trades apply also to businesses. So this Chapter is needed to cater for businesses which fall short of a trade.

918.     There are no specific charging provisions for income from non-trade film and sound recordings businesses in ICTA. Such income is chargeable under Schedule D Case VI for UK sources and Schedule D Case V for foreign sources under the source legislation. The new charge has been carved out of a general charging provision and dealt with - together with the special allocation rules - in a separate charging Chapter. The new Chapter will apply to both UK source and foreign source businesses.

Clause 609: Charge to tax on films and sound recordings businesses

919.     This clause charges to tax income from businesses involving the exploitation of films and sound recordings where the activities fall short of trading. It is based on section 18 of ICTA .

920.     Subsection (1) imposes a charge on UK or foreign businesses involving the exploitation of films or sound recordings where the activities do not amount to a trade. Reclassifying the income according to its nature makes sense. The special allocation rules for films and sound recordings in sections 40A to 40D F(No 2)A 1992 (and sections 41 to 43 F(No 2)A 1992 for films) apply to both trades and businesses. The creation of a new charge and Chapter for this income provide a convenient link with the special allocation rules for films and sound recordings businesses (where the activities fall short of trading) which might otherwise be missed.

921.     The new charge on income from non-trading film or sound recordings businesses has been carved out of the general sweep up charge (see clause 687) and included in a separate Chapter together with a signpost to the special allocation rules for expenditure relating to such activities.

Clause 610: Income charged

922.     This clause sets out the amount charged to tax under this Chapter. It is based on sections 65 and 68 of ICTA.

923.     Subsection (3) provides that this clause is subject to the special rules for foreign income in Part 8 of this Bill. The special allocation rules for films and sound recordings can apply to businesses carried on outside the United Kingdom as well as to businesses carried on in the United Kingdom.

Clause 611: Person liable

924.     This clause states who is liable for any tax charged under this Chapter. It is based on section 59 of ICTA.

Clause 612: Calculation of income

925.     This clause contains calculation rules for income charged under section 609. It is new.

926.     Where a particular type of income is carved out of, what would otherwise be, a general charge, the Bill explicitly sets out the calculation rules applicable to that income. This approach has been extended to foreign source income charged under Schedule D Case V in the source legislation. This clause sets out expenses that would, in practice, be deductible in calculating profits and does not widen or restrict the scope of deductible expenses.

927.     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.

928.     Subsection (4) precludes expenditure which would not have been allowed had a trade been carried on. So expenses precluded by Chapter 4 of Part 2 of this Bill are not deductible here.

Clause 613: Application of trading income rules to non-trade businesses

929.     This clause provides that Chapter 9 of Part 2 of this Bill - the special allocation rules for trades - apply to non-trade businesses as they apply to trades (with certain modifications). It is new.

Chapter 4: Certain telecommunication rights: non-trading income

Overview

930.     This Chapter imposes a charge on profits derived from certain telecommunication rights not held for trading purposes. It also sets out how the profits are to be calculated. The Chapter is based on Schedule D Cases III, V and VI of ICTA and Schedule 23 to FA 2000. The rights dealt with in the Chapter are certain telecommunications licences and capacity on telecommunications cable systems, known as indefeasible rights to use (IRU).

931.     Schedule 23 to FA 2000 does not impose a charge to tax on the income derived from the rights. The main purpose of Schedule 23 to FA 2000 is to allow a taxpayer who acquires qualifying rights a revenue deduction for expenditure that would otherwise be treated as capital for tax purposes. It does this by providing that the income tax treatment follows the treatment in the accounts provided the accounts are prepared in accordance with generally accepted accounting practice. This rule applies not only to the acquisition but also to revaluations and disposals.

932.     In most cases it is likely that the rights will be acquired for use in a trade. For this reason Schedule 23 to FA 2000 is rewritten as Chapter 10 of Part 2 of this Bill. But the Schedule applies for all income tax purposes. This Chapter rewrites the charge if the assets are not acquired for the purposes of a trade.

933.     The Chapter applies only to IRUs acquired on or after 21 March 2000. See the transitional rule in Schedule 2 of this Bill. No telecommunications licences to which this Chapter applies were acquired before that date.

Clause 614: Charge to tax on certain telecommunication rights of a non-trader

934.     This clause charges to tax income from telecommunication rights arising to a non-trader. It is based on Schedule D Cases III, V and VI, section 18(1) and (3) of ICTA, and paragraph 1 of Schedule 23 to FA 2000.

