Clause 690: Person obtaining gain

1993.     This clause specifies the person obtaining the gain. It is based on section 776(2)(c)(i) and (ii) and 776(5)(b) of ICTA.

1994.     Subsection (3) indicates when a number of transactions may be regarded as constituting a single arrangement or scheme. Subsection (3) differs from the source legislation in that it is not drafted to apply for the purposes of clause 686(1). There is no need for subsection (3) to bring a plurality of transactions within clause 686(1)(b), since a plurality of transactions will already be within clause 686(1)(a).

Clause 691: Income charged

1995.     This clause defines the measure of income and gives a signpost to clause 693 (method of calculating gain). It is based on section 776(3B) of ICTA.

Clause 692: Person liable

1996.     This clause defines the person liable, bringing together a number of provisions previously separate provisions. It is based on section 776(3)(b), (3B) and (8) of ICTA.

1997.     Subsection (1) states that the person liable for any tax charged under this Chapter on income is the person whose income it is.

1998.     Subsection (2) then lays down the general rule: that person is the person who realises the gain.

1999.     Subsection (3) states that the general rule is subject to two exceptions, set out in subsections (4) and (6).

2000.     Subsection (4) deals with the case where there is a person providing value. If all or any part of the gain accruing to a person ("A") is derived from value provided directly or indirectly by another person ("B"), the income is B's.

2001.     Subsection (5) makes it clear that it does not matter for the purpose of subsection (4) whether or not the value is put at the disposal of A.

2002.     Subsection (6) deals with the case where there is a person providing an opportunity to realise a gain. If all or any part of the gain accruing to a person is derived from an opportunity of realising a gain provided directly or indirectly by another person, the income is the other person's.

2003.     There is no equivalent of subsection (5) to back up subsection (6), because none is needed. This is a change in the law but not in practice. See Change 109 in Annex 1.

2004.     Subsection (8) makes a minor change in the law, although not in practice. See the commentary on clause 689 and Change 108 in Annex 1.

Clause 693: Method of calculating gain

2005.     This clause lays down how a gain is to be calculated for the purposes of this Chapter. It is based on section 776(6) of ICTA.

Clause 694: Transactions, arrangements, sales and realisations relevant for Chapter

2006.     Clause 694 concerns transactions, arrangements, sales and realisations relevant for this Chapter. It is based on section 777(2) and (3) of ICTA.

2007.     This clause is the first of a group of supplementary clauses (clauses 694 to 697). These clauses apply for the purposes of the Chapter as a whole; because of their importance, they have been placed immediately after clauses 688 to 693, the core clauses.

Clause 695: Tracing value

2008.     This clause is about tracing value. It is based on section 777(5) of ICTA.

Clause 696: Meaning of "another person"

2009.     This clause explains the meaning of "another person" in this Chapter. It is based on section 777(7) of ICTA.

Clause 697: Valuations and apportionments

2010.     This clause is about valuations and apportionments. It is based on section 777(6) of ICTA.

Clause 698: Exemption: gain attributable to period before intention to develop formed

2011.     This clause exempts that part of a gain which is fairly attributable to a period before the intention to develop the land was formed. It is based on section 776(7) of ICTA.

2012.     It is the first of a group of three exemptions, which are set out in clauses 698 to 700.

Clause 699: Exemption: disposals of shares in companies holding land as trading stock

2013.     This clause limits the scope of the charge by providing an exemption for disposals of shares in companies holding land as trading stock. It is based on section 776(10) of ICTA.

Clause 700: Exemption: private residences

2014.     This clause gives exemption in respect of private residences, if certain conditions are met. It is based on section 776(9) of ICTA.

Clause 701: Recovery of tax where consideration receivable by person not assessed

2015.     This clause deals with recovery of tax where consideration is receivable by a person (B) other than the person assessed (A). It is based on section 777(8) and (13) of ICTA.

2016.     Under subsection (3) A is entitled to recover from B any part of the tax which A has paid. To assist with this, A may obtain a certificate of tax paid: see the commentary on clause 702.

2017.     This clause also includes a "tie-breaker" provision. This is a minor change in the law. See Change 110 in Annex 1.

Clause 702: Recovery of tax: certificates of tax paid etc

2018.     This clause deals with certificates of tax paid for the purposes of clause 701(3). It is based on section 777(8) of ICTA.

2019.     Section 777(8) of ICTA provides that the certificate is to be furnished by "the Board or an inspector". In 1969, when this legislation was introduced, section 5 of the Income Tax Management Act 1964 provided that all assessments to income tax at the standard rate were to be made by an inspector and all assessments to surtax were to be made by the Board. The reference to "the Board" in section 777(8) appears to be a missed consequential on the abolition of surtax. This clause therefore omits "the Board" as redundant and, following section 7 of CRCA, refers to "an officer of Revenue and Customs" rather than "an inspector".

