House of Commons - Explanatory Note
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Clause 533: Exemption for public revenue dividends

1616.     This clause provides an exemption for public revenue dividends used for the repair of certain places of worship. It is based on section 505(1) and (1A) of ICTA.

Clause 534: Exemption for transactions in deposits

1617.     This clause provides an exemption for profits arising from transactions in certificates of deposit, and for transactions in deposit rights where there is no certificate but the person entitled to the right can call for the issue of a certificate. It is based on parts of sections 56 and 56A of ICTA.

1618.     The Uncertificated Securities (Amendment) (Eligible Debt Securities) Regulations 2003 (SI 2003/1633) provides for "eligible debt securities", which are securities held in a dematerialised system. A paper certificate cannot be issued in respect of these securities. The statutory instrument assimilates these, in the Tax Acts, to certificates of deposit. The rewritten clause makes explicit the treatment of these eligible debt securities.

1619.     Subsection (2) specifies that the exemption applies to the extent that profits or gains are applied to charitable purposes.

Clause 535: Exemption for offshore income gains

1620.     This clause provides an exemption for a gain on the disposal of a material interest in a non-qualifying offshore fund, provided the gain is applied to charitable purposes. It is based on section 761(6) of ICTA.

1621.     Details of offshore funds can be found in Chapter 5 of Part 17 of ICTA. Section 761(6B) of ICTA is inserted by Schedule 1 to this Bill.

Clause 536: Exemption for certain miscellaneous income

1622.     This clause provides an exemption for certain categories of miscellaneous income from income tax, provided the income is applied to charitable purposes. It is based on section 505(1) and (1AA) of ICTA.

1623.     The precise terms of the clause draw significantly on the consequential amendments made by ITTOIA.

1624.     In subsection (1)(b), the reference to Act includes references to Acts of the Scottish Parliament and Northern Ireland legislation. See Change 145 in Annex 1, clause 952 and the commentary on that clause.

1625.     Subsection (3)(a) and (b) specify that royalties and other income from intellectual property and income from relevant telecommunication rights, where such income is not taxable as profits of a trade, are eligible for exemption. This is a change from the source legislation in that such income was only exempt if it came within the definition of annual payments. See Change 96 in Annex 1.

Clause 537: Exemption for income from estates in administration

1626.     This clause provides an exemption for estate income received by the trustees of a charitable trust provided the income is applied to the purposes of the charitable trust. It is new.

1627.     Estate income is income from property held by the personal representatives of the estate of a deceased person on behalf of the beneficiaries of the estate. The personal representatives are liable to income tax on the income. The exemption provided by this clause allows the trustees of a charitable trust to recover any income tax suffered by the personal representatives. See Change 97 in Annex 1.

Clause 538: Requirement to make claim

1628.     This clause provides that in general a claim is necessary for an exemption. It is based on sections 56(3), 505(1) and 761(6) of ICTA, section 46(1) of FA 2000 and section 83(4) of FA 2004.

1629.     Claims are made either as required during the tax year, eg to secure repayments of income tax treated as paid in relation to gift aid payments, or in a self-assessment return. The need to make a claim ensures that there is a mechanism for appeals in the event of any dispute about the availability or amount of any exemption.

1630.     The self-assessment procedure means that a charitable trust only needs to complete a tax return, and make the associated claims, if the charitable trust is chargeable to tax or is required to do so by HMRC.

1631.     The reference in section 505(1) of ICTA to claims being to the Board of Inland Revenue has been changed. Claims will simply be to an officer of Revenue and Customs. See Change 5 in Annex 1, which also affects clauses 542, 557, 558 and 561. One effect of a claim being made to the Board was that appeals were to the Special Commissioners. This is maintained by means of an amendment to section 46C of TMA.

1632.     Subsection (3) provides that where an individual makes a direction in a self-assessment return for a tax repayment to be paid as a gift to a charitable trust, the trustees are treated as having made a claim. See clause 429 and the commentary on that clause.

Clause 539: Restrictions on exemptions

1633.     This clause restricts exemptions where income of a charitable trust is attributed to non-charitable expenditure. It is based on section 505(4) of ICTA.

