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 121: Exempt income: personal injury damages: omission of statutory references and inclusion of damages for death: clauses 731 and 751 and Schedule 2

This change relates to the omission, from the provisions exempting interest on personal injury damages and damages paid as periodical payments from income tax, of references to the specific statutory provisions under which the damages are awarded, and the inclusion of damages for death.

Section 329(1) of ICTA exempts interest on damages for personal injury from income tax and section 329AA of ICTA exempts personal injury damages paid in the form of periodical payments.

Section 329AA(1) of ICTA (as amended by section 100(2) of the Courts Act 2003) exempts periodical payments (as defined in section 329AA(1A) of ICTA) from income tax. Under section 329AA(1A)(b) of ICTA "periodical payments" includes payments made under an agreement so far as it settles a claim or action for damages in respect of personal injury (including an agreement as varied).

Section 329AA(6) of ICTA provides that such a claim or action includes claims or actions brought under various statutory provisions. In fact, it was never intended to limit the scope of the exemption by referring to these specific provisions. So, in rewriting this exemption, clause 731 omits these references. However, the omission of the specific references to the Fatal Accidents Act 1976 and the Fatal Accidents (Northern Ireland) Order 1977 has made it necessary to refer specifically to damages for death, because without the references to that Act and Order it would not be clear that such damages are included in damages for personal injuries.

Similarly, section 329(1) of ICTA exempts interest on damages in respect of personal injuries or in respect of a person's death included in a sum for which judgment is given by virtue of the provisions referred to in section 329(2) of ICTA. In rewriting this exemption, clause 751 omits these references and merely refers to interest on damages for personal injury or death included in a sum awarded by a court, without referring to the provisions under which the award may be made.

Since these references have been omitted, it is necessary specifically to exclude interest relating to the period between the making and satisfaction of an award, as such interest is awarded under the Judgments Act 1838, which is not listed in section 329(2) of ICTA.

This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.

Change 122: Exempt income: personal injury damages: exemption of persons receiving payments on behalf of injured persons: clause 734

This change relates to the extension of the provisions exempting personal injury damages paid as periodical payments from income tax, to include payments to a person receiving payments on behalf of an individual entitled to the payments.

Section 329AA(4) of ICTA provides that certain payments paid by trustees to, or for the benefit of, an injured person who is entitled to damages are exempt from income tax. However, that section does not provide that the person receiving the payment on behalf of the person so entitled is exempt from income tax. But, in practice, the person receiving damages on behalf of another is not taxed.

In rewriting section 329AA(4) of ICTA, clause 734(2)(b) extends the persons entitled to the exemption to a person who receives a payment on behalf of the injured person.

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 123: Exempt income: health and employment insurance payments: extension to insurance against loss of office: clauses 736(2) and 737(2)(b)

This change extends the risks against which insurance policies may provide if payments under them are to be exempt to loss of office.

Sections 580A and 580B of ICTA exempt payments under insurance policies providing cover against risks to health or employment from income tax where they meet specified conditions.

Under section 580A(3)(b) of ICTA the risk of loss of employment is described as "a risk that circumstances will arise as a result of which the insured will cease to be employed or will cease to carry on any trade, profession or vocation carried on by him". Under section 580A(4)(b) of ICTA the related period during which payments may continue is described as "any period during which the insured is, in circumstances insured against by the relevant part of the policy, either unemployed or not carrying on a trade, profession or vocation".

In practice, although section 580A(3)(b) of ICTA refers to loss of employment and not loss of office, the Inland Revenue does not distinguish between employees and office holders in deciding whether there is a qualifying risk relating to employment. So, taken together with the reference to trades, professions and vocations in section 580A(3)(b) of ICTA, the risk that a person will no longer be in receipt of income as a result of a loss of work of any sort is included. Accordingly, in rewriting that section in clause 736(2), the risk that circumstances will arise as a result of which the insured will cease to hold an office has been included.

Similarly, in rewriting section 580A(4)(b) of ICTA in clause 737(2)(b), a period during which the insured, in circumstances insured against by the relevant part of the policy, does not hold an office is expressly included.

