Clause 807: Duty to deduct from certain payments of yearly interest

2412.     This clause sets out the basic duty to deduct sums representing income tax from certain payments of yearly interest. It is based on sections 4 and 349 of ICTA.

2413.     This clause does not apply to interest paid by building societies. See the commentary on clause 808 and Change 127 in Annex 1.

2414.     Subsection (1)(d) concerns payments made to persons whose "usual place of abode" is outside the United Kingdom.

2415.     The term "usual place of abode" also occurs:

• in clause 820 in this Chapter (industrial and provident societies);

• in clause 839 (certain royalties etc): and

• in clause 904 (non-resident landlords).

2416.     The term "usual place of abode" is consciously retained, because it is a technical term, distinct from residence.

2417.     The duty to deduct in subsection (2) applies to any yearly interest arising in the United Kingdom, subject to the exceptions mentioned in subsections (3) and (4).

2418.     The source legislation in section 349(2) of ICTA identifies yearly interest by referring both to interest falling within Chapter 2 of Part 4 of ITTOIA (income tax) and Case III of Schedule D (corporation tax). But before the amendment to section 349(2) was made by ITTOIA, the yearly interest concerned was identified simply by reference to section 18(3)(a) of ICTA (the income tax definition of interest chargeable under Case III of Schedule D).

2419.     Here, in rewriting section 349(2) of ICTA, the opportunity is taken to revert to this single test, which amounts to the requirement that the income arises in the United Kingdom. The reference to "Schedule A" in section 18(3)(a) of ICTA is not included as this applied only to annual payments.

2420.     Subsection (2) also makes it explicit that the rate at which deduction must be made is the savings rate, that being the rate applicable to income within Chapter 2 of Part 4 of ITTOIA.

Clause 808: Interest paid by building societies

2421.     This clause provides an exception from the duty to deduct under this Chapter when interest is paid by a building society. It is based on section 349(2) of ICTA.

2422.     This clause removes a drafting defect in section 349(2) of ICTA. It reflects the fact that all duties to deduct sums representing income tax from payments made by building societies are dealt with in Chapters 2 and 4 of Part 14 (based on sections 349(3A) and (3B) of ICTA and regulations made under 477A(1) of ICTA). See Change 127 in Annex 1.

Clause 809: Interest paid by deposit-takers

2423.     This clause provides an exception from the duty to deduct under this Chapter when interest is paid by a deposit-taker and there is a duty to deduct tax under Chapter 2 of this Part, or there would have been such a duty to deduct but for regulations made under clause 785 (no liability to income tax), or the exceptions contained in clauses 791 to 794 (non-UK resident declarations). It is based on section 349(3) of ICTA.

Clause 810: UK public revenue dividends

2424.     This clause provides an exception from the duty to deduct under this Chapter for payments of UK public revenue dividends (although there may be a duty to deduct under Chapter 5). It is new.

Clause 811: Interest paid by banks

2425.     This clause provides an exception from the duty to deduct under this Chapter for interest paid by a bank "in the ordinary course of its business". It is based on section 349(3) and (3AA) of ICTA.

2426.     But this does not override any duty to deduct under Chapter 2 of this Part.

2427.     Broadly, all interest is paid "in the ordinary course of its business" (see subsection (1)) unless:

• the borrowing relates to the capital structure of the bank; or

• the characteristics of the transaction giving rise to the interest are primarily attributable to an intention to avoid United Kingdom tax.

See in particular Statement of Practice 4/96.

Clause 812: Interest paid on advances from banks

2428.     This clause provides an exception from the duty to deduct under this Chapter for interest payable to a bank in respect of an advance from that bank, if the person entitled to the interest (whether or not the bank itself) is within the charge to corporation tax. It is based on section 349(3), (3AA) and (3AB) of ICTA and articles 3 and 4 of the European Investment Bank (Designated International Organisation) Order 1996 (SI 1996/1179).

2429.     If the advance is from the European Investment Bank there is no duty to deduct whether or not the payer is within the charge to UK corporation tax. This provision enacts article 4 of the European Investment Bank (Designated International Organisation) Order 1996 (SI 1996/1179). See Change 128 in Annex 1. See also clause 925 (which enacts article 3 of the Order).

