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Income Tax Bill


 

These notes refer to the Income Tax Bill as introduced in the House of Commons on 7th December 2006 [Bill 14]

INCOME TAX BILL


EXPLANATORY NOTES

1.     These explanatory notes relate to the Income Tax Bill as introduced in the House of Commons on 7 December 2006. They have been prepared by the Tax Law Rewrite project at HMRC in order to assist readers of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of its contents. So if a clause or part of a clause does not seem to require explanation or comment, none is given.

3.     The commentary on each clause indicates the main origin or origins of the clause. A full statement of the origins of each clause is contained in the Bill's Table of Origins.

4.     At the end of the commentary, there is supporting material in two annexes:

  • -Annex 1 contains details of the minor changes in the law made by the Bill;

  • -Annex 2 contains lists of:

    -     the Extra-Statutory Concessions to which the Bill gives effect,

     -     the minor changes made by the Bill which involve giving statutory effect to principles derived from case law, and

  • -     provisions not included in the Bill on the grounds of redundancy.

Bill 14—EN (I)     54/2

SUMMARY

5.     The main purpose of the Income Tax Bill is to rewrite the income tax legislation that has not so far been rewritten so as to make it clearer and easier to use.

6.     The Bill covers:

  • the basic provisions about the charge to income tax, income tax rates, the calculation of income tax liability and personal reliefs;

  • various specific reliefs, including relief for losses, the enterprise investment scheme, venture capital trusts, community investment tax relief, interest paid, gift aid and gifts of assets to charities;

  • specific rules about settlements and trustees, manufactured payments and repos, tax avoidance and deduction of tax at source; and

  • general income tax definitions.

7.     The Bill does not generally change the meaning of the law when rewriting it. The minor changes which it does make are within the remit of the Tax Law Rewrite project and the Parliamentary process for the Bill. In the main, such minor changes are intended to clarify existing provisions, make them consistent or bring the law into line with established practice.

BACKGROUND

The Tax Law Rewrite project

8.     In December 1995 the Inland Revenue presented a report to Parliament on the scope for simplifying the United Kingdom tax system (The Path to Tax Simplification). The main recommendation was that United Kingdom direct tax legislation should be rewritten in clearer, simpler language.

9.     This recommendation was warmly welcomed, both in Parliament and in the tax community. In his November 1996 Budget speech the then Chancellor of the Exchequer (the Rt Hon Kenneth Clarke QC MP) announced that the Inland Revenue would propose detailed arrangements for a major project to rewrite direct tax legislation in plainer language.

10.     The project team was given the task of rewriting the United Kingdom's existing primary direct tax legislation. The aim is that the rewritten legislation should use simpler language and structure than previous tax legislation. The members of the project are drawn from different backgrounds. They include HMRC employees, private sector tax professionals and parliamentary counsel including (as head of the drafting team) a senior member of the Parliamentary Counsel Office.

Steering Committee

11.     The work of the project is overseen by a Steering Committee, chaired by the Rt Hon the Lord Newton of Braintree OBE DL (who took over from the Rt Hon the Lord Howe of Aberavon CH QC at the beginning of 2006). The membership of the Steering Committee as at 31st October 2006 was:

    The Rt Hon the Lord Newton of Braintree OBE DL (Chairman)

    Dr John Avery Jones CBE

    Adam Broke

    Baroness Cohen of Pimlico

    Ian Dewar

    Mike Eland CB

    The Rt Hon Michael Jack MP

    Eric Joyce MP

    Rachel Karp

    David Swaine

    Professor John Tiley CBE

Consultative Committee

12.     The work is also reviewed by a Consultative Committee, representing the accountancy and legal professions and the interests of taxpayers. The membership of the Consultative Committee as at 31st October 2006 was:

Mark NellthorpChairman
Derek AllenInstitute of Chartered Accountants of Scotland
Brian Atkinson100 Group
Adam BrokeSpecial Committee of Tax Law Consultative Bodies
Colin CampbellConfederation of British Industry
Taha DharsiLondon Chamber of Commerce and Industry
Mary FraserAssociation of Chartered Certified Accountants
Malcolm Gammie CBE QCThe Law Society of England and Wales
Julian GhoshRevenue Bar Association
Keith GordonChartered Institute of Taxation
Terry HopesInstitute of Chartered Accountants in England and Wales
Isobel d'InvernoLaw Society of Scotland
Simon McKieInstitute of Chartered Accountants in England and Wales
Francis SandisonThe Law Society of England and Wales
Simon SweetmanFederation of Small Businesses
Michael TemplemanInstitute of Directors
Wreford VogeChartered Institute of Taxation
Professor David WilliamsOffice of the Social Security Commissioners
Mervyn WoodsConfederation of British Industry

Consultation

13.     The work produced by the project has been subject to public consultation. This has allowed all interested parties an opportunity to comment on draft clauses.