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 124: Exempt income: health and employment insurance payments: meaning of "the insured": clause 742

This change extends the meaning of "the insured" in certain provisions relating to the exemption of payments made under insurance policies insuring against health or employment risks.

Sections 580A and 580B of ICTA exempt payments under insurance policies providing cover against risks to health or employment from income tax where they meet specified conditions. The legislation uses the expression "the insured" in several places, without any definition. In certain provisions, "the insured" is extended by section 580A(9) of ICTA to include the insured's spouse, and any other person with whom they have joint, insured liabilities.

Clause 742 extends the definition further so that a child of the insured is covered if the child is under 21. This means that payments from insurance policies taken out in respect of children's health or employment are included in the exemption so long as the general conditions for the exemption are met. These include the condition under section 580A(6) of ICTA that the premiums must not have qualified for tax relief by being deductible in calculating the insured's income from any source or be deductible from that income. So, following the extension of the meaning of "the insured" to include the insured's children, if premiums were so deductible as respects the child's income, the exemption would not be available for payments made under the policy. However, that is extremely unlikely to be the case.

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 125: Exempt income: interest on damages for personal injury: awards by foreign courts: clause 751(1)

This change gives statutory effect to ESC A30 (interest on damages for personal injuries (foreign court awards)).

Section 329(1) of ICTA exempts interest on damages for personal injury from income tax by reference to judgements given by virtue of the statutory provisions specified in section 329(2) of ICTA. These are provisions that have effect in the various parts of the United Kingdom.

However, ESC A30 provides that the exemption under section 329 of ICTA is extended to interest on damages awarded in corresponding circumstances by a foreign court if the interest is exempt from tax in the country in which the award is made.

Clause 751(1)(c) gives effect to the concession.

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 126: Interest under employees' share schemes: participants in the scheme: clause 752

This change extends the exemption from tax to interest received from any participant in an employees' share scheme (and not just from company employees and salaried directors).

The origin of section 688 of ICTA is paragraph 9 of Schedule 4 to FA 1970. In 1970 the exception from the prohibition on financial assistance for employees' share schemes was in terms of the employees of the company (section 54(1) of the Companies Act 1948). It was specifically provided that "employees" included directors holding a salaried employment or office in the company.

The current exception (section 153(4)(b) of the Companies Act 1985) refers to "the provision by a company, in good faith in the interest of the company, of financial assistance for the purposes of an employees' share scheme". Section 743 of the Companies Act 1985 explains what is meant by an "employees' share scheme". Such a scheme may, among other things, encourage the holding of shares by former employees and the spouses and children of employees and former employees.

Consequently, although former employees and spouses and children can benefit from schemes that are set up to comply with section 153(4)(b) of the Companies Act 1985, any payments of interest by them do not benefit from the exemption in section 688 of ICTA.

Clause 752 extends the exemption to interest received by trustees from any participant in the scheme.

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 127: Interest under employees' share schemes: foreign source interest: clause 752

This change extends the exemption from tax to foreign interest.

Section 688 of ICTA exempts trustees from income tax under Schedule D Case III. If a UK resident company advanced money to UK resident trustees for the purposes of an employees' share scheme, the trustees might receive interest from non-UK resident employees. In such circumstances the foreign interest would be charged under Schedule D Case V. Accordingly, the trustees would not benefit from the exemption in section 688 of ICTA.

Clause 752 provides that no liability to income tax arises under Chapter 2 of Part 4 of this Bill in respect of the interest. The income charged by that Chapter includes foreign income that was formerly charged under Schedule D Case V.

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 128: Rent-a-room relief: income other than trading or property income: clauses 785, 786, 794 and 798.

This change prevents the receipt of certain Schedule D Case VI income from disqualifying taxpayers from rent-a-room relief (as well as allowing the relief on that income).

Under paragraph 2(1) of Schedule 10 to F(No 2)A 1992 relief is available only if all "relevant sums" deriving from letting accommodation in the taxpayer's home would otherwise be chargeable under Schedule A or Schedule D Case I.