2430.     More generally, the clause provides that the powers under clause 925(2)(e) may, in designating an international organisation as a bank, modify this section. In particular, such an organisation may not be within the charge to UK corporation tax, but a designation may still result in there being no duty to deduct from interest on advances from that organisation.

Clause 813: Interest paid on advances from building societies

2431.     This clause provides an exception from the duty to deduct under this Chapter for interest on an advance from a building society. It is based on section 477A(7) of ICTA.

Clause 814: National Savings Bank interest

2432.     This clause provides an exception from the duty to deduct under this Chapter for interest on deposits with the National Savings Bank. It is based on section 349(3) of ICTA.

Clause 815: Quoted Eurobond interest

2433.     This clause provides an exception from the duty to deduct under this Chapter for interest on quoted Eurobonds. It is based on section 349(3) of ICTA.

Clause 816: Interest on loan to buy life annuity

2434.     This clause provides an exception from the duty to deduct under this Chapter for interest subject to the regime in section 369 of ICTA. It is based on section 349(3) of ICTA.

Clause 817: Relevant foreign income

2435.     This clause provides an exception from the duty to deduct under this Chapter for interest which is chargeable to income tax as relevant foreign income. It is based on section 349(3) of ICTA.

Clause 818: Authorised persons dealing in financial instruments

2436.     This clause provides an exception from the duty to deduct under this Chapter for a person authorised under FISMA whose business wholly or mainly involves dealing in financial instruments as principal. It is based on section 349(3) of ICTA.

Clause 819: Interest paid by recognised clearing houses etc

2437.     This clause provides an exception from the duty to deduct under this Chapter for certain payments of interest made by recognised clearing houses (RCH) and recognised investment exchanges (RIE), as defined in FISMA. It is based on section 349(3) and (6) of ICTA.

2438.     In relation to such payments of interest, two conditions have to be met.

2439.     The first condition (subsection (1)(a)) requires that the RCH or RIE carry on the business of providing a service whereby there are contracts between each of the parties to a transaction and the RCH or RIE, instead of contracts directly between the parties. Such a service is called a "central counterparty clearing service" (as defined in subsection (3)).

2440.     The second condition (subsection (1)(b)) requires that the payment is made in the ordinary course of that business to users of the service in respect of margin or other collateral deposited with the payer.

2441.     Subsection (2) concerns cases where an RCH or RIE may be a party to contracts involving the sale and repurchase of securities, with or without a put option. In such cases the margins between the sale price and the repurchase price are treated for tax purposes as payments of interest, which may (or may not) be yearly interest.

Clause 820: Industrial and provident society payments

2442.     This clause provides an exception from the duty to deduct under this Chapter where an interest payment is made by registered industrial and provident society to a person whose usual place of abode is in the United Kingdom, and a related requirement to make returns of such payments. It is based on section 486(2), (3), (6) and (12) of ICTA.

2443.     For discussion of "usual place of abode", see the commentary on clause 807.

Clause 821: Statutory interest

2444.     This clause provides an exception from the duty to deduct under this Chapter where statutory interest is paid under the Late Payment of Commercial Debts (Interest) Act 1998. It is new.

2445.     Tax Bulletin 42 (August 1999) indicated that where statutory interest is paid, it would not be regarded as yearly and would not therefore be subject to deduction of tax under section 349(2) of ICTA. See Change 129 in Annex 1.

Chapter 4: Deduction from payments in respect of building society securities

Overview

2446.     This Chapter requires building societies to deduct sums representing income tax from payments of dividends and interest on certain securities which are listed or capable of being listed on a recognised stock exchange.

2447.     Other payments of dividends and interest made by building societies are dealt with in Chapter 2 of this Part.

Clause 822: Payments in respect of building society securities

2448.     This clause sets out the duty to deduct sums representing income tax from payments made in respect of certain building society shares or securities which are listed or capable of being listed on a recognised stock exchange. It is based on sections 4(1A) and (2) and 349(3A), (3B) and (4) of ICTA.

2449.     Subsection (3) provides that qualifying certificates of deposit, qualifying uncertificated eligible debt security units and quoted Eurobonds are not subject to the duty to deduct under this Chapter.

