|Income Tax (Trading and Other Income) Bill - continued||House of Commons|
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Section 122 of ICTA
78. In section 122(2) of ICTA the reference to section 121(2) of ICTA has been amended to "section 121(3)". This corrects a minor error in ICTA.
79. Section 122(4) of ICTA has been omitted. It became redundant when FA 1995 removed the requirement to deduct income tax from the payment of rent within section 119 of ICTA.
Section 333 of ICTA
80. Section 333 of ICTA is rewritten in Chapter 3 of Part 6 of this Bill but section 333(4)(e) of ICTA allows the regulations to include provisions generally for the administration of corporation tax. Since this cannot be rewritten in this Bill and a repeal of all of section 333 of ICTA but for that small part would be ungainly this new section has been substituted.
Section 347A of ICTA
81. In the source legislation, section 347A(1) of ICTA makes provision about the tax treatment of certain annual payments both from the perspective of the payer and the recipient. So a payment to which the section applies is not a charge on income for the person paying it. Section 347A(1)(a) of ICTA then denies the payer a deduction from his income in respect of the payment and section 347A(1)(b) of ICTA deals with the recipient and gives the recipient an exemption from income tax or corporation tax (as the case may be).
82. Section 347A(2) of ICTA describes the payments to which section 347A(1) of ICTA applies for both these purposes.
83. The income tax exemption is rewritten in Chapter 8 of Part 4 of this Bill. So section 347A(1)(b) of ICTA has been amended by this Schedule so that it is an exemption from corporation tax only.
84. Further, the Schedular/Case system of classification of income has been abolished for income tax purposes. So section 347A(2) of ICTA has been amended by this Schedule so that it deals solely with payments which, but for the exemption, would be within the charge to corporation tax under Schedule D Case III.
85. A new subsection "(2A)" has been inserted by this Schedule to deal with the income tax equivalent of section 347A(2) of ICTA (as amended). Because the conditions in section 347A(2) of ICTA are rewritten in clauses 727 to 729 of this Bill, new subsection (2A) refers to the payments which are exempt from income tax as a result of clause 727 of this Bill.
86. This Schedule also omits section 347A(5) of ICTA and the subsection is repealed by Schedule 3 to this Bill.
87. Section 347A(5) of ICTA is rewritten so far as deductions under sections 65(1)(b) and 68(1)(b) of ICTA are concerned. The reference to section 355 of ITEPA in section 347A(5) of ICTA is not rewritten. Section 347A(5) of ICTA denies a deduction for an annual payment paid out of certain foreign income if that annual payment would not have been within the charge to tax if the payment had arisen in the United Kingdom.
88. Section 355 of ITEPA allows an employee to claim a deduction against foreign earnings for certain payments made abroad which if the payments had been made in the United Kingdom would have given rise to tax relief. If there is no such tax relief in the United Kingdom, section 355 of ITEPA effectively denies a deduction. So in the context of section 347A(5) of ICTA the reference to section 355 of ITEPA is superfluous.
Section 349 of ICTA
89. The new section 349ZA(3) of ICTA defines "the net amount of the proceeds or instalment" for the purposes of the application of section 349 of ICTA. Any incidental expenses of the sale which are deducted before payment are taken into account for this purpose. The source legislation does not explicitly mention incidental expenses of sale, although the words "net proceeds of sale" in section 524(1) of ICTA imply that some deduction is available.
90. The reference in section 524(3) of ICTA to the net proceeds of sale had significance for the purposes of the rule that the payer must deduct income tax from the capital sum comprised in the net proceeds of sale. In deducting tax, the payer is required to leave out of account certain matters that affect the seller's ultimate liability to tax. Although the seller's liability may be reduced if he bought the rights for a capital sum, such a reduction does not affect the amount of tax that is to be deducted by the payer (see section 524(7) to (9) of ICTA). And if the seller makes an election to spread his tax liability over six years, that election does not affect the amount of tax that is to be deducted by the payer (see section 524(4)(a) of ICTA).
