House of Commons - Explanatory Note
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Section 620

3084.     This amendment removes redundant references to the British Museum and the Natural History Museum. See Change 79 in Annex 1 and the commentary on clause 430.

Section 624

3085.     New subsection (1A) makes it explicit that trustees' expenses are not taken into account in measuring the income of a settlor under section 624 of ITTOIA. This follows from the fact that it is the income arising that is deemed to be the settlor's and the income arising is the gross amount out of which the trustees may pay expenses.

Section 628

3086.     This amendment removes redundant references to the British Museum and the Natural History Museum. See Change 79 in Annex 1 and the commentary on clause 430.

Section 646A

3087.     This new section in ITTOIA is based on section 44 of FA 2000. It requires the apportionment of trustees' expenses in a case where any income of a settlement would be treated as the income of a settlor but for the fact that it is given to or arises to a charity. Expenses are allocated rateably between charitable income and other income. The rule applies both in cases where expenses affect the amount of income liable at the special trust rates, and in cases where expenses affect the amount of income of a beneficiary liable to income tax. Section 44 of FA 2000 is being amended to provide for the position of a beneficiary within the charge to corporation tax. For the treatment of expenses generally see Change 91 in Annex 1.

Section 680A

3088.     This new section is based on section 698A of ICTA. It ensures that payments by personal representatives to beneficiaries out of income retain the character of the underlying income. The opportunity has been taken to clarify a point of doubt in the source legislation. See Change 155 in Annex 1.

3089.     It may be noted that section 698A(1) and (2) of ICTA apply only where income is treated under "this Part" in a particular way. In fact, following ITTOIA, the income tax cases to which "this Part" previously applied are now in Chapter 6 of Part 5 of ITTOIA. But paragraph 5 of Schedule 2 to ITTOIA enables the reference to "this Part" to be read as embracing the ITTOIA provisions now in Chapter 6 of Part 5 of ITTOIA.

Section 682

3090.     New subsection (4A) ensures that the amount charged forms part of "total income" in Step 1 of clause 23. If exceptionally the relief being recovered under section 682(4)(b) was a relief given as a tax reduction, then the recovery is a charge to an amount of income tax instead (see clause 32).

Schedule 2

Paragraph 109

3091.     Amendment to this transitional provision is necessary because section 539 of ITTOIA has been rewritten. See the commentary on Schedule 1 (section 539 of ITTOIA). Relief for a deficiency within this provision is given as a deduction from total income instead of as a tax reduction.

Finance Act 2005

Schedule 2

3092.     As part of the alignment of the building society and deposit-taker regimes on deduction of tax, paragraphs 5 and 6 of Schedule 2 to FA 2005 have been replaced with a new paragraph, paragraph 11, of Schedule 2 to FA 2005.

3093.     In respect of qualifying time deposits (see clause 799) there was some doubt about whether relevant arrangements (as defined in paragraph 1 of Schedule 2 to FA 2005) with deposit-takers would be paid gross. This was because, under the source legislation, paragraph 6 of Schedule 2 to FA 2005 treats relevant arrangements as if they are deposits rather than deposits made by way of loan. (For building societies, paragraph 5 of Schedule 2 to FA 2005 treats relevant arrangements as a deposit or loan.)

3094.     But it was clearly the intention that all the deposit-taker rules applied to relevant arrangements. New paragraph 11(b) treats relevant arrangements as if they were deposits consisting of a loan in order to put the matter beyond doubt.

3095.     As part of Change 119 in Annex 1 (enactment of regulations) regulation 2(4) of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231) (as amended by SI 2005/3474) has been enacted so that references to interest in Chapter 2 of Part 14 of this Bill include returns on relevant arrangements (as defined in paragraph 1 of Schedule 2 to FA 2005).

Finance (No 2) Act 2005

Section 7

3096.     The amendments to references to "total income" operate by reference to "Step 3 income", defined by reference to clause 23 of this Bill. See the commentary on that clause.

