This change is adverse to some taxpayers and favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.

Change 74: Deduction for expenditure on energy saving items: drop the requirement for a claim: clause 312

This change removes the requirement for a formal claim to relief for qualifying expenditure on energy saving items.

Section 31A of ICTA 1988 allows a revenue deduction for capital expenditure meeting certain conditions on energy saving items.

Section 31B(3) of ICTA requires a claim for relief under section 31A of ICTA. This requirement sits uneasily with Self Assessment and the general approach of this Bill is not to require a claim for reliefs given as deductions in calculating profits of a trade or property business.

So clause 312 drops the requirement to make a claim for relief, with the result that relief will be given by a deduction in the calculation of income in the taxpayer's return. This simplifies the position and makes the administration of the relief consistent with trading and property income deductions generally.

The provisions that govern claims are not the same as the provisions that govern returns. But in practice the change from claim to deduction will have only the following consequences, which both relate to the time available for "claiming" the deduction.

First, the absolute time limit for making a claim is replaced by a time limit that may vary according to the particular circumstances. That may be because the return is issued late or because the taxpayer makes a late return. Accordingly, the Inland Revenue is no longer able to refuse a claim because it is late by reference to an absolute time limit: returns time limits and sanctions will apply and they depend on the date the return was issued and submitted.

Second, the time limit available to make the "claim" will normally reduce. That is because, as a formal claim, the time limit for a claim under section 31B of ICTA is (almost) 70 months from the end of the relevant tax year (section 43(1) of TMA) whereas as a deduction in a return the filing date time limit applies - normally (almost) ten months after the relevant tax year (section 8(1A) of TMA) or, for amendments to returns, twelve months after the filing date (section 9ZA(2) of TMA). However, error or mistake relief claims under section 33 of TMA will be possible if too much tax is paid as a result of omitting to include the deduction in the tax return. Claims under section 33 of TMA must be made within five years of 31 January following the tax year to which the return relates.

This change is adverse to some taxpayers and favourable to others in principle but is not expected to have any practical effect.

Change 75: Meaning of "relevant period" in sections 325 and 326: non-resident companies: clause 324

This change defines the "relevant period" by reference to the tax year for non-resident companies liable to income tax in respect of furnished holiday accommodation. That removes any doubt as to how the source legislation applies to such companies.

The clauses in Chapter 6 of Part 3 of this Bill define lettings that can qualify for special tax advantages. They are based on section 504 of ICTA. To qualify, certain conditions have to be met during a particular test period - the "relevant period" in clause 324.

Section 504(4) of ICTA deals with non-company cases. The test period is defined by reference to the tax year.

Section 504(5) of ICTA deals with company cases. The test period is defined by reference to the accounting period.

Those subsections reflect the different chargeable periods for income tax (the tax year) and corporation tax (the accounting period).

Clause 324 is based on section 504(4) of ICTA so the "relevant period" for all persons within Bill 3 is defined by reference to the tax year. But because this Bill applies to non-resident companies liable to income tax, that does not replicate directly the source legislation. If the concept of "accounting period" can apply for income tax purposes, the source legislation defines the test period for such companies by reference to their accounting period by virtue of section 504(5) of ICTA.

The change is to define the "relevant period" for non-resident companies that are within the charge to income tax by reference to the tax year. This is appropriate because non-resident companies not within corporation tax are liable to Schedule A income tax on the profits of the tax year and not the profits of an accounting period (sections 11 and 21(2) of ICTA). It brings non-resident companies into line with all other income tax payers in this respect. Doing so reflects the Inland Revenue view of how this legislation is intended to work. And it reflects, as far as can be established, wider views on, and current practice in, interpreting the section.

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.Change 76: Furnished holiday accommodation: permitted longer-term occupation: clause 325

This change alters the period during which, in order to qualify for the special tax treatment of the commercial letting of furnished holiday accommodation, the accommodation must not be occupied for more than 31 days at a time.

Section 504(3) of ICTA provides:

(3) Accommodation shall not be treated as holiday accommodation for the purposes of this section unless-

     (a)     it is available for commercial letting to the public generally as holiday accommodation for periods which amount, in the aggregate, to not less than 140 days;

     (b)     the periods for which it is so let amount in the aggregate to at least 70 days; and

     (c)     for a period comprising at least seven months (which need not be continuous but includes any months in which it is let as mentioned in paragraph (b)) it is not normally in the same occupation for a continuous period exceeding 31 days.

