House of Commons - Explanatory Note
Income Tax Bill - continued          House of Commons

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This change has no effect for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.

Change 102: Transactions in securities: statement of case by tribunal for opinion of court: clause 640 and Schedule 2 Part 13 (transactions in securities: statement of case by tribunal for opinion of High Court or Court of Session)

This change affects the procedure on income tax appeals concerning transactions in securities by removing the requirement for the dissatisfied party to "declare his or their dissatisfaction" before requiring the tribunal to state a case for the opinion of the court.

Chapter 1 of Part 17 of ICTA (transactions in securities) has its own appeals procedure. This includes the option for the dissatisfied party to require an appeal which has been heard by the Special Commissioners to be re-heard by the special tribunal constituted under section 706 of ICTA.

Section 705A(1) and (2) of ICTA provide:

(1) Immediately after the determination by the tribunal of an appeal re-heard by them under section 705 of this Act, the appellant or the Board, if dissatisfied with the determination as being erroneous in point of law, may declare his or their dissatisfaction to the tribunal.

(2) The appellant or the Board, as the case may be, having declared his or their dissatisfaction, may, within thirty days after the determination, by notice in writing require the tribunal to state and sign a case for the opinion of the High Court.

Under sections 705A(12) and 705B(1) of ICTA, in Scottish and Northern Irish appeals the case is stated for the opinion of the Court of Session sitting as the Court of Exchequer in Scotland and the Court of Appeal in Northern Ireland, respectively.

Section 705A thus obliges the dissatisfied party to declare his or their dissatisfaction before requiring the tribunal to state a case.

This obligation is considered to be superfluous.

Section 56 of TMA also deals with tax appeals to the courts by way of case stated. Section 56 of TMA (statement of case for opinion of High Court) was amended by SI 1994/1813, which (among other things) confined section 56 to appeals from the General Commissioners and substituted section 56A of TMA (appeals from the Special Commissioners). SI 1994/1813 repealed section 56(1) and (2) of TMA, the wording of which was identical in all material respects to section 705A(1) and (2). It is considered a historical accident that the obligation to declare dissatisfaction has been retained in section 705A of ICTA when it has been omitted from section 56 of TMA.

Clause 640, which is based on section 705A of ICTA, therefore omits the requirement for the dissatisfied party to declare dissatisfaction before requiring the tribunal to state a case.

This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.

Change 103: Transfer of assets abroad: meaning of "associated operation": clause 652

This change clarifies the meaning of "associated operation" for the purposes of the transfer of assets abroad legislation.

Section 742(1) of ICTA defines "an associated operation" in relation to a transfer as:

an operation of any kind effected by any person in relation to any of the assets transferred or any assets representing, whether directly or indirectly, any of the assets transferred, or to the income arising from any such assets, or to any assets representing, whether directly or indirectly, the accumulations of income arising from any such assets.

This definition is ambiguous. It is unclear whether the references to "any such assets" are references only to the assets actually transferred, or to those assets plus any assets representing them.

The punctuation indicates that the latter is the better view, and clause 652 of this Bill reflects it.

This is a minor change in the law in that it will prevent the taxpayer arguing for the contrary view.

This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 104: Transfer of assets abroad: cessation of entitlement to receive capital sum: clause 662

This change makes it clear that there is no liability under section 739(3) of ICTA (transfer of assets abroad: charge where capital sum receivable or received) if the taxpayer's entitlement to receive a capital sum has ceased.

Section 739 of ICTA prevents individuals who are ordinarily resident in the United Kingdom from avoiding liability to income tax by means of transfers of assets as a result of which income becomes payable to persons who are non-UK resident or non-UK domiciled. Section 739(3) deems income to become the taxable income of the individual if the individual receives or is entitled to receive a capital sum.

Broadly speaking, any sum paid or payable by way of loan or repayment of a loan is a "capital sum" for this purpose, as is any other sum paid or payable otherwise than as income, if it is not paid or payable for full consideration in money or money's worth. Section 739(3) does not deem the capital sum to be income; instead, it takes income which has become payable to persons abroad as a result of the transfer and deems that income to be the transferor's.

But the wording of section 739(3) of ICTA leaves the timing of the charge rather unclear. It reads: "Where, whether before or after any such transfer, such an individual receives or is entitled to receive any capital sum .."

