Clause 765: Employment income of individuals in the United Kingdom for temporary purpose

2253.     This clause provides that an individual who is in the United Kingdom for a temporary purpose and stays there for only a limited period is not to be treated as UK resident for the purposes of the rules in Chapters 4 and 5 of Part 2 of ITEPA which determine taxable earnings from employment. It is based on section 336(2) and (3) of ICTA.

2254.     Subsection (1), which describes to whom this clause applies, makes clear that this clause relates only to the residence status of individuals and the term "individual" is used throughout this clause in place of "person" in section 336 of ICTA.

2255.     In subsection (1)(b), reference to 183 days has been substituted for the reference to six months in section 336(2) of ICTA. See Change 117 in Annex 1 and the commentary on clause 764.

2256.     Subsections (3) and (4) are based on the final words of section 336(2) of ICTA:

but shall be treated as resident there if he has.

Clause 766: Visiting forces and staff of designated allied headquarters

2257.     This clause provides that the presence in the United Kingdom of certain individuals who are in the United Kingdom for specific purposes only does not cause the individual to be treated, for income tax purposes, as being UK resident or as changing the individual's residence or domicile (see subsection (4)). It is based on section 323 of ICTA.

2258.     This clause applies to an individual who is in the United Kingdom by reason only of being a member of a visiting force of a designated country or of a civilian component of such a force (see subsection (1)) or by reason of falling into one of the categories of individuals mentioned in subsections (2) and (3). But it does not apply to British and certain other citizens (see subsection (1)(c)).

2259.     As it is clear that this clause can only relate to individuals, the term "individual" is used throughout this clause in place of "person" in section 323 of ICTA.

2260.     Subsection (1) sets out in full the description of a member of a visiting force to whom this clause applies. This avoids the cross reference to section 303(1) of ITEPA in section 323(2) of ICTA.

2261.     The definitions of "member" (in relation to a visiting force), "visiting force" and "member of a civilian component of a visiting force" are contained in Part 1 of the Visiting Forces Act 1952 (the 1952 Act). Those definitions have not been set out in full in this clause - partly for reasons of length and partly to retain the explicit link between this clause and the 1952 Act. Subsection (6) incorporates them by reference.

2262.     This clause corrects a minor drafting error in section 323(4) of ICTA. Section 323(4) of ICTA provides that references to a visiting force in section 323(2) apply also to a civilian component of such a force and that "that subsection shall be construed as one with Part 1 of the Visiting Forces Act 1952". As there is no reference to "civilian component" in section 323(2) of ICTA, construing that subsection as one with Part 1 of the 1952 Act does not have the effect of applying the definition of "member of a civilian component of a visiting force" in section 10 of that Act for the purposes of section 323(4) or (5) of ICTA. There is no doubt that the definition is intended to apply.

2263.     This clause makes the correction by:

• incorporating in subsection (1) the provisions of section 323(4) of ICTA applying section 323(2) of that Act to a member of a civilian component of a visiting force; and

• providing in subsection (6) not only for subsection (1) to be interpreted as if in Part 1 of the 1952 Act, but also for subsection (2), which is based on section 323(5) of ICTA, to be so interpreted.

2264.     Section 303 of ITEPA, which is based on part of section 323 of ICTA and applies to the individuals to whom this clause applies, provides that earnings paid to such individuals by the government of a designated country or by a designated allied headquarters are exempt from income tax.

2265.     The effect of clause 766 of this Bill is that an individual to whom it applies is not liable to United Kingdom income tax on income arising from a source outside the United Kingdom.

2266.     Subsection (5) ensures that an individual to whom this clause applies has the benefit of the personal reliefs to which the individual would be entitled if resident in the United Kingdom. Such reliefs will, accordingly, be available in calculating the individual's liability to United Kingdom income tax on such income as, for example, United Kingdom bank interest, dividends from UK resident companies and UK-based earnings which are not exempt under section 303 of ITEPA.