It is not clear whether a "month" for the purposes of paragraph (c) means a calendar month (in the sense of January, February, etc) or any period of one month. It is also not clear whether any breaks in the period of at least seven months can fall at any time or must divide the period into periods of whole months. The better view seems to be that any period of a month during which the accommodation is commercially let to members of the public as holiday accommodation must not overlap with any period during which it is continuously in the same occupation for more than 31 days.

A further uncertainty is whether, for the purposes of paragraph (c), the time that the accommodation is "let as mentioned in paragraph (b)" is 70 days or (which is the better view) all the time that it is commercially let to the public generally as holiday accommodation.

On the latter reading, section 504(3)(c) of ICTA secures that accommodation is not let as holiday accommodation if it is let for more than 31 days continuously (otherwise than because of circumstances that are not normal). Clause 325(4) gives effect to this reading.

This reading also reduces to less than five months the total periods during which the accommodation can be in the same occupation for more than 31 days. This can operate capriciously to extend the period of "at least seven months" where the holiday lettings are spaced out throughout the year and not concentrated in a few months.

In clause 325(5), the requirement in section 504(3)(c) of ICTA is relaxed so that the periods for which the accommodation is continuously in the same occupation for more than 31 days must not amount to more than 155 days (the aggregate length of the five longest months) during the relevant period (see clause 324). This means that the period during which any occupation of the accommodation must be on a short-term basis:

• need not be composed of whole months but can be made up of non-consecutive days; and

• is never extended beyond 155 days.

So, where two or three days of a holiday letting fall in a particular month, the requirement in clause 325(5) of the Bill (unlike section 504(3)(c) of ICTA) does not restrict what can be done with the accommodation during the rest of the month (provided that the condition is satisfied over the relevant period as a whole).

This change is in taxpayers' favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 77: Furnished holiday accommodation: period over which lettings are averaged: clause 326

This change alters the period during which lettings are averaged for the purpose of treating infrequently let property as qualifying holiday accommodation from the tax year to the relevant period (as defined in clause 324).

Subsections (6) to (8) of section 504 of ICTA allow averaging where a taxpayer lets both furnished holiday accommodation and accommodation that would be holiday accommodation if the test in section 504(3)(b) of ICTA were satisfied in relation to it (the "under-used accommodation"). The requirement in section 504(3)(b) of ICTA is that the accommodation is commercially let to members of the public for at least 70 days. Section 504(4) of ICTA says that that requirement must be determined by reference to a period (called the "relevant period" in clause 326) which is:

• the tax year; or

• if the accommodation was not let in the year before (or the year after), one year beginning with the first letting (or one year ending with the last letting) in the tax year.

Where the taxpayer elects for averaging, section 504(7) of ICTA treats the under-used accommodation specified in the election as qualifying holiday accommodation if the average of the number of days during the "tax year" for which the furnished holiday accommodation and the under-used accommodation was let is at least 70.

If the relevant period for particular accommodation is not the tax year, the accommodation may have been let for more than 70 days during the "relevant period" but not for more than 70 days during the "tax year". But because the figures averaged in section 504(7) of ICTA are the numbers of days let during the "tax year", specifying the accommodation in an election could not raise the average number of days of letting during that year above 70.

In rewriting section 504(7) of ICTA, clause 326(4) provides that the average is to be taken by reference to days during the "relevant period".

This change is in taxpayers' favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 78: Deduction of management expenses of owner of mineral rights: omission of condition that expenses are "necessarily" incurred: clause 339

This change deals with the omission of the requirement that the allowable expenses of managing mineral rights are necessarily incurred.

Section 121(1) of ICTA makes provision for expenses of management and supervision to be deducted from amounts chargeable to income tax in respect of mineral rents and royalties. The section requires that the expenses are disbursed "wholly, exclusively and necessarily".

Section 121(1) of ICTA is rewritten as clause 339. That clause does not reproduce the condition that the expenses must be "necessarily" incurred. There is no evidence as to how this test is applied in practice but it is not obvious how it could be enforced. The extensive body of case law on the meaning of expenses being incurred "necessarily" applies to income formerly taxed under Schedule E (now taxed as employment income under ITEPA). That case law establishes that each and every holder of the office or employment would have to incur the expense.

