House of Commons - Explanatory Note
Income Tax (Trading and Other Income) Bill - continued          House of Commons

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

Change 152: Intellectual property receipts which are earned income for the purposes of the Income Tax Acts: Schedule 1 (section 833 of ICTA)

This change concerns certain capital receipts from intellectual property which fall within the definition of "earned income" for the purposes of the Income Tax Acts.

Section 529(1) of ICTA provides that "income from patent rights" arising to an individual is in certain circumstances to be treated as earned income. The circumstances are where the patent was granted for an invention devised by the individual, whether alone or jointly. If any part of the patent rights has previously belonged to someone else, only the part of the income which is not attributable to the rights owned by the other person counts as earned income (section 529(2) of ICTA).

There is no definition of "income from patent rights" in Chapter 1 of Part 13 of ICTA. Section 533(1) of ICTA defines "patent rights" as the right to do or authorise the doing of anything which would, but for that right, be an infringement of a patent. The section also contains a definition of "income from patents" covering:

  • any royalty or other sum paid in respect of the user of a patent;

  • any amount on which tax is payable under section 524 (taxation of receipts from sale of patent rights) or 525 (taxation of such receipts on death, winding up or partnership change) of ICTA; and

  • any amount on which tax is payable under section 472(5) of or paragraph 100 to Schedule 3 to CAA 2001 (balancing charges).

In practice, all the kinds of income mentioned in this definition of "income from patents" are treated as if they were "income from patent rights" for the purposes of section 529(1) of ICTA. It is not thought that there is any other kind of income which is covered by the reference in that section to "income from patent rights".

It benefits taxpayers for the amounts mentioned in the definition of "income from patents" to be treated as earned income for the purposes of the Income Tax Acts.

Earned income is excluded from the rule in section 282A of ICTA that, in a case where the property from which income arises is jointly owned by a husband and wife, it is to be treated as income to which they are entitled in equal shares.

Income treated as earned income by virtue of section 529 of ICTA also falls within the definitions of "relevant earnings" which apply for the purposes of Chapters 3 (retirement annuities) and 4 (personal pension schemes) of Part 14 of that Act (see sections 623 and 644 respectively).

The amendment to section 833 of ICTA in Schedule 1 to this Bill rewrites section 529 of ICTA as subsections (5B) to (5E) of section 833 of that Act. These subsections form part of the main definition of "earned income" for the purposes of the Income Tax Acts.

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 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).

So section 833 of ICTA, as amended, confirms that the kinds of income referred to in the definition of "income from patents" in section 533(1) of ICTA are all to be treated as "earned income" for the purposes of the Income Tax Acts.

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 153: Deduction for employers' national insurance contributions paid by an employee: Schedule 1

This change gives a deduction as part of an employee's travel expenses for national insurance contributions paid in respect of a person employed by the employee.

Section 617(3) of ICTA contains a general prohibition on the deduction for tax purposes of any social security contribution. But subsection (4) sets out certain exceptions to the general prohibition. One of the exceptions concerns a deduction from taxable earnings for employers' national insurance contributions paid by an employee.

Before section 617 of ICTA was amended by ITEPA the exception was expressed in terms of a deduction available under section 198 of ICTA. That section covered most of the expenses for which an employee could have a deduction. In ITEPA the rules for expenses were split between the "general rule" in section 336 and the rule for "travel expenses" in sections 337 to 342.

The consequential amendment of section 617 of ICTA by paragraph 87(3) of Schedule 6 to ITEPA allows a deduction for employers' national insurance contributions only if they are within the general rule in section 336 of ITEPA. It is possible for an employee to incur travel expenses in the form of an employee's wages (for instance, those of a chauffeur). In that case, a deduction should be available for employers' national insurance contributions under sections 337 to 342 of ICTA.

This Bill moves the employment income part of the rule in section 617 of ICTA into ITEPA, where it becomes section 360A. Subsection (2) of the new section makes it clear that a deduction may be made for employers' national insurance contributions in accordance with the general rule in section 336 of ITEPA or in accordance with the rules for travel expenses in sections 337 to 342 of ITEPA. This restores the law to what it was before the ITEPA amendment to section 617 of ICTA.

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 154: Certain pension income from the Republic of Ireland: basis of calculation: Schedule 1(sections 575, 613, 631 and 635 of ITEPA)

This gives a 10% deduction in calculating the amount of certain pension income arising in the Republic of Ireland regardless of whether it is the income of a person who could make a claim for the remittance basis.