14.     This consultation took the form of a series of papers which publish clauses in draft. There were 30 of these, published between April 2004 and October 2005. A draft Bill was published for consultation in February 2006. And two further papers on provisions in FA 2006 were published in July 2006. All these documents are available on the Tax Law Rewrite website.

15.     In addition to formal consultation, the project presents its papers to the Committees to inform the Committees and seek their views on particular issues. The project has also consulted on an informal basis with specialists in particular subject areas. For example, there have been regular meetings of the VCS (venture capital schemes) rewrite group during the development of the draft EIS and VCT clauses. This is a small group of practitioners (who represent a number of professional bodies), policy and technical specialists from HMRC and members of the project.

16.     Those who responded to one or more of the papers, or to the draft Bill, include:

    Anne Wilson

    Anthony Davis

    Association of Charitable Foundations

    BDO Stoy Hayward LLP

    Boodle Hatfield

    British Bankers' Association

    Building Societies Association

    Chartered Institute of Taxation

    Charity Commission

    Charity Law Association

    Charles King-Farlow

    Charles Pocock

    Christine Harpin

    City of Westminster & Holborn Law Society

    Colin Campbell

    Confederation of British Industry

    David F Williams

    Deloitte & Touche LLP

    Department for Constitutional Affairs

    Department of Finance and Personnel for Northern Ireland

    Department for Social Development in Northern Ireland

    Ernst & Young LLP

    Euroclear

    Francis Sandison

    Freshfields Bruckhaus Deringer

    George Harrison

    Helen Billing

    Horwath Clark Whitehill LLP

    Investment Management Association

    Institute of Chartered Accountants in England and Wales

    Institute of Chartered Accountants of Scotland

    James Kessler QC

    John Avery Jones

    John Clark

    John Jeffrey-Cook

    Ken Moody

    KPMG LLP

    Law Society of England and Wales

    London Investment Banking Association

    London Society of Chartered Accountants

    Lovells

    Low Incomes Tax Reform Group

    Mark Whitehouse

    Mazars LLP

    Office of the Legislative Counsel, Northern Ireland

    PricewaterhouseCoopers LLP

    Sayer Vincent

    Society of Trust and Estate Practitioners

    Terry Hopes

    Wedlake Bell

    Wellcome Trust

Note: this list excludes those who asked that their responses be treated in confidence.

INCOME TAX BILL

17.     The Bill:

  • applies for income tax, continuing the general approach of previous rewrite Bills of separating income tax and corporation tax legislation;

  • contains the basic provisions of income tax, such as the charge to income tax, tax rates, how a person's income tax liability is calculated, personal reliefs, and general definitions which apply for income tax purposes;

  • deals with various specific reliefs, including reliefs for losses, the enterprise investment scheme, venture capital trusts, community investment tax relief, interest paid, gift aid and gifts of assets to charities;

  • broadens the picture by filling in the rest of the income tax picture, in particular in relation to settlements and trustees, avoidance and deduction of tax at source; and

  • will take the place of ICTA as the main Act about income tax, complemented by ITEPA and ITTOIA (which dealt with the charges to income tax on employment, pension, trading and other income).

18.     The Bill has 968 clauses and 4 Schedules.

19.     The clauses are arranged as follows:

    Part 1: Overview

    Part 2: Basic provisions

    Part 3: Personal reliefs

    Part 4: Loss relief

    Part 5: Enterprise investment scheme

    Part 6: Venture capital trusts

    Part 7: Community investment tax relief

    Part 8: Other reliefs

    Part 9: Special rules about settlements and trustees

    Part 10: Special rules about charitable trusts etc

    Part 11: Manufactured payments and repos

    Part 12: Tax avoidance

    Part 13: Income tax liability: miscellaneous rules

    Part 14: Deduction of income tax at source

    Part 15: Income Tax Acts definitions etc

    Part 16: Definitions for purposes of Act and final provisions

20.     The Schedules are:

    Schedule 1: Minor and consequential amendments

    Schedule 2: Transitionals and savings

    Schedule 3: Repeals and revocations

    Schedule 4: Index of defined expressions

21.     Tables of Origins and Destinations have also been prepared. The Table of Destinations shows the destination not only of repealed provisions but of all provisions rewritten in the Bill.

