Clause 835: Meaning of "applicable rate" in section 834

2505.     This clause defines "applicable rate" in clause 834. It is based on section 4 of ICTA.

2506.     Payments within clause 833 are all subject to deduction at the basic rate. Deductions from annual payments made by persons other than individuals are also normally at the basic rate. The only exceptions, where the savings rate applies instead, are certain payments under purchased life annuities, namely those charged to tax under Chapter 7 of Part 4 of ITTOIA.

2507.     Subsection (4)(b), which is based on section 4(1A) of ICTA, caters, for example, for the case where the recipient is a company within the charge to corporation tax.

2508.     This clause is subject to provisions requiring or permitting deduction at special rates - see Chapter 8 of this Part. It is also subject to regulation 3 of the Double Taxation Relief (Taxes on Income) (General) Regulations 1970 (SI 1970/488) which provides for a different rate of tax to be deducted from a gross payment if a notice under regulation 2(2) has been given.

2509.     In all cases, the rate is determined by the year in which the payment is made. See Change 131 in Annex 1 and the commentary on clause 833.

Clause 836: Deduction from patent royalties

2510.     This clause requires the deduction of sums representing income tax from patent royalties. It is based on sections 4, 7, 125, 348(2) and 349(1) of ICTA.

2511.     In addition to annual payments, deduction applies to any royalty or other sum in respect of the use of a patent under sections 348(2) and 349(1)(b) of ICTA.

2512.     If a payment in respect of a patent is also a qualifying annual payment then this clause does not apply (subsection (2)(a)). This clarifies that deduction does not apply to a patent royalty which is an annual payment and is paid by an individual otherwise than in connection with the individual's trade. See Change 132 in Annex 1.

2513.     In the case of annual payments, the source legislation states explicitly that to be caught by the deduction rules a payment has to be assessable under Schedule D Case III. That rule carries with it the requirement that the payment should arise in the United Kingdom. There is no such explicit statutory rule covering patent payments that are not annual payments. Normally those payments are not assessable under Case III. But in practice it has always been the case that, for such a payment to be subject to the deduction rules, it must arise in the United Kingdom. Subsection (3) makes this explicit.

2514.     Subsection (4) makes explicit that deduction is to apply only where the payment is charged to income or corporation tax. See Change 133 in Annex 1.

2515.     This clause applies to payments by any person, but otherwise largely follows the format of clause 834. If the payer is an individual or has some modified net income, then the tax is collected as part of the payer's self-assessment under Chapter 17. If the payer is not an individual and has no modified net income, then the tax is collected under Chapter 15 if the payer is a UK resident company, and under Chapter 16 otherwise. See Changes 81 and 131 in Annex 1 and the commentary on clause 833.

Clause 837: Annual payments for dividends or non-taxable consideration

2516.     This clause provides a definition of "annual payment for dividends or non-taxable consideration". It is based on section 125 of ICTA.

2517.     With certain exceptions, subsection (3) has the effect of excluding from the duties to deduct under this Chapter any annual payment that is made for consideration that is either:

• for a dividend or the right to receive a dividend; or

• not taxable.

2518.     The exceptions to that general rule are given in subsections (4) to (7).

2519.     The source legislation specifies that the payment must not be interest (section 125(2)(a) of ICTA). Annual payments within subsection (2) do not include interest, so this does not need to be stated explicitly. In addition, no specific reference is made to annuities (also mentioned in the source legislation) as these are simply one type of annual payment.

Clause 838: Interpretation of Chapter

2520.     This clause clarifies that the references to an individual in this Chapter include a Scottish partnership if at least one partner is an individual. It is based on section 347A(6) of ICTA.

Chapter 7: Deduction from other payments connected with intellectual property

Overview

2521.     This Chapter requires the deduction of sums representing income tax from certain payments connected with intellectual property. It is based on sections 4, 349(1), 349ZA, 524(3), 532, 533 and 536 to 537B of ICTA.

2522.     The payments concerned are:

• royalties or periodical payments in respect of copyright and design rights, and payments in respect of public lending rights ("relevant intellectual property rights") where the usual place of the owner or seller is outside the United Kingdom; and

• proceeds of sale by a non-UK resident of patent rights, if the proceeds of sale are, or include, a capital sum.