935.     If the rights are acquired for pure investment purposes and the licensor does not undertake to provide any extra services, ICTA charges the profits to tax under Schedule D Case III as an annual payment (or under Schedule D Case V in the unlikely event that the source is outside the United Kingdom).

936.     If the licensor undertakes to provide services that do not amount to a trade, ICTA charges the profits under Schedule D Case VI (or under Schedule D Case V if the source is outside the United Kingdom).

Clause 615: Income charged

937.     This clause sets out the amount charged to tax. It is based on sections 64, 65 and 69 of ICTA and Schedule 23 to FA 2000.

Clause 616: Person liable

938.     This clause states who is liable for any tax charged. It is based on section 59 of ICTA.

Clause 617: Deductions in calculating certain income charged

939.     This clause sets out how to calculate the income charged to tax if the taxpayer provides services that do not amount to a trade. It is based on section 69 of ICTA and Schedule 23 to FA 2000.

940.     In the source legislation this income would be charged under Schedule D Case VI (or under Schedule D Case V if the source is outside the United Kingdom). The rules set out in this clause deal with two aspects of the calculation of this income. First, the general deduction rules that apply to income taxed under Schedule D Case VI. Second, the particular rules that apply to income from telecommunication rights.

941.     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.

942.     Schedule 23 to FA 2000 set out a particular set of rules that apply to income from telecommunication rights. Because they are most likely to apply to trading income this clause merely cross-refers to the rewrite of those rules in clauses 147 and 148.

Clause 618: Payments received after deduction of tax

943.     This clause deals with the position of an individual receiving income within this Chapter from which tax has been deducted. It is based on sections 348 and 349 of ICTA.

944.     Under section 348(1)(b) of ICTA "a sum representing the amount of income tax thereon" may be deducted from certain annual payments. The clause reproduces the effect of section 348(1)(d) of ICTA, under which the sum is treated as income tax paid by the person to whom the payment is made. The payer is entitled, but not obliged, to deduct this sum representing tax, which is treated as tax paid by the recipient. The tax treated as paid by the recipient of the annual payment is taken into account, along with any other tax paid by deduction at source and any tax credits, in calculating the tax payable for the tax year.

945.     In so far as this clause covers payments which are not annual payments within section 348(1) of ICTA, the scope of the provision has been made more explicit. Section 348(1)(d) of ICTA applies, in terms, only to annual payments from which any deduction is made under section 348(1)(b) of ICTA, but case law effectively extends it to payments under sections 348(2) and 349 of ICTA. See commentary on clause 426.

Chapter 5: Settlements: amounts treated as income of settlor

Overview

946.     This Chapter rewrites the settlements legislation in Chapters 1A and 1B of Part 15 of ICTA. This legislation prevents the avoidance of tax where a person (the settlor) arranges for his or her income to be received by someone who is either chargeable to tax at a lower rate than the settlor, or not chargeable to tax at all. The legislation operates by treating the income as if it were the settlor's. The legislation operates where:

• the settlor retains an interest in property but the income from that property is received by another;

• payments from a settlement set up by the settlor are made to a minor child of the settlor; or

• payments are made to the settlor from the settlement in the form of capital rather than income.

Clause 619: Charge to tax under Chapter 5

947.     This clause charges to tax payments, whether income or capital, which are deemed to be the income of the settlor under this Chapter. It also provides that the part which represents distributions attracts the dividend ordinary rate. It is based on sections 660C and 677 of ICTA.

948.     Subsection (1) charges to tax the income and capital payments which are treated as the income of the settlor under this Chapter. It rewrites the charges under sections 660C and 677(7) of ICTA. Section 660C(1) of ICTA, which charges income treated as the settlor's because he or she retains an interest in the settlement or because of payments, etc to a minor child, imposes a Schedule F charge on distributions and a charge under Schedule D Case VI on other income. Section 677(7) of ICTA, which charges capital payments treated as the settlor's income, imposes a Case VI charge on all such payments. The listing in this subsection of the amounts treated as income acts as an introduction to the Chapter and explains the nature of the charge under the Chapter.

949.     Subsection (3) lists the income that is to be treated under subsection (2) as within section 1A(2)(b) of ICTA. The income is all distribution income or income treated as such. The effect of this provision is that this income is charged at the dividend ordinary rate (the Schedule F ordinary rate). The income within section 660C(1A), which this subsection rewrites, is included here as follows:

• (1A)(a) is rewritten at (3)(a);

• (1A)(b) is rewritten at (3)(b) and (e);

• (1A)(f) is rewritten at (3)(c); and

• (1A)(g) is rewritten at (3)(d).