Glossary

22.     The commentary uses a number of abbreviations. They are listed below.

    CAA     the Capital Allowances Act 2001

    CAA 1990     the Capital Allowances Act 1990 (and similarly CAA 1968)

    CRCA     the Commissioners for Revenue and Customs Act 2005

    ESC     Extra-statutory concession

    HMRC     Her Majesty's Revenue and Customs

    FA 1989     Finance Act 1989 (and similarly for other Finance Acts)

    F(No 2)A     Finance (No. 2) Act

    FISMA     the Financial Services and Markets Act 2000

    ICTA      the Income and Corporation Taxes Act 1988

    ICTA 1970      the Income and Corporation Taxes Act 1970

    IHTA     the Inheritance Tax Act 1984

    ITEPA      the Income Tax (Earnings and Pensions) Act 2003

    ITTOIA     the Income Tax (Trading and Other Income) Act 2005

    MOD     manufactured overseas dividend

    PAYE     Pay As You Earn

    R&D     research and development

    TCGA      the Taxation of Chargeable Gains Act 1992

    TMA      the Taxes Management Act 1970

    VAT      value added tax

COMMENTARY ON CLAUSES

Part 1: Overview

Clause 1: Overview of Income Tax Acts

23.     This clause provides an overview of the location of the main legislation dealing with income tax. It is new.

Clause 2: Overview of Act

24.     This clause provides an overview of the Bill. It is new.

Part 2: Basic provisions

Overview

25.     This Part contains basic provisions about the charge to income tax.

Chapter 1: Charges to income tax

Overview

26.     This Chapter sets out the provisions of the Income Tax Acts where the main charges to income tax are to be found and contains basic rules about the annual nature of income tax.

Clause 3: Overview of charges to income tax

27.     This clause is based on section 1(1) of ICTA.

28.     Subsection (1) lists the principal provisions that contain charges to income tax, which are all in ITEPA and ITTOIA.

29.     Subsection (2) makes it clear that there are also charges to income tax in other legislation. The main ones are shown, but the list is not exhaustive.

Clause 4: Income tax an annual tax

30.     This clause is based on sections 1(2), 2(2) and 832(1) of ICTA.

31.     Section 2(1) of ICTA, which provides for the due proportion of income tax to be charged for every fractional part of one pound, has not been rewritten as it is otiose.

Clause 5: Income tax and companies

32.     This clause provides that income of companies that is liable to corporation tax is not charged to income tax. It is based on sections 6(2) and 11(1) of ICTA.

33.     In brief, a company's income (other than income arising to it in a fiduciary or representative capacity) is within the charge to corporation tax if:

  • the company is UK resident; or

  • the company is non-UK resident and:

    (a)     the income is trading income arising through or from a permanent establishment in the United Kingdom of the company; or

    (b)     the income arises from property or rights used by, or held by or for, the permanent establishment.

See the commentary on clause 768 in relation to the residence of companies.

Chapter 2: Rates at which income tax is charged

Overview

34.     This Chapter sets out all the rates of income tax and provides rules about the rates of tax at which income is charged. It is based on sections 1, 1A, 1B and 686(1A) of ICTA.

35.     Two main principles are at work:

  • first, the rate of tax depends on the type of income concerned; and

  • second, income may be subject to progressively higher rates of tax depending on the overall amount of income of the person concerned.

36.     The second principle applies only to individuals (subject to a special rule about the first £1,000 of trustees' trust rate income in Chapter 6 of Part 9 of this Bill).

Clause 6: The starting rate, basic rate and higher rate

37.     This clause sets out the main rates at which income tax is charged. It is based on section 1(2) of ICTA.

38.     With some exceptions, notably savings and dividend income (see clauses 12 and 13), any income of an individual is taxed at either the starting rate, the basic rate or the higher rate, depending on the level of the individual's income.

39.     Subsection (2) specifies that the main rates are determined each year by Parliament.

40.     Other rates at which income tax is charged do not have to be specified by Parliament annually and are instead set out in the clauses signposted by subsection (3).

Clause 7: The savings rate

41.     This clause sets out the savings rate of income tax. It is based on section 1A(1B) of ICTA.

42.     The "savings rate" is a new name for what is called "the lower rate" in the source legislation.

Clause 8: The dividend ordinary rate and dividend upper rate

43.     This clause sets out these two rates of income tax that apply to dividend income. It is based on section 1B(2) of ICTA.

Clause 9: The trust rate and dividend trust rate

44.     This clause sets out the two rates of income tax that apply, in particular, to accumulation or discretionary income of trustees. It is based on section 686(1A) of ICTA.

