|Income Tax (Trading and Other Income) Bill - continued||House of Commons|
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Clause 753: Interest on repayment of student loan
1417. This clause provides an exemption from tax for interest paid to borrowers of student loans in respect of refunds of over-repayments of such loans. It is based on section 331A of FA 1999.
Clause 754: Redemption of funding bonds
1418. This clause provides that, where the issue of funding bonds results in a charge to tax as interest under clause 380, any interest paid on the subsequent redemption of the funding bonds is exempt from tax. The exemption also applies where the deemed interest on the funding bond was charged to corporation tax but on redemption the bond was held by an income tax payer. The clause is based on section 582 of ICTA.
Clause 755: Interest on foreign currency securities etc. owned by non-UK residents
1419. This clause is based on section 581 of ICTA. It provides an exemption from income tax for interest on certain foreign currency securities, or loans, beneficially owned by people who are not resident in the United Kingdom. The exemption is available only if the Treasury make an appropriate direction.
1420. Section 581(1)(a) of ICTA provides that, if a Treasury direction is made, interest on this type of security or loan is not subject to deduction of tax at source. This provision is not rewritten in this Chapter. It is rewritten as a new section 581A of ICTA (inserted into ICTA by Schedule 1 of this Bill).
1421. The meaning of "foreign currency" in this clause is dealt with separately in clause 756.
1422. Subsection (1) sets out the interest within the scope of the exemption for the purposes of this clause. Section 581 of ICTA originally applied only to securities issued by local authorities. It was later extended to cover securities issued by, or loans made to, statutory corporations by adding section 581(4) of ICTA.
1423. Subsection (2) sets out the conditions to be met if the exemption is to apply. The reference to "eventual repayment" in subsection (2)(b) of the clause (and based on section 581(4) of ICTA) is relevant only for a loan with no immediate entitlement to repayment.
1424. Subsection (3) of the clause is an anti-avoidance provision. Section 581(3) of ICTA is very widely drafted: "where any income of any person is by virtue of any provision of the Income Tax Acts to be deemed to be income of any other person, that income shall not be exempt ..". In fact, there are only two sets of provisions under which this type of income could be deemed to be income of another person. The relevant provisions are listed in subsection (3) of the clause.
1425. Subsection (4) reflects the effect of the devolution settlements. See Change 19 in Annex 1.
Clause 756: Which securities and loans are foreign currency ones for section 755
1426. This clause defines "foreign currency securities" for the purposes of clause 755. It is based on section 581 of ICTA. Although the basic proposition in subsection (1) is quite straightforward, there are four qualifications to this proposition, set out in subsections (3) to (6).
1427. The source legislation, introduced during the exchange control era, refers to securities and loans "expressed in a currency other than sterling". However, there could be more than one interpretation of the word "expressed". In this context, the logical interpretation is that "expressed" means "repayable". This is in line with the exchange control definition of a foreign currency security, and with the reference to securities "expressed" in a particular currency in other contexts in the Tax Acts. This clause is therefore drafted in terms of the currency used for repayment.
Clause 757: Interest and royalty payments: introduction
1428. This clause acts as a general introduction to clauses 758 to 767. It is based on section 97 of FA 2004.
1429. Clauses 757 to 767 rewrite most of Chapter 6 of Part 3 of FA 2004 which implements the European Union Interest and Royalties Directive (Council Directive 2003/49/EC of 3 June 2003).This directive provides for the elimination of source state taxation on interest and royalty payments between associated companies in different member States of the European Union.
1430. These clauses therefore exempt from income tax certain interest and royalty payments made between associated companies where the beneficial owner is a company of another member State or a permanent establishment of such a company in a member State other than the United Kingdom. Although the person beneficially entitled to the income will be a company, the exemption is from income tax. This is because non-UK resident companies are only within the charge to corporation tax on such payments if they trade in the United Kingdom through a permanent establishment here and the interest or royalties are attributable to the permanent establishment.