Part 3: Amendments having effect in relation to shares issued after 5 April 2007 Income and Corporation Taxes Act 1988

Chapter 3 of Part 7

3097.     Under section 967(2), Part 5 of this Bill does not have effect in relation to shares issued before 6 April 2007. Instead the ICTA provisions dealing with the enterprise investment scheme (EIS) on which Part 5 of this Bill is based continue to have effect for these shares.

3098.     So this paragraph provides that the omission of Chapter 3 of Part 7 of ICTA (except for section 305A) only has effect in relation to shares issued after 5 April 2007.

Schedule 2: Transitionals and savings

Overview

3099.     This Schedule provides transitionals and savings.

3100.     The commentary on this Schedule makes specific points on certain of the entries.

Part 1: General provisions

3101.     These paragraphs ensure continuity of the law, despite the fact that this Bill repeals and rewrites provisions.

3102.     It is made clear that the proposition about the continuity of the law does not apply to changes in the law made by this Bill.

3103.     The paragraphs in this Part stand instead of section 17(2) of the Interpretation Act 1978 and provide a comprehensive set of transitional arrangements.

Part 2: Changes in the law

3104.     This paragraph allows anyone affected by a change in the law made by this Bill to elect that the change does not apply to events occurring before 6 April 2007. This allows the Bill to be applied as soon as possible without imposing charges retrospectively.

3105.     The Bill applies for income tax purposes. But it also makes consequential amendments to corporation tax. So corporation tax is also provided for here.

Part 3: Rates at which income tax is charged

3106.     These paragraphs prevent any difficulties arising from the changes made by this Bill in the names of the lower rate and the rate applicable to trusts.

Part 4: Personal reliefs

3107.     These paragraphs ensure that individuals who are entitled to blind person's allowance or married couple's allowance immediately before 6 April 2007 will be able to transfer the appropriate part of that relief to their spouse or civil partner for the tax years 2007-08 and 2008-09. See Change 7 in Annex 1.

Part 5: Losses (except losses on disposal of shares)

Trade loss relief against general income

Early trade losses relief

3108.     The first paragraph under these headings deal with losses in tax years 2007-08 onwards which, under the Part 4 of this Bill, can reduce profits of tax years before 2007-08 (tax years before this Bill has effect).

3109.     The second paragraph under each heading relates to a person who makes a loss for tax year 2006-07 and is denied the corresponding relief under ICTA because the way in which the trade was being carried on was not commercial on 5 April 2007. That person is not to be denied relief for a loss made in 2007-08 purely because this Bill looks to a different date, than would have been the case under ICTA, in deciding whether the trade is commercial. See Change 9 in Annex 1.

Sideways relief: trade leasing allowances given to individuals

3110.     This paragraph relates to an individual who makes a loss for tax year 2006-07 and is denied relief under ICTA for trade leasing allowances because the individual fails to meet the tests concerning the period for which the individual carries on the trade or devotes most of his or her time to it. That person is not to be denied relief for trade leasing allowances in 2007-08 purely because this Bill looks to different periods for these tests than would have been the case under ICTA. See Change 10 in Annex 1.

Reliefs for limited partners not to exceed contribution to the firm

Reliefs for members of LLPs not to exceed contribution to the LLP

Members of LLPs: carry-forward of losses

Reliefs for non-active partners not to exceed contribution to the firm

Non-active partners: carry-forward of losses

3111.     Each of these paragraphs reflects the clarification that losses used as capital losses are treated in the same way as if they had reduced non-trade income. See Change 13 in Annex 1 and the commentary on clause 103.

Restrictions on reliefs for non-active partners: pre-10 February 2004 events

3112.     This paragraph adapts, where appropriate, the approach in clause 110 to follow that of section 118ZE of ICTA (restriction on relief for non-active partners).

3113.     Broadly, the "aggregate amount" in section 118ZE of ICTA ignored sideways relief given for losses of a tax year with a basis period ending before 10 February 2004 (with suitable adjustments for tax years whose basis period straddled that date). But such relief as was ignored was, so far as possible, deducted from contributions to capital made by the individual before 10 February 2004.