2020.     Subsection (3) gives a signpost to the clause in Part 14 (Deduction of tax at source) which rewrites section 777(9) of ICTA.

Clause 703: Clearance procedure

2021.     This clause deals with clearances. It is based on section 776(11) and (12) of ICTA.

2022.     Clause 703 includes a minor change in the law. Section 776(11) of ICTA gives the clearance function to "the inspector to whom [the taxpayer] makes his return of income". In practice, HMRC do not interpret this restrictively. Clause 703 gives the clearance function to the Commissioners for Her Majesty's Revenue and Customs. This will be consistent with section 707 of ICTA (transactions in securities: clearance procedure), which is rewritten in clauses 634 and 635. Commissioners' directions under section 2(3) of CRCA will lay down how the clearance function is delegated. See Change 111 in Annex 1.

2023.     Clause 703 will apply solely for income tax purposes and section 776(11) and (12) of ICTA will apply solely for corporation tax purposes. HMRC's operational guidance will tell officers what action they should take if a clearance application is made which appears to refer to the wrong provision. If HMRC issue a clearance under clause 703 of this Bill or under section 776 of ICTA which refers by mistake to the wrong provision, HMRC will treat it as if it referred to the correct provision.

Clause 704: Power to obtain information

2024.     This clause enables HMRC to obtain information which is relevant to this Chapter. It is based on section 778 of ICTA.

2025.     Section 778 of ICTA refers to "the Board or an inspector" and "the Board or the inspector". For the reason given in the commentary on clause 702, the references to "the Board" in section 778 appear be a missed consequential on the abolition of surtax. Clause 704 therefore now omits "the Board" as redundant and, following section 7 of CRCA, refers to "an officer of Revenue and Customs" rather than "an inspector".

2026.     Subsection (1) includes a minor change in the law: it expressly restricts the particulars to be provided to those which an officer of Revenue and Customs may reasonably require. See Change 107 in Annex 1.

Clause 705: Interpretation of Chapter

2027.     This clause is interpretative. It is based on sections 776(13) and 777(13) of ICTA.

2028.     Section 777(13) defines "capital amount" to mean any amount, in money or money's worth, which, apart from the sections 775 and 776, does not fall to be included in any computation of income for purposes of the Tax Acts. It provides that other expressions including the word "capital" are to be construed accordingly. The drafting of subsection (1) reflects the fact that a gain is the result of an arithmetical calculation, arrived at very broadly by deducting receipts from expenses, and cannot itself be said to be "in money or money's worth".

2029.     Subsection (2) (meaning of "property deriving its value from land") is based on section 776(13)(b) of ICTA.

Section 776(13)(a) of ICTA: "land"

2030.     This clause does not rewrite the second limb of the definition of "land" in section 776(13)(a) of ICTA.

2031.     In Schedule 1 to the Interpretation Act 1978 land is defined as including "buildings and other structures, land covered with water, and any estate, interest, easement, servitude or right in or over land." Although the Interpretation Act 1978 was largely a consolidation, the definition of land was new and only applies from the commencement of that Act.

2032.     The origin of section 776(13)(a) of ICTA is section 32(12)(a) of FA 1969. This definition therefore predates the definition of land in Schedule 1 to the Interpretation Act 1978.

2033.     The definition of "land" in force in 1969 was that contained in the Interpretation Act 1889. In section 3 of that Act land was defined as including "messuages, tenements, and hereditaments, houses and buildings of any tenure". This section was derived from section 4 of Lord Brougham's Act of 1850. The definition was never appropriate for Scotland where messuages and hereditaments were unknown to the law.

2034.     There is nothing in the definition of "land" in the Interpretation Act 1978 which is not also within the definition of "land" in section 776(13)(a) of ICTA.

2035.     The Interpretation Act 1978 refers to "buildings and other structures". Section 776(13)(a) of ICTA merely refers to "buildings". But this cannot be read as excluding "structures", because what is a building is a question of degree and circumstance and case law makes it clear that virtually any kind of structure is capable of being a building.

2036.     Adopting the Interpretation Act definition of "land" for the purposes of this Chapter would only be a change in the law if a "structure" (a) was not, as a matter of normal English usage, "land", (b) was not a "building" (and was therefore not brought within "land" by the second limb of section 776(13)(a)), and (c) was nevertheless brought within "land" by the provision in the Interpretation Act that "land" includes buildings and other structures. There is no reason to believe that there are such "structures".

2037.     The Interpretation Act 1978 refers to "land covered with water"; section 776(13)(a) of ICTA does not. But there is no doubt that for legal purposes land includes every species of ground as well as waters and marshes. The term "land covered with water" has been used in legislation to distinguish, for rating purposes, land covered by artificial bodies of water such as reservoirs, filter beds belonging to water companies, canals, dry docks etc; no such distinction would be appropriate in the context of section 776 of ICTA, and therefore none was made.