1431. Income tax on interest and royalty payments would, apart from this exemption, be collected by deduction under section 349 of ICTA. Section 105(5) of FA 2004 introduced a new subsection (7) in section 349 of ICTA which provides that the latter section is subject to the exemption rewritten in these clauses. The general disregard clause in Chapter 10 of Part 6 of this Bill ensures that, without a specific provision to the contrary, an amount that is exempt under Part 6 is disregarded for all other income tax purposes and this will include section 349 of ICTA. Section 349(7) of ICTA is not therefore amended to refer to the interest exemption but it continues to refer to section 101 of FA 2004 (dealing with the deduction of tax from royalty payments under section 349 of ICTA) which is not rewritten (see commentary on clause 762).
Clause 758: Exemption for certain interest and royalty payments
1432. This clause gives the exemption and conditions for that exemption. Three conditions must be satisfied for the royalties exemption to apply and four for the interest exemption. The clause is based on section 98 of FA 2004.
1433. Subsection (1) gives the exemption. Section 105(4) of FA 2004 inserts into section 18 of ICTA a subsection which makes the charge under that section subject to the exemption rewritten here. This is not rewritten as it is not considered necessary given the wording of subsection (1) of this clause.
Clause 759: The person making the payment
1434. The first condition in clause 758 is that the payer of the interest or royalties is in the United Kingdom, whether as a UK permanent establishment of a company resident in another member State or a company resident in the United Kingdom (other than its permanent establishment outside the United Kingdom). The purpose of this clause is to identify the payer (and thus ensure that the payer is in the United Kingdom) where the paying company has a permanent establishment in another territory. The criterion is where the payments are deductible against tax. If they are deductible against the profits of the permanent establishment in the territory where it is situated it is the permanent establishment that is treated as the payer. The clause is based on section 99 of FA 2004.
Clause 760: The person beneficially entitled to the payment
1435. The second condition in clause 758 is that the person beneficially entitled to the income in respect of the payment is a European Union company other than such a company's permanent establishment in the United Kingdom or in a non-member State. The purpose of this clause is to identify the beneficial owner where a European Union company has a permanent establishment in the United Kingdom or a non-member State and to ensure that the condition is satisfied. The clause is based on section 99 of FA 2004.
Clause 761: Meaning of "25% associates"
1436. The third condition in clause 758 is that the payer and beneficial owner should be 25% associates. This clause explains what is meant by a 25%. It is based on section 99 of FA 2004.
Clause 762: Interest payments: exemption notices
1437. This clause enables regulations about exemption notices to be made. These notices are required by the fourth and final condition in clause 758 for the interest exemption. The clause is based on section 100 of FA 2004.
1438. No exemption notice is required for royalty payments. Section 101 of FA 2004 is not rewritten in this Bill as it relates to the deduction of tax. Section 102 of FA 2004 provides for claims for repayment of tax that has been deducted from interest or royalties paid and this section is not rewritten.
Clause 763: Special relationships
1439. This clause provides that the exemption will not apply where the interest or royalties have not been paid between independent parties acting at arm's length. This is achieved by reference to a "special relationship" (a term used in double taxation treaties) between the payer and the beneficial owner of the income such that the payments will not be at arm's length. The clause is based on section 103 of FA 2004.
1440. Subsection (3) provides that where a claim to relief under a double taxation treaty would provide greater relief from tax than is available under this exemption the company may chose to claim relief under the treaty.
Clause 764: Application of ICTA provisions about special relationships
1441. This clause ensures that the special relationships rule in clause 763 is construed in the same way as similar rules in double taxation treaties. (Sections 808A and 808B of ICTA deal with the construction of the term "special relationship" in such treaties.) It is based on section 103(2) to (4) of FA 2004.
Clause 765: Anti-avoidance
1442. This clause prevents exemption from tax being given if the purpose or one of the main purposes of the payments is to avoid tax. The wording is based on similar provisions in double taxation treaties. The clause is based on section 104 of FA 2004.
1443. Subsection (1) applies to interest payments. Because it looks at the purposes of the person concerned with the creation or assignment of the debt, the clause may apply where the interest payments are paid indirectly to a person not entitled to the exemption, for example where a payment is dog-legged through a European Union company to a non-European Union company.
Clause 766: Interest and royalty payments: interpretation
1444. This clause explains various terms used in the clauses for this exemption. It is based on section 97 of FA 2004.
Clause 767: Power to amend references to the Directive by Order
1445. This clause allows the Treasury to amend the provisions for this exemption where that is appropriate for implementing any amendment to, or replacement of, the Directive adopted after 8 April 2004, the date when the clauses for Finance Bill 2004 were finalised. The clause is based on section 97 of FA 2004.