3114.     That might still be relevant to an individual who would have been able to benefit from section 118ZJ of ICTA (carry forward of unrelieved losses of non-active partners) that potentially permitted sideways relief for brought forward losses. Additionally, it could be relevant to cases where a partnership that was trading on 10 February 2004 sets up a new trade after that date, because of the change from "contribution to the trade" in the source legislation to "contribution to the firm". See Change 16 in Annex 1.

Application of existing regulations under sections 114 and 735

3115.     The Partnership (Restrictions on Contributions to a Trade) Regulations 2005 (SI 2005/2017) are amended consequentially on the change from "contribution to the trade" in the source legislation to "contribution to the firm". See Change 16 in Annex 1.

Loss relief against miscellaneous income: Case VI losses

3116.     This paragraph allows Schedule D Case VI losses to continue to be carried forward for relief against certain income of future years. The income in question would have been Schedule D Case VI income but for ITTOIA 2005 removing, for income tax, that concept in relation to tax years starting after 5 April 2005.

Part 6: Losses on disposal of shares

3117.     The transitional provisions in this Part relate principally to the provisions of Chapter 3 of Part 7 of ICTA which are applied, with modifications, by cross reference for the purpose of the definition of eligible trading company in section 576(4A) of that Act. Section 576(4A) of ICTA was introduced with effect from 6 April 1998 in relation to shares issued on or after that date. The majority of those provisions of Chapter 3 of Part 7 of ICTA, as modified, have been included in full in clauses 137 to 146 for the purposes of share loss relief.

3118.     Part 5 (Enterprise investment scheme), which is based on Chapter 3 of Part 7 of ICTA (other than section 305A of ICTA), has effect only in relation to shares issued on or after 6 April 2007. See the commentary on clause 967(3). One of the effects of clause 967(3) is that all Changes in Annex 1 relating to clauses of Part 5 apply for the purposes of that Part only to shares issued on or after 6 April 2007.

3119.     But Chapter 6 of Part 4 (losses on disposal of shares) applies to give share loss relief if the shares are disposed of on or after 6 April 2007, including cases where the shares were issued before that date.

3120.     In determining whether the shares are shares in a qualifying trading company, the conditions applicable at the time of issue of the shares must be met. It is therefore necessary to include transitional provisions relating to clauses 137 to 146, notwithstanding that no transitional provisions are required for the provisions of Part 5 to which they correspond.

3121.     The transitional provisions in this Part accordingly, reflect all the amendments made since 6 April 1998 to the provisions of Chapter 3 of Part 7 of ICTA which are the origins of clauses 137 to 146 and of other clauses of Part 5 of this Bill which are applied for the purposes of clauses 137 to 146, including the minor changes in the law made by this Bill.

3122.     In addition to those provisions, this Part contains transitional provisions relating to clauses 134 and 151 necessary to provide for the conditions applicable if the shares were issued before 6 April 1998.

3123.     The transitional provisions which relate to clauses of this Bill which are replicated for corporation tax purposes in the new sections 576A to 576L of ICTA also apply to those new sections.

Qualifying trading companies

3124.     This transitional provision, together with that relating to clause 151 (interpretation of Chapter), provides for the conditions which apply to determine whether shares issued before 6 April 1998 are shares in a qualifying trading company.

Disposals of new shares

3125.     This transitional provision has the effect that Change 24 in Annex 1 applies only to "new shares" (as defined in clause 145(1)(b)) issued on or after 6 April 2007. See the commentary on clauses 136 and 145 This Change applies only for the purposes of share loss relief.

The trading requirement

3126.     This transitional provision has the effect that, for the purposes of share loss relief as well as EIS relief, Changes 41 and 42 in Annex 1 apply only to shares issued on or after 6 April 2007. Those Changes apply to clause 181 to which clause 137 corresponds with modifications. See the commentary on clause 967(3) for the commencement of clause 181.

The control and independence requirement

3127.     This transitional provision has the effect that, for the purposes of share loss relief as well as EIS relief, Change 44 in Annex 1 applies only to shares issued on or after 6 April 2007. That Change applies to clause 185 to which clause 139 corresponds with modifications. See the commentary on clause 967(3) for the commencement of clause 185.