91. These rules ensure that the payer is not required, in deducting tax, to take account of matters that may be outside his knowledge. Against this background, it makes sense for the rule requiring the deduction of income tax at source to require the payer to take into account only those incidental expenses that are deducted before payment of the sale proceeds. The payer would otherwise be required to take into account matters that he could not readily ascertain. The rule requiring the payer only to take account of those incidental expenses that are deducted before payment does not affect the seller's ultimate liability to tax.
Section 391 of ICTA
92. Section 391 of ICTA provides relief for the losses of a trade, profession or vocation taxed under Schedule D Case V. Such losses can be used only against the losses of another Case V trade, profession or vocation (or certain income within ITEPA).
Section 392 of ICTA
93. The amendment of section 392 of ICTA preserves the loss regime that applies to income that is, in the source legislation, income within Schedule D Case VI.
94. Section 392 of ICTA is an income tax only provision that provides relief for losses in income types that are charged, in the source legislation, to tax under Schedule D Case VI. It provides the only avenue of relief available in respect of such losses.
95. In the source legislation the charge under Schedule D Case VI comprises three elements:
96. On account of its breadth and diversity, Schedule D Case VI is often referred to as a "sweep-up" charge. Subject to some important qualifications mentioned below, the purpose of section 392 of ICTA is to allow set-off of losses arising from these different types of swept-up income against swept-up profits. Losses are allowed, and profits relieved, on an undifferentiated basis. That is, once within section 392 of ICTA, a loss can be set off against a profit of any sort (provided it is a Schedule D Case VI profit or, in addition, since ITEPA, certain pension profit) and is not limited to set off only against profit of the same type.
97. But not all of the items within the current Schedule D Case VI charge fall automatically within the section 392 of ICTA loss regime because not all are inherently capable of producing a loss. And section 392 of ICTA requires the presence of a "transaction" from which the loss or profit must arise.
98. If there is a transaction, section 392 of ICTA provides:
99. Bill 3 makes wide-ranging changes in the way Schedule D Case VI income is charged. Specifically:
100. The amendment of section 392 of ICTA will ensure that notwithstanding these recategorisations, the scheme of loss relief provided by the source legislation will continue unchanged. The table in the proposed new section 836B of ICTA lists the provisions that currently provide for a Schedule D Case VI charge and to which section 392 of ICTA is, therefore, potentially relevant. Provisions of an administrative nature to recover excess relief and undercharges of tax are excluded: see the commentary on section 18, Schedule D Case VI of ICTA in Schedule 1. These are:
101. There is one Schedule D Case VI provision in the source legislation where the position for the source legislation has not been preserved. That is section 127 of ICTA (enterprise allowance) which is rewritten as clause 207 in Chapter 15 of Part 2 of this Bill. The amount charged under Schedule D Case VI in the source legislation is dealt with in the rewrite as part of the calculation of trade profits: see Change 53 in Annex 1. So it does not need to be included in the amendment of section 392 of ICTA.
Section 443 of ICTA
102. Section 443 of ICTA is repealed for income tax purposes. This is achieved by retaining the current text of this provision as Schedule D Cases I and VI will apply solely for corporation tax purposes after this Bill.
103. Section 443 of ICTA deals with the case in which the proceeds of a life assurance policy are paid out in the form of assets and not in cash. When section 443 of ICTA was introduced as section 35 of FA 1967 the section governed the treatment of the assets for the purposes of both capital gains and short term gains (Schedule D Case VII).
104. At that time the disposal by the insurance company would usually be taxed as a capital gain. The main purpose of the 1967 legislation was to make clear that the disposal was at market value. It seems the reference to Schedule D Cases I, VI and VII was to deal with the less common case in which the corporation tax charge on the company on disposal was taxed under these Cases.
105. The section also put it beyond doubt that the base cost of the asset to the policy holder was market value either for capital gains or short term gains purposes.
