House of Commons - Explanatory Note
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Clause 19: Meaning of "dividend income"

69.     This clause defines "dividend income". It is based on section 1A(1AA), (2), (3) and (8) and section 1B(1) and (3) of ICTA.

Clause 20: The starting rate limit and the basic rate limit

70.     This clause set out the starting rate limit and the basic rate limit. It is based on section 1(2) to (3) of ICTA.

71.     The figures used in this Bill are those for 2006-07. They will be updated for 2007-08 by means of an indexation order.

Clause 21: Indexation of the starting rate limit and the basic rate limit

72.     This clause provides for indexation of the starting rate and basic rate limits. It is based on section 1(4) to (6) of ICTA.

73.     Subsections (2) and (3) set out in step form how to compute the limit for a given year by reference to the limit for the previous year and the percentage rise in the retail prices index. The words "unless Parliament otherwise determines" in section 1(4) have been omitted as it is always open to a Finance Bill to disapply this provision, so no express provision to this effect is needed.

74.      Subsection (4) is an administrative provision to reflect the fact that it is usually only known at the time of the Chancellor's Budget speech whether statutory indexation will apply. This leaves insufficient time before the start of the tax year for employers to update their payroll systems. This rule gives employers until the first pay-day after 17 May to make the necessary changes.

75.     Subsection (5) obliges the Treasury to specify the indexed amounts in a statutory instrument which must be made in the tax year before the tax year to which they are to apply.

Chapter 3: Calculation of income tax liability

Overview

76.     This Chapter deals with the calculation of a person's income tax liability for a tax year.

77.     The calculation sets out how the rules about the rates at which income is charged, and provisions about reliefs, allowances, tax reductions etc, are applied to the components of a person's total income to arrive at the person's income tax liability.

78.     The calculation does not deal with amounts of tax suffered (eg under PAYE or by way of deduction of tax at source) as these are set off against a person's liability rather than deducted in arriving at it. See section 59B(1) of TMA.

79.     Nor does it deal with relief given by "discharge or repayment", as here too the relief can operate only once the amount of a person's liability has been determined. Examples of such reliefs include paragraph 6 of Schedule 14 to ICTA (life insurance relief for non-residents) and section 416 of CAA (mineral extraction allowance - expenditure on restoration within 3 years of ceasing to trade).

Clause 22: Overview of Chapter

80.     This clause provides an overview of the Chapter. It is new.

81.     The persons liable to income tax include individuals, trustees, personal representatives, non-UK resident companies, and companies acting in a fiduciary or representative capacity.

82.     But where non-UK resident companies carry on a trade in the United Kingdom through a permanent establishment, they are liable to corporation tax instead of income tax on their chargeable profits. See the commentary on clause 5.

Clause 23: The calculation of income tax liability

83.     This clause sets out the steps to be taken in calculating a taxpayer's liability to income tax for a tax year. It is based on many provisions in the source legislation, in particular section 835 of ICTA.

84.     Step 1 brings together all the amounts of income on which a taxpayer is charged to income tax for the tax year. The sum of these amounts is called "total income", and each of the amounts is a "component" of total income.

85.     In the source legislation there were some contexts in which "total income" was used in a different sense (eg in section 1 of ICTA, where it meant what is defined in Step 2 as "net income"). But in this Bill it is used consistently to denote this first stage result. And the consequential amendments to other legislation in Schedule 1 ensure that it will always be used in this sense elsewhere.

86.     Step 2 deals with those reliefs (other than personal allowances) which are given by deduction from income.

87.     Most of the reliefs listed in clause 24 may be deducted from any type of income. But some may only be deducted from certain components of total income. See clause 25(3).

88.     Step 2, combined with the provisions about the reliefs themselves and the rules in clause 25 about the way in which deductions are made, ensures that the reliefs are allowed in the proper way to arrive at "net income".