That is not a test that can be sensibly applied to income taxed under Schedule D Case VI. It is most unlikely that the "necessarily" restriction is applied in practice and this clause recognises this by omitting "necessarily".

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 79: Distributions made by UK companies: clause 366

This change alters the test for bringing a distribution received from a UK company, or a payment representative of such a distribution, into account in calculating the profits of a trade from one based on the underlying shares to one based on the character of the receipt or payment.

Section 95 of ICTA sets out the circumstances in which a distribution made by a UK company, or a "payment which is representative of" a UK distribution, is brought into account in calculating the profits of a trade.

Section 95 of ICTA operates by determining whether the recipient of a distribution is a dealer in relation to that distribution. This is tested by reference to whether the proceeds of a notional sale by the recipient of the shares in respect of which the distribution is received would be taken into account in calculating the profits of the trade of the recipient.

This approach is a legacy of the origin of section 95 of ICTA. Section 95 of ICTA is derived from section 54 of FA 1982. Section 54 of FA 1982 was concerned with the tax treatment of a dealer from whom a company purchased its own shares. In that context it was logical to focus on the shares rather than on the distribution. But this has the problem not only that the sale is theoretical but also that the shares may not be held by the dealer when the distribution is received. It is no longer the logical approach now that section 95 of ICTA applies to all distributions received by share dealers.

So clause 366(1) has the effect that a distribution received from a UK company, or a payment representative of such a distribution, is dealt with under Chapter 2 of Part 2 of this Bill if that distribution or payment is a trade receipt.

The Inland Revenue believe it is highly unlikely that a distribution or payment could be a receipt of a trade unless the proceeds of any sale of the shares giving rise to the distribution would also be treated as a receipt of that trade. But if this is not the case, the change is likely to be favourable to taxpayers as the treatment of trading income is generally more favourable than the treatment of investment income.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 80: Building society dividends: payment of dividends treated as interest: clause 372

This change provides for building society dividends (whether paid gross or net) to be charged to tax as interest and not as dividends.

A building society dividend paid in respect of a shareholding in the society does not strictly constitute interest. However, building society shares are more similar in nature to interest-bearing deposits than to normal company shares and this is reflected in the their tax treatment.

Section 477A(9) of ICTA provides that building society dividends paid without deduction of tax are regarded as paid by way of interest for the purpose of Schedule D. The implication appears to be that they are accordingly charged to tax as interest.

However, where building society dividends are paid under deduction of tax, either by virtue of section 349(3A) or section 477A(1) of ICTA, the source legislation does not specifically charge the dividends to tax as interest. Section 349(3A) of ICTA simply requires that tax be deducted from building society dividends paid on quoted securities. Section 477A(5) of ICTA appears to bring dividends that fall within section 477A(1) of ICTA into Schedule D Case III, but falls short of specifically charging the dividends to tax as interest.

So, apart from dividends paid gross, the source legislation does not specifically charge building society dividends to tax as interest, although in practice that is how dividends paid under deduction of tax are dealt with. In practice, all building society dividends within those sections of ICTA are charged to tax as interest.

Accordingly, clause 372(1) provides that "Any dividend paid by a building society is treated as interest for the purposes of this Act" without distinguishing between dividends paid gross or net.

This change has no implications for the amount of tax paid, who pays it or when.

Change 81: Industrial and provident society payments: clause 379

This change provides for share interest payable by registered industrial and provident societies to be treated as interest.

Section 486(4) of ICTA provides that share interest is chargeable under Schedule D Case III. The definition of "share interest" in section 486(12) of ICTA is "..any interest, dividend, bonus or other sum..". Section 486(4) of ICTA also provides that loan interest is chargeable under Schedule D Case III, as it would be in any event. As loan interest is true interest, which will be taxed under clause 369, there is no need to refer to it in this provision. There are three possible ways of dealing with share interest: include a specific tax charge for it, charge it under the same Chapter as interest or treat it as interest.

The rationale behind the source legislation is that this type of payment is much the same as an interest return on an investment. But it is not necessarily true interest and it is not likely to fall within any of the other types of income within Schedule D Case III. The approach adopted is consistent with that taken for other items of income; while these payments are not interest, they are taxed as if they were interest. So clause 379(1) provides that such a payment "..is treated as interest for income tax purposes..". This technically goes further than merely taxing it under the same Schedule and Case as interest.