Section 68 of ICTA provides the basis for calculating the amount of income chargeable under Schedule D Cases IV and V where that income arises in the Republic of Ireland. It provides rules which are in part equivalent to those provided by section 65 of ICTA where such income arises in any other country outside the United Kingdom. The basis provided by section 68 of ICTA (disregarding some obsolete material on averaging) is the amount of income arising in the tax year. Section 68 of ICTA does not include an equivalent of the remittance basis, which is made available by section 65 of ICTA to those who fall within the terms of section 65(4) of ICTA.

Sections 65 and 68 of ICTA are applied by sections 575, 613, 631 and 635 of ITEPA to the pension income charged as a result of those sections. Section 68(5) of ICTA provides that, in calculating the amount of any income which arises in the Republic of Ireland from a pension, a deduction of 10% of the amount of the pension income may be allowed. This is equivalent to the deduction provided by section 65(2) of ICTA for other foreign pension income charged on the arising basis. However, section 68(5) of ICTA adds a condition which denies the deduction where the pension income is "the income of a person falling within section 65(4)", that is a person who has claimed the remittance basis for his non-Irish income.

In practice, the Inland Revenue do not apply that condition. Accordingly, in the amendments made by Schedule 1 to the Bill to the provisions in sections 575, 613, 631 and 635 of ITEPA that contain the basis for the calculation of the pension income charged under that Act as a result of those sections, no distinction is drawn between income charged on the basis of the amount arising in the Republic of Ireland and income charged on the basis of the amount arising in any other country outside the United Kingdom. The 10% deduction is made a part of the basis of calculation for all the 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 155: Employment-related annuities: taxable pension income: annuities arising in the Republic of Ireland: Schedule 1 (section 613 of ITEPA 2003)

This ensures that 10% can be deducted when calculating the taxable amount of certain annuities arising in the Republic of Ireland.

Section 613(2) of ITEPA applies the rules applicable to income within Schedule D Case V to calculate the amount chargeable as taxable pension income in respect of foreign annuities within Chapter 10 of Part 9 of that Act. Section 613(3) of ITEPA lists relevant rules, and includes both sections 65 and 68 of ICTA.

The 10% deduction for pensions provided by section 65(2) of ICTA was extended by section 613(4) of ITEPA to annuities within Chapter 10 of Part 9 of ITEPA. (The text of the note explaining that change in the law is given below for ease of reference.)

The deduction provided by section 65(2) of ICTA does not extend to pensions arising in the Republic of Ireland. Section 68 of ICTA disapplies section 65 of ICTA for all income arising in the Republic of Ireland which is chargeable under Schedule D Case IV or V. Section 68 of ICTA provides calculation rules for the taxable amount of such income, although the differences from those in section 65 of ICTA are in practice limited to the non-availability of the remittance basis set out in section 65(4) to (9) of ICTA. Section 68(5) of ICTA provides a deduction from pensions which is equivalent to that provided by section 65(2) of ICTA. But this does not extend to annuities, even where they are in the nature of pensions. The need to extend the benefit of section 68(5) of ICTA to annuities arising in the Republic of Ireland was overlooked in drafting section 613(4) of ITEPA.

The amendments of section 613 of ITEPA in Part 2 of Schedule 1 to the Bill replace the references to Schedule D Case V and to provisions in ICTA, all of which are repealed by Schedule 3 of the Bill (for income tax purposes only, where appropriate). In doing so, the amendments extend the benefit of the 10% deduction provided by section 68(5) of ICTA to annuities arising in the Republic of Ireland which are within Chapter 10 of Part 9 of ITEPA.

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

ITEPA 2003: Explanatory Notes: Annex 1:

Change 138: Other employment-related annuities: income chargeable: foreign annuities: section 613

This ensures that 10% can be deducted when calculating what amount of certain foreign annuities is to be taxed and also that retrospective payments of these annuities can be spread out over previous tax years when calculating tax liability.

Sections 65(2) and 585(2) of ICTA both concern pensions taxable under Schedule D, Case V. Schedule D, Case V taxes foreign income and so most pensions arising outside the United Kingdom are taxed under it.

Under section 65(2) of ICTA, the amount of the pension which is taxed under Schedule D, Case V is reduced by 10%.

Section 585(2) of ICTA concerns any pension (or increase in a pension) taxed under Schedule D, Case V which is granted retrospectively (i.e. granted for a period before the time of the grant). The pension (or increase) is treated as arising in the period for which it is granted, not at the time when it is actually granted. This may allow the pensioner's liability to tax on the retrospective payment to be spread out over more than one tax year.