89.     It is important that this is done by reference to the components of total income, to pave the way for Step 4.

90.     Step 3 deals with the deduction of the personal allowance and blind person's allowance from the components of net income. This step only affects individuals. The rule that these deductions come last is based on section 835(5) of ICTA.

91.     Again, it is important that this is done by reference to the components of total income, to pave the way for Step 4.

92.     Step 4 applies the rates of tax specified in Chapter 2 (and, where the taxpayer is a trustee, the relevant Chapters of Part 9 of this Bill) to the amounts of the components remaining after Step 3.

93.     Step 5 adds together the amounts of tax on each component.

94.     Step 6 then deducts any tax reductions. These are listed in clause 26. Further rules about how these tax reductions are made are in clauses 27 to 29.

95.     Step 7 then adds on certain other amounts of income tax for which a taxpayer may be liable, as listed in clause 30.

Clause 24: Reliefs deductible at Step 2

96.     This clause lists all the reliefs that may be deducted from components of total income at Step 2 of the calculation. It is based on many provisions in the source legislation.

97.     The clause is arranged to highlight those reliefs which apply only to individuals, and to avoid duplication of references to particular reliefs.

98.     This clause, and others in the Chapter, contains lists of provisions some of which are in this Bill and some which are elsewhere. Such lists are arranged by reference to the order that the provisions appear in this Bill and by reference to the date on which other legislation was enacted.

99.     The entries in the lists are not each given their own sub-paragraph reference. This will reduce the scope for confusion should any amendments need to be made to the lists in future Finance Acts.

100.     One of the reliefs deducted at this step is for annual payments and patent royalties under Chapter 4 of Part 8. See Change 81 in Annex 1 and the overview commentary on Chapter 4 of Part 8.

101.     The opportunity has been taken to clarify the way in which reliefs under sections 446 and 454 of ITTOIA work. See the amendments made to those sections in Schedule 1.

102.     The list of reliefs does not include section 811 of ICTA. That section allows a reduction of a component of income for foreign tax suffered on that income where no credit is available. It has been excluded on the basis that the relief reduces the amount of income from the source (and where appropriate can create or augment a trading loss) before it enters into the calculation in clause 23.

103.     For the same reason, the list does not include relief under section 798C of ICTA which was introduced by FA 2005.

104.     For the rules about what (if anything) may be done with any excess relief over the amount of income from which it can be deducted it is necessary to refer to the particular provisions dealing with the relief concerned. But see also the provisions of clause 25.

Clause 25: Reliefs and allowances deductible at Steps 2 and 3: supplementary

105.     This clause contains rules about the way deductions are made against components of income. It is based on section 835(3), (4) and (5) of ICTA.

106.     The main rule, in subsection (2) is that deductions are allowed in the way that results in the greatest reduction of income tax liability.

107.     This rule means that where a deduction may be set against more than one component of income or there are two or more deductions available, they are allowed in the way that produces the least income tax liability. The order in which deductions that are allowable against a particular component of income are made under Step 2 cannot affect the liability for the tax year concerned. If there is sufficient income then all deductions are allowed in full. If there is insufficient income then unrelieved income is nil. But the order in which they are made can affect the amount of relief that is available to carry forward or back (in the case of reliefs where that is a possibility).

108.     Subsection (3) is a signpost to provisions that modify the rule in subsection (2), in particular in the case of reliefs given only against certain types of income.

109.     Subsections (4) and (5) ensure that a deduction is only given to the extent that there is income to absorb the deduction, taking into account deductions already made.

110.     Some, but not all, of the source provisions contain the rule that income cannot be reduced below nil, but even where not explicitly mentioned, it has always been the accepted practice that a deduction can only be made from income to the extent that there is income to absorb the deduction. The position is now explicit for all income deductions.

111.     A similar point arises in connection with deductions that operate as tax reductions. See the commentary on clause 29.