Clause 767: Residence of personal representatives

2267.     This clause sets out rules for determining the residence status of personal representatives, in their capacity as such, where one or more (but not all) of them are UK resident in their own capacity. It is based on section 111(1) and (2) of FA 1989.

2268.     Section 111 of FA 1989 was enacted, together with section 110 of that Act (residence of trustees), following the decision in Dawson v CIR (1989), 62 TC 301 HL ¹². Section 110 of FA 1989 was repealed by FA 2006 and replaced by similar but extended provisions in section 685E(2) to (7) of ICTA (see the commentary on clauses 475 and 476).

¹²      [1989] STC 473

2269.     In Dawson it was held that under the law then in force trust income from a foreign source could not be assessed on a UK resident trustee whose fellow trustees were non-UK resident. In his speech, with which the other members of the Judicial Committee concurred, Lord Keith of Kinkel stated (at page 329):

The argument for the Revenue accepts that the income of the settlements arose or accrued to the three trustees jointly, and not jointly and severally, so that none of them was entitled in law separately to any particular share or fraction of the income. It is contended, however, that the whole income from the foreign investments did, on a proper construction of para 1(a)(i) of s 108 [of ICTA 1970], arise or accrue to the Respondent as a person residing in the United Kingdom, and that the circumstance that it did so to him jointly with two co-trustees resident abroad is irrelevant. However, the word "person" in that sub-sub-paragraph must include the plural "persons" by virtue of s 6(c) of the Interpretation Act 1978. If all three trustees had been resident in the United Kingdom application of the enactment would have been such the income would have been treated as arising or accruing to all three, and all three would have been jointly assessable to tax. In the situation which prevails here, namely that one of the trustees is resident in the United Kingdom but the other two are resident abroad, the income likewise arises or accrues to all three, but all three cannot be jointly assessed to tax. There can be no justification for assessing to tax the Respondent alone, on the ground that he is resident in the United Kingdom, because the income does not arise or accrue to him personally. He has no right of control over the income. His only interest in it is a right and duty to secure, in conjunction with his co-trustees, that it is applied in accordance with the directions of the trust deeds. Similarly, when one turns to s 114(1) of the Act of 1970 it is found that the persons receiving or entitled to the income are the three trustees jointly. Should the plural "persons" be turned into the singular "person" it is found that the Respondent as an individual cannot properly be described as the person receiving or entitled to the income.

2270.     The effect of section 111 of FA 1989 is to determine, in a case where some of the persons who are the personal representatives are in their own capacity UK resident and some are not, that the personal representatives, in their capacity as such, are either all UK resident or all non-UK resident.

2271.     If all the personal representatives are UK resident, then, as the persons jointly receiving or entitled to the income, the personal representatives are chargeable in that capacity to income tax in respect of all the income so arising, whether from a United Kingdom or a foreign source. If none of them is UK resident, they are only chargeable in that capacity to income tax in respect of any of that income from a United Kingdom source.

2272.     This clause determines the residence status of all of the personal representatives in that capacity by reference to the residence or domicile of the deceased at the time of death.

2273.     If the deceased was UK resident, ordinarily UK resident or domiciled in the United Kingdom at the time of death, any of the deceased's personal representatives who are non-UK resident in their own capacity are to be treated as UK resident in their capacity as personal representatives of the deceased. See subsections (2) and (3).

2274.     If the condition in subsection (3) is not met in relation to the deceased, any of the deceased's personal representatives who are UK resident in their own capacity are to be treated as non-UK resident in their capacity as personal representatives of the deceased. See subsection (4).

2275.     The provision in section 111(1)(b) of FA 1989 that a personal representative who is treated as non-UK resident under that paragraph is also to be treated as resident outside the United Kingdom is included in Chapter 2 of Part 12 (see the commentary on clause 651). The provisions of section 111(7) and (8) of FA 1989, relating to the effect of that rule on liability under sections 739 and 740 of ICTA, are included in Part 13 of Schedule 2.