106. The reference to short term gains was repealed in 1971. And with the consolidation of the capital gains tax code, the capital gains tax rule can now be found in section 204(3) of TCGA. These changes to the section mean that, in the income tax context, section 443 of ICTA now deals only with the policy holder's acquisition of the assets for the purposes of Schedule D Cases I and VI. But of course the mere acquisition of the assets cannot give rise to any liability under Schedule D Cases I or VI.
107. The value of the assets acquired would be reflected in a Schedule D Case I computation only if the policy itself were held as trading stock. In that unlikely event the Inland Revenue is content to follow generally accepted accounting practice in calculating the profits of the trade.
108. It is very difficult to envisage any circumstances in which the disposal of assets acquired on the maturity of an insurance policy would give rise to a Schedule D Case VI liability. But in that most unlikely event the application of the decision in Curtis Brown Ltd v Jarvis (1929), 14 TC 744 HC would suggest a similar result as for Schedule D Case I.
Sections 539 to 554 of ICTA
109. The amendments for these sections do three things. First, they ensure that any liability arising under Chapter 2 of Part 13 of ICTA is chargeable to corporation tax only (see, in particular, the amendments of sections 539 and 547 of ICTA). Second, section 552 to 552B of ICTA (information: duty of insurers) are amended to reflect the fact that the same event will be a chargeable event under both Chapter 2 of Part 13 of ICTA and Chapter 9 of Part 4 of this Bill, and the gain produced by the event will be treated as arising under both Chapters (though, again, the gain will only be charged once on any one taxpayer under, or by virtue of, one of those Chapters according to that taxpayer's status). Third, the redundant section 554 of ICTA is repealed.
110. The amendment of the definition of a life annuity in section 539 of ICTA recognises that the determination of what is, or is not, a purchased life annuity depends on whether the annuitant is within the corporation tax or income tax charge. The annuitant may be subject to one tax charge and the person who is liable for a gain arising on a chargeable event in respect of the annuity contract may be subject to the other. Both provisions for determining an annuity have to be mentioned here to avoid restricting the scope of the charge under section 547(1)(b) of ICTA. The amendment of section 543 of ICTA is made for the same reasons as regards the calculation of the gain.
111. A new section, section 539ZA (policies and contracts in which persons other than companies are interested), is inserted in ICTA. This section deals with the circumstance where the application of Chapter 2 of Part 13 of ICTA (and related provisions), that is, whether there is a chargeable event and what the amount of the gain is, has to take into account anything that occurred (or may yet occur) in respect of the policy at a time when any liability may, wholly or in part, arise or have arisen under Chapter 9 of Part 4 of this Bill. It mirrors clause 544.
112. The section makes clear that Chapter 2 of Part 13 of ICTA and related provisions, "the corporation tax provisions", apply in respect of any other circumstance regardless of any application of Chapter 9 of Part 4 of this Bill at that time. For example, if there has been a chargeable event under section 540(1)(a)(v) of ICTA at a time when liability on the gain arose wholly or in part under Chapter 9 of Part 4 of this Bill (so that there was also a chargeable event under clause 509), that event is still to be taken into account in the later application of the corporation tax provisions.
113. This new section recognises that both the corporation tax provisions and the provisions in Chapter 9 of Part 4 of this Bill apply to a policy or contract, so that there is a chargeable event under each, but the two sets of provision apply separately as regards liability. There are also a number of reliefs and other rules that affect income tax liability only.
114. As a consequence of the repeal of section 547(1)(a) of ICTA (rewritten in clause 465) and section 547(1)(e) of ICTA (rewritten in clause 468), the subsections interpreting the meaning of trusts created by an individual and providing the definition of a "foreign institution" have been relocated to section 547A of ICTA.
115. The amendments of sections 552 to 552B of ICTA provide for a single certificate to be given to each relevant policy holder in respect of an event and the gain which it produces (and, where required, to the Inland Revenue) notwithstanding that the event will be a chargeable event under both Chapter 2 of Part 13 of ICTA and Chapter 9 of Part 4 of this Bill, and the gain will be treated as arising under both Chapters. The amendments also reflect the different language in the two Chapters and the fact that certain provisions of Chapter 9 of Part 4 of this Bill will have no equivalent in Chapter 2 of Part 13 of ICTA.