Clause 26: Tax reductions

112.     This clause lists the tax reductions that are allowed in terms of tax at Step 6 of the calculation in clause 23. It is based on many provisions in the source legislation.

113.     The approach adopted to the layout of this clause is in line with that adopted in relation to clause 24.

114.     One of the tax reductions is for relief under section 539 of ITTOIA. See Change 3 in Annex 1.

Clause 27: Order of deducting tax reductions: individuals

115.     This clause provides rules about the order in which tax reductions are to be given for individuals. It is based on many provisions in the source legislation.

116.     In the source legislation, many of the provisions dealing with tax reductions contain rules which specify how that reduction interacts with other tax reductions. These rules, so far as they relate to individuals, are brought together in subsections (4) to (6).

117.     But those rules are not comprehensive. As well as bringing the existing rules together into one place, the clause introduces a new rule in subsections (2) and (3) providing that, subject to the following subsections, the reductions are allowed in the way that gives the greatest reduction in liability for the year. See Change 4 in Annex 1.

118.     Subsections (4) and (5) list those provisions where rules setting out some priority are contained in the source legislation. Subject to the point mentioned in the next paragraph, the provisions are listed in the order in which the source rules require the reliefs to be allowed. If any other reduction (except double taxation relief) is due then it may be allowed at whatever stage (before or after any of the provisions in subsection (5)) gives the maximum reduction.

119.     It is clear from section 256 of ICTA that reductions under Chapter 1 of Part 7 of ICTA are given after all other reductions (except double taxation relief), but no order of priority between the two reductions within that Chapter is given. Since the reduction for married couples and civil partners is transferable whereas the reduction under section 273 of ICTA is not, it will always be beneficial if any reduction under section 273 of ICTA comes first. Subsection (5) reflects this. See Change 4 in Annex 1.

Clause 28: Order of deducting tax reductions: other persons

120.     This clause provides rules about the order in which tax reductions are to be given for persons other than individuals. It is based on sections 790(3) and 796(1) of ICTA and sections 26 and 27(1) of FA 2005.

121.     There are fewer tax reductions available than for individuals, so the rules are less complex. Subsection (2) corresponds to clause 27(2) in providing a new rule that the reductions are allowed in the way that gives the greatest reduction in liability. See Change 4 in Annex 1 and the commentary on clause 27.

122.     Subsection (5) is a special rule concerning the tax reduction given to certain trustees under section 26 of FA 2005.

Clause 29: Tax reductions: supplementary

123.     This clause contains additional rules about the giving of tax reductions. It is based on a number of provisions in the source legislation.

124.     Subsections (2) and (3) ensure that a reduction is only given to the extent that there is tax to absorb the reduction, taking into account reductions already made. Many of the source provisions contain the rule that the tax cannot be reduced below nil (see for example section 256(2) of ICTA). And top-slicing relief under section 535 of ITTOIA cannot give a greater tax reduction than the tax increase resulting from including the gain concerned within total income. The position is now explicit for all tax reductions. See the commentary on clause 25.

125.     Subsection (4) ensures that the rules in this clause limiting the amount of a tax reduction by reference to the amount of tax against which it is set will not affect the calculation under section 796 of ICTA of the limit on income tax credit relief for double taxation. It also ensures that those rules will not affect the operation of any other provisions limiting the amount of a tax reduction.

126.     Subsection (5) ensures that any reference in this Chapter to double taxation relief under section 788 of ICTA brings in relief allowed in accordance with arrangements made under that section.

Clause 30: Additional tax

127.     This clause lists provisions under which amounts of tax are added to the tax liability at Step 7 of the calculation. It is based on a number of provisions in the source legislation.

Clause 31: Total income: supplementary

128.     This clause provides supplementary rules, in particular about the tax year in which income received under deduction of tax or with a tax credit is to be taken into account. It is based on section 835(6) and (7) of ICTA.