2038.     Finally, section 776(13)(a) of ICTA refers to "any estate or interest in land or buildings", whereas the Interpretation Act 1978 is more specific, referring to "any estate, interest, easement, servitude or right in or over land" (emphasis added). Nonetheless, the section 776(13)(a) definition of land includes the rights italicised above. It is couched in generic terms and does not need to mention specific interests in land, including those particular to Scots law.

2039.     It is therefore a matter of historical accident that section 776 of ICTA includes its own non-exhaustive definition of "land", rather than using the standard non-exhaustive definition in the Interpretation Act 1978. The Bill therefore omits the second limb of section 776(13)(a) of ICTA as redundant.

2040.     The Bill does not rewrite the first limb of section 776(13)(a) as a Chapter-wide definition. Instead, references to "the land" are expanded to "all or part of the land" where appropriate.

Section 777(13) of ICTA: "receivable"

2041.     Section 777(13) of ICTA provides: "For the purposes of the relevant provisions .. any amount in money or money's worth shall not be regarded as having become receivable by some person until that person can effectively enjoy or dispose of it."

2042.     Section 777(1) defines "the relevant provisions" as sections 775 to 777 of ICTA, therefore on the face of it the qualification of "receivable" in section 777(13) applies to section 776 of ICTA. But the word "receivable" is not actually used in section 776.

2043.     In Yuill v Wilson (1980), 52 TC 674 HL ⁸ and Yuill v Fletcher (1984), 58 TC 145 CA ⁹ the courts interpreted "realised" in section 776(3) of ICTA consistently with the explanation of "receivable" in section 777(13). In the House of Lords in Yuill v Wilson, Viscount Dilhorne said (52 TC on page 714):

⁸[1980] STC 460.

⁹ [1984] STC 401.

"I have based my conclusions on the meaning which I think should be given to the expression "the gain is realised". Section [777] of the Act is as I have said intended to supplement sections [775] and [776]. Subsection (13) of section [777] is a definition subsection and, inter alia, states that for the purposes of sections [775] and [776] "any amount in money or money's worth shall not be regarded as having become receivable by some person until that person can effectively enjoy or dispose of it." The operation of [section 776] does not depend on whether money or money's worth is receivable. One does not find in it any reference to money or money's worth being receivable. It depends on whether a gain is obtained or realised. So the operation of this definition is, to say the least, obscure in relation to section [776]. It, however, accords with the meaning which I think should be given to the word "realised", that is to say, that a gain is not realised until it can be effectively enjoyed or disposed of."

2044.     Lord Salmon agreed with Viscount Dilhorne. Other judges interpreted "realised" in the same way as Viscount Dilhorne, but relied on what is now section 777(13) of ICTA to do so. ¹⁰

¹⁰ In the Court of Appeal, Buckley LJ and Goff LJ had used the explanation of "receivable" to interpret "realised" and in the House of Lords so too did Lord Russell of Killowen and Lord Keith of Kinkel. Lord Edmund-Davies did not express an opinion on this point. In Yuill v Fletcher, the Special Commissioners noted this difference of approach, and inferred that the application of what is now section 777(13) of ICTA to what is now section 776 of ICTA could "be legitimately regarded as an open question, or at least as containing open questions": (paragraph 9.9 of the Decision: 58 TC 145 on page 163). Neither the High Court nor the Court of Appeal expressed any view on this point; the Court of Appeal held that the House of Lords' decision in Yuill v Wilson should be followed as either a binding precedent or of the highest persuasive authority.

2045.     Following Viscount Dilhorne and Lord Salmon, this Bill does not rewrite the explanation of "receivable" for the purposes of this Chapter. This omission does not change the law.

Chapter 4: Sales of occupation income

Overview

2046.     This Chapter contains an anti-avoidance provision directed against schemes which turn income from an occupation into capital. It is based on sections 775, 777 and 778 of ICTA.

2047.     The clauses of this Chapter are arranged in the following order:

• Clauses 706 to 708 - introduction;

• Clauses 709 to 712 - charge on sale of occupation income;

• Clauses 713 to 716 - further provisions relevant to the charge;

• Clauses 717 and 718 - exemption for sales of going concerns;

• Clauses 719 and 720 - recovery of tax;

• Clause 721 - power to obtain information;

• Clause 722 - interpretation.

Clause 706: Overview of Chapter

2048.     This clause provides an overview of the Chapter, outlining its purpose and the charge it imposes. It is based on section 775(1) of ICTA.

2049.     Although section 775(1)(a) and (b) of ICTA refer to "transactions or arrangements", section 775(1)(c) only refers to "transactions". The original source legislation, section 31(1)(c) of FA 1969, refers to "transactions or arrangements" and subsection (2) restores this phrase.