2276.     The definition of "personal representatives" in section 111(3) of FA 1989 has been omitted. Instead, the general Income Tax Acts definition of "personal representatives" in clause 923 applies to this clause. See Change 143 in Annex 1 and the commentary on clause 923.

Clause 768: Residence rules for trustees and companies

2277.     This clause provides signposts to other provisions relating to residence, not included in this Chapter. It is new.

2278.     Those provisions are:

• clauses 475 and 476 of this Bill which contain the rules for determining the residence of trustees and

• sections 66 and 66A of FA 1988 and section 249 of FA 1994 which contain rules for determining the residence of a company.

2279.     The provisions in FA 1988 and FA 1994 do not form part of this Bill, as they apply not only for the purposes of the Tax Acts but also for the purposes of TMA and of TCGA and all other enactments relating to capital gains tax.

2280.     In relation to a company, this clause is to be read with clause 5 which provides that income tax is not charged on the income of a company if the company is within the charge to corporation tax in respect of the income. That clause contains a signpost to sections 6(2) and 11(1) of ICTA for the circumstances in which a company is within the charge to corporation tax in respect of its income. Those circumstances in turn depend upon the residence of the company.

Chapter 3: Jointly held property

Overview

2281.     These clauses rewrite the rules in sections 282A and 282B of ICTA that apply to income arising from property held in the joint names of a husband and wife or civil partners who are living together. In general, the effect of the rules is that such income is allocated equally between the parties.

2282.     There are no specific rules dealing with the allocation of income arising from property owned jointly by other persons. If assets are held "in common" so that each party has a specific share, then the allocation of income would normally reflect those shares. And if assets are held by joint tenants, then in law each person owns the whole of the property and is entitled to the whole of the income. But in practice such income is not subject to double assessment and is normally allocated equally.

Relevance of "earned income"

2283.     The term "earned income" has a long history. It is defined in section 833(4) to (6) of ICTA, and subsection (6) indicates that there are a number of further provisions under which certain sorts of income are treated as earned.

2284.     Following the changes made to pensions tax legislation in FA 2004 which came into force on 6 April 2006, section 282A of ICTA is now the only place in the Income Tax Acts which makes specific use of the term earned income. (And it is not used in relation to national insurance purposes.) There is a single reference to patent income within section 833(5B) of ICTA, in the definition of "relevant UK earnings" in section 189(2)(c) of FA 2004.

2285.     Rather than retain this concept, the joint property rule is rewritten in direct terms without reference to earned income, mainly by excluding all income within Part 9 of ITTOIA from the joint property rule. Accordingly, it is no longer necessary to define earned income, and specific provisions treating income as earned are repealed by this Bill. In addition, the reference to section 833(5B) of ICTA in section 189 of FA 2004 is amended by Schedule 1 to this Bill. See Change 118 in Annex 1.

Section 277 of ICTA

2286.     This section, dating in part from 1842, also relates to income arising from jointly owned property. It is not related to sections 282A and 282B. It is instead about how personal reliefs may be claimed against income arising from jointly owned property. As there is no longer any form of joint assessment of income belonging to more than one person, this provision is otiose and has not been rewritten.

Clause 769: Jointly held property

2287.     This clause provides the general rule (the 50:50 rule) that income from jointly held property is allocated equally between the spouses or civil partners. It is based on section 282A of ICTA.

2288.     Subsection (1) explains that the clause applies to married couples and civil partners provided that they live together. The meaning of "living together" is explained in clause 945.

2289.     Subsection (2) gives the general rule and subsection (3) provides exceptions.

2290.     Exception A relates to income to which neither of the individuals is beneficially entitled. It follows that the 50:50 rule does not apply when the couple hold the property as nominees or trustees.

2291.     Exception B applies where the couple own property in common in unequal shares and make a declaration under clause 770.

