Clause 817: Alternative calculation of profits: income chargeable under Chapter 8 of Part 5

1590.     This clause sets out the basis of calculation when the income is from foster care that does not amount to trading and it exceeds the individual's limit. It is based on paragraph 13 of Schedule 36 to FA 2003.

Clause 818: Election for alternative method of calculating profits

1591.     This clause provides for a foster carer to elect for the alternative form of the relief. It is based on paragraph 14 of Schedule 36 to FA 2003.

1592.     This clause also provides explicitly for a procedure to withdraw an election within the stated time limit. The absence of such a procedure in the source legislation for foster-care relief is in contrast to the source legislation for rent-a-room on which the former is otherwise closely modelled. It was not considered necessary in the source foster-care relief legislation because, unlike the rent-a-room relief election, a foster-care relief election is made only for one year. It was implicit in the year by year approach that the foster-care election could be withdrawn within the Self Assessment time limits by, for example, an amendment to a return. This Part puts these similar reliefs side by side and a contrast in approach might wrongly suggest a different intended legal effect. To make the position clear this clause provides explicitly for the withdrawal of an election.

1593.     Subsection (2) makes it clear that the election applies only to the year for which it is made.

1594.     Subsection (3) converts references, in the source legislation, to the Board of Inland Revenue into references to the Inland Revenue. See Change 149 in Annex 1.

Clause 819: Adjustment of assessment

1595.     This clause provides for an election for the alternative form of relief to be made following an adjustment to an individual's return of foster-care profit. It is based on paragraph 14 of Schedule 36 to FA 2003.

1596.     Without this clause an individual might be prevented from electing for the alternative form of relief if his or her return of foster-care profits were adjusted after the normal election time limit in clause 818.

1597.     Subsection (3) makes it clear that the election applies only to the year for which it is made.

1598.     Subsections (3) and (4) follow the approach described in the commentary on clause 818 in providing for the withdrawal of an election under this clause.

Clause 820: Periods of account not ending on 5th April

1599.     This clause is the first of four clauses that deal with cases where the foster-care activities amount to a trade and accounts are prepared to a date other than 5 April. It is based on paragraph 15 of Schedule 36 to FA 2003.

1600.     The rules that apply to this sort of case have been extracted from the main body of the rules and grouped together in a place of less prominence as they are believed to apply only to a minority of foster carers.

Clause 821: Meaning of "relevant limit"

1601.     This clause introduces and defines the term "relevant limit". It is based on paragraph 15 of Schedule 36 to FA 2003.

1602.     For cases where the foster-care activities amount to a trade and accounts are prepared to a date other than 5 April, the amount with which the individual's total foster-care receipts are compared to determine what form of relief is available is the individual's "relevant limit" (and not, as normally, "the limit"). The calculation of the relevant limit reflects the fact that the basis period of the trade will not coincide with the periods (tax years) for which the "fixed amount" and the "amount per child" are determined. This clause give rules to link the "fixed amount" and the "amount per child" for tax years to basis periods.

Clause 822: Full relief

1603.     This clause provides for full relief in "accounting date other than 5 April" cases. It is based on paragraph 15 of Schedule 36 to FA 2003.

1604.     It achieves the same effect for these cases as clause 812 and clause 813 together achieve for other cases.

Clause 823: Alternative method of calculating profits

1605.     This clause provides for the alternative form of relief in "accounting date other than 5 April" cases. It is based on paragraphs 14 and 15 of Schedule 36 to FA 2003.

1606.     It achieves the same effect for these cases as clause 815 and clause 816 together achieve for other cases.

1607.     Subsection (3) applies the election and adjustment of assessment provisions in clause 818 and clause 819. In so doing it imports (through clause 818(3) and clause 819(4)) the conversion of references, in the source legislation, to the Board of Inland Revenue into a reference to the Inland Revenue. See Change 149 in Annex 1. It expresses the time limits by reference to the Self Assessment rules.

Clause 824: Capital allowances: introduction

1608.     This clause is the first of four clauses that deal with the capital allowances aspects of foster-care relief. It is based on paragraphs 16 and 20 of Schedule 36 to FA 2003.