1634.     A number of the exemptions have been extended to treat adjustment income and post-cessation receipts as exempt. As a result the restrictions apply to the extended exemptions. See Change 92 in Annex 1 and the commentary on clause 524.

1635.     A statutory exemption has been introduced for profits of fund-raising events. The restrictions apply to this exemption. See Change 95 in Annex 1 and the commentary on clause 529.

1636.     A statutory exemption has also been introduced for income from estates in administration. The restrictions apply to this exemption. See Change 97 in Annex 1 and the commentary on clause 537.

Clause 540: The non-exempt amount

1637.     This clause specifies how the non-exempt amount is calculated. It is based on section 505(3) and (4) of ICTA.

1638.     The term "attributable income and gains" is defined in subsection (3). This label replaces "relievable income and gains" as defined in section 505(3) of ICTA.

1639.     Subsection (5) specifies that section 256(4) of TCGA is to be ignored in applying subsection (3)(b). Section 256 of TCGA provides the exemption from capital gains tax for certain gains accruing to a charity. Schedule 1 to this Bill amends section 256, adding subsections (3) to (5). Schedule 1 also inserts sections 256A and 256B, to deal with the interaction between income tax and capital gains tax as regards attributing income and gains to the non-exempt amount.

Clause 541: Attributing income to the non-exempt amount

1640.     This clause specifies how income is attributed to the non-exempt amount. It is based on section 505(4) and (7) of ICTA.

1641.     It specifies that the non-exempt amount is to have attributed to it amounts of attributable income or amounts of attributable gains or a combination of both, until it is "used up".

Clause 542: How income is attributed to the non-exempt amount

1642.     This clause specifies that the charitable trust can decide the attribution of attributable (exempt) income or chargeable gains to the non-exempt amount, to determine which "items" of otherwise exempt income or chargeable gains should be treated as taxable. It is based on section 505(7) of ICTA.

1643.     Where the restrictions apply, an amount of income (or chargeable gains) equal to the non-exempt amount (of expenditure) must be identified (as calculated in accordance with the previous clause) in order to enable the charitable trust to complete its tax return and self-assess its tax liability. This clause provides the mechanism for the charitable trust to specify the "items" or "elements" of income (such as trading income or investment income) which lose the benefit of exemption.

1644.     But if the charitable trust has not provided the attribution within a period of 30 days from the day of a request for a specification of the attribution, an officer of Revenue and Customs can decide the attribution. References to the "Board" have been replaced with "an officer of Revenue and Customs". See Change 5 in Annex 1 and the commentary on clause 538.

Clause 543: Meaning of "non-charitable expenditure"

1645.     This clause defines "non-charitable expenditure". It is based on sections 506 and 506A of ICTA.

1646.     Section 506(1) contains a definition of "charitable expenditure". But neither expenditure itself not "non-charitable expenditure" are defined explicitly. This clause sets out the definition in some detail, to reflect practice and HMRC guidance. See Change 98 in Annex 1, which also affects clauses 544 and 545.

Clause 544: Section 543: supplementary

1647.     This clause applies relevant material located elsewhere (eg rules for computing trading losses and about basis periods) and provides interpretative material (eg about the meaning of expenditure). It is new. See Change 98 in Annex 1.

Clause 545: Section 543(1)(f): meaning of expenditure

1648.     This clause provides interpretative material about the meaning of "expenditure". It is new. See Change 98 in Annex 1.

1649.     Subsection (1) makes it clear that "expenditure" includes expenditure on the acquisition of capital assets. But expenditure on assets qualifying for capital allowances is taken account of in determining, for example, a trading loss and so is not included in expenditure within clause 543(1)(f).

Clause 546: Section 543(1)(f): tax year in which certain expenditure treated as incurred

1650.     This clause specifies the tax year to which expenditure relating to commitments (whether or not contractual in nature) that have been entered into is to be allocated for the purpose of operating the restrictions. It is based on section 506(2) of ICTA.

1651.     This rule has been rewritten in terms which make explicit reference to United Kingdom generally accepted accounting practice. See Change 99 in Annex 1.

Clause 547: Section 543(1)(f): payment to body outside the UK

1652.     This clause provides interpretative material about payments to a body situated outside the United Kingdom. It is based on section 506(3) of ICTA.