Section 65(2) and section 585(2) both refer only to pensions, not to annuities. However, certain kinds of annuities taxed under Schedule D are in the nature of pensions. In cases where annuities like these arise outside the United Kingdom (and so are also taxed under Case V), the practice of the Inland Revenue is to allow sections 65(2) and 585(2) to be applied.

The following provisions of Part 9 of the Act (pension income) provide for tax to be charged on those Schedule D annuities which are in the nature of pensions-

????????     section 610: annuities under sponsored superannuation schemes; and ????????     section 611: annuities in recognition of another person's services.

In cases where these annuities arise outside the United Kingdom, the amount which is taxed is determined in accordance with section 613 of the Act. This section applies certain provisions of ICTA, including sections 65 and 585 (see section 613(1)(a) and (c)). Section 613(4) makes clear that when sections 65 and 585 apply for these purposes, the references in sections 65(2) and 585(2) to pensions are to be read as references to these kinds of annuity.

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

Change 156: Post-cessation receipts: Part 3 of Schedule 2

This change removes the charge on some post-cessation receipts following the cessation of a trade etc before 6 April 2000.

As a result, section 109 of ICTA (which applies in the case of a charge under section 104, but not section 103, of ICTA) need not be rewritten.

Section 104 of ICTA applies where profits have been calculated on a conventional basis (that is, otherwise than by reference to earnings). The section charges tax in two circumstances. First, if there are post-cessation receipts ("sums arising from the carrying on of the trade .. before the discontinuance .. not brought to account .. before the discontinuance" - section 104(2)). Second, if there are sums received after a change of accounting basis (section 104(4)), being "sums arising from the carrying on of the trade .. before the change .. not brought to account .. for any period" - section 104(5).

Post-cessation receipts

The charge on post-cessation receipts is restricted to sums that are not "otherwise chargeable to tax" (section 104(2) of ICTA). So, if they are chargeable under section 103 of ICTA they are not charged under section 104 of ICTA. The effect of this restriction is that the only post-cessation receipts charged by section 104 of ICTA (under subsection (2)) are those excluded from section 103 of ICTA by section 103(2)(b). This is where the profits are calculated on a "conventional" basis and the receipt would have been included in profits if those profits had been calculated by reference to earnings.

Change of basis

The second charge under section 104 of ICTA, under subsection (4) on a change of accounting basis, was replaced by section 44(3) of FA 1998 but only for changes of accounting basis on or after 6 April 1999. The replacement charge was under Schedule 6 to FA 1998, later replaced by Schedule 22 to FA 2002. The two sets of rules tackled a change of basis in different ways: the charge under section 104 of ICTA was triggered by the receipt of a sum (which may be some time after the change of accounting basis); the replacement charges arise on the change of accounting basis.

So section 104 of ICTA may theoretically apply, despite its repeal, to a sum which arose before a change of accounting basis before 6 April 1999 but which is received in 2005-06 or later.

Section 109 of ICTA was introduced at the same time as the charge under section 104 to give a measure of relief for cash basis people who were (at the time - in 1968) within ten years of retirement.

Who is chargeable?

There are three possibilities of a charge under section 104 of ICTA:

    (a) The recipient ceased trading (calculating profits on a conventional basis) on or before 5 April 2000 (the last date possible, unless the recipient is a barrister) and receives a sum in 2005-06 or later.

    (b) The recipient ceased trading (calculating profits on a conventional basis) after 5 April 2000 and receives a sum in 2005-06 or later. Such a person must be a barrister in the early years of practice (section 43 of FA 1998) because that is the only person for whom the earnings basis is not obligatory under section 42 of FA 1998.

    (c) The recipient had a change of accounting basis before 6 April 1999 and receives a sum in 2005-06 or later.

The approach of the Bill

This transitional provision changes the spreading relief in section 109 of ICTA into an exemption. But the exemption, like the relief in section 109 of ICTA, applies only to individuals born before 6 April 1917. For those individuals the effect is as follows:

The charge for individuals within paragraph (a) is removed.

An individual within paragraph (b) cannot both have been carrying on the profession on 18 March 1968 (as required by section 109(1)(a) of ICTA) and be in the early years of practice on cessation after 5 April 2000. So the relief in section 109 of ICTA does not apply.

Section 104 of ICTA no longer applies to pre-1999 changes of accounting basis for individuals born before 6 April 1917. So the charge for individuals within paragraph (c) is removed.