1609.     The clause introduces key terms and links the language of this Chapter with that of CAA: the language and concepts have to link directly with those of CAA. The "chargeable period" mentioned in subsection (2)(a) is an example. In CAA "chargeable period" does not necessarily mean, for individuals, "tax year". It can mean (for trades) "period of account" (section 6(1) of CAA). Subsection (3) provides the link so that the provisions work properly.

1610.     The overall effect of the four capital allowances clauses is that, in tax years when either form of foster-care relief applies, capital allowances and balancing charges are not relevant.

1611.     Unlike paragraph 16 of Schedule 36 to FA 2003, the capital allowances clauses in this Chapter make no reference to the rules that apply when the foster care does not amount to a trade and the foster-care receipts are chargeable under Schedule D Case VI. That is because an arrangement to provide foster care is not a qualifying activity within section 15(1) of CAA and therefore the question of capital allowances and balancing charges cannot arise.

1612.     Dropping these references will have no practical effect because entitlement to an allowance or liability to a balancing charge does not arise from Schedule 36 to FA 2003 but from CAA. The references in Schedule 36 to FA 2003 are, however, potentially confusing and removing them makes the rewritten legislation clearer.

Clause 825: Carried forward unrelieved qualifying expenditure

1613.     This clause provides for the temporary suspension of allowances and charges in respect of pool expenditure during tax years when foster-care relief applies. It is based on paragraph 17 of Schedule 36 to FA 2003.

1614.     Subsection (3) deals with the transition from a year when foster-care relief does not apply to a year when it does.

1615.     Subsection (4) deals with the transition from a year when foster-care relief does apply to a year when it does not.

Clause 826: Excluded capital expenditure

1616.     This clause prevents an allowance for capital expenditure incurred at a time when foster-care relief applies. It is based on paragraph 18 of Schedule 36 to FA 2003.

Clause 827: Excluded capital expenditure: subsequent treatment of asset

1617.     This clause provides for an allowance, when foster-care relief ceases to apply, in respect of capital expenditure incurred at a time when foster-care relief did apply (and for which therefore no allowance was due in accordance with clause 826). It is based on paragraph 19 of Schedule 36 to FA 2003.

Clause 828: Overlap profit

1618.     This clause preserves entitlement to overlap relief when the foster-care activities are a trade. It is based on paragraphs 10 and 15 of Schedule 36 to FA 2003.

1619.     Subsection (2)(a) allows relief for overlap profit against foster-care profits calculated under the rules in this Part. That may include relief for overlap profit that was created before the introduction of foster-care relief. If foster-care profits are treated as nil (because full foster-care relief under clause 813 or clause 822 applies) the overlap relief can create a loss.

1620.     Subsection (2)(b) allows the creation of overlap profit when the foster-care alternative basis of calculation applies (no overlap profit can be created when full foster-care relief applies). The overlap profit is calculated by reference to the profit after the foster-care rules have applied.

Part 8: Foreign income: special rules

Overview

1621.     This Part contains rules that may affect the calculation of income charged under this Bill or under Parts 9 or 10 of ITEPA.

1622.     In the source legislation for this Bill, income arising out of the United Kingdom is charged to income tax mainly under Schedule D Cases IV and V (section 18 of ICTA sets out the Cases of Schedule D). But some income arising out of the United Kingdom may be charged under Schedule D Cases I and II if it is earned by the foreign branch of a United Kingdom trade or profession. Or under a non-schedular charge if the provision covers both United Kingdom and non-United Kingdom income.

1623.     The term "foreign income" has not been used in the Tax Acts (other than as part of the obsolescent term "foreign income dividends"), and it does not have any clear or defined meaning. Chapter 1 of this Part of the Bill introduces the label "relevant foreign income" to describe the income and other amounts charged to income tax in this Bill that are charged under Schedule D Cases IV or V in the source legislation. That income is charged in this Bill alongside the equivalent United Kingdom income (with the exception of dividends from non-UK resident companies (Chapter 4 of Part 4 of this Bill)).

1624.     A number of special rules apply to relevant foreign income. Rather than repeat the rules in every place where they apply the rules are rewritten in this Part. The "income charged" clauses for any charge that includes relevant foreign income incorporates the rules by making the main calculation rule subject to this Part. For example, see clause 7(4) (trade profits: income charged).