1653.     The clause makes it clear that the onus is on the trustees of the charitable trust to ensure that any payments to a body outside the United Kingdom are applied for charitable purposes. Otherwise the charitable trust must classify the payments as "non-charitable expenditure".

Clause 548: Section 543(1)(i) and (j): investments and loans

1654.     This clause provides interpretative material about the making of investments or loans. It is based on section 506(5) of ICTA.

1655.     The clause makes it clear that it is only the expenditure in the tax year on making new investments and loans, or expenditure to fund net increases in such investments or loans, that is included in the calculation of non-charitable expenditure.

Clause 549: Transactions with substantial donors

1656.     This clause defines "substantial donor transaction" and explains when a person is a substantial donor to a charitable trust. It is based on sections 506A(1) and (2) and 506C(3) of ICTA.

1657.     Under subsection (2)(a) a person giving £25,000 or more in a period of 12 months will be a substantial donor for up to three consecutive tax years.

1658.     Under subsection (2)(b) a person giving £100,000 or more in a period of six years will be a substantial donor for up to 13 consecutive tax years.

1659.     In either case, subsection (3) means that the person is also a substantial donor for the five tax years following the last of those consecutive tax years.

1660.     It should be noted that references to a charitable trust include connected charities (see clause 556) and that references to a substantial donor include persons connected with the donor (see clause 557(1)(a)).

Clause 550: Meaning of "relievable gift"

1661.     This clause includes details of the sources of gifts that are "relievable gifts" for the purposes of the preceding clause. It is based on section 506C(1) of ICTA.

Clause 551: Non-charitable expenditure in substantial donor transactions

1662.     This clause specifies that certain amounts relating to substantial donor transactions are to be treated as non-charitable expenditure. It is based on sections 506A(3) to (5) and 506C(2) and (6) of ICTA.

1663.     The source legislation specifies that certain matters are to be determined by the Commissioners for Her Majesty's Revenue and Customs. References to "the Commissioners for Her Majesty's Revenue and Customs" have been replaced with references to "an officer of Revenue and Customs". See Change 5 in Annex 1, which also affects clauses 554 and 557. The source legislation specifies that, on an appeal against an assessment, the Special Commissioners may review a decision of the Commissioners, so clause 557 specifies that the Special Commissioners may affirm or replace a decision of an officer.

Clause 552: Adjustment if section 551(1) and (2) applied to single transaction

1664.     This clause makes it clear that there can be no double counting. It is based on section 506C(4) of ICTA.

Clause 553: Section 551: certain payments and benefits to be ignored

1665.     This clause provides that payments or benefits arising from transactions, relating to gift aid donations made by individuals or qualifying donations by companies, are to be ignored if they do not disqualify the donations concerned from relief. It is based on section 506B(7) of ICTA.

Clause 554: Transactions: exceptions

1666.     This clause specifies exceptions to the transactions caught by clause 549. It is based on section 505B of ICTA.

1667.     In particular, the clause carves out of the substantial donor provisions transactions of an ordinary commercial nature.

1668.     References to the "Commissioners" have been replaced with references to "an officer of Revenue and Customs". See Change 5 in Annex 1 and the commentary on clause 551.

Clause 555: Donors: exceptions

1669.     This clause specifies exceptions to the donors caught by clause 549. It is based on section 506B(8) and (9) of ICTA.

1670.     Subsection (1) concerns companies set up by charitable trusts, for example to carry on trading activities as a means of generating funds.

1671.     Subsection (2) concerns registered social landlords and housing associations, which often share services and accommodation with charities as a means of meeting charitable and non-charitable objectives, through complex group structures.

Clause 556: Connected charities

1672.     This clause extends, for the purposes of clauses 549 to 555, the meaning of "charitable trust" to include charities connected with the charitable trust. It is based on section 506C(5) of ICTA.

Clause 557: Substantial donor transactions: supplementary

1673.     This clause provides interpretative material for the previous two clauses. It is based on section 506C(7) to (9) of ICTA.

1674.     References to the "Commissioners" have been replaced with references to "an officer of Revenue and Customs". See Change 5 in Annex 1 and the commentary on clause 551.

Clause 558: Approved charitable investments

1675.     This clause sets out which investments, including loans made by way of investment, count as approved charitable investments for the purposes of the rules restricting exemptions. It is based on Schedule 20 to ICTA.