"Relevant sums" includes sums accruing in respect of meals, cleaning, laundry and goods and services of a similar nature provided in connection with the use of furnished accommodation (paragraphs 2(2) and 8 of Schedule 10 to F(No 2)A 1992). If a taxpayer lets a room and the income is charged under Schedule A, any incidental income for (say) occasional laundry services or meals would normally be chargeable under Schedule D Case VI. The receipt of that income would therefore disqualify the taxpayer from the relief.

This was not the case when F(No 2)A 1992 was enacted. Paragraph 2(1) of Schedule 10 to F(No 2)A 1992 originally referred to Schedule D Cases I and VI. At that time, income from letting furnished accommodation was charged under Schedule D Case VI unless the taxpayer elected for it to be charged under Schedule A (or unless the letting arrangements amounted to a trade as, for example, in the case of a bed and breakfast business).

In replacing section 15 of ICTA, FA 1995 brought all lettings of furnished accommodation within the Schedule A charge. FA 1995 replaced the reference to Schedule D Case VI in paragraph 2(1) of Schedule 10 to F(No 2)A 1992 with a reference to Schedule A.

The definition of "rent-a-room receipts" in clause 786(1) includes, by virtue of paragraph (d), receipts that would otherwise be chargeable under Chapter 8 of Part 5 of this Bill (income not otherwise charged (the successor to Schedule D Case VI for this kind of receipt)). Consequently, those receipts no longer disqualify the taxpayer from the relief. Rent-a-room relief is also available on the receipts.

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 129: Rent-a-room relief: making the United Kingdom location condition explicit and a potential disqualification from the relief: clauses 785 and 786

This change makes it explicit that rent-a-room relief applies only to United Kingdom property and removes a bar to the relief that can arise in respect of a let United Kingdom residence if, exceptionally, an individual also lets an overseas residence at the same time.

Paragraph 2(1) of Schedule 10 to F(No 2)A 1992 provides that an individual qualifies for relief for a tax year if all sums which accrue to the individual for the year from letting a room in a qualifying residence, or from providing associated goods or services, would otherwise be chargeable under Schedule A or Schedule D Case I.

Paragraph 4 of Schedule 10 to F(No 2)A 1992 provides that a residence is an individual's "qualifying residence", in respect of a tax year, if at some time during the period specified in that paragraph it is the individual's only or main residence. In rewriting that provision, clause 786(1)(a) makes it explicit that the residence must be in the United Kingdom.

For an individual who has only a single qualifying residence in respect of a tax year the requirement is implicit in paragraph 2(1) of Schedule 10 to F(No 2)A 1992. If the residence is overseas the individual could not qualify for rent-a-room relief because any income from letting a room in the residence would be chargeable to tax under Schedule D Case V (as profits of an overseas property business or, exceptionally, income of a foreign trade).

That contrasts with the case of an individual who in a tax year lets a room in a qualifying United Kingdom residence and in a qualifying overseas residence. This case arises only if the individual's only or main residence changes during the period specified in paragraph 4 of Schedule 10 to F(No 2)A 1992.

Under paragraph 2(1) of Schedule 10 to F(No 2)A 1992, any income from letting a room in the overseas residence which is chargeable under Schedule D Case V would disqualify the individual from any rent-a-room relief at all (and which would otherwise have been available on income from the United Kingdom residence).

Relief will continue not to be available on income from an overseas residence. But the income relating to the overseas residence will no longer disqualify the individual from obtaining rent-a-room relief on income from the United Kingdom residence at the time of the change of residence.

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 130: Rent-a-room relief: removing anomaly from qualifications for relief: clauses 788 and 795

This change counts any relevant balancing charge in the "total rent-a-room amount" for the purpose of establishing entitlement to the alternative method of calculation.

Under the source legislation a taxpayer with rent below the individual's limit but whose rent-a-room income and any relevant balancing charges together exceed the limit is not eligible for either form of rent-a-room relief.

Paragraph 9(4) of Schedule 10 to F(No 2)A 1992 prevents that taxpayer from qualifying for exemption. ("Relevant balancing charges" are balancing charges which would otherwise be made under CAA in respect of any plant or machinery used in any trade or Schedule A business from which the rent-a-room income is derived.)