Clause 839: Certain royalties etc where usual place of abode of owner is abroad

2523.     This clause requires the deduction of sums representing income tax from certain payments in respect of a "relevant intellectual property right" (see clause 840). It is based on sections 4(1) and (2), 536(1) and (2), 537 and 537B(1) and (2) of ICTA.

2524.     Subsection (1)(b) makes explicit that deduction is to apply only where the payment is charged to income or corporation tax. See Change 133 in Annex 1.

2525.     The payments concerned are those where the owner of the intellectual property right, or a past owner who has assigned the right but receives payments in respect of it, has a usual place of abode outside the United Kingdom.

2526.     For discussion of "usual place of abode", see the commentary on clause 807.

2527.     But the duty to deduct does not apply in cases where the payment is for copies of works or articles that have been exported from the United Kingdom for distribution elsewhere.

2528.      Subsection (5) makes it explicit that the rate at which deduction must be made is the basic rate and imposes the duty to deduct on the person by or through whom the payment is made. But see the commentary on clause 841 for special rules affecting some paying agents.

Clause 840: Meaning of "relevant intellectual property right"

2529.     This clause defines relevant intellectual property right for the purposes of clause 839. It is based on sections 536(1) and (2), 537 and 537B(1) and (2) of ICTA.

2530.     Subsection (2) qualifies the basic categories by excluding copyrights in films and expanding the definition of "right in a design" to reflect the fact that although registered designs were protected in UK law from 1949, by the Registered Designs Act 1949, "design rights" in unregistered designs were not protected until Part III of the Copyright, Designs and Patents Act 1988 came into force in 1989.

Clause 841: Royalty payments etc made through UK resident agents

2531.     This clause addresses issues that arise when a payment is made, not by the owner of the right, but by an agent who in turn is entitled to deduct a commission from the payment. It is based on sections 536(3) and (4) and 537B(3) and (4) of ICTA.

2532.     The normal rule is that the payment is to be reduced by the amount of commission before calculating the amount that is to be deducted.

2533.     But if the agent does not know the amount of commission, or does not know that it is payable, the sum representing income tax must be calculated on the gross amount of the payment, and that amount must be accounted for.

Clause 842: Royalty payments: further provision

2534.     This clause supplements the provisions in clause 839. It is based on sections 536(1), (5) and (6) and 537B(1), (5) and (6) of ICTA.

Clause 843: Proceeds of a sale of patent rights: payments to non-UK residents

2535.     This clause requires the deduction of sums representing income tax from the proceeds of sale of patent rights where the seller is non-UK resident and the proceeds are, or include, a "capital sum". It is based on sections 4, 349(1), 349ZA, 524(3), 532 and 533 of ICTA.

2536.     Section 524(3) of ICTA will continue to apply for corporation tax.

2537.     Subsections (2) and (3) give details of the duty to deduct, and make it explicit that the rate at which deduction must be made is the basic rate. Expenses of the sale, if deducted before payment is made, reduce the amount of the proceeds, as does any element of those proceeds not consisting of a capital sum. The income tax must then be calculated on the amount of the proceeds, as so reduced.

2538.     Subsection (4) extends the provisions of this clause to licences connected with patents, and rights to acquire future patent rights. This subsection is based on the interpretative provisions of section 533 of ICTA.

2539.     Subsection (5) defines "capital sum" by reference to section 4 of CAA. It does not include any sum that is taken into account in computing trading profits or that constitutes earnings from an employment or office.

2540.     Under section 588 of ITTOIA a seller of patent rights who originally paid a capital sum on acquisition of those rights (the capital sum on acquisition) can deduct it from the capital sum on which income tax is charged on the sale. But under section 595 of ITTOIA, when computing the amount of income tax to be deducted from the capital sum on sale, the capital sum on acquisition cannot be deducted from it (subsection (6)(a)).

2541.     Nor is the amount of income tax to be deducted affected by the provisions about spreading of the capital sum, and payment of it by instalments, under section 524(9) of ICTA (subsection (6)(b)).

Chapter 8: Chapters 6 and 7: Special provision in relation to royalties

Overview

2542.     This Chapter deals with two international aspects relating to the deduction of sums representing income tax from royalties paid by companies. It is based on section 349E of ICTA and section 101 of FA 2004.