1446. Subsection (2) enables references in section 101 of the FA 2004 to be amended where necessary as a result of amendments to the Directive. This is necessary as section 101 of that Act is not rewritten (see commentary on clause 762).
1447. Section 97(4) of ICTA, which allows a first Treasury order to take effect before the making of the order, is not rewritten as it would apply only if the Directive had been amended before Royal Assent to FA 2004 in a way that affected Chapter 6 of Part 3 of that Act.
Clause 768: Commercial occupation of woodlands
1448. This clause exempts income arising from the occupation of commercial woodlands from any charge as miscellaneous income. It is based on paragraph 3(2) of Schedule 6 to FA 1988.
1449. A consequence of this exemption is that no loss relief is available under section 392 of ICTA (losses from miscellaneous transactions). A requirement of that section is that any profit on the transaction would be liable to income tax.
1450. This clause is complemented by clauses 11 and 267. The combined effect of these three clauses is that income from the occupation of commercial woodlands is ignored for income tax purposes.
1451. The definition of "commercial woodlands" in subsection (2) is supplemented by the definition of "woodlands" in clause 876.
Clause 769: Housing grants
1452. This clause exempts from income tax grants paid under legislation intended to assist in providing, maintaining or improving housing. It is based on section 578 of ICTA.
1453. Subsection (1) reflects the effect of the devolution settlements. See Change 19 in Annex 1.
1454. Subsection (2) makes it clear that the expenditure need not be incurred by any particular person and that it may be current or future expenditure.
Clause 770: Amounts applied by SIP trustees acquiring dividend shares or retained for reinvestment
1455. The commentary on the SIPs legislation in Chapter 3 of Part 4 of this Bill explains the background to approved share incentive plans. This clause is based on sections 493(1) and 496(1) of ITEPA. Without these exemptions a tax liability would arise under Chapter 3 of Part 4 of this Bill (in respect of cash dividends paid by UK resident companies) or under Chapter 4 of Part 4 of this Bill (in respect of cash dividends paid by non-UK resident companies). As the tax liability arises under this Bill, the exemptions are rewritten in Part 6 of this Bill rather than retained in ITEPA. Signposting provisions to this exemption are in sections 493 and 496 of ITEPA.
1456. The references to tax credits in subsection (2) of sections 493 and 496 of ITEPA are not rewritten in this clause. The rewrite of section 231 of ICTA in this Bill (see clause 397) makes it unnecessary.
Clause 771: Relevant foreign income of consular officers and employees
1457. This clause exempts from income tax the relevant foreign income of consular officers and employees who satisfy particular conditions where an Order in Council has directed that the clause should apply to give effect to a bilateral international convention with a foreign state. The provision is applicable only to a dozen or so conventions and it is unlikely that further Orders in Council will be made. The Consular Relations Act 1968 has made the use of such bilateral conventions unnecessary. "Relevant foreign income" is defined in clause 830. The clause is based on section 322 of ICTA.
1458. Subsection (1) provides that the relevant foreign income of a consular officer or employee of a foreign state in the United Kingdom is exempt from tax if an Order in Council directs that the section applies to that state to give effect to a reciprocal arrangement and the individual concerned meets certain conditions. "Reciprocal arrangement" is the term used by section 302 of ITEPA which rewrites the employment income aspects of section 322 of ICTA. "Reciprocal arrangement" is defined in subsection (5).
1459. Subsection (2)(b) refers to "a British overseas territories citizen". This rewrites section 322(1)(a) of ICTA "a British Dependent Territories citizen". Section 2(3) of the British Overseas Territories Act 2002 requires any reference to a British Dependent Territories citizen be read as a reference to a British overseas territories citizen. The change of name has been incorporated into this clause.
Clause 772: Further provisions about Orders under section 771
1460. This clause makes further provisions for Orders in Council under clause 771. It is based on section 322 of ICTA.
Clause 773: Income from Inter-American Development Bank securities
1461. This clause provides an exemption from income tax, in certain circumstances, relating to income from a security issued by the Inter-American Development Bank. It is based on section 583 of ICTA.