Relief after an exchange of shares for shares in another company

3128.     This transitional provision has the effect that Changes 24 and 25 in Annex 1 apply only to "new shares" (as defined in clause 145(1)(b)) issued on or after 6 April 2007. See the commentary on clause 145 and also on clause 136 to which Change 24 also applies. Those Changes apply only for the purposes of share loss relief.

Excluded activities: wholesale and retail distribution

3129.     This transitional provision has the effect that, for the purposes of share loss relief as well as EIS relief, Change 45 in Annex 1 applies only to shares issued on or after 6 April 2007. That Change applies to clause 193(5)(b) which is applied by clause 137(7). See the commentary on clause 967(3) for the commencement of clause 193.

Excluded activities: leasing of ships

3130.     This transitional provision has the effect that, for the purposes of share loss relief as well as EIS relief, Change 43 in Annex 1 applies only to shares issued on or after 6 April 2007. That Change applies to clause 194 which is applied by clause 137(7). See the commentary on clause 967(3) for the commencement of clause 194.

Excluded activities: provision of services or facilities for another business

3131.     This transitional provision has the effect that, for the purposes of share loss relief as well as EIS relief, Change 46 in Annex 1 applies only to shares issued on or after 6 April 2007. That Change applies to clause 199 which is applied by clause 137(7). See the commentary on clause 967(3) for the commencement of clause 199.

Meaning of company being "in administration"

3132.     This transitional provision has the effect that, for the purposes of share loss relief, Change 56 in Annex 1, relating to a company being in administration under the law of Northern Ireland, does not apply if a petition for an administration order was presented before 6 April 2007. The provision relates to clause 252 only as it is applied by clause 138(5) for the purposes of share loss relief. See the commentary on clause 967(3) for the commencement of clause 252 as it applies for the purposes of EIS relief and also the consequential amendment to section 312(2A) of ICTA in Schedule 1.

Part 7: Enterprise investment scheme

3133.     Part 5 of this Bill deals with the enterprise investment scheme, (EIS). It has effect only in relation to shares issued on or after 6 April 2007. See the commentary on clause 967(3). One of the effects of clause 967 is that the Changes in Annex 1 relating to clauses in Part 5 apply only to shares issued on or after 6 April 2007. There is an exception in the case of the consequential amendment to section 312(2A) of ICTA, explained in the explanatory note on that section in Schedule 1.

3134.     Also since the ICTA provisions will not be repealed for shares issued before 6 April 2007 there is no need for transitional provisions in the case of most Finance Act amendments made to EIS. But there is an exception in the case of the FA 2006 amendment to the gross assets requirement, as noted below.

The gross assets requirement

3135.     Paragraph 1(3) and (4) of Schedule 14 to FA 2006 defer the effect of the amendments to section 293(6A) of ICTA for shares subscribed for before 22 March 2006 and for investment funds approved before 22 March 2006 in specified circumstances. This transitional provision ensures that this treatment continues if these shares are not issued until after 5 April 2007.

Part 8: Venture capital trusts

3136.     See the commentary on clause 967(3) and on Part 7 of this Schedule for the approach taken to the enterprise investment scheme, (EIS).

3137.     Venture capital trusts (VCTs) share many of the features described for EIS but in contrast to EIS the scheme does not lend itself to a single commencement provision. An approach for VCT which was similar to that proposed for EIS would involve a number of different commencement provisions. This would complicate things within the scheme and, for example, in relation to consequential amendments.

3138.     So there are extensive transitional provisions for VCTs in this Part, concerned with Finance Act amendments, where there could be continuing effect on or after 6 April 2007, and with the minor changes in the law made by this Bill.

Part 9: Other reliefs

Interest: loans for investing in co-operatives

3139.     The condition that relief is only available for interest on a replacement loan if it replaces an original loan made after 10 March 1981 has been removed. See Change 71 in Annex 1.

Gift aid: restrictions on associated benefits

3140.     This provision ensures that the priority rule introduced into clause 419(8) (see Change 77 in Annex 1) does not operate retrospectively.

Qualifying maintenance payments: maintenance assessments

3141.     This provision follows section 86 of the Child Support, Pensions and Social Security Act 2000 under which the amendments to section 347B of ICTA contained in paragraph 8 of Schedule 3 to that Act are commenced. The power to commence such amendments is now a power to appoint a day under this transitional provision.