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 157: Gains from contracts for life insurance etc: time limit for policy holders previously not resident in the United Kingdom to vary policy or contract so it is not a personal portfolio bond: Part 7 of Schedule 2

This change gives statutory effect to Part 3 of ESC B53.

Regulation 3 of the Personal Portfolio Bonds (Tax) Regulations 1999 SI 1999/1029 contains exceptions from the definition of "personal portfolio bond" for certain pre-17 March 1998 policies or contracts. One exception applies to a policy or contract which is varied before the end of the first insurance year which begins on or after 6 April 1999 to restrict the kinds of property or index which may be selected under its terms.

A further refinement applies if the policy holder was not resident in the United Kingdom on 17 March 1998, but later becomes UK resident. To prevent the policy or contract from being a personal portfolio bond, the policy holder may vary it before the later of the end of the first insurance year which begins on or after 6 April 1999, and the end of the first insurance year which begins after the time when the policy holder first becomes resident in the United Kingdom after 17 March 1998.

An individual who becomes UK resident during a tax year is treated as being resident for the whole of that tax year. So where the insurance year in relation to a policy or contract begins shortly after the beginning of a tax year, and the policy holder arrives in the United Kingdom close to the end of the tax year, the period for variation of the policy or contract may end shortly after the policy holder's arrival in the United Kingdom.

Part 3 of the concession moderates the effect of this rule in a case where a policy holder arrives in the United Kingdom after 17 March 1998 to take up permanent residence, or to stay for at least two years. In that case the insurance year within which the policy or contract may be varied is the first insurance year to begin on or after the date the policy holder first arrives in the United Kingdom to take up permanent residence or to stay for at least two years.

Part 7 of Schedule 2 to this Bill gives statutory effect to this part of the concession. See the paragraph headed "policy holders becoming permanently UK resident after 17th March 1998".

It applies where a policy holder was not UK resident on 17 March 1998, but becomes UK resident after that time. The policy holder must, on the date of his or her arrival by virtue of which he or she becomes UK resident, have the intention to take up permanent residence, or to stay for at least two years.

Where those conditions are met the policy or contract may be varied to take it outside the definition of "personal portfolio bond" before the later of the end of the first insurance year beginning on or after 6 April 1999, and the end of the first insurance year beginning on or after the date of his arrival by virtue of which he became UK resident.

Part 3 of ESC B53 does not say in terms that no gain arises under the Personal Portfolio Bonds (Tax) Regulations 1999 in relation to any insurance year ending after the date on which the policy holder became UK resident, but before the insurance year in which the variation is made. This is how the ESC is operated in practice, and the paragraph mentioned above spells this out.

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 158: Redundant material - Table 1

This change concerns the omission of redundant material.

The omission of provisions that are redundant in whole or in part is an integral part of the rewrite process and, strictly speaking, does not involve any change in the substantive law.

But for ease of reference those omissions worthy of specific explanation are listed in the table below. The table sets out where those explanations can be found.