1676.     The label "approved charitable investments" replaces the label "qualifying investments" in section 506(4) of ICTA.

1677.     Paragraph 2 of Schedule 20 specified investments falling within Schedule 1 to the Trustee Investment Act 1961 (TIA 1961) as approved, with a small exception. For trust law purposes TIA 1961 has been largely superseded by the Trustee Act 2000 (TA 2000). So the detail of investments covered by Schedule 1 to TIA 1961 has been incorporated into the clauses in a more succinct and updated form, removing the need to refer to a Schedule to an Act (TIA 1961) that trustees no longer need to refer to for investment purposes. See Change 100 in Annex 1. This affects this clause, clause 559 and clause 560.

1678.     The reference to securities traded on the Unlisted Securities Market has been deleted as obsolete, because the Unlisted Securities Market ceased trading in December 1996.

1679.     Investments can qualify as approved charitable investments if, despite not falling into any of the specified types not requiring a claim, a claim is made and it is accepted by HMRC. In order to be accepted, the claimant must show that the investment has been made for the benefit of the charitable trust and has not been made for the avoidance of tax.

1680.     Investments include loans made by way of investment. And although not explicitly stated, such a loan would include a loan secured by a mortgage over land.

1681.     The source legislation included a reference in paragraph 7(2) of Schedule 20 to ICTA to an "authorised institution" - which in the context of that paragraph clearly means a "bank". In fact "authorised institution" was amended to read "bank" in paragraph 7(1) by Schedule 37 to FA 1996, but was not amended in paragraph 7(2). This was an oversight and is corrected here.

1682.     In Type 4, the reference to Act includes references to Acts of the Scottish Parliament and Northern Ireland legislation. See Change 145 in Annex 1, clause 952 and the commentary on that clause.

1683.     References to the "Board" have been replaced with "an officer of Revenue and Customs". See Change 5 in Annex 1.

Clause 559: Securities which are approved charitable investments

1684.     This clause sets out details of which investments in securities count as approved charitable investments for the purposes of the rules restricting exemptions. It is based on Schedule 20 to ICTA and Schedule 1 to TIA 1961.

1685.     The detail of investments covered by Schedule 1 to TIA 1961 have been incorporated into these clauses in a more succinct and updated form. See Change 100 in Annex 1 and the commentary on clause 558.

Clause 560: Conditions to be met for some securities

1686.     This clause sets out details of certain conditions which some of the securities specified in the previous clause have to meet to count as approved charitable investments for the purposes of the rules restricting exemptions. It is based on Schedule 1 to TIA 1961.

1687.     The detail of the investments covered by Schedule 1 to TIA 1961 is incorporated into these clauses in a more succinct and updated form. See Change 100 in Annex 1 and the commentary on clause 558.

1688.     Subsection (8) specifies (among other things) that a company acquiring control of another company or other companies is treated as having paid a dividend or dividends paid by the other company or companies. The effect of including this provision (rather than cross-referring to a provision in TIA 1961) is that "control" needs to be defined. Consequently the definition of "control" in clause 929 applies for the purposes of this subsection. See Change 100 in Annex 1.

Clause 561: Approved charitable loans

1689.     This clause sets out which loans (not being made by way of investment) count as approved charitable loans for the purposes of the rules restricting exemptions. It is based on Schedule 20 to ICTA.

1690.     The label "approved charitable loans" replaces the label "qualifying loans" in section 506(4) of ICTA.

1691.     References to the "Board" have been replaced with references to "an officer of Revenue and Customs". See Change 5 in Annex 1.

Clause 562: Excess expenditure treated as non-charitable expenditure of earlier years

1692.     This clause treats "excess expenditure" in a tax year as non-charitable expenditure for earlier tax years. It is based on sections 505(3) and (5) of ICTA.

1693.     The "excess expenditure" is the amount of the non-charitable expenditure of the year in excess of the available income and gains of the tax year.

1694.     The term "available income and gains" is defined in subsection (4). This label replaces "total income and gains" as defined in section 505(3) of ICTA.

Clause 563: Rules for attributing excess expenditure to earlier years

1695.     This clause specifies the earlier tax years to which the excess expenditure is to be attributed, later years taking priority to earlier ones. It is based on section 505(5) and (6) of ICTA.