2292.     Exception C applies to all income that arises to the individuals as partners. This exception covers not only income arising from a trade or profession carried on in partnership, but any other business income arising to a firm. See Change 118 in Annex 1 and the overview commentary on this Chapter.

2293.     Exception D applies to the commercial letting of furnished holiday accommodation, which is treated as a trade. See Change 118 in Annex 1 and the overview commentary on this Chapter.

2294.     Exception E is based on section 282A(4A) of ICTA. It ensures that if close company shares or securities are held "in common", income arising from that property is allocated according to true beneficial ownership rather than equally.

2295.     Exception F ensures that the rule in subsection (2) does not apply to income that is treated as the income of the other individual or a third party under any other provision of the Income Tax Acts.

Clause 770: Jointly held property: declarations of unequal beneficial interests

2296.     This clause enables couples to specify that the 50:50 rule does not apply to income arising from particular property held "in common", so that the income is then allocated according to each individual's beneficial interest. It is based on sections 282A and 282B of ICTA.

2297.     A declaration can only be made where the entitlement of each individual to a share in the income matches the entitlement to his or her share in the underlying property (subsection (1)).

Chapter 4: Other miscellaneous rules

Overview

2298.     This Chapter contains miscellaneous income tax provisions.

Clause 771: Local authorities and local authority associations

2299.     This clause exempts United Kingdom local authorities and local authority associations from income tax. It is based on section 519 of ICTA.

Clause 772: Issue departments of the Reserve Bank of India and the State Bank of Pakistan

2300.     This clause exempts from income tax the income of the issue departments of the central banks of India and Pakistan. It is based on section 517 of ICTA.

Clause 773: Government securities held by non-UK resident central banks

2301.     This clause exempts from income tax certain income arising in the United Kingdom to overseas central banks. It is based on section 516 of ICTA.

2302.     The scope of the exemption is specified in an order made by Her Majesty in Council. It does not extend to income arising in the normal course of a bank's trading operations in the United Kingdom.

Clause 774: Official agents of Commonwealth countries etc

2303.     This clause provides an exemption from income tax for certain income arising to official agents of Commonwealth countries and of the Republic of Ireland and of states or provinces of those countries. It is based on section 320(2) to (4) of ICTA.

2304.     The exemption is the same as that given to members of the staff of a diplomatic mission under the Diplomatic Privileges Act 1964 which gives force to the United Kingdom's international obligations under the Vienna Convention on Diplomatic Relations. In most cases, provided the agent is not a United Kingdom national and is present in the United Kingdom solely for the purpose of the agent's duties, that is an exemption for the agent's official earnings and other income arising outside the United Kingdom. Private income arising in the United Kingdom remains liable to income tax.

2305.     Section 320(1) of ICTA provides an exemption to an Agent-General and section 320(3)(a) an exemption to his or her personal staff. These exemptions have not been rewritten as they merely duplicate exemptions now given under the Commonwealth Countries and Republic of Ireland (Immunities and Privileges) Order SI 1985/1983.

2306.     Section 320(3)(c), which provides an exemption to an official agent of a self-governing colony, has not been rewritten because there are no overseas territories now certified as self-governing colonies.

Clause 775: European Economic Interest Groupings

2307.     This clause sets out the basic rules that determine how the members of a European Economic Interest Grouping are to be taxed. It is based on section 510A of ICTA to the extent that it relates to income tax.

2308.     Members of a Grouping may be companies, individuals or partnerships.

Clause 776: Restriction of deductions for annual payments

2309.     This clause prevents annual payments for which the consideration is either a dividend or not taxable from being deducted in calculating a person's income from any source. It is based on section 125(1) of ICTA.

2310.     Clause 832(5)(f) prevents the annual payments concerned from being qualifying annual payments. So they are not subject to deduction of tax at source, nor eligible for relief under Chapter 4 of Part 8 (annual payments and patent royalties). This clause extends the ban on relief so that no annual payment that meets the definition in clause 837 is an allowable deduction in calculating income in any circumstances.