Clause 32: Liability not dealt with in the calculation

129.     This clause lists income tax liabilities not dealt with in the calculation. It is new.

130.     These liabilities arise in connection with:

  • the recovery of excessive relief (eg the withdrawal or reduction of EIS relief or the recovery of excess credit for overseas tax) where the taxpayer's self-assessment for the tax year is final;

  • deduction of tax at source (eg Chapters 15 to 17 of Part 14 and the reverse charge provisions), where the liability is not in respect of the person's own liability; and

  • stand-alone charges (eg Chapter 1 of Part 12, or in relation to the administration of pension schemes).

Part 3: Personal reliefs

Overview

131.     This Part contains rules relating to personal reliefs for individuals. It is based on Chapter 1 of Part 7 of ICTA.

132.     The reliefs dealt with in this Part fall into two distinct categories. First, there are two reliefs that operate as a deduction from net income. They are the personal allowance and blind person's allowance. The rules for those reliefs are in Chapter 2.

133.     Second, there is one relief which operates by way of a reduction in terms of tax. That is the tax reduction for certain married couples and civil partners. The rules for that relief are in Chapter 3.

134.     Chapter 4 contains general provisions, in particular relating to residence and indexation of allowances.

135.     The reliefs under Chapters 2 and 3 are available only to individuals meeting the residence etc requirements of clause 56, which is based on section 278 of ICTA. Individuals who, under the source legislation, could claim these reliefs only by virtue of meeting the condition in section 278(2)(a) are catered for by corresponding provisions in ICTA, as amended by this Bill, rather than by this Part. This is because if the condition concerned (which, in particular, operates by reference to whether the individual is a Commonwealth citizen) were included in this Bill it would not have been possible to certify that the Bill was compatible with the Human Rights Act 1998.

136.     In addition, to limit the extent to which the provisions of this Bill depend on reliefs given by virtue of an individual meeting the condition in section 278(2)(a) of ICTA, transfers of blind person's allowance and married couple's allowance will no longer be available unless the two individuals concerned make their claims to relief under the same set of provisions. This rule is subject to a transitional provision providing that it will not apply to those entitled to such allowances immediately before the Bill comes into force until the start of the 2009-10 tax year. See Part 4 of Schedule 2 and Change 7 in Annex 1.

137.     The figures used for allowances and income thresholds throughout this Part are those for 2006-07. An indexation order will be made before 6 April 2007 setting the figures for 2007-08 (unless those figures are then changed by FA 2007). Although that order will expressly apply only to ICTA, the continuity of the law provisions in Schedule 2 to this Bill will ensure that the figures here are also updated.

Chapter 1: Introduction

Clause 33: Overview of Part

138.     This clause explains where to find the rules relating to each relief that is dealt with in this Part. It is new.

Chapter 2: Personal allowance and blind person's allowance

Overview

139.     This Chapter makes provision for the personal allowance and the blind person's allowance. It is based on sections 256(1), 257, 265 and 278 of ICTA.

140.     The residence requirement for each allowance has been built into clauses 35 to 39 with no special provision for claims by non-UK residents to be made to the Commissioners for Her Majesty's Revenue and Customs. Claims for allowances are made to officers of Revenue and Customs, and no appeals are reserved to the Special Commissioners. This is achieved by not specifying to whom claims are to be made. See Change 5 in Annex 1.

Clause 34: Allowances under Chapter

141.     This clause introduces the Chapter and explains where to find the rules relating to those allowances given by deduction from income. It is new.

Clause 35: Personal allowance for those aged under 65

142.     This clause sets out the conditions for an individual aged under 65 to be entitled to a personal allowance. It is based on sections 256(1), 257 and 278 of ICTA.

143.     Section 256 of ICTA makes it clear that a claim is required. Although in practice this personal allowance is often given automatically for years for which a valid claim would still be possible (a practice which will continue), it is necessary to retain the formal claims procedure in order to provide a mechanism to resolve disputed claims. For claims generally, see Change 5 in Annex 1 and the overview commentary on this Chapter.