But neither does the taxpayer qualify for the alternative method of calculation under paragraph 11 of Schedule 10 to F(No 2)A 1992 because the rent-a-room income alone does not exceed the limit (as required by sub-paragraph (1)(b)).

Clause 795 provides that, if the other conditions are satisfied, the alternative method of calculating profits (the successor to paragraph 11 of Schedule 10 to F(No 2)A 1992) is available if the "total rent-a-room amount" exceeds the individual's limit. The "total rent-a-room amount" is defined in clause 788 to include any relevant balancing charges.

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 131: Foreign income: special rules: meaning of "relevant foreign income": treatment of certain payments made by industrial and provident societies arising from a source outside the UK: clause 830

This change allows foreign source loan interest, dividends and bonuses or other sums payable by a registered industrial and provident society to benefit from provisions available to income taxed under Schedule D Cases IV and V.

Under section 486(4) of ICTA any share or loan interest paid by a registered industrial and provident society is charged to tax under Schedule D Case III wherever it arises. Under section 66 of FA 1988 a society registered under the Industrial and Provident Societies Acts will be resident in the United Kingdom through incorporation. A society may, however, be non-resident where it also satisfies a residence test in the territory of a treaty partner of the United Kingdom and the treaty awards residence to that other territory. Section 249 of FA 1994 will then apply to treat the society as non-resident. Theoretically therefore share or loan interest paid by a registered society may arise outside the United Kingdom but be charged under Schedule D Case III. In consequence such income cannot, under the source legislation, benefit from treatment specific to Schedule D Cases IV and V.

It is unlikely that share or loan interest would arise to an industrial and provident society from a non-UK source. But it is believed that in principle it ought to benefit from the treatment available to interest within Schedule D Cases IV and V. Clause 830 defines "relevant foreign income" as income arising from a source outside the United Kingdom which is charged under certain provisions which are listed. So, clause 379 is not excluded from the list of provisions in clause 830(2) under which a charge on relevant foreign income could arise. (See the reference to Chapter 2 of Part 4 of this Bill in subsection (2)(e)).

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 132: Foreign income: special rules: relevant foreign income charged on remittance basis: conditions for claim: clauses 831 and 857(1)

This change makes a minor alteration to the rules in section 65(4) of ICTA (remittance basis) to remove the citizenship condition so that any person who is not ordinarily resident in the United Kingdom is entitled to make a claim.

Section 18(3) of ICTA charges tax on income of a person resident in the United Kingdom which arises from securities (Schedule D Case IV) or possessions (Schedule D Case V) outside the United Kingdom. Section 65 of ICTA contains the rules for calculating the amount of income within Schedule D Cases IV and V that is chargeable to tax. Tax is charged on the amount of the income arising in the tax year unless the person chargeable under section 59 of ICTA meets one of the conditions set out in section 65(4) of ICTA and makes a claim. If one of those conditions is met and a claim is made, tax is charged on the amount of the income received in the United Kingdom. The first condition is that the person is domiciled outside the United Kingdom. The second condition is that the person is both not ordinarily resident and a citizen of the Commonwealth or the Republic of Ireland.

The restriction of the second condition to citizens of certain countries is thought to have little practical effect. Citizens of other countries who are resident, but not ordinarily resident, in the United Kingdom are very unlikely to have their domicile in the United Kingdom. And, if they are not domiciled in the United Kingdom, they will meet the first condition, regardless of where they are ordinarily resident. In addition, restricting the second condition to citizens of certain countries might be argued to involve discrimination.

Therefore, in order to simplify the second condition and to ensure equality of treatment for all citizens who are not ordinarily resident in the United Kingdom, clause 831(4) of the Bill rewrites the second condition without the reference to citizenship of certain countries.

This change affects not only clause 831 but also those provisions that refer to meeting the conditions in that clause. See, in particular, clause 857 and the definition of when the remittance basis applies to a person in clause 878(2). Clause 857 (partners to whom the remittance basis applies) is based on section 112(1A) of ICTA which repeats the conditions found in section 65(4) of ICTA. The definition of when the remittance basis applies to a person is required for various clauses in Part 3 of the Bill relating to overseas property income. See in particular clauses 269(3) and (4), 357 and 358.