1462. Subsections (2) to (4) set out the circumstances which must all apply if the income is to be exempt. The exemption applies in respect of any income from a security issued by the Bank (including dividends or interest).
Clause 774: Income from securities issued by designated international organisations
1463. This clause provides an exemption from income tax, in certain circumstances, relating to income from a security issued by designated international organisations. It is based on section 324 of ICTA.
1464. Subsections (2) to (4) set out the circumstances which must all apply if the income is to be exempt. The exemption applies in respect of any income from a security issued by the relevant designated organisation (including dividends or interest).
Clause 775: Income towards reducing the national debt
1465. This clause provides an exemption from income tax, in certain circumstances, in respect of income arising from property held in trust where the trust funds are to be used for the reduction of the national debt. It is based on section 514 of ICTA.
Clause 776: Scholarship income
1466. This clause is based on section 331 of ICTA.
1467. Subsection (1) sets out the exemption and subsection (2) points the way to section 215 of ITEPA. Section 215 of ITEPA provides that if the scholarship income is employment-related, the scholarship exemption applies only to the holder of the scholarship. But such income is also exempt from tax if the conditions set out in section 213 of ITEPA (scholarships provided by trust funds etc) are fulfilled.
Clause 777: VAT repayment supplements
1468. This clause exempts VAT repayment supplement from tax. It is based on section 827(2) of ICTA. The supplement does not have the character of interest. So the exemption is in this Chapter rather than with the exemptions for interest.
Clause 778: Incentives to use electronic communications
1469. This clause exempts from tax incentives provided under regulations to make use of electronic communications. It is based in section 143 of FA 2000.
Clause 779: Gains on commodity and financial futures
1470. This clause is based on section 128 of ICTA. That section was introduced as section 72 of FA 1985. It was part of the change which removed gains on commodity and financial futures from the scope of Schedule D (unless chargeable as trade profits) and charged them instead as capital gains under section 143 of TCGA. This is an unusual instance of an item which is naturally income being charged instead as a capital profit (most "deeming" legislation is designed to tax capital profits as income).
1471. Section 80 of FA 1997 reversed the FA 1985 change to the extent of gains charged to tax thereafter under Schedule 5AA to ICTA (guaranteed returns on transactions in futures and options, rewritten in Chapter 12 of Part 4 of this Bill).
1472. The only Cases of Schedule D which could apply to the gains covered by section 128 of ICTA, where the gain is income on first principles (and disregarding the exemption the section provides), are Schedule D Cases V and VI. As the relevant charging function of those Cases is rewritten in Chapter 8 of Part 5 of this Bill, the clause is expressed as an exemption from the charge under that Chapter.
1473. Together with the "priority clauses" (clauses 575 and 576), which award priority to a charge under Part 2 or under Chapter 12 of Part 4 of this Bill, expressing the exemption in that way ensures that any gains not falling within that Part or Chapter are not charged to income tax. That leaves the way clear for gains covered by this exemption to be taxed under section 143 of TCGA.
1474. The clause imports the definitions provided by section 143 of TCGA.
Clause 780: Disabled person's vehicle maintenance grant
1475. This clause is based on section 327 of ICTA and exempts from income tax grants made in respect of a disabled person's vehicle.
Clause 781: Payments under New Deal 50plus
1476. This clause is based on section 84 of FA 2000 and exempts from income tax certain payments made to a person participating in the New Deal 50plus scheme.
Clause 782: Payments under employment zone programme
1477. This clause is based on section 85 of FA 2000 and exempts from income tax payments made to a person participating in an employment zone programme.
Chapter 10: General
Clause 783: General disregard of exempt income for income tax purposes
1478. This clause confirms that income covered by exemptions in this Part, unless specific rules are provided, is exempt for all purposes of the Income Tax Acts (including information returns and the operation of sections 348 and 349 of ICTA).
1479. The source legislation employs a variety of expressions concerning exemptions which may suggest that particular exemptions might be more narrowly expressed than others. But even where apparently more narrow wording is employed the implications of such wording are mitigated by regulations or practice.
1480. Subsection (2) is based on section 325. It provides that the full amount of NSB interest (exempt and non-exempt interest) is to be included in information returns.