Section 739(6) provides that income is not deemed to be the individual's under section 739(3) for any tax year "by reason only of his having received a sum by way of loan if that sum has been wholly repaid before the beginning of that year". Therefore income may be deemed to be the individual's in other cases where there has been an actual receipt of a capital sum in a previous tax year. But section 739 makes no provision about whether section 739(3) imposes a charge if the individual was merely entitled to receive a capital sum in a previous tax year.

In practice, where entitlement to a capital sum has ceased HMRC do not pursue further liability under section 739(3).

Clause 662 gives effect to this practice by providing that the individual must either receive or be entitled to receive a capital sum in the tax year or have received a capital sum in an earlier tax year.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 105: Transfer of assets abroad: transferors not subject to charge where benefit received: clause 665

This change clarifies the exclusion from liability to income tax under section 740 of ICTA (transfer of assets abroad: charge where benefit received) for those who are liable to income tax under section 739 of ICTA (transfer of assets abroad: charge where power to enjoy income or where capital sum received) on deemed income in respect of the same transfer. The change makes it clear that this exclusion extends to those who would be liable under section 739 apart from falling within the exception in section 743(3) for non-domiciled individuals taxed on the remittance basis.

Section 739 of ICTA prevents individuals who are ordinarily resident in the United Kingdom from avoiding liability to income tax by means of transfers of assets as a result of which income becomes payable to persons who are non-UK resident or non-UK domiciled. Section 739 deems the income of the person abroad to be the taxable income of the individual if the individual has power to enjoy the income of the person abroad or receives a capital sum.

Under sections 831 and 832 of ITTOIA 2005, persons who are domiciled outside the United Kingdom can make a claim only to be subject to income tax in the United Kingdom on the relevant foreign income which is received in the United Kingdom (and not on their worldwide relevant foreign income).

Section 743(3) of ICTA makes a corresponding exception from section 739 of that Act for individuals who are domiciled outside the United Kingdom. An individual is not chargeable on deemed income under section 739 if that individual would not have been chargeable in respect of the actual income because of the individual's domicile.

Section 740 of ICTA deems individuals to receive taxable income if they receive benefits provided out of assets available as a result of transfers of the kind envisaged in section 739 and are not "liable to tax under section 739 by reference to the transfer". This raises the question whether, by preventing a non-UK domiciled individual transferor from being chargeable under section 739, section 743(3) of ICTA exposes that individual to potential liability under section 740.

It is HMRC's practice not to assess under section 740 a non-UK domiciled individual who transfers assets but is outside the charge to tax under section 739 by virtue of the provisions of section 743(3). But it is arguable that the wording of section 740 would permit a charge under section 740 on a non-UK domiciled transferor in these circumstances. Clause 665 of this Bill gives the current practice a clear statutory basis.

Where a non-UK domiciled individual transfers assets but is not chargeable to tax under section 739 owing to section 743(3), there is no bar in HMRC's view on the application of section 740 to others who did not themselves make the transfer but were beneficiaries of it. HMRC interpret clause 665 in the same way.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 106: Transfer of assets abroad: calculation of liability of non-transferors receiving benefit: clause 666

This change clarifies how liability for income tax of non-transferors who receive a benefit is calculated, in particular where the benefit is less than the "relevant income" in relation to the individual receiving the benefit.

Section 740 of ICTA deems individuals to receive taxable income if (broadly speaking) they receive benefits as a result of transfers of assets as a result of which income becomes payable to persons resident or domiciled outside the United Kingdom and are not liable under section 739 of ICTA (liability of transferors) in respect of the transfers.

The general effect of section 740(1) to (3) of ICTA is:

  • to tax non-transferors on the amount or value of any such benefit received by them;

  • only to tax such a benefit where, on or after 10 March 1981 (see section 740(7) of ICTA), income has arisen by the use of which the benefit could be provided ("relevant income"); and

  • to tax the benefit whether it is conferred before or after the relevant income is actually available.

Relevant income is defined in relation to an individual in section 740(3) of ICTA. Briefly, it is any income arising to a person abroad which, as a result of the transfer of assets, "can directly or indirectly be used for providing a benefit for the individual".