116. Section 553C of ICTA is amended so that it is a corporation tax provision, as the income tax application of the section and the related parts of the Personal Portfolio Bonds (Tax) Regulations 1999 SI 1999/1029, as amended by SI 2001/2724 and SI 2002/455, are rewritten in Chapter 9 of Part 4 of this Bill.
117. Section 553C(9A) to (9E) of ICTA enable regulations under that section to provide for a chargeable event gain to arise in relation to a policy or contract which is a personal portfolio bond despite the fact that, at the time, the policy or contract is held such that a gain would be charged under, or by virtue of, Chapter 9 of Part 4 of this Bill. The power is limited so that the regulations may include each provision for the purposes only of enabling the gain to be taken into account on the later application of Chapter 2 of Part 13 of ICTA to the policy or contract.
118. Section 554 of ICTA is omitted. It is spent.
Sections 586 and 587 of ICTA
119. These amendments repeal sections 586 and 587 of ICTA for income tax purposes. Both sections apply only when the United Kingdom is in a declared state of war. They disallow payments made in connection with war damage indemnity schemes and in respect of war injuries to employees. The sections were enacted to deal with the particular circumstances of the second world war when high rates of taxation meant that payments could be made almost entirely at the Exchequer's expense. They are now obsolete.
Sections 695 and 696 of ICTA
120. This concerns the amendment of sections 695(4)(b) and 696(6) of ICTA so that they will apply for corporation tax purposes without references to the charge to income tax under Schedule D Case IV.
121. Part 16 of ICTA deems certain payments made to beneficiaries from estates in administration to be income. Although Part 16 of ICTA principally applies to beneficiaries within the charge to income tax, it is also capable of applying to beneficiaries within the charge to corporation tax. Chapter 6 of Part 5 of this Bill rewrites the provisions which apply for income tax purposes, and Schedule 1 amends Part 16 of ICTA so that it will only apply for corporation tax purposes.
122. Section 695 (limited interests in residue) and section 696 (absolute interests in residue) of ICTA apply respectively to persons who have a limited interest in the residue of an estate at any time during the administration period or an absolute interest in the residue.
123. Under sections 695(2) and 696(3) of ICTA payments made in respect of those interests are deemed to be paid to the persons with the interests as income for the tax year in question. Section 695(4) of ICTA makes different provision about the amount of the income deemed to have been paid and the way it is treated for tax purposes according to whether the estate is a United Kingdom estate or a foreign estate in the tax year in which the amount is deemed to have been paid. Similar provision is made by section 696(4) and (6) of ICTA for persons with absolute interests in estates. (The relevant parts of these sections are rewritten for income tax purposes in clauses 649(1), 656 and 657.)
124. In the case of United Kingdom estates, a free-standing non-Schedular charge is imposed because the provisions merely say that the amount is income, but do not specify a charging Schedule. In the case of foreign estates, sections 695(4)(b) and 696(6) of ICTA provide that the amount deemed to have been paid as income is to be "chargeable to income tax under Schedule D Case IV as if it were income arising from securities in a place out of the United Kingdom". This operates successfully for persons liable to income tax. But there is no longer any charge under Schedule D Case IV for corporation tax purposes. Paragraph 5 of Schedule 14 to FA 1996 introduced a new Schedule D Case III for corporation tax purposes to replace the previous Cases III and IV (see section 18(3A) of ICTA). This income does not fall within the ambit of the new Schedule D Case III.
125. So, since there are no Schedular charges imposed on this income from foreign estates for corporation tax purposes, the amendments of sections 695(4)(b) and 696(6) of ICTA in Schedule 1 omit the words referring to the charge under Schedule D Case IV. This leaves the income subject to non-Schedular charges in the same way as the income from United Kingdom estates.
Section 817 of ICTA
126. This amendment repeals section 817 of ICTA for income tax purposes. The section is an income calculation rule because it applies "in arriving at the amount of profits or gains for tax purposes". It can trace its origins back almost unchanged to the 1803 Act.