1625.     Chapter 4 of this Part of the Bill has a potentially wider application than Chapters 2 or 3 of this Part, as it can apply to all income arising outside the United Kingdom rather than just relevant foreign income.

1626.     There are a number of charges under Parts 9 (pension income) and 10 (social security income) of ITEPA that, before being rewritten in ITEPA, were charges under Schedule D Case V. See sections 573, 609 to 611, 629, 633 and 678 of ITEPA. The amount of income charged under those provisions is calculated by reference to certain rules in ICTA, some of which are rewritten in this Part. Schedule 1 to this Bill amends the ITEPA provisions to provide an "income charged" rule and to deem the income in question to be relevant foreign income for the application of rules in this Part of this Bill.

1627.     Unless the remittance basis applies (see Chapter 2 of this Part of the Bill), or the income arises from a trade, profession or vocation, the amount of relevant foreign income charged for a tax year is the income arising in the year. This rule is based on section 65(1) of ICTA and forms part of the basis of each "income charged" provision in this Bill for relevant foreign income. See, for example, clause 403 (dividends from non-UK resident companies). Where a charge includes both relevant foreign income and equivalent United Kingdom income the same rule serves for both (see, for example, clause 370 (interest: income charged)).

1628.     The "income charged" provisions do not rewrite the words "whether the income has been or will be received in the United Kingdom" from section 65(1) of ICTA.

1629.     Before FA 1914, the remittance basis was the only basis of assessment for income within Schedule D Cases IV and V. It applied to all UK residents and not just to those persons who were non-UK domiciled, or were both not ordinarily resident in the United Kingdom and were either Commonwealth or Irish citizens. FA 1914 took certain Schedule D Cases IV and V income out of the remittance basis and that income was taxed thereafter on the arising basis.

1630.     The words "whether the income has been or will be received in the United Kingdom" were included in the 1914 legislation to emphasise that income within Schedule D Cases IV and V was now chargeable to tax, whether or not the income had been remitted to the United Kingdom. That emphasis is no longer needed.

1631.     In the source legislation the basis for charging income arising in the Republic of Ireland is as follows:

• income from trades, professions or vocations, section 68(3) and (4) of ICTA;

• income from property, section 65A of ICTA;

• other Schedule D Case IV or V income, section 68(1) of ICTA; and

• pension income Part 9 of ITEPA, but the rules in section 68 of ICTA apply.

1632.     Parts 2 and 3 of this Bill integrate the rules in sections 68(3) and (4) and 65A of ICTA in respect of trade profits and property business income arising in the Republic of Ireland with the rules for other such income.

1633.     The wording of section 68(1) of ICTA is identical in all material respects to section 65(1) of ICTA. The "income charged" provisions for relevant foreign income charged on the arising basis, in Parts 4 and 5 of this Bill, are based on both sections 65(1) and 68(1) of ICTA. Likewise, the deductions provided by Chapter 3 of this Part are based on both sections 65 and 68 of ICTA.

1634.     See also Chapter 2 of Part 10 of this Bill for further rules that may affect the calculation of income arising outside the United Kingdom charged on the arising basis.

Chapter 1: Introduction

Overview

1635.     This Chapter sets out the content of Part 8 and provides a definition of "relevant foreign income" for this Bill.

Clause 829: Overview of Part 8

1636.     This clause is new.

Clause 830: Meaning of "relevant foreign income"

1637.     This clause is based on section 18 of ICTA. The main provisions in this Bill which apply to relevant foreign income (apart from numerous charges to tax and "income charged" clauses) are:

• clause 771: exemption for relevant foreign income of consular officials and employees;

• Chapter 2 of this Part: relevant foreign income charged on remittance basis;

• Chapter 3 of this Part: relevant foreign income charged on arising basis: deductions and reliefs.

1638.     To be "relevant foreign income", income must arise from a source outside the United Kingdom, and be chargeable under one of the provisions listed in subsection (2). (See also the definition of "income" in clause 878(1), by virtue of which "income" here includes amounts treated as income. A number of the provisions listed in subsection (2) include such income; for example, see Chapter 8 of Part 4 of this Bill.)