Clause 36: Personal allowance for those aged 65 to 74

144.     This clause provides a higher level of allowance for individuals aged 65 to 74. It is based on sections 256(1), 257 and 278 of ICTA.

145.     Subsection (2) is the rule that the allowance is reduced if the individual's adjusted net income exceeds a threshold. But the allowance cannot be reduced below the amount of the personal allowance in clause 35.

Clause 37: Personal allowance for those aged 75 and over

146.     This clause provides a higher level of allowance for individuals aged 75 and over. It is based on sections 256(1), 257 and 278 of ICTA.

147.     As in clause 36, subsection (2) rewrites the rule that provides for the reduction of the allowance if the claimant's income exceeds a threshold. But the allowance cannot be reduced below the amount of the personal allowance in clause 35.

Clause 38: Blind person's allowance

148.     This clause deals with the conditions for blind person's allowance. It is based on sections 256(1), 265 and 278 of ICTA.

149.     As with the personal allowances, the residence requirement has been built into subsection (1). In fact, due to the particular conditions of the relief set out in the following subsections, it is very rare for a non-resident to be entitled to the allowance.

150.     Section 265(1) of ICTA requires the claimant to be a "registered blind person". This term is defined in section 265(7) in two legs.

151.     The first leg refers to registers compiled under section 29 of the National Assistance Act 1948. That Act never applied to Northern Ireland and was repealed in relation to Scotland by the Social Work (Scotland) Act 1968 (section 95(2) and Part 1 of Schedule 9). It follows that any registers maintained by local authorities in Scotland or Northern Ireland or by Societies for the Blind on their behalf are not registers under section 29. So subsection (2) makes it clear that this condition can only apply to registers kept by local authorities in England and Wales.

152.     The second leg of the definition in section 265(7), which applies only to Scotland and Northern Ireland, refers to persons who are blind within the meaning of section 64(1) of the National Assistance Act 1948. This definition, which is that the individual is unable to do any work for which eyesight is essential, is the same as that underpinning entitlement to registration by local authorities in England and Wales, and is set out in subsection (3).

153.     Subsection (4) legislates ESC A86. This treats a claimant as satisfying the registration condition in the year prior to formal registration where evidence of blindness on which registration is based had been obtained in that prior year. See Change 6 in Annex 1.

Clause 39: Transfer of part of blind person's allowance to a spouse or civil partner

154.     This clause allows the transfer of any excess allowance due to a blind person to his or her spouse or civil partner if the blind person's income is insufficient to absorb the allowance fully. It is based on sections 256(1), 265 and 278 of ICTA.

155.     It is implicit in section 265 of ICTA that a spouse or civil partner receiving all or part of an allowance under this provision must be an individual entitled to claim allowances in their own right. Subsection (1) makes this explicit by incorporating the residence requirement for the receiving spouse or civil partner.

156.     Subsection (2) specifies that it is only the excess allowance that can be transferred, that the transferor must make an election (see clause 40), and makes it clearer that in order to be entitled to the allowance the transferee must claim it.

157.     Subsection (3) provides rules for determining the amount by which the allowance exceeds income for the purposes of this clause. It takes the amount of net income as the starting point. The appropriate personal allowance is then deducted.

158.     Section 265(3)(c) of ICTA has not been rewritten as it is obsolete.

Clause 40: Election for transfer of allowance under section 39

159.     This clause sets out rules about elections under clause 39. It is based on section 265(5) and (6) of ICTA.

160.     There is no need to specify that the election must be in the form specified by the Commissioners for Her Majesty's Revenue and Customs since paragraph 2(3) of Schedule 1A to TMA achieves that result.

161.     Subsection (2) provides that if an individual has made an election for the transfer of his or her excess blind person's allowance in a tax year then this is also treated as an election for the transfer of any excess tax reduction for married couples and civil partners.

 
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Prepared: 8 December 2006