950.     Section 660C(1A)(c) to (e) has not been listed because it is unnecessary. The income within section 233(1), (1A) and (1B) of ICTA is already included within section 660C(1A)(a) as "income chargeable under Schedule F". Such income is included within subsection (3)(a) of this clause since Chapter 3 of Part 4 of this Bill rewrites the Schedule F charge.

951.     Section 660C(1A)(b) of ICTA includes income to which section 1A of ICTA applies: "by virtue of it being equivalent foreign income falling within subsection (3)(b) [of section 1A of ICTA] and chargeable under Case V of Schedule D". The "equivalent foreign income" within that subsection is dividends or other distributions of a non-UK resident company which would be chargeable under Schedule F if that company were resident in the UK. Because Chapter 4 of Part 4 of this Bill charges foreign dividends and not foreign distributions, subsection (4) provides that any such foreign distributions falling outside that Chapter are included within clause 619(3)(e) because they would, if the company were UK resident, fall within Chapter 3 of that Part. Chapter 3 of Part 4 of this Bill rewrites the Schedule F charge on both dividends and distributions of a UK resident company.

Clause 620: Meaning of "settlement" and "settlor"

952.     This clause explains the meaning of "settlement" and "settlor" for the purposes of this Chapter. It is placed in this part of the Chapter to help the reader by giving an early indication of the nature of the charge under this Chapter. It is based on section 660G and 677 of ICTA.

Clause 621: Income charged

953.     This clause sets out the amount charged to tax. It is based on sections 69, 660C and 677 of ICTA.

954.     All the income and capital payments which are to be treated as the settlor's income are chargeable to tax.

955.     The income to be treated as the settlor's income under clause 624 is the income arising under the settlement. The meaning of income arising under a settlement is given in clause 648. Subsection (1) of that clause provides that income arising under a settlement includes income chargeable to income tax by deduction or otherwise and, in the case of income from outside the United Kingdom, income which would be chargeable if received by a United Kingdom resident. In consequence the appropriate measure of income chargeable and the tax year of charge are provided by the charging sections of other Chapters of this Bill (or the appropriate sections of the Income Tax Acts).

956.     Clause 648(2) provides that where the settlor is non-domiciled etc and the settlement is entitled to income which would not be chargeable on the settlor if he or she made a claim for the remittance basis to apply, it is excluded from income arising under a settlement and is therefore not chargeable on the settlor.

957.     The amount of income arising under a settlement which is treated as the settlor's income under clause 629 and the year of charge are given in subsection (1) of that clause.

958.     The amount to be treated as the settlor's income under clause 633 and the year of charge are given in subsection (1) of that clause.

Clause 622: Person liable

959.     This states who is liable for any tax charged. It is based on sections 660A, 660B and 677 of ICTA.

960.     Section 660A(1) of ICTA provides that income charged on the settlor is not treated as the income of any other person. Since that person could be a company, and outside the scope of this Bill, new section 660C(4) of ICTA (see Part 1 of Schedule 1 to the Bill) ensures that a charge cannot be made on a company in respect of that income.

Clause 623: Calculation of income

961.     This clause allows the settlor the same deductions and reliefs as if he had received as income the amount on which he is chargeable. As a result of this the settlor is charged to tax as if he had received the income arising under the settlement directly. It is based on sections 660C and 677 of ICTA. Section 660C(3) is not rewritten in this Bill.

Clause 624: Income where settlor retains an interest

962.     This is the first of the rules under which income is treated as the settlor's. Where the settlor retains an interest in settled property the income arising under the settlement is treated as the settlor's. The clause is based on section 660A of ICTA.

Clause 625: Settlor's retained interest

963.     This clause explains when a settlor is treated as having an interest in property for the purposes of clause 624 and exceptions to this. It is based on sections 660A of ICTA.

964.     Subsection (1) explains what is meant by a settlor having an interest in property. The interests may also be those of the settlor's spouse.

965.     Subsections (2) and (3) give occasions where a settlor does not have an interest in property. The exceptions cover instances when the settlor may by inadvertence or circumstances likely to be outside his or her control have an interest in property which he or she has settled or an interest in property derived from that property. These circumstances include bankruptcy, where the settlor may obtain an interest in property as a result of the bankruptcy of another person who has an interest in that property. This might occur where the beneficiary of a settlement, who is also the creditor of the settlor, becomes bankrupt and the debt is settled by a payment of settlement income from the bankrupt's estate.