2450.     The references to qualifying deposit right in sections 349(3A) and (4) of ICTA have not been rewritten as they are obsolete. See Change 126 in Annex 1.

2451.     Subsection (4) provides the duty to deduct a sum representing income tax, and makes it explicit that the rate at which tax is to be deducted is the savings rate, that being the rate applicable to income within Chapter 2 of Part 4 of ITTOIA.

2452.     Subsection (7) defines "dividend" as including any distribution and defines "security" as including a share, including in particular a "permanent interest bearing share" as defined in section 117 of TCGA.

Chapter 5: Deduction from payments of UK public revenue dividends

Overview

2453.     This Chapter requires the deduction of sums representing income tax from payments of UK public revenue dividends. It is based on sections 4, 50 to 51AA, 349(3C) and (4), 350 and 350A of ICTA.

Clause 823: Overview of Chapter

2454.     This clause provides an overview of the Chapter. It is new.

Clause 824: Meaning of "UK public revenue dividend"

2455.     This clause defines "UK public revenue dividend" as being any income from securities which is paid out of the public revenue of the United Kingdom or Northern Ireland, but excludes interest on local authority stock. It is based on section 349(4) of ICTA.

2456.     The reference to "Northern Ireland" in the definition of "UK public revenue dividend" reflects the fact that amounts paid out of the public revenue of the United Kingdom to the Northern Ireland Exchequer Consolidated Fund (from which securities may be issued under section 11(1)(c) of the Exchequer and Financial Provisions Act (Northern Ireland) 1950) are not "public revenue of the United Kingdom".

Clause 825: Duty to deduct from certain UK public revenue dividends

2457.     This clause sets out the general duty to deduct a sum representing income tax from payments of UK public revenue dividends. It is based on sections 4, 50 and 349(3C) of ICTA.

2458.     Subsection (2) makes it explicit that the rate at which deduction must be made is the savings rate, that being the rate applicable to income within Chapter 2 of Part 4 of ITTOIA.

Clause 826: Payments of UK public revenue dividends which are payable gross

2459.     This clause sets out an exception to the general duty to deduct in clause 825. It is based on sections 50 and 51(1) of ICTA.

2460.     Subsection (1) provides that there is no duty to deduct if a payment of interest is made in respect of "gross-paying government securities" and no application has been made for the interest to be paid net of tax.

2461.     Subsection (2) defines "gross-paying government securities" as being "gilt-edged securities" or securities which are the subject of a Treasury direction.

Clause 827: Treasury directions

2462.     This clause is based on sections 50, 51 and 51AA of ICTA.

2463.     Subsections (1) and (2) allow the Treasury to direct that securities issued under the National Loans Acts 1939 and 1968 are "gross-paying government securities".

2464.     Subsection (3) deals with the issue of Northern Ireland securities and allows the Treasury, at the request of the Department of Finance and Personnel, to direct that securities issued under section 11(1)(c) of the Exchequer and Financial Provisions Act (Northern Ireland) 1950 are "gross-paying government securities".

2465.      Section 51(2) of ICTA sets out the provisions of section 11(1)(c) of the 1950 Act by including the words, "for money borrowed by the Department of Finance and Personnel for the purposes of making issues from the Consolidated Fund of Northern Ireland". These words have not been included as they do not alter the scope of the reference to section 11(1)(c) of the 1950 Act and are, therefore, unnecessary.

Clause 828: Deduction at source application

2466.     This clause allows the holder of registered gross-paying government securities to make an application for the securities to be subject to deduction of a sum representing income tax under clause 825. It is based on section 50 of ICTA.

2467.     The application must be made to the Registrar in such form as is prescribed by the Registrar with the approval of the Treasury. It is effective one month after the application has been made and ceases to be effective when the person who made it is no longer the registered owner or when the election ceases to have effect following its withdrawal under clause 829.

2468.     Subsections (4) and (5) confirm that where the registered holders are trustees they can make an application for sums representing income tax to be deducted under clause 825 without the consent of any other person and despite anything in the trust instrument.