This change has no implications for the amount of tax paid, who pays it or when.

Change 82: Funding bonds: charge to tax as interest: clause 380 and Schedule 1

This change replaces the charge to tax under Schedule D Case VI, which operates in particular circumstances where funding bonds are issued but it is impractical to retain any bonds on account of income tax, with a charge on all funding bonds as interest and extends the exemption from income tax for charities to cover the income otherwise within the replaced charge.

Section 582(1) of ICTA provides that where funding bonds are issued to a creditor in respect of any liability to pay interest on certain debts, the issue of the bonds is treated as if it were the payment of an amount of that interest equal to the value of the bonds at the time of issue. Where a person would be required to deduct tax from the payment if it were an actual payment of interest, bonds to a value equal to the tax on the interest are to be retained and tendered in satisfaction of the tax (see section 582(2)(a) of ICTA).

So section 582(1) of ICTA generally treats the issue of funding bonds as a payment of interest and they are taxed accordingly. But there is one situation where funding bonds are charged to tax under Schedule D Case VI, rather than as interest. Section 582(2)(b) of ICTA provides that where it is "impracticable" to retain bonds the recipient is instead chargeable to tax under Schedule D Case VI. As section 582(1) of ICTA treats funding bonds as a payment of interest for all purposes of the Taxes Acts, applying a different charge under Schedule D Case VI in just one situation has no particular logic and adds an unnecessary complication. So the separate charge has not been reproduced. Clause 380 ensures that all issues of funding bonds are charged to tax as interest, irrespective of the circumstances in which they are issued.

The amendment of section 392 of ICTA in Schedule 1 to the Bill preserves the possibility of loss relief being claimed as a deduction from this income. (It is not considered that a loss could arise in a transaction where a charge is imposed under section 582 of ICTA.)

Section 505(1)(c)(ii) of ICTA, which allows a charity exemption for income taxed under Schedule D Case III, has been amended so as to refer to all income within clause 380 whether formerly Schedule D Case III or Case VI.

This change has no implications for the amount of tax paid, who pays it or when, except that the extension of the exemption for charities' income is in taxpayers' favour in principle and may benefit some in practice, although the numbers affected and the amounts involved are likely to be small.

Change 83: Discounts: charge to tax as interest: clause 381

This change provides for discounts currently taxed under section 18(1)(b) of ICTA and Schedule D Case III (b) to be taxed as interest.

Discounts have been part of the charge to tax under Schedule D Case III since at least 1805. Several tax cases have considered aspects of their tax treatment including the difficulties in determining the nature of a "discount" as compared with "interest". It has emerged from this case law that while the line between the terms can be difficult to identify, they are distinguishable in nature.

Discounts are nevertheless taxed in much the same way as interest. They are charged to tax on the person receiving or entitled to the discount: see section 59(1) of ICTA. Similarly, income tax is computed on the full amount of the income arising within the year of assessment without any deduction: see section 64 of ICTA.

Chapter 2 of Part 4 of this Bill includes a specific charge to tax for interest which is extended to include other types of income which are currently treated as interest.

Clause 381 provides that discounts, other than those in relevant discounted securities within Schedule 13 to FA 1996, are taxed under Chapter 2 of Part 4 of this Bill as interest, so removing the necessity to distinguish between them for the purposes of the charge to income tax. It follows that the separate charge for these discounts is not rewritten in the Bill.

This change has no implications for the amount of tax paid, who pays it or when.

Change 84: Dividends etc from UK resident companies: tax credits etc where dividends etc received by companies who pay income tax: clauses 397, 399 and 400

This change involves applying sections 231(1) and (3) and 233(1) and (1A) of ICTA as if references to companies did not include companies receiving distributions in a fiduciary or representative capacity.

Section 6(2) of ICTA recognises that income may arise to a company:

• in a beneficial capacity; or

• in a fiduciary or representative capacity.

Broadly speaking, section 6(2) of ICTA prevents income tax applying to income arising to companies in a beneficial capacity. And section 8(2) of ICTA provides that corporation tax applies to profits arising to a company beneficially but excludes profits arising to a company in a fiduciary or representative capacity from corporation tax. The result is that a corporate trust is subject to income tax. The exception to this is that a non-UK resident company's profits are charged to income tax rather than corporation tax, even where it is beneficially entitled to them, except where UK branch business is involved. (See section 6(2)(a) of ICTA.)