Under section 740(2)(a) of ICTA the amount to be charged in the tax year in which the benefit is received is found by comparing the amount or value of the benefit with "the relevant income of years of assessment up to and including the year of assessment in which the benefit is received". Under section 740(2)(b) if the benefit exceeds the relevant income, then an amount equal to the relevant income is chargeable to income tax in the individual's hands and the excess benefit is carried forward, compared with relevant income in the next and subsequent tax years and charged so far as it does not exceed that relevant income, until none is left to be carried forward.

Section 740 of ICTA leaves several questions unanswered.

It provides that if the relevant income exceeds the benefit, the amount or value of the benefit is chargeable to income tax in the individual's hands, but does not make provision about the treatment of the excess of the relevant income over that amount.

Taken literally and in isolation, section 740(2)(a) suggests that whenever a benefit is received the amount or value of the benefit must be compared with all the relevant income that has arisen on or after 10 March 1981, regardless of whether the receipt of previous benefits has involved charges by reference to that income before. But relevant income is defined as income that can directly or indirectly be used to provide a benefit in the tax year, and section 744(1) and (2)(b) of ICTA prevent the same relevant income being taken into account more than once.

It is therefore considered that the surplus relevant income (if it continues to be available) has not been taken into account and so must be carried forward year by year until extinguished by a benefit or benefits. Clause 666 of this Bill gives effect to this view by providing for surplus relevant income to be carried forward.

This change has consequential effects on the way that section 740(6) of ICTA is rewritten in clause 667 of this Bill. That section provides for a reduction in the amount carried forward in respect of a benefit to a tax year after the year of receipt where the whole or part of the benefit is a capital payment that causes a capital gains tax charge to arise.

This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 107: Transfer of assets abroad, transactions in land and sales of occupation income: power to obtain information: "reasonably require": clauses 681, 704 and 721

This change expressly restricts the particulars that an officer of Revenue and Customs may require to be provided under section 745(1) or section 778(1) of ICTA to those particulars which the officer may reasonably require.

Section 745(1) of ICTA enables the Board to require a person to give them such particulars "as they think necessary" for the purposes of Chapter 3 of Part 17 of ICTA. Section 778(1) of ICTA similarly enables the Board or an inspector to require a person to give them such particulars "as the Board or the inspector think necessary" for the purposes of sections 775 and 776.

The opportunity has been taken in clauses 681, 704 and 721 of this Bill to modernise this language and expressly impose the criterion of reasonableness. This is consistent with the way in which HMRC exercise the power in practice.

This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.

Change 108: Transactions in land and sales of income from occupation: application to non-UK residents: clauses 689, 692 and 711

This change is about the omission of provisions which might suggest that the normal rule that non-UK residents are not liable for income tax when the source of the income is outside the United Kingdom does not apply in the case of the charges under sections 775 and 776 of ICTA.

Section 775(9) of ICTA (sales of income from occupation: territorial scope) provides: "This section shall apply to all persons, whether resident in the United Kingdom or not, if the occupation of the individual is carried on wholly or partly in the United Kingdom." Section 776(14) of ICTA (transactions in land: territorial scope) similarly reads: "This section shall apply to all persons, whether resident in the United Kingdom or not, if all or any part of the land in question is situated in the United Kingdom." These provisions derive from paragraph 7(1) and (2) respectively of Schedule 16 to FA 1969.

It is unclear to what extent section 776 of ICTA applies to a non-UK resident who disposes of several areas of land, some within the United Kingdom and some outside the United Kingdom, under a single transaction if the statutory conditions for liability under section 776 are met. Similarly, it is unclear to what extent section 775 of ICTA applies to a non-UK resident who carries on an occupation partly within and partly outside the United Kingdom and enters into a transaction within section 775.

Section 827A(3) of ICTA provides that an amount arising to a non-UK resident is chargeable to income tax only if it is from a source in the United Kingdom. This would mean that the non-UK resident would only be chargeable on the gain attributable to the land situated, or on the capital amount attributable to the occupation carried on, in the United Kingdom.

But section 827A(5) of ICTA provides that section 827A is subject to any express or implied provision to the contrary in any provision of the Income Tax Acts. It could be argued that sections 775(9) and 776(14) of ICTA each show a contrary intention to the general rule in section 827A(3) and that therefore in such a case the whole of the gain would be chargeable.