2469.     Subsection (6) defines "registered" and "the Registrar" for the purposes of the Chapter (but see also clause 827(4)).

2470.     The definition of "registered" has been extended to include gilts which are "recorded" in the books of the Registrar. This change provides legislative support for deduction at source applications under this clause in respect of gilts held in CREST. See Change 130 in Annex 1.

Clause 829: Withdrawal of application

2471.     This clause is about the withdrawal of an application for net payment under clause 828. It is based on section 50(5) of ICTA.

2472.     The clause sets out that a withdrawal of an application may be made by the registered holder of the securities only by notice to the Registrar in such form as is prescribed by the Registrar with the approval of the Treasury. Such a withdrawal will have effect one month after the date the Registrar receives the notice.

Clause 830: Power to make regulations

2473.     This clause enables the Commissioners for Her Majesty's Revenue and Customs to make regulations in relation to the Chapter. It is based on section 350A of ICTA.

2474.     Subsection (2) allows regulations to be made which differentiate between different kinds of UK public revenue dividends and to make different provision for different circumstances. Subsection (2)(b) has been aligned to the wording of similar provisions. In particular it now includes a reference to incidental and consequential amendments.

2475.     Section 350A(2)(b) of ICTA, which allowed regulations to be made in respect of the Bank of Ireland, has not been rewritten as it obsolete following the Bank of Ireland's decision to discontinue its stock registration business.

2476.     As a result of that decision, the United Kingdom gilts registers managed by the Bank of Ireland were closed with effect from 25 October 2002 (SI 2002/2521). The holdings were transferred to the main United Kingdom gilts register managed by the Bank of England with effect from 28 October 2002. So the specific provisions in section 350A(2)(b) are no longer necessary. If the Commissioners for Her Majesty's Revenue and Customs were to wish to make similar provision in respect of a particular institution in future (including the Bank of Ireland) they could do so under the general power provided by clause 830(2)(a).

Chapter 6: Deduction from annual payments and patent royalties

Overview

2477.     This Chapter requires the deduction of sums representing tax from certain annual payments and patent royalties. It is based on sections 4, 125, 347A, 348 and 349(1) of ICTA and section 727 of ITTOIA.

2478.     These rules are coupled with those providing for relief for certain of the payments concerned in computing net income: see Chapter 4 of Part 8 and the related commentary. Together, the rewritten rules replace the scheme of the source legislation relating to charges on income (which owes its origins to the historic concept of alienation of income). See Change 81 in Annex 1.

2479.     Sections 348 and 349(1) of ICTA are at the heart of the material about deduction of tax in the source legislation and have a very long history. The basic structure is that a payment falls within section 348 if it is payable wholly out of income brought into charge on the payer, but falls within section 349(1) if it is not payable wholly out of such income. (Payments which are deductible in computing income from a given source are not made out of income charged to tax and therefore fall into section 349(1).)

2480.     The main differences between those sections in relation to deduction of tax are that

• deduction is optional under section 348 of ICTA but mandatory under section 349(1) of ICTA; and

• under section 348 the tax is in effect collected as part of the tax charged on the payer's income, but under section 349(1) the tax is directly assessed (section 350 of ICTA).

2481.     As a result of Change 81 deduction is made mandatory in all cases and the machinery for collecting the sums deducted has been changed, with direct assessment applying in fewer cases.

Clause 831: Overview of Chapter

2482.     This clause provides an overview of the Chapter. It is new.

Clause 832: Meaning of "qualifying annual payment"

2483.     This clause defines "qualifying annual payment". It is based on sections 7(1), 125(1), 348(1A), 349(1A) and 687(1) of ICTA.

2484.     Under the source legislation, for an annual payment to be within the scope of sections 348 and 349 of ICTA it had to be charged to tax:

• under Schedule D Case III;

• under Chapters 7 or 10 of Part 4, section 579, or Chapters 4 or 7 of Part 5 of ITTOIA (and not be relevant foreign income); or

• under sections 609 and 611 of ITEPA.

2485.     This takes account of the amendments made by paragraph 62 of Schedule 10 to FA 2005 (pension schemes etc) with effect from 6 April 2007.