45.     The "trust rate" is a new name for what is called "the rate applicable to trusts" in the source legislation.

Clause 10: Income charged at the starting, basic and higher rates: individuals

46.     This clause sets out that the three main rates of income tax charged on the income of individuals are charged in three slices. It is based on section 1(2) of ICTA.

47.     The first slice (subsection (1)) is income up to the starting rate limit - the starting rate band. The second slice (subsection (2)) is income between the starting rate limit and basic rate limit - the basic rate band. The third slice (subsection (3)) is income above the basic rate limit - the higher rate band.

48.     Subsection (4) is a signpost to provisions that apply different rates of tax to certain types of income falling within each band. Income has to be placed in order so that the rates which would otherwise apply can be established. The rules on how this is to be done are in clause 16.

Clause 11: Income charged at the basic rate: other persons

49.     This clause charges tax at the basic rate on income of persons other than individuals. It is based on section 1(2) of ICTA.

50.     Of the three main rates, only the basic rate applies. But other rates apply to specific sorts of income. In particular, savings income is charged at the savings rate and dividend income at the dividend ordinary rate. And income of discretionary and accumulation settlements is charged at the trust rates. There is a signpost to these exceptions in subsection (2).

Clause 12: Income charged at the savings rate

51.     This clause charges savings income at the savings rate to the extent that it would otherwise fall within the basic rate band. It is based on section 1A(1) of ICTA.

52.     There are a number of exceptions that provide that certain savings income is charged differently, usually at the trust rate. These are signposted in subsection (2).

Clause 13: Income charged at the dividend ordinary and dividend upper rates: individuals

53.     This clause applies either the dividend ordinary rate or the dividend upper rate to dividend income of individuals. It is based on sections 1A(1), (1AA), (1A) and (4) and 1B(1) of ICTA.

54.     To the extent that the dividend income (other than dividend income charged on the remittance basis) would otherwise fall within the starting rate or basic rate bands, subsection (1) provides that the dividend ordinary rate applies instead.

55.     To the extent that the dividend income would otherwise fall within the higher rate band, subsection (2) provides that the dividend upper rate applies instead.

56.     Subsection (3) provides that subsections (1) and (2) are subject to any provisions to the contrary.

57.     "Dividend income" includes income chargeable under Chapter 5 or 6 of Part 4 of ITTOIA (see the definition in clause 19). See Change 1 in Annex 1.

Clause 14: Income charged at the dividend ordinary rate: other persons

58.     This clause applies the dividend ordinary rate to dividend income of persons other than individuals. It is based on section 1A(1), (1A) and (4) of ICTA.

59.     Subsection (1) applies the dividend ordinary rate in place of the basic rate to dividend income (other than dividend income charged on the remittance basis). A number of provisions which override this rule (typically to provide that one of the trust rates applies instead), are signposted by subsection (2).

Clause 15: Income charged at the trust rate and the dividend trust rate

60.     This clause provides a signpost to Chapters 3 to 6 of Part 9, which are about the circumstances in which income tax is charged at the trust rate and the dividend trust rate. It is new.

Clause 16: Savings and dividend income to be treated as highest part of total income

61.     This clause provides the ordering rules that determine at what rate a particular type of income would be charged but for the clauses imposing the savings rate or the dividend rates. It is based on section 1A(5) of ICTA.

62.     Subsection (2) says that the rules apply for all other income tax purposes as well, except in the cases mentioned.

63.     Subsections (3) to (5) contain the ordering rules. In essence, dividend income is the top part of income, savings income the middle part, and other income the lowest part.

64.     Subsection (6) is a signpost to clause 946 which deals with the relationship between the rules in this clause and other rules requiring particular income to be treated as the highest part.

65.     Subsection (7) ensures that dividend income charged on the remittance basis does not count as dividend income for the purposes of this clause.

Clause 17: Repayment: tax paid at basic rate instead of starting or savings rate

66.     This clause allows a repayment claim outside Self Assessment if a person has suffered tax at the basic rate on income received and the person is only liable at the starting rate or the savings rate on that income. It is based on sections 1(6A) and 1A(6A) of ICTA.

Clause 18: Meaning of "savings income"

67.     This clause defines "savings income". It is based on section 1A(1AA), (2), (3) and (4) of ICTA.

68.     The definition includes income on which personal representatives are liable under section 466 of ITTOIA (gains from contracts for life insurance etc), removing an anomaly in the source legislation. See Change 2 in Annex 1.

 
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Prepared: 8 December 2006