Clause 777: Letters patent etc: exempting provisions

2311.     This clause voids the impact of exempting provisions in letters patent. It is based on section 829(4) of ICTA.

2312.     The words "to be granted" in the source legislation have been omitted as it is not possible for an exemption to be in point until the letters patent are actually granted.

2313.     Subsection (3) is drafted on the basis that purported exemptions in all letters patent etc are void.

2314.     Section 829(4) of ICTA also contains the rule that any statute which purports to confer income tax exemptions on a particular person or class of persons is void. It is not considered that "statute" can have its modern meaning of "Act of Parliament", since it is always open to Parliament to enact specific tax exemptions if it chooses to do so. It is instead aimed at provisions of a quasi-legislative nature such as bye-laws. But the idea of a local rule overriding an Act of Parliament by providing an income tax exemption is no longer tenable. So this part of section 829(4) is repealed as obsolete.

Clause 778: Extra return to be treated as interest etc

2315.     This clause treats as interest certain "extra returns" that arise in some circumstances if new securities are issued of the same kind as existing securities. It is based on section 587A(1) to (3) of ICTA.

2316.     The clause applies where new securities are issued which are of the same kind as existing securities, except that at the issue date the existing securities will have accrued a certain amount of interest. In order to pay the same amount of "interest" on all the securities at the next interest payment date, the issue price of the new securities is increased to reflect the accrued interest on the existing securities. This clause contains special rules for the treatment of the amount by which the issue price is increased.

2317.     Subsection (1) sets out the conditions that must be met for the provision to operate. The total amount by which the issue price of the new securities is increased and which is then returned to the holder along with the true interest on the securities at the next interest payment date is called the "extra return".

2318.     Subsection (2) specifies that the extra return must be equal to the interest that accrued for the relevant period on an equivalent number of existing securities. The relevant period is defined in clause 779.

2319.     Subsection (3) ensures that the extra return is treated as a payment of interest. It then follows that where deduction of tax applies, it will apply to the whole amount of "interest" including the extra return.

2320.     Subsection (4) ensures that no relief is given to the issuer for the extra return.

2321.     For corporation tax purposes, section 587A of ICTA applies only if the new securities were issued before 1 April 1996. Accordingly, this provision has not been retained for corporation tax purposes.

Clause 779: Interpretation of section 778

2322.     This clause provides definitions for terms used in clause 778. It is based on section 587A(3) to (6) of ICTA.

Part 14: Deduction of income tax at source

Overview

2323.     This Part concerns the main rules about deduction of income tax at source.

2324.     The Part sets out the various duties to deduct, apart from those arising in connection with PAYE (see Part 11 of ITEPA) and the Construction Industry Scheme (see Chapter 3 of Part 3 of FA 2004, which is taking over from Chapter 4 of Part 13 of ICTA).

2325.     The Part retains the distinction in the source legislation between the deduction of "sums representing income tax" and the collection of the income tax which those sums represent. This reflects the conceptual distinction between income tax which is charged on a person's income and income tax which is deducted at source (and not subject to a charge to tax). The Part also contains provisions which make clear the link between the sums deducted and the amount to be collected (eg clause 884(2)).

Chapter 1: Introduction

Clause 780: Overview of Part

2326.     This clause provides an overview to the Part. It is new.

Clause 781: Income tax deducted at source treated as income tax paid by recipient

2327.     This clause treats sums representing income tax deducted (or treated as deducted) from a payment under this Part (other than under clauses 899 (visiting performers) or 904 (non-resident landlords)) as tax paid by the recipient, and links such amounts with the provisions of TMA concerning payment of income tax. It is based on sections 348(1) and 349(1) of ICTA and sections 426, 550, 602, 618 and 686(1) of ITTOIA.