2543.     The first aspect concerns double tax arrangements (as defined in clause 957), whose provisions may lay down a rate other than the basic rate as the one to be applied to such payments. The Chapter provides that the paying company may deduct a sum representing income tax at the treaty rate (which in some cases is 0%) if it reasonably believes that the payee (as defined in clause 846(2)) is entitled to double taxation relief on the payment.

2544.     The second aspect concerns the provisions implementing the European Union Savings and Royalties Directive (Council Directive 2003/49/EC) in sections 757 to 767 of ITTOIA. These provide that a UK resident company, or a UK permanent establishment of a European Union company, may pay without deduction if it reasonably believes that the income arising from the payment will be exempt under section 758 of ITTOIA.

Clause 844: Double taxation arrangements: deduction at treaty rate

2545.     This clause sets out the conditions under which a company may deduct sums representing income tax on the royalty payment at the treaty rate. It is based on section 349E(1), (2) and (5) of ICTA.

2546.     Subsection (3) states that if, despite the reasonableness of the company's belief, the payee is not in fact entitled to double tax relief, the right to deduct at the treaty rate is treated as never having existed.

Clause 845: Power to make directions disapplying section 844

2547.     This clause gives power to an officer of Revenue and Customs, if not satisfied that the payee will in fact be entitled to double taxation relief on a royalty payment, to direct that clause 844 is not to apply. It is based on section 349E(3) and (4) of ICTA.

2548.     If an officer so directs, the paying company will then have to deduct a sum representing income tax at the basic rate as required under Chapter 6 or 7.

2549.     The reference in the source legislation to "the Board" is replaced with a reference to an officer of Revenue and Customs. See Change 5 in Annex 1.

Clause 846: Interpretation of sections 844 and 845

2550.     This clause gives interpretations of "royalty" and "payee" in relation to clauses 844 and 845. It is based on section 349E(1) and (5) of ICTA.

2551.     Subsection (1) defines "royalty" widely, including in particular any proceeds of a sale of patent rights.

Clause 847: EU companies: discretion to make payment gross

2552.     This clause provides that, if the paying company reasonably believes that section 758 of ITTOIA (exemption for certain interest and royalty payments) applies to the payment, it may pay without deducting a sum representing income tax. It is based on section 101(1) and (2) of FA 2004.

2553.     Section 758 of ITTOIA gives exemption in respect of royalty payments by UK resident companies, or by a UK permanent establishment of a European Union company, to a European Union company (see sections 757 to 767 of ITTOIA).

2554.     Subsection (3) states that if, despite the reasonableness of the company's belief, the payment is not in fact exempt under section 758 of ITTOIA, the right to pay without deduction is treated as never having existed.

Clause 848: Power to make directions disapplying section 847

2555.     This clause gives power to an officer of Revenue and Customs, if not satisfied that payments will in fact be exempt under section 758 of ITTOIA, to direct that clause 847 is not to apply. It is based on section 101(3) and (4) of FA 2004.

2556.     If an officer so directs, the paying company will then have to deduct a sum representing income tax if this is required under clauses 836(7) or 839.

2557.     The reference in the source legislation to "the Board" is replaced with a reference to an officer of Revenue and Customs. See Change 5 in Annex 1.

Clause 849: Duty of payee to notify if payment not exempt

2558.     This clause imposes a duty on the payee to notify an officer of Revenue and Customs and the paying company if it becomes aware that a condition for exemption under section 758 of ITTOIA is no longer met. It is based on section 101(5) of FA 2004.

2559.     The reference in the source legislation to "the Board" is replaced with a reference to an officer of Revenue and Customs. See Change 5 in Annex 1.

Clause 850: Supplementary

2560.     This clause supplements the provisions in clauses 847 to 849. It is based on section 101(8) and (9) of FA of 2004.

Chapter 9: Manufactured payments

Overview

2561.     This Chapter deals with deduction of income tax at source from manufactured property income dividends, manufactured interest and manufactured overseas dividends (MODs). It is based on paragraphs 3 to 4 of Schedule 23A to ICTA and section 139 of, and paragraph 30 of Schedule 17 to, FA 2006.

Clause 851: Manufactured dividends on UK shares: Real Estate Investment Trusts

2562.     This clause imposes an obligation to deduct income tax at source on payers of manufactured dividends (manufactured property income dividends or MPIDs) which are representative of dividends (property income dividends or PIDs) paid by Real Estate Investment Trust companies or by principal companies of Real Estate Investment Trust groups. It is based on section 139 of, and paragraph 30 of Schedule 17 to, FA 2006.