1639.     The definition is based on words in section 18(3) of ICTA:

• "tax in respect of income arising from securities out of the United Kingdom" (Schedule D Case IV); and

• "tax in respect of income arising from possessions out of the United Kingdom" (Schedule D Case V).

1640.     Section 18(1) and (3) of ICTA requires that, to fall within the charge under those Cases, as opposed to another charging provision, the amount has to be (a) income, (b) which arises from, (c) securities or possessions, (d) out of the United Kingdom and (e) is not charged in priority under another Schedule of ICTA of ITEPA.

1641.     Case law establishes that "securities" are a sub-set of "possessions". The definition of "relevant foreign income" does not maintain any distinction between income within Schedule D Case IV and income within Schedule D Case V in the source legislation.

1642.     The definition uses "source" rather than "possessions" (the expression in Schedule D Case V). "Possessions", in the context of Schedule D Cases IV and V, appeared in the first income tax Act of 1799 when the word carried associations, in particular with colonial property, that it no longer has. The definition employs the more widely used term "source".

1643.     The meaning of "possessions" in Schedule D Case V has been interpreted by case law. It covers any and every source of income arising outside the United Kingdom. Income charged to tax under Schedule D Cases IV and V by virtue only of section 18(3) of ICTA (that is, excluding amounts treated as income by another provision in the source legislation and charged under Schedule D Case IV or V) has an identifiable source.

1644.     In Colquhoun v Brooks (1889), 2 TC 490 HL (where the subject was how to tax a partner's share of a foreign trade), Lord Macnaghten dealt (page 508) with the meaning of "possessions" in terms of a source of income. There were then no income tax charges on amounts that were not income from a source:

Turning now to the "fifth case," I ask why are not the Respondent's profits and gains from his Melbourne business within the "fifth case"? What is the meaning of the term "possessions" in that case? The word "possessions" is not a technical word. It seems to me that it is the widest and most comprehensive word that could be used. Why, for instance, should not possessions in Ireland mean everything, every source of income that the person chargeable has in Ireland, whatever it may be? Why should not "profits from possessions out of Great Britain," which is to be found in Schedule G., No. XI., and recalls the expression "income out of Great Britain" in the Act of 1799, mean profits from every source of income abroad? I use the expression "source of income" because it is as a source of income that the Act contemplates and deals with property and everything else that a person chargeable under the Act may have, and the Act itself, in section 52, uses the expressions "sources chargeable under the Act" and "all the sources contained in the said several schedules" as describing everything in respect of which the tax is imposed.

1645.     The scope of Schedule D Cases IV and V has since been extended by provisions which charge to income tax, within one or other of the Cases, a profit or gain which would not otherwise be income arising from a security or from possessions within section 18(3) of ICTA. That is, on first principles they would be capital profits or receipts. Such chargeable amounts could not therefore be said to derive from a "source" in the traditional sense. In Walker v Centaur Clothes Group Ltd (2000), 72 TC 379 HL ¹¹, Lord Hoffmann commented (page 416):

¹¹STC [2000] 324

Income tax is traditionally a source-based annual tax, liability depending upon the existence of a source of income falling under one of the Schedules during the year of assessment (see Brown (Surveyor of Taxes) v National Provident Institution [1921] 2 AC 222, 8 TC 57).

If the income tax had retained that ancient simplicity, it would be true to say that income could not be within the charge to tax unless there was a source within the charge and a person could not be within the charge unless he had a source of income within the charge. But that would be because of the nature of the income tax and not anything in the language of the definition.

It is, however, no longer true to say that liability to income tax depends upon the existence during the year of assessment of a source within the charge. There are cases (such as post-cessation receipts) when liability depends upon the existence of income defined by reference to a source which does not exist within the year of assessment. Or liability may depend upon an event, such as a balancing charge on the sale of an asset which has attracted a capital allowance, or the receipt of a capital sum from a particular kind of transaction, which is deemed to be taxable income received in that year of assessment or sometimes spread over several years of assessment.

1646.     Although the definition uses "income which arises from a source" to cover all income within the definition, specific rules have been added, in view of Lord Hoffmann's remarks, in clauses 428(3) and 658(2), to attribute a foreign source to the income in question to ensure that there is no doubt that the definition applies to these provisions.