2486.     Subsection (2) specifies that the payment must arise in the United Kingdom. This follows from the fact that historically Case III was limited to United Kingdom sources and it is necessary to introduce this specific condition because United Kingdom sources and foreign sources are dealt with together in ITTOIA.

2487.     Subsection (3) addresses the case where the recipient is a person other than a company and identifies all the provisions in ITEPA and ITTOIA under which annual payments formerly within Case III may be chargeable.

2488.     Subsection (4) addresses the case where the recipient is a company. If the company is liable to income tax then the income must be within the provisions set out in subsection (3). But if the company is liable to corporation tax Case III still applies.

2489.     Subsection (5) excludes a number of types of payment from the provisions in this Chapter.

2490.     Payments treated as made to unit holders from unauthorised unit trusts are not specifically excluded here. That is because they are dealt with in Chapter 13 of this Part and, following the approach adopted in Chapter 10 of Part 4 of ITTOIA, such amounts are no longer treated as annual payments. So it is irrelevant to consider whether they are "qualifying".

2491.     If an annual payment is made by a building society, it is subject to the rule that "payment" includes "crediting": see the Income Tax (Building Societies) (Annual Payments) Regulations 1991 (SI 1991/512).

Clause 833: Deduction from commercial payments made by individuals

2492.     This clause requires that individuals deduct sums representing income tax from qualifying annual payments made for commercial reasons. It is based on sections 4, 347A(2), 348(1) and 349(1) of ICTA and sections 727 and 728 of ITTOIA.

2493.     These are the only qualifying annual payments made by individuals not taken out of taxation by section 347A(2) of ICTA and section 727 of ITTOIA.

2494.     The clause makes deduction mandatory and provides for the tax to be collected as part of the individual's self-assessment (see Chapter 17), so there will be no direct assessments in such cases in future. See Change 81 in Annex 1.

2495.     It is made explicit that the rate at which deduction must be made is the basic rate.

2496.     It is also provided that the basic rate concerned is to be the basic rate for the year of payment. See Change 131 in Annex 1, which also affects clauses 834, 835 and 836.

2497.     The source legislation differentiates between cases where the individual is "liable to make the payment", and cases where payments are made on behalf of someone else (through the formula "the person by or through whom the payment is made"). Since the tax in respect of all payments by individuals will in future be accounted for through the individual's own self-assessment, this clause simply says "the individual must, on making the payment, ..".

2498.     ESC A16 gives relief to a payer who fails to make a payment from which tax was deductible in the year in which it was due to be paid (and in which the payer had income to at least partly cover the payment), but who makes the payment in a later year. This gave rise to an assessment under section 350 of ICTA. The concession will be amended to reflect the new legislative structure relating to annual payments.

Clause 834: Deduction from annual payments made by other persons

2499.     This clause requires persons other than individuals to deduct sums representing income tax from annual payments. It is based on sections 4, 347A(3), 348(1) and 349(1) of ICTA and sections 727 to 728 of ITTOIA.

2500.     For persons other than individuals the range of payments within sections 348(1) and 349(1) of ICTA is wider than it is for individuals because the provision that certain payments are not to be charges on income (section 347A(1) of ICTA and section 727 of ITTOIA) applies only to payments by individuals. Accordingly, while clause 833 applies only to commercial payments, this clause applies to any annual payment that is a qualifying annual payment within clause 832.

2501.     This clause does not apply to a payment made by an individual's personal representatives unless it would have constituted a commercial payment within clause 833 if paid by the individual before the individual's death.

2502.     Subsections (3) to (5) set out the conditions that determine which method is used to collect the tax. Deduction at the applicable rate (see the commentary on clause 835) is mandatory in all cases, but the method of recovery depends on whether the payer does, or does not, have any modified net income in the year in which payment is made.

2503.     If the payer has some modified net income, then the tax is collected as part of the payer's self-assessment by virtue of Chapter 17. If the payer has no modified net income, then the tax is collected under Chapter 15 if the payer is a UK resident company, and otherwise under Chapter 16. See Changes 81 and 131 in Annex 1 and the commentary on clause 833.

2504.     Where the payer is not an individual and will not be accounting for the tax under Self Assessment, the term "the person by or through whom the payment is made" has been retained.