966.     The settlor is also excluded from having an interest in property as long as someone under the age of 25 years is alive during whose lifetime that property cannot be payable to the settlor other than in a bankruptcy or by assigning or charging the individual's interest in the property. While there is no requirement that the person under 25 years should have an interest in that property it may generally be expected that they will.

967.     Subsection (5) provides the meaning of "related property" ("derived property" in section 660A(10) of ICTA). At the time of writing the House of Lords judgement following the appeal against the decision in West v Trennery (2003), EWCA Civ 1792 ¹⁰ on the interpretation of "derived property" in section 77(8) of TCGA is not available. The definition of "derived property" in that section is the same as in section 660A(10) of ICTA. In consequence the clause closely follows the source legislation. The Revenue's view is that section 77(8) of TCGA should be parsed as in section 169F of TCGA.

¹⁰ STC [2004] 170

Clause 626: Exception for outright gifts between spouses

968.     This clause provides an exception to the rule in clause 624 for an outright gift of property between spouses which gives rise to income. Such gifts are within the exclusion as long as the property gifted is more than simply a right to income and the right to income is a right to the whole of the income. The clause is based on section 660A of ICTA.

Clause 627: Exceptions for certain types of income

969.     This clause provides that clause 624 does not apply to certain income between former parties to a marriage and to commercial and charitable payments and pension contributions. It is based on sections 660A of ICTA.

970.     Subsection (1) enables a person to make a settlement that benefits a former or separated spouse without that income being treated as income of the settlor.

971.     Subsection (3)(c) refers to regulations made under the Welfare Reform and Pensions Act 1999 and its equivalent in Northern Ireland although section 660A(11)(c) of ICTA (inserted by paragraph 28 of Schedule 35 to FA 2004) simply refers to regulations made by the Secretary of State. See Change 105 in Annex 1.

972.     Subsection (3) applies for the tax year 2006-07 onwards and rewrites the changes to section 660A(11) of ICTA introduced by FA 2004. A transitional rule is found in Part 8 of Schedule 2 to this Bill which gives the rules for "approved pension arrangements" for 2005-06. The FA 2004 changes to pension provisions only apply from 2006-07.

Clause 628: Exception for gifts to charities

973.     This clause provides that certain charitable donations will not be treated as the settlor's income under clause 624. It is based on section 44 of FA 2000.

974.     Section 44 of FA 2000 applies to the charge under both sections 660A and 660B (settlor-interested trusts and payments to a minor child of the settlor). Section 44 of FA 2000 is rewritten in two places in this Chapter, once as an exemption from the charge under clause 624 and secondly as an exemption from the charge under clause 629. (A payment may, for example, be made by trustees to a charity which benefits a minor child of the settlor.) Subsection (3)(b), which includes within the sum paid to a charity sums for which the exemption in clause 630 applies, covers the possibility, unlikely though it may be, of a trust changing its nature during a tax year whereby it is no longer a settlor-interested trust and thus one to which clause 630 might apply. (A charge under that clause will not apply if a charge under clause 624 applies.) Any charitable payments exempted from a charge on the settlor under 629 must be included to give the correct result.

Clause 629: Income paid to unmarried minor children of settlor

975.     This clause provides the second charge under this Chapter. Income paid to or for the benefit of an unmarried minor child of the settlor or income which is treated as that child's income is charged as income of the settlor if it does not already fall within clause 624. The clause is based on section 660B of ICTA

976.     Subsection (1) sets out the basic rule. Subsection (1)(b) ensures that avoidance cannot arise by using a bare trust arrangement where a child is a beneficiary of the trust, although no income is paid to or for the child's benefit.

977.     Subsection (2) provides that a charge under clause 624 will always take precedence over a charge under this clause.

978.     See the entry in Part 8 of Schedule 2 to this Bill for the application of this clause in relation to income arising under a settlement made before 9 March 1999 or from funds provided before that date.

979.     Section 660B(1) of ICTA provides that income charged on the settlor is not treated as the income of any other person. Since that person could be a company, and outside the scope of this Bill, new section 660C(4) of ICTA (see Part 1 of Schedule 1 to the Bill) ensures that a charge cannot be made on a company in respect of that income.

Clause 630: Exceptions for gifts to charities

980.     This clause provides that certain charitable donations will not be treated as the settlor's income under clause 629.This exemption might apply in the unusual circumstances of a charity benefiting the minor child of a settlor, that is to say that payments out of the settlement to the charity were paid to or applied for the benefit of the settlor's minor child. The clause is based on section 44 of FA 2000.

981.     See the commentary on subsection (3)(b) of clause 628 as to how subsection (2)(b) of this clause applies.