127. The primary purpose of the section is set out in subsection (1)(a). This provides no deduction is allowed in calculating the profits unless it [the deduction] is "expressly enumerated in the Tax Acts". This clarification may have served some purpose in the early years of income tax. But as both ITEPA and this Bill set out what deductions are to be allowed there is no need for a general rule that says no other deductions are to be allowed.
Section 827A of ICTA
128. This new section replaces the territorial provisions in section 18(1)(a) of ICTA, which will be repealed for income tax purposes, as they affect those charges under Schedule D Case VI which are not rewritten in this Bill.
129. Such charges would otherwise lose the benefit of the territoriality rules in section 18(1)(a) of ICTA. This new section aims to replace those rules. It is modelled on the territorial scope clauses in Chapter 1 of Parts 4 and 5 of this Bill.
130. See the commentary to clause 368 as to how section 18(1)(a) of ICTA and rules on the territorial scope apply to charges under Schedule D Case VI.
131. Some provisions in Tables 1 and 3 of new section 836B of ICTA have their own territoriality rules or the provisions may otherwise make clear how income from a source outside the United Kingdom is to be taxed. For this reason the territoriality rules are to apply, subject to any express or implied provision to the contrary (subsection (5)).
Section 833 of ICTA
132. Section 531(6) of ICTA provides that income from the disposal of know-how is to be earned income in certain cases. However, the concept of earned income is not rewritten in this Bill. This paragraph rewrites section 531(6) of ICTA as subsection (5A) of section 833 of ICTA.
133. Section 529 of ICTA provides that "income from patent rights" is to be earned income in certain cases. However, the concept of earned income is not rewritten in this Bill. This paragraph rewrites section 529 of ICTA as subsections (5B) to (5E) of section 833 of ICTA.
134. There is no definition of "income from patent rights" in Chapter 1 of Part 13 of ICTA. Section 833(5B) of ICTA provides for "patent income" to be earned income in certain circumstances, mirroring the circumstances specified in section 529(1) of ICTA. The definition of "patent income" in new section 833(5D) of ICTA follows the definition of "income from patents" in section 533(1) of ICTA (except that it is drafted by reference to the intellectual property provisions in the Bill rather than in ICTA). See Change 152 in Annex 1.
Paragraph 7A of Schedule 22 to ICTA
135. This new paragraph rewrites paragraph 7(1), (3) and (4) of Schedule 13 to FA 1996. These sub-paragraphs deal with how relief is to be given for losses on deeply discounted securities incurred by pension trustees where the securities have been held since 26 March 2003 and are listed on a recognised stock exchange. Because this provision is likely to be of extremely limited application and will disappear with the repeal of Schedule 22 to ICTA with effect from 6 April 2006 it has been relegated from Chapter 8 of Part 4 of this Bill to this Schedule.
Paragraph 5 of Schedule 30 to ICTA
136. This amendment repeals paragraph 5 of Schedule 30 to ICTA for income tax purposes.
137. Paragraph 5 of Schedule 30 to ICTA is a transitional measure that relates to the pre-1963 version of Schedule A. Under that version of Schedule A a trader who owned the property from which he or she carried on a trade was allowed a Schedule D Case I deduction equal to the amount of the Schedule A charge on the property. The right to the deduction was removed when Schedule A moved from a charge on the annual value of the property to a charge on the rent received.
138. Timing differences between Schedule D Case I and Schedule A could result in a loss of relief if the taxpayer ceased to occupy the property for the purposes of the trade in a period in which he or she did not also cease to carry on the trade. FA 1963 introduced a relief to compensate for this loss of relief. It is based on the relief that would have been given for the tax years 1963-64 and 1964-65 and is allowed as a deduction in calculating the trade profits for the tax year in which they cease to carry on the trade.
139. While in theory it is still possible to claim the relief given the passage of over 40 years and the effects of inflation it is almost certain no new claims will be made in or after the tax year 2005-06.
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