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

Redundant provisionTopicSee commentary on clause etc
Industry Act 1972 etcIndustrial development grants105
Industrial Devpt. Act 1982 Regional development grants105
ICTA s.18(3) Case III(a) (part)Interest - "payable out of UK"369
ICTA s.18(3) Case III(a) (part)Interest - "of money, yearly, etc"369
ICTA s.18(3) Case III(a) (part)Annual payments - omission of examples of annual payments683
ICTA s.18(3) Case III(a) (part)Annual payments - omission of "any annuity"683
ICTA s.18(3) Case III(c)Interest - government securities369
ICTA s.18(6)Interest and royalties exemption758
ICTA s.24(6)(a)Definition of "lease"317
ICTA s.40(1),(2),(3),(4),(4A)Apportionment of sale proceeds320
ICTA s.53(2) Farming - body of persons9
ICTA s.56(2) (part)Transactions in deposits - person liable554
ICTA s.56(3)(a)Transactions in depositsChapter 11 of Part 4
ICTA s.56A(3)(a)Transactions in deposits - person liable554
ICTA s.59(2)Person liable - "concerns"8
ICTA s.60(4)Death of taxpayerSchedule 1
ICTA s.64 (part)Annual payments - "without any deduction"684
ICTA s.64 (part)Interest, etc - "without any deduction"370
ICTA s.64 (part)Purchased life annuities - "without any deduction"424
ICTA s.65(1)Foreign income - whether income received in United KingdomPart 8 (overview)
ICTA s.68(3) (part)Foreign income - Irish trades and pensions7
ICTA s.71Computation of income tax where no profits in year of assessmentSchedule 1
ICTA s.74(1)(b)Private expensesSchedule 1
ICTA s.74(1)(c)Private expenses - rent34
ICTA s.74(1)(d)Trade tools68
ICTA s.74(1)(g)Improvements33
ICTA s.74(1)(h)Notional interestSchedule 1
ICTA s.74(1)(k)Average lossesSchedule 1
ICTA s.74(1)(m)AnnuitiesSchedule 1
ICTA s.74(1)(o)MirasSchedule 1
ICTA s.82Interest to non-residentsSchedule 1
ICTA s.86(5)(d)Seconded employeesSchedule 1
ICTA s.92Regional development grantsSchedule 1
ICTA s.96(7)(c)Averaging - stock relief221
ICTA s.97(4)Treasury orders767
ICTA s.105(1) (part), (3)Post-cessation receipts - capital allowances255
ICTA s.113(6)SuccessionsSchedule 1
ICTA s.119(2)Mineral rents paid in kind335
ICTA s.122(4)Income tax deducted from mineral rentsSchedule 1
ICTA s.251B(2)Share incentive plans - drop "(except to the extent that it represents a foreign cash dividend)"393
ICTA s.232(1) (part)Tax credits - non-residents - "having made a claim in that behalf"397
ICTA s.325 (part)NSB ordinary account interest691
ICTA s.326(1) (part)SAYE schemes - "other sum"702
ICTA s.347A(2)(d) - cross reference to section 125(3)(c)Annual payments - payments to which 347A applies729
ICTA s.347A(5) (part)Annual payments - deductions - reference to section 355 of ITEPASchedule 1
ICTA s.349(7) (part)Interest and royalties exemption757
ICTA s.443Insurance policies paid in kindSchedule 1
ICTA s.491(9),(11)Mutual concerns - drop examples104
ICTA s.524(10)Patent rights - election by non-residents591
ICTA s.526(2) (part)Relief for expenses: patent income600
ICTA s.531(8) (part)Disposals of know-how583
ICTA s.533(4) (part)Patent rights - sums paid for Crown use etc.599
ICTA s.540(1)(b) (part)Gains on contracts for life insurance policies etc 485
ICTA s.553A(3) (part)Gains on contracts for life insurance policies etc531
ICTA s.554Borrowing on life policiesSchedule 1
ICTA s.580B(4)Health and employment insurance - terms of a policy740
ICTA s.585(3) (part), (4), (5)Delayed remittances - application of relief835
ICTA s.586Disallowance war risk premiums Schedule 1
ICTA s.587Disallowance war injury paymentsSchedule 1
ICTA s.656(2)(a)Purchased life annuities718
ICTA s.660C(1A)(c), (d) and (e)Settlements619
ICTA s.695(6)Income from estates678
ICTA s.698(1) (part)Income from estates664
ICTA s.699(6)(b)Income from estates669
ICTA s.699A(1)(b)Income from estates680
ICTA s.701(6) and (7)Income from estates666
ICTA s.817Deductions not allowedSchedule 1
ICTA s.832(1) Definition of farming876
ICTA Sch. 5 paras. 7 and 9(5)Herd basis - working animal rule112
ICTA Sch. 5 para. 3(4)(b)Herd basis - replacement of animals116
ICTA Sch 5AA par. 4(1)Guaranteed returns on futures and options - disposal, etc to include more than one562
ICTA Sch. 15B para. 7(3)(a)Venture capital trusts "(including a capital dividend)"709
ICTA Sch.30 para. 5Schedule A transitionalSchedule 1
ICTA Sch.30 para. 18Stock relief transitionalSchedule 1
FA 1996 Sch.13 para. 3(2) (part)Deep gain securities "disregarding"435
FA 1996 Sch. 13 para. 4(4)Deep gain securities "Whether by the exercise"438
FA 1996 Sch. 13 para 9A(2)(b)"connected with the company"456
FA 1996 Sch. 13 para 14D(6) (part)"otherwise giving effect"447
FA 2000 Sch. 23 para. 4Telecommunication rights - group accounts147
FA 2002 Sch.22 para. 13(3) and (4)Adjustment income: partnerships238
FA 2004 s. 97(4)Interest and royalties exemption. Effect of Treasury order767
SI 1997/1029 para. 5(2B)(c)Personal portfolio bonds - calculation of gain524
 
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Prepared: 3 December 2004