2563.     Subsection (1) sets the conditions for the clause to apply. First, the person must pay a "manufactured dividend" as mentioned in clause 573. Second, the manufactured dividend must be representative of a PID.

2564.     A dividend may be partly but not wholly a PID. Subsection (2) provides that the clause applies only so far as the manufactured dividend is representative of a PID.

2565.     Subsection (3) ensures that, if the payer of the MPID is either UK resident or paying the MPID through a UK branch or agency, the rules on deducting income tax at source from PIDs apply, with any necessary modifications, to the MPID.

2566.     Subsections (4) and (5) enable regulations to be made subjecting MPIDs, if they fall outside subsection (3) to a "reverse charge". This provision is analogous to clauses 853 and 856, which impose "reverse charges" on manufactured interest on UK securities and MODs and are discussed in detail below.

2567.     Subsections (6) and (7) provide that the amount of income tax to be accounted for and paid is equal to the amount which the payer would have been required to deduct if the payment had been an actual PID.

Clause 852: Manufactured interest on UK securities: payments by UK residents etc

2568.     This clause imposes an obligation on payers of manufactured interest to deduct income tax at source. It is based on section 4(1A) of, and paragraph 3 of Schedule 23A to, ICTA.

2569.     It is the first of a group of clauses about manufactured interest on UK securities (clauses 852 to 854).

2570.     Subsection (1) sets out three conditions for the clause to apply. First, the person must pay "manufactured interest" as defined in clause 578. Second, the manufactured interest must be paid in the circumstances set out in clause 578(1). Third, the payer must be either (a) UK resident or (b) paying the manufactured interest in the course of a trade carried on in the United Kingdom through a branch or agency.

2571.     Subsection (2) is based on paragraph 3(2) of Schedule 23A to ICTA. Paragraph 3(2)(a), so far as relevant, provides that "the manufactured interest shall be treated .. as if it (i) were an annual payment to the recipient, but (ii) were neither yearly interest nor an amount payable wholly out of profits or gains brought into charge for income tax." This deeming provision brings the manufactured interest within section 349(1)(a) of ICTA.

2572.     Section 349(1)(a) of ICTA is rewritten in Chapter 6 of this Part (deduction from annual payments and patent royalties). But paragraph 3 of Schedule 23A to ICTA applies section 349(1)(a) to manufactured interest with important modifications: see paragraph 3(2)(b), (4) and (5). This Chapter therefore rewrites paragraph 3 of Schedule 23A separately from Chapter 6.

2573.     This is done without the use of deeming. Subsection (2) spells out that the payer of the manufactured interest must, on making the payment, deduct from the gross amount of the manufactured interest a sum representing income tax on it.

2574.     The rate applicable under subsection (2) is the savings rate in force for the tax year in which the payment is made (and not, as in Chapter 6, the basic rate). This follows from section 4(1A) and (2)(b) of, and paragraph 3(2)(b)(ii) of Schedule 23A to, ICTA.

2575.     Subsection (3) defines the "gross amount" of manufactured interest.

2576.     Subsection (4) explains that this clause is subject to certain other provisions:

• clauses 583 and 585 in Part 11 (Manufactured payments and repos);

• clause 854 (cases where interest on underlying securities paid gross) in this Chapter; and

• Chapter 11 of this Part (payments between companies etc: exception from duties to deduct) - see clause 863(2)(g), which is based on section 349A(3) of ICTA.

2577.     Subsection (5) is a signpost to the collection provisions. If the payer has to deduct tax from the manufactured interest under section 349(1)(a) of ICTA, and the payer is a company, the tax is collected under section 350(4) of, and Schedule 16 to, ICTA. Under paragraph 3(7) of Schedule 23A to ICTA, this applies whether or not the company is UK resident. These provisions are rewritten in Chapter 15 of this Part. Chapter 15 includes some minor changes to the law which are potentially relevant to payments within clause 852:

• -Change 136 makes it clear that a return need be submitted only where a relevant payment was made in that particular return period. It also clarifies related points.

• -Change 137 brings into line the information required to be included on a return where a payment is made otherwise than in an accounting period with the information which is required where the payment is made in an accounting period.