1647.     Subsection (2) lists by Chapter or clause the provisions in this Bill that charge income and other amounts which the source legislation charges under Schedule D Cases IV or V. Where only one of the charges in a Chapter applies to relevant foreign income, the clause applying that charge has been specified - see clause 579 (charge to tax on royalties and other income from intellectual property). Also Chapter 2 of Part 4 of this Bill has been included in full because if any interest from a registered industrial and provident society is foreign interest, although it is not charged under Cases IV and V in the source legislation, it will be treated by the Bill as relevant foreign income. See Change 131 in Annex 1.

1648.     Subsection (3) eliminates income that would otherwise be within the definition of "relevant foreign income" because it is charged in accordance with clause 844. In the source legislation, such income is charged under Schedule D Case VI. This subsection is based on section 584(4) of ICTA.

Chapter 2: Relevant foreign income charged on remittance basis

Overview

1649.     This Chapter provides an alternative to the arising basis for calculating the charge on relevant foreign income where a claim is made by an eligible claimant. It is based on section 65 of ICTA. The well-known term "remittance basis" is used in the Chapter heading and clause headings but not in the clauses themselves.

1650.     The term is also used in clause 878(2) (other definitions). The definition in that clause applies for the purpose of the expression "a person to whom the remittance basis applies" (see, for example, clauses 357 (charge to tax on overseas property income) and 857 (partners to whom the remittance basis may apply)).

1651.     The Chapter includes a relief for "delayed remittances", based on section 585 of ICTA.

Clause 831: Claims for relevant foreign income to be charged on the remittance basis

1652.     This clause is based on sections 65 and 68 of ICTA. If a claim is made under this clause neither Chapter 3 nor Chapter 4 of this Part applies to the claimant's income for that year. (Those Chapters deal respectively with relevant foreign income charged on arising basis (deductions and reliefs) and unremittable income.)

1653.     A claim under this clause is for the remittance basis to be applied for a tax year rather than (as in the source legislation) a claim for a purely personal status from which the remittance basis will flow for that year.

1654.     A claim is made for a particular tax year. The claim is an annual claim. In the source legislation, a claim has to be made to the Board of Inland Revenue. In practice, it is usually made by applying the remittance basis in making the claimant's self assessment. The clause reflects this practice and does not require the claim to be made either to the Board or to the Inland Revenue. (Those terms are defined in clause 878(1).) See Change 149 in Annex 1.

1655.     Subsections (2) to (4) set out the conditions to be met for a valid claim. In the source legislation condition B has a further requirement, that the claimant is a Commonwealth citizen or a citizen of the Republic of Ireland. That requirement is not rewritten. See Change 132 in Annex 1.

1656.     Income arising in the Republic of Ireland is never charged on the remittance basis, so such income is excluded from a claim under this clause.

Clause 832: Relevant foreign income charged on the remittance basis

1657.     This clause is based on section 65 of ICTA.

1658.     The source legislation has separate rules for calculating the amount of income charged on the remittance basis under Schedule D Cases IV and V. As there is no significant difference in these bases in practice no such distinction is made in this clause. See Change 133 in Annex 1.

1659.     The words "in respect of relevant foreign income" have been included, indicating that the sums received should either comprise the relevant foreign income in question, or represent that income. Lord Radcliffe said in Thomson v Moyse (1960), 39 TC 291 HL (page 335):

No doubt proper construction of those words [sums received] require that the sums computable must be "of" the income, by which I would understand "sums of money derived from the application of the income to achieving the necessary transfer".

1660.     Generally, relevant foreign income charged on the remittance basis is charged on the full amount of sums received in the United Kingdom without any deductions. However, the source legislation (tail words of section 65(5)(b) of ICTA) permits such deductions as are allowed under the Income Tax Acts in respect of profits chargeable under Schedule D Case I, that is, income from a trade but not from a profession or vocation.

1661.     Subsections (3) and (4) apply the deduction to income from a trade, profession or vocation carried on wholly abroad. This recognises that, in the context of income arising in the United Kingdom, income from professions and vocations uses the trading income calculation rules. See Change 134 in Annex 1.