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 133: Foreign income: special rules: relevant foreign income charged on remittance basis: amalgamation of rules for Schedule D Cases IV and V: clause 832

This change relates to the amalgamation of the rules which apply to income assessed under the remittance basis where income is taxed under either Schedule D Case IV or Case V.

Section 65(5) of ICTA contains the rules for calculating the quantum of income within Schedule D Cases IV and V that is chargeable to tax under the remittance basis. Currently, there are separate rules for Schedule D Case IV income (see section 65(5)(a) of ICTA) and Schedule D Case V income (see section 65(5)(b) of ICTA).

The rule for Case IV income is as follows:

Tax shall be computed in the case of tax chargeable under Case IV, on the full amount, so far as the same can be computed, of the sums received in the United Kingdom in the year of assessment, without any deduction or abatement

And for Case V income:

Tax shall be computed in the case of tax chargeable under Case V, on the full amount of the actual sums received in the United Kingdom in the year of assessment from remittances payable in the United Kingdom or from property imported, or from money or value arising from property not imported, or from money or value so received on credit or on account in respect of any such remittances, property, money or value brought or to be brought into the United Kingdom, without any deduction or abatement other than is allowed under the provisions of the Income Tax Acts in respect of profits charged under Case I of Schedule D.

These separate rules date from the Income Tax Act of 1803. Schedule D Case IV covers income from securities and Schedule D Case V income from possessions. The Case IV rule is more succinct, possibly because the rule did not need to cover so many eventualities as the rule applying to income from possessions, which covered income from more diverse sources.

The leading case of Thomson v Moyse (1960), 39 TC 291 HL established that the Case IV rule charging to tax "sums received in the United Kingdom" included all the examples of "sums received" listed under the Case V rule. There was some disagreement as to whether the Case V rule was narrower in its scope. This turned on whether or not the list of examples given in the rule was intended as a complete list of possibilities or merely examples of how sums might be received.

Although there was not a complete consensus of views, even those who did not think that the Case V rule was as wide in its scope as the Case IV rule agreed that the examples given for the Case V rule appeared to cover every conceivable way sums might be received in the UK.

In practice, the Inland Revenue treat the scope of the two rules as the same. There have been no cases since Thomson v Moyse where the point has been raised again.

Therefore no distinction between Schedule D Case IV and Case V type income is made in the Bill and the two rules concerning the remittance basis have been merged to cover all Schedule Case IV and Case V income (in the Bill "relevant foreign income" as defined in clause 830). No list of how sums might be received has been included, because of the impracticality of producing a finite list, and the amount of detail required for a list of mere examples.

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 134: Foreign income: special rules: relevant foreign income charged on remittance basis: allowable deductions under section 65(5)(b) of ICTA: clause 832

This change extends the rule in section 65(5)(b) of ICTA allowing deductions from remittances in respect of trade profits to profits of professions or vocations exercised outside the United Kingdom.

Section 65(5) of ICTA contains the rules for calculating the quantum of income within Schedule D Case IV and V that is chargeable to tax under the remittance basis. There are separate rules for Schedule D Case IV (section 65(5)(a) of ICTA) and Schedule D Case V (section 65(5)(b) of ICTA) income.

The rules for Schedule D Case V income are as follows:

Tax shall be computed in the case of tax chargeable under Case V, on the full amount of the actual sums received in the United Kingdom in the year of assessment from remittances payable in the United Kingdom or from property imported, or from money or value arising from property not imported, or from money or value so received on credit or on account in respect of any such remittances, property, money or value brought or to be brought into the United Kingdom, without any deduction or abatement other than is allowed under the provisions of the Income Tax Acts in respect of profits charged under Case I of Schedule D.

The italicised words at the end are interpreted as meaning that where the income remitted is the equivalent of income within Schedule D Case I (i.e. profits arising from a trade), then the same deductions are available. The deductions are not available to all types of income remitted. But clause 832(3) and (4) extend this rule so that the same deductions may be made from remittances of income in respect of professions or vocations exercised outside the United Kingdom as are made from income in respect of professions or vocations exercised in the United Kingdom.