• -Change 140 removes the charging provision in section 350(1) of ICTA, to bring this legislation into line with the approach taken in other legislation about collection of income tax deducted at source. So a person will not be "chargeable" in cases falling within Chapters 3 to 7, 10, 12, 13 and 18 of this Part.

2578.     If the payer is not a company, the tax is collected under section 350(1) of ICTA, which is rewritten in Chapter 16 of this Part. Chapter 16 also includes Change 140.

Clause 853: Foreign payers of manufactured interest: the reverse charge

2579.     This clause imposes an obligation on certain recipients to account for and pay income tax on manufactured interest received. It is based on paragraphs 3 and 3A of Schedule 23A to ICTA.

2580.     By analogy with section 8 of the Value Added Tax Act 1994, specialists refer to this obligation as the "reverse charge." This expression does not appear in the legislation itself but is commonly used. So it has been included in the sidenote to this clause.

2581.     Although this clause is not about "deduction of income tax at source", it is included in this Chapter because it applies in circumstances in which there would be a requirement to deduct income tax at source if the payer was UK resident.

2582.     Subsection (1) sets out three conditions for the clause to apply. First, the person must pay "manufactured interest" as defined in clause 578. Second, the manufactured interest must be paid in the circumstances set out in clause 578(1). These conditions are identical to those in clause 852(1). The third condition contrasts with the third condition in clause 852(1): the payer must be non-UK resident and not paying the manufactured interest in the course of a trade carried on in the United Kingdom through a branch or agency.

2583.     If these conditions are satisfied, subsection (2) sets out the circumstances in which the recipient must account for and pay income tax in respect of the manufactured interest.

2584.     Subsection (3) provides that the amount of income tax to be accounted for and paid is equal to the amount which the payer would have been required to deduct if the case had been within clause 852.

2585.     Subsection (4) provides that, if the payer would not have been required to deduct any sum under clause 852, the recipient is not required to account for and pay any income tax under subsection (3). For the convenience of users, subsection (5) highlights important cases in which subsection (4) applies.

2586.     The collection rule for all recipients, whether or not they are companies and whether or not they are UK resident, is given by secondary legislation: regulation 3(1) and (2) of SI 1997/992, made under paragraph 8 of Schedule 23A to ICTA. The relevant provisions of paragraph 8 are rewritten in clause 586, which refers to this Chapter.

Clause 854: Cases where interest on underlying securities paid gross

2587.     This clause is an exception to the withholding provisions of clauses 852 and 853. It is based on paragraphs 1 and 3A of Schedule 23A to ICTA. Broadly speaking, if the interest itself mentioned in subsection (1) is payable gross, the manufactured interest representative of it is also payable gross.

Clause 855: Manufactured overseas dividends: payments by UK residents etc

2588.     This clause imposes an obligation on the payer of a MOD to deduct income tax from the gross amount of the MOD. It is based on paragraphs 4(1) and 4(2) of Schedule 23A to ICTA. It is the first of a group of clauses concerned with MODs (clauses 855 to 858).

2589.     Subsection (1) sets out three conditions for the clause to apply. First, the person must pay a MOD as defined in clause 581. Second, the MOD must be paid in the circumstances set out in clause 581(1). Third, the payer must be either (a) UK resident or (b) paying the MOD in the course of a trade carried on through a branch or agency in the United Kingdom.

2590.     Paragraph 4(2) of Schedule 23A to ICTA deems the MOD to be an annual payment within section 349 of ICTA. This clause avoids the use of deeming. Subsection (2) spells out that the payer of the MOD must, on making the payment, deduct from the gross amount of the manufactured overseas dividend a sum equal to the relevant withholding tax on the gross amount.

2591.     Subsection (3) explains that this clause is subject to certain other provisions. Unlike clause 852, this clause is not subject to Chapter 11 of this Part (payments between companies etc: exception from duties to deduct), because section 349A(4)(b) of ICTA excludes MODs from the provisions of sections 349A to 349D of that Act.

2592.     Subsection (4) is a signpost to the powers in clauses 586 and 858 to make regulations about collection of tax. The collection rules about MODs, and the rules about tax vouchers for MODs, are given by secondary legislation: regulations 11 and 15 respectively of SI 1993/2004, made under paragraph 8 of Schedule 23A to ICTA. The relevant provisions of paragraph 8 are rewritten in clause 586.