In practice, HMRC do not regard any such contrary intention as being shown. Clauses 692 and 709 of this Bill follow that interpretation and so do not rewrite the part of sections 775(9) and 776(14) about residence. This omission is considered to be a change in the law, as it will prevent HMRC from arguing for the other interpretation.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 109: Transactions in land: person liable: provider of opportunity to realise a gain: clause 692

This change omits words from section 776(8) of ICTA indicating that where a gain on a transaction in land that is charged under that section is derived from an opportunity of realising a gain provided by another person and as a result that person is liable for the tax, it does not matter whether or not the opportunity was put at the disposal of the person to whom the gain actually accrues.

Section 776 of ICTA charges gains of a capital nature relating to the land to income tax where the gains are made by persons connected with land or the development of land and the statutory conditions are met.

In certain circumstances, people who are liable to pay income tax in the United Kingdom may enter into transactions in land as a result of which value, or an opportunity of realising a gain, is provided to another person (who may not be so liable). In such cases, section 776(8) of ICTA lays down that the provider of the value or, as the case may be, the opportunity is the person liable to income tax under section 776.

Section 776(8), so far as relevant, reads: "If all or any part of the gain accruing to any person is derived from value, or an opportunity of realising a gain, provided directly or indirectly by some other person, whether or not put at the disposal of the first-mentioned person .."

In Yuill v Wilson (1980), 52 TC 674 3 on page 706, Goff LJ criticised the drafting of what is now section 776(8):

3 [1980] STC 460.

I find it very difficult to appreciate what [the words "whether or not put at the disposal of the first-mentioned person" in what is now section 776(8)] were intended to cover. In the case of value I can well see that a gain may be derived by one person from value provided by another, whether directly or indirectly, without that value being put at the disposal of the first-mentioned person; for example, if A pays money to B as consideration for the grant of an option to C. As at present advised, however, I find it very difficult to see how one can gain from an opportunity provided by another without that opportunity being put at the disposal of the first-mentioned person. (emphasis added)

As it is considered that no sensible meaning can be given to the words "whether or not put at the disposal of the first-mentioned person" so far as they relate to the earlier words "an opportunity of realising a gain", in rewriting the passage under review clause 692(5) (transactions in land: person liable) refers only to the value provided by another person and not the opportunity of realising a gain.

If this view were incorrect, then the restriction of the scope of clause 692(5) might in some circumstances exclude taxpayers from liability under the "transactions in land" Chapter.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 110: Transactions in land and sales of occupation income: income treated as the highest part of the taxpayer's income: clauses 701 and 719

This change introduces a rule for determining in a case where a person has income chargeable under section 775 of ICTA (sales of occupation income) and income chargeable under section 776 of ICTA (transactions in land) how much of each of those kinds of income is treated as the highest part of the person's income.

Section 777 of ICTA supplements both section 775 and section 776 of ICTA.

Under both section 775 and section 776, a person (A) may be assessed to tax in respect of consideration receivable by another person (B). Under section 777(8)(a), in both cases A is entitled to recover from B the tax assessed and paid. To this end, section 777(8) entitles A to obtain from HMRC a certificate specifying the amount of income in respect of which tax has been paid.

The last sentence of section 777(8) provides:

For the purposes of this subsection any income which a person is treated as having by virtue of sections 775 and 776 shall, subject to section 833(3), be treated as the highest part of his income.

Although the expression "the highest part of [the taxpayer's] income" in section 777(8) is not expressly defined, it is clear from the context that the expression means the part of the taxpayer's income which is subject to the taxpayer's highest marginal rate or rates of income tax.

But, if there is more than one amount of deemed income under section 775 or section 776 or both, and section 775 or section 776 or both take the taxpayer into the next tax bracket (e.g. over the higher rate threshold), section 777(8) does not specify the priority of the charges.

Such a case is unlikely to arise in practice, because section 777(8) certificates are rarely if ever requested. But, if it did, HMRC would resolve the problem by a just and reasonable apportionment under section 777(6)(a).