Clause 707: Meaning of "occupation"

2050.     This clause explains the expression "occupation". It is based on section 775(3) of ICTA.

Clause 708: Priority of other tax provisions

2051.     This clause provides for other tax provisions to apply in priority to Chapter 4. It is based on section 777(10) of ICTA.

Clause 709: Charge to tax on sale of occupation income

2052.     This clause sets out the scope of the charge. It is based on section 775(2A) of ICTA.

2053.     Clauses 709 to 712 form the core of the Chapter.

Clause 710: Conditions for sections 711 and 712 to apply

2054.     This clause sets out the circumstances in which income is treated as arising. It is based on sections 775(1), (3), and (7) to (9) and 777(13) of ICTA.

2055.     Subsection (1) specifies three conditions (labelled A to C) which must all be met if clause 711 or, as the case may be, clause 712 is to apply.

2056.     Subsection (2) sets out condition A, which is about location of the occupation carried on by the individual.

2057.     Subsection (3) sets out condition B, which is about the ways in which transactions are effected or arrangements made to exploit the individual's earning capacity in the occupation.

2058.     Subsection (4) is based on the explanation of the meaning of "income or receipts derived from the individual's activities" in section 775(3) of ICTA.

2059.     Subsection (5) sets out condition C, which is about the receipt of a capital amount by the individual, either for the individual or for another person.

2060.     Subsection (6) provides further details about what the previous subsection includes.

2061.     Subsection (7) defines "capital amount". It is based on section 777(13) of ICTA. Section 777(13) of ICTA refers to "any amount .. which, apart from the sections 775 and 776, does not fall to be included in any computation of income for purposes of the Tax Acts". It is not possible for an amount to be treated as income both by section 775 and by section 776 of ICTA, and so subsection (7) does not rewrite the reference to section 776.

Clause 711: Income arising where capital amount other than derivative property or right obtained

2062.     This clause applies if the capital amount mentioned in clause 710(5) does not consist of either property which derives substantially the whole of its value from the individual's activities or a right which does so. It is based on sections 775(1), (2) and (7) and 777(13) of ICTA.

2063.     If clause 711 applies, subsection (2) treats the capital amount as income.

2064.     Subsection (2) omits the reference in section 775(2) to the capital amount being treated as "earned income". The only place in the Income Tax Acts where the expression "earned income" is used, following the reform of the pensions legislation in FA 2004, is section 282A of ICTA (jointly held property). As explained in the commentary on Chapter 3 of Part 13, section 282A has been rewritten in direct terms without reference to earned income. Accordingly, this clause does not refer to earned income either.

2065.     HMRC's interpretation of the territorial scope of section 775 of ICTA is summarised in the table below.

2066.     The clauses reflect this interpretation, and make a minor change in the law (although not in practice) to clarify the territorial scope of section 775. See Change 108 in Annex 1.

Clause 712: Income arising where derivative property or right obtained

2067.     This clause applies if the capital amount mentioned in clause 710(5) does consist of either property which derives substantially the whole of its value from the individual's activities or a right which does so. It is based on section 775(2) and (7) of ICTA.

2068.     The effect of this clause replicates that of section 775(7) of ICTA, which imposes a separate charge from section 775(1) to (2A) of ICTA. It may apply in (for example) cases where individuals acquire stock options and subsequently exercise them.

Clause 713: Transactions, arrangements, sales and realisations relevant for Chapter

2069.     This clause concerns transactions, arrangements, sales and realisations relevant for this Chapter; it greatly extends the circumstances in which a charge to tax may arise. It is based on section 777(2) and (3) of ICTA.

Clause 714: Tracing value

2070.     This clause is about tracing the value of any property or right. It is based on section 777(5) of ICTA.

Clause 715: Meaning of "other person"

2071.     This clause explains the meaning of "other person" in this Chapter. It is based on section 777(7) of ICTA.

Clause 716: Valuations and apportionments

2072.     This clause is about valuations and apportionments. It is based on section 777(6) of ICTA.

Clause 717: Exemption for sales of going concerns

2073.     This clause limits the scope of the charge by providing an exemption (itself limited by clause 718) for transfers of businesses and companies as going concerns. It is based on section 775(4) and (6) of ICTA.

Clause 718: Restriction on exemption: sales of future earnings

2074.     This clause is directed against abuse of the exemption given by clause 717. It is based on section 775(5) of ICTA.

2075.     The taxpayer might attempt to avoid the charge under this Chapter by exploiting clause 717, namely by transferring a future income stream into a business or company carrying on a going concern and obtaining a capital amount for the disposal of the entire package. In such a case, this clause would require an apportionment and restrict the exemption.

2076.     Clause 718 also includes a minor change in the law, although not in practice. See Change 112 in Annex 1.