Part 10: Special rules about settlements and trustees

Trustees' expenses to be set against trustees' trust rate income

3142.     The rule about when trustees' expenses are taken into account will operate from 6 April 2007 on an "incurred" rather than on a "paid" basis. See Change 87 in Annex 1. This provision deals with expenses that were incurred before 6 April 2007.

Discretionary payments: trustees' tax pool

3143.     This provision ensures that the tax pool as at 5 April 2007 is carried forward to 2007-08 (including in cases where trustees have been non-UK resident: see Change 89 in Annex 1).

Part 13: Tax avoidance

Transfers of assets abroad: non-transferors receiving benefit- exclusion of income arising before 10 March 1981

3144.     A saving provision is included for section 740(7) of ICTA.

Individuals in partnership: recovery of excess relief

Individuals claiming relief for film related trading losses

3145.     Paragraphs have been added to make it explicit that the change from "contribution to the trade" in the source legislation to "contribution to the firm" does not affect references to provisions in this Bill in various clauses being taken, where necessary, as references to corresponding provisions in ICTA See Change 16 in Annex 1.

3146.     The Partnership (Restrictions on Contributions to a Trade) Regulations 2006 (SI 2006/1639) are amended consequentially on the change from "contribution to the trade" in the source legislation to "contribution to the firm". See Change 16 in Annex 1.

Part 14: Deduction of income tax at source

Deduction by deposit-takers: discretionary or accumulation settlements

3147.     These paragraphs rewrite the transitional provision in section 481(5B) of ICTA, parts of section 86 of FA 1995 and the Deposit-Takers (Interest Payments) (Discretionary or Accumulation Trusts) Regulations 1995 (SI 1995/1370) about certain deposits made before 6 April 1995.

3148.     Under section 481(5B) of ICTA deposits made before 6 April 1995 are not liable to deduction of tax where, prior to making the payment, the deposit-taker has not received notification that the income arises to trustees of a discretionary or accumulation trust.

3149.     In accordance with Change 5 in Annex 1, references to the "Board" in section 481(5B)(b) of ICTA have been replaced with "an officer of Revenue and Customs".

3150.     Under section 482(11)(ab) and (12) of ICTA, the Commissioners for Her Majesty's Revenue and Customs have power to make regulations in relation to the notification under section 481(5B) of ICTA and the circumstances in which the deposit-taker can delay acting on such a notification. This provision has not been rewritten as it is obsolete.

3151.     The regulations in SI 1995/1370 were made under section 482(11)(ab) of ICTA. These regulations provide that a deposit-taker will not have to deduct tax from a payment made within 30 days of receipt of a notification that the income arises to trustees of a discretionary or accumulation trust and have been incorporated into the transitional provision. See Change 119 in Annex 1 (enactment of regulations). This Bill also revokes SI 1995/1370. See Schedule 3 (Repeals and revocations).

3152.     In accordance with Change 5 in Annex 1, references to the "Board" in regulation 5 of SI 1995/1370 have been replaced with "an officer of Revenue and Customs".

Deduction from certain UK public revenue dividends

3153.     These paragraphs rewrite the transitional provision in section 37(10) to (13) of F(No 2)A 1997, about gilts issued before 6 April 1998.

3154.     Section 37(10) of F(No 2)A 1997 provides that where any person holds a gilt issued before 6 April 1998, which was subject to a Treasury direction under section 50(1) of ICTA (that the gilt interest is to be paid gross), any application under section 50(2) of ICTA (for net payment) made before 6 April 1998 continues to have effect despite the provisions in F(No 2)A 1997 which provided that all gilt interest was to be paid gross in future.

3155.     Section 37(11) to (13) of F(No 2)A 1997 provides that where a gilt held prior to 6 April 1998 was subject to deduction of tax and no Treasury direction under section 50(2) of ICTA was made, the holder will be deemed to have made an application for interest payments to be made net of tax. The deemed application can be revoked by notice withdrawing the deemed application under clause 829 (withdrawal of application).

 
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