Section 231(1) of ICTA provides that where a company resident in the UK makes a qualifying distribution and the person receiving the distribution is another such company (ie a UK resident company) or a person resident in the UK (not being a company), then the recipient of the distribution is entitled to a tax credit.

Section 231(1) of ICTA makes it clear that a UK resident company is entitled to a tax credit.

Section 231(3) and (3AA) of ICTA describe how the tax credit may be used. It may either be set against an income tax liability under section 3 of ICTA or against the person's income tax liability on total income for the tax year in which the distribution is made.

Section 231(3) of ICTA expressly excludes UK resident companies because it only applies to a person "not being a company resident in the United Kingdom".

It is unnecessary for section 231(3) and (3AA) of ICTA to extend to corporation tax and apply to UK resident companies liable to that tax because such companies do not pay corporation tax on qualifying distributions (see section 208 of ICTA). But, unless it is a mere nominee, a UK resident company receiving a distribution in a fiduciary or representative capacity is charged to income tax on the aggregate of the distribution and the tax credit (see paragraph 2 of Schedule F in section 20(1) and section 835(6)(a) of ICTA). So section 231(3) of ICTA excludes such a company from setting its tax credit against its income tax liability.

In practice, however, the Inland Revenue look at the capacity in which a company is acting and treat a company receiving a distribution in a representative or fiduciary capacity, and hence liable to income tax on it, as if it were an individual receiving it in that capacity. So, in effect, the words "a company resident in the United Kingdom" in section 231(3) of ICTA are taken to refer only to a UK resident company acting in a beneficial capacity. Therefore companies acting in a fiduciary or representative capacity are taken to fall within that section and so may use their tax credits. Clause 397(2) gives effect to this by not excluding UK resident companies from claiming.

Similar difficulties arise over the wording of sections 233(1) and (1A) of ICTA.

Section 233(1) of ICTA provides for recipients of distributions to be treated as having paid income tax at the Schedule F ordinary rate on the amount of the distribution. It is expressed to apply if in a tax year the income of any person "not being a company resident in the United Kingdom" includes a distribution, in respect of which that person is not entitled to a tax credit.

So, on a literal interpretation of the phrase "not being a company resident in the United Kingdom" in section 233(1) of ICTA, all UK resident companies whether they are acting in a beneficial or in a fiduciary or representative capacity are excluded. But again because section 233(1) of ICTA is about income tax it does not need to exclude companies subject to corporation tax and it fails to deal with companies receiving distributions in a fiduciary or representative capacity.

In practice, however, the exclusion is only treated as applying to UK resident companies receiving distributions in a beneficial capacity. So a UK resident company acting in a fiduciary or representative capacity and falling within section 233(1) of ICTA is treated as having paid income tax under section 233(1). Clauses 399(1) and (2) and 400(1) and (2) rewrite section 233(1) of ICTA and give effect to the practice by not excluding UK resident companies.

Section 233(1A) of ICTA follows on from section 233(1) of ICTA, but deals only with qualifying distributions. It provides that where the income of any person "who is not a company" and is non-UK resident includes a qualifying distribution in respect of which the person is not entitled to a tax credit, so much of the distribution as is comprised in:

(a)     income on which the person is treated as having paid income tax at the Schedule F ordinary rate under section 233(1)(a) of ICTA, or

(b)     income to which section 686 of ICTA applies (discretionary accumulation and maintenance trusts),

is treated for the purposes of those provisions as if it were grossed up at that rate. And for the purposes of those provisions income tax is treated as having been paid at that rate on it.

Again, strictly a non-UK resident company acting in a fiduciary or representative capacity does not fall within section 233(1A) of ICTA as it is a company. It can only fall within section 233(1) of ICTA (and so would not be subject to grossing-up). But, in practice, the same approach is followed for companies receiving the distribution in a fiduciary or representative capacity as with sections 231(1) of ICTA and 233(1) of ICTA. So section 233(1A) of ICTA is taken to apply to all non-residents, whether individuals or companies receiving the distributions in such a capacity. Clause 399(3) and (4) follow this approach in rewriting section 233(1A) of ICTA without any exclusion for such companies.