1696.     The amount of excess expenditure that can be attributed to the year 2005-06 or earlier years cannot exceed the amount that would have been attributed if the change in the method of calculating excess expenditure resulting from section 55 of FA 2006 had not been introduced. See the transitional provision in Part 11 of Schedule 2.

Clause 564: Adjustments in consequence of section 562

1697.     This clause then specifies that any necessary adjustments (eg to tax, interest etc) for earlier years may be made. It is based on section 505(5) of ICTA.

Part 11: Manufactured payments and repos

Overview

1698.     This Part contains provisions about sale and repurchase arrangements, stock lending and other transactions in the financial markets giving rise to manufactured payments. It is based on sections 231AA, 231AB, 730A, 730B and 736B to 737E of, and Schedule 23A to, ICTA.

Chapter 1: Introduction

Clause 565: Overview of Part

1699.     This clause gives an overview of the Part. It is new.

1700.     The remaining clauses of this Chapter explain some important terms which are used in the same sense throughout this Part.

Clause 566: Meaning of "UK shares" and "UK securities"

1701.     This clause defines "UK shares" and "UK securities". It is based on sections 737B and 737C of, and paragraph 1 of Schedule 23A to, ICTA.

1702.     This Part uses the label "UK shares" for income tax purposes instead of the label "United Kingdom equities" given in paragraph 1 of Schedule 23A to ICTA, as the definition includes preference shares. The label "United Kingdom equities" is retained in Schedule 23A for corporation tax purposes.

Clause 567: Meaning of "overseas securities" and "overseas dividend"

1703.     This clause defines "overseas securities" and "overseas dividend". It is based on sections 737B and 737C of, and paragraph 1 of Schedule 23A to, ICTA.

Clause 568: Meaning of "stock lending arrangement"

1704.     This clause defines "stock lending arrangement". It is based on sections 231AA and 736B of ICTA and sections 263B and 263C of TCGA.

Clause 569: Meaning of "repo"

1705.     This clause defines "repo". It is based on sections 231AA, 231AB, 730A, 730B, 737B, 737E of, and paragraph 1 of Schedule 23A to, ICTA.

Clause 570: Meaning of "buying back" securities etc.

1706.     This clause provides the meaning of the expression "buying back" securities. It is based on sections 730B, 737B and 737E of ICTA.

Clause 571: Meaning of "related" agreements

1707.     This clause explains when agreements are "related". It is based on sections 730B, 737B and 737E of ICTA.

Chapter 2: Manufactured payments

Overview

1708.     This Chapter is concerned with the treatment of manufactured payments, in particular:

  • the taxability of manufactured payments in the hands of the recipient (or, if different, the owner);

  • tax relief for the payer of manufactured payments; and

  • taxes management.

1709.     The detailed structure of the Chapter is as follows:

  • Clause 572 - overview of the Chapter;

  • Clauses 573 to 577 - manufactured dividends on UK shares;

  • Clauses 578 to 580 - manufactured interest on UK securities;

  • Clauses 581 and 582 - manufactured overseas dividends (MODs);

  • Clauses 583 to 585 - special cases;

  • Clauses 586 to 588 - general regulation-making powers;

  • Clauses 589 to 591 - minor definitions which apply to this Chapter.

1710.     Manufactured payments will normally arise under stock loan and repo agreements, but they may also occur if there has been a "short" sale of securities. A "short" sale is a sale of securities by someone who does not own the securities at the time of selling them, so is required to acquire them at a time between the date of the bargain and the date when the seller has to deliver them to the purchaser. Dealers may sell short for a variety of reasons. For example, dealers may expect the market price of the securities to fall between the time of the sale bargain and the time at which they expect to buy and so may choose to delay acquiring securities.

1711.     A consequence of short selling can be that the dealer sells the securities "cum-div" (with dividend) but buys them "ex-div" (without dividend - leaving the right to the next dividend with the seller). The dealer pays the buyer a sum as compensation for the dividend that the buyer expected to receive, but did not. This sum is a manufactured payment.

1712.     Many of the detailed rules, especially as regards MODs, are laid down in regulations. The Bill does not rewrite any of these regulations.

 
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Prepared: 8 December 2006