1481. Subsection (3) provides that specific provisions override this clause: an example is the provision of information under the SIP code in paragraph 93 of Schedule 2 to ITEPA.
Part 7: Income charged under this Act: rent-a-room and foster-care relief
Chapter 1: Rent-a-room relief
1482. The clauses in this Part are based on section 59 of, and Schedule 10 to, F(No 2)A 1992. These provisions are entitled "Furnished Accommodation" in the source legislation but are commonly known as "rent-a-room", the name adopted in the rewrite.
1483. "Rent-a-room" gives relief in one of two forms for householders who provide furnished accommodation in their homes for lodgers. One form is complete tax exemption for the rent, provided it does not exceed a certain level - the "full relief" form. If the rent does exceed that level the rent-a-room profit is taxable. But taxpayers can choose to have the profit calculated by deducting a fixed amount as expenses, rather than their actual expenses, if that is advantageous - the "alternative method of calculation" form of the relief.
1484. References to "profits or gains" in the source legislation which relate only to income are rewritten in this Chapter omitting the reference to "gains". This continues the tidying up of such references started in section 46(3) and Schedule 7 of FA 1998.
Clause 784: Overview of Chapter 1
1485. This clause introduces the relief. It is new.
1486. Subsection (2) introduces the key factor in determining the form of relief available: the level of gross receipts.
1487. Subsection (3) introduces the full form of the relief where gross receipts are modest.
1488. Subsection (4) introduces the alternative method of calculation form of the relief where gross receipts are larger.
Clause 785: Person who qualifies for relief
1489. This clause states the basic conditions that an individual must satisfy to obtain the relief. It is based on paragraph 2 of Schedule 10 to F(No 2)A 1992.
1490. Subsection (1)(a) is a general condition that is satisfied only if the taxpayer claiming rent-a-room relief satisfies the more detailed conditions in respect of the letting.
1491. Subsection (1)(b) helps in restricting the relief to the simpler cases for which it is intended. In referring to the income types to which rent-a-room relief is relevant it avoids reference to a "source" - the term used in paragraph 2(3) of Schedule 10 to F(No 2)A 1992 - because what is meant by a "source" in this context may not always be clear. So in rewriting references to a "source", subsection (1)(b) refers to trades, lettings or agreements.
1492. Paragraph 2(3) of Schedule 10 to F(No 2)A 1992 disqualifies an individual from relief if the income from any source from which his or her rent-a-room income is derived also includes income that is not rent-a-room income. "Source" is not defined.
1493. The source of the income arising from a trade is the trade itself.
1494. When Schedule 10 to F(No 2)A 1992 was enacted, relief was available on income from furnished lettings if the income fell within Schedule D Case VI (rather than Schedule A). The source of such income was considered to be the letting in question. FA 1995 brought income from furnished lettings in the United Kingdom within Schedule A and consequentially amended Schedule 10 to F(No 2)A 1992 to make relief available on such income. The amendment was not intended to be read as changing the source of the income for the purposes of that Schedule. For a Schedule A business to be a "source" for this purpose could have capricious results: running a separate business of letting commercial property would disqualify an individual from rent-a-room relief on Schedule A income for letting a room in his or her house (but rent-a-room relief could still be available to a person who ran both a bed-and-breakfast business at home and a separate commercial trade).
1495. As regards amounts incidental to the letting, and within Schedule D Case VI, on which rent-a-room relief might be available (for example, receipts for goods or services such as meals or laundry) the source of the income is the agreement to provide the goods or services in question.
1496. So subsection (1)(b) refers to whatever is the appropriate source for each kind of income for which rent-a-room relief is available.
1497. Clause 785, unlike the provision in paragraph 2(1) of Schedule 10 to F(No 2)A 1992, does not impose the condition that to be within rent-a-room, all the letting income (or income related to a letting) must be trade or UK property business income. Specifically, it allows rent-a-room relief to apply where certain income related to a letting is received that would, in the source legislation, be within Schedule D Case VI. The existence of any such amounts would, under the source legislation, disqualify the taxpayer from rent-a-room relief in respect of all his or her income. See Change 128 in Annex 1.
1498. The approach in subsection (1)(b) also removes a potential disqualification from rent-a-room relief in particular circumstances. See Change 129 in Annex 1.
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