Clauses 701 and 719 rewrite section 777(8). Splitting the last sentence of section 777(8) in this way has highlighted the absence of a tie-breaker in the source legislation. The draft clauses therefore include one: they provide that if the individual is treated as having income under both Chapters, only a just and reasonable proportion of the land income, and only a just and reasonable proportion of the occupation income, is to be treated as the highest part of the individual's income.

This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.

Change 111: Transactions in land: clearance procedure: clause 703

This change gives the Commissioners for Her Majesty's Revenue and Customs responsibility for granting or denying clearance concerning transactions in land.

Section 776 of ICTA is an anti-avoidance provision concerning transactions in land. Section 776(11) lays down a statutory clearance procedure. It provides that the taxpayer is to provide particulars of the transaction to "the inspector to whom he makes his return of income".

This could cause theoretical difficulties if the taxpayer:

  • is not legally obliged to file a self-assessment return;

  • does not file a self-assessment return; and

  • wishes to obtain clearance under section 776(11) of ICTA.

In practice, if the taxpayer makes a clearance application to the HMRC office dealing with that taxpayer's affairs, that HMRC office will process the application.

Clause 703, which is based on section 776(11) of ICTA, gives the responsibility for clearances concerning transactions in land to the Commissioners for Her Majesty's Revenue and Customs, rather than the officer to whom the taxpayer makes a return of income. This is consistent with section 707 of ICTA (transactions in securities: clearance procedure), which is rewritten in clauses 634 and 635.

This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.

Change 112: Sales of occupation income: restriction on exemption for sales as going concerns: meaning of "income or receipts": clause 718

This change clarifies the meaning of "income and receipts" for the purposes of the restriction under section 775(5) of ICTA on the exemption for sales of going concerns from the charge under section 775 of ICTA. The restriction on the exemption applies where the value of the going concern is attributable to a material extent to prospective income or profits for which full consideration will not be received.

Section 775 of ICTA (sale by individual of income derived from his personal activities) is directed against arrangements whereby individuals seek to sell their earnings in return for capital sums which escape income tax. If it applies, section 775 taxes the capital sum received for the sale as income.

Section 775(4) of ICTA gives an exemption for sales of going concerns. For example, it is common for existing partners in a professional firm to be paid a capital sum by a new partner in return for a share in the partnership. Section 775(4) provides that section 775 does not apply so far as the value of what is disposed of is attributable to its value as a going concern. So it ensures that section 775 does not catch normal commercial arrangements such as this.

Section 775(5) of ICTA is directed against attempts to abuse this exemption. If (for example) the taxpayer transfers into an existing business the copyright of a book which he or she has written, and obtains a capital sum for the disposal of the business as a going concern, the exemption is restricted. To the extent that the value of the business is attributable to the going concern, it falls within section 775(4). But to the extent that the value of the business is attributable to the copyright, section 775(5) takes the capital sum out of section 775(4) and taxes it as income.

Section 775(5) of ICTA reads:

If the value of the profession, vocation or business as a going concern is derived to a material extent from prospective income or receipts derived directly or indirectly from the individual's activities in the occupation, and for which, when all capital amounts are disregarded, the individual will not have received full consideration, whether as a partner in a partnership or as an employee or otherwise, subsection (4) above shall not exempt the part of a capital amount so derived.

Section 775(3)(b) of ICTA provides that the expression "income or receipts" includes "payments for any description of copyright or licence or franchise or other right deriving its value from the activities, including the past activities, of the individual."

But the scope of this inclusion clause is uncertain. On the one hand, section 775(3) of ICTA begins "In this section ..", implying that it extends to section 775(5). On the other, section 775(3)(b) begins "references in subsection (1) above", implying that it does not. It is unclear which takes priority.

It is considered that, as a matter of normal usage, the expression "income or receipts derived directly or indirectly from the individual's activities in the occupation" in section 775(5) of ICTA is apt to include "payments for any description of copyright or licence or franchise or other right deriving its value from the activities, including the past activities, of the individual." Therefore in so far as section 775(3)(b) applies to section 775(5) it is merely declaratory.

Clause 718 rewrites section 775(5) of ICTA on the basis that section 775(3)(b) applies to it.

This is a change in the law, in that it will prevent taxpayers from maintaining the contrary view.

 
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Prepared: 8 December 2006