Implications for material remaining in regulations
This Bill contains powers to enable regulations to be made in relation to the matters for which regulations can presently be made (excluding those matters now included within the clauses of this Bill). These powers support the existing regulations, which will remain in force under the continuity of the law provisions in this Bill (see Schedule 2 Part 1), and enable changes to them to be made in future.
This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle and in practice) only administrative matters.
Change 120: Deduction of tax: deposit-takers and building societies: definition of relevant investment: clauses 784, 789, 791, 792 and 805
Introduction
This change builds on Change 119 (enactment of regulations). It aligns the gross payment category rules for building societies with those for deposit-takers, resulting in a common basis for identifying the payments which are to be subject to deduction of sums representing income tax. This change enables the two regimes to be combined.
Under the source legislation, there is a significant difference in the way the deposit-taker rules and the building society rules identify the payments from which sums representing income tax are potentially to be deducted (subject to the various exceptions). The deposit-taker rules in section 481(4) of ICTA identify four categories (individuals, Scottish partnerships, personal representatives and trustees). But regulation 3 of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231) (the building society regulations) imposes an obligation to deduct sums representing income tax in all cases unless the payment falls within the scope of a gross payment category set out in regulation 4 (or the payment is referred to in section 477A(1A) of ICTA).
The reasons for this are historical. The difference of approach no longer achieves anything of substance and makes the essential identity of the two regimes very difficult to discern. The regimes are aligned to the deposit-taker approach (already in primary legislation), this being the simpler of the two.
History
The history of these provisions starts in 1894, when extra-statutory arrangements were first introduced under which building societies accounted annually for income tax at a composite rate. These became statutory in 1951, the regulations including various exceptions (eg for pension funds).
In FA 1984 a similar composite rate tax (CRT) scheme with quarterly accounting was introduced for retail bank deposits. This triggered changes to the building society rules in 1985, to bring them onto a similar quarterly scheme and to widen the range of exceptions. But, whereas bank interest was either paid gross or net of CRT, any building society payments which were not within CRT, or specifically allowed to be paid gross, had to be paid net of basic rate tax.
From April 1991, CRT was abolished in favour of deduction of sums representing basic rate income tax. So far as the building society provisions were concerned, this was achieved simply by requiring deduction of sums representing basic rate tax from payments other than those which could be paid gross. The possibility of re-engineering the provisions more fundamentally, along the lines now proposed, was considered but did not prove possible at the time.
Since then, a number of further additions have been made to the categories of payment that can be made gross, in particular going beyond exempt bodies to embrace companies (in 1992). Differences of scope between the regimes are now very small.
Effects of alignment
There are a number of circumstances in which payments by building societies made after deduction under the source legislation will no longer need to have sums representing income tax deducted.
This is a taxpayer-favourable change in cash flow terms, but does not affect final liability to tax. It could also, in some circumstances, mean the taxpayer has to complete a self-assessment return. But these effects could arise under the source legislation, if a taxpayer used a deposit-taker rather than a building society.
In tandem with this, the basis on which building societies may treat investments as relevant is aligned to that for deposit-takers. This:
- reduces the range of cases in which building societies will need to obtain declarations specifically for tax purposes; and
- means that many of the provisions in regulation 4(1) of the building society regulations, which identify specific gross payment categories, will no longer be needed (in particular, regulations 4(1)(d), (f), (g), (k), (p), (q) and (r)).
As a result of the alignment, the following remaining differences of scope between the two regimes are removed:
- The gross payment categories for non-residents are defined by reference to the beneficial owner. For building societies, this means that the payment will not need to be made directly to the non-resident beneficiary in order for it to be made gross.
- Payments made to non-UK resident individuals (or Scottish partnerships) under regulation 4(1)(a) of the building society regulations will only be made gross where all the persons (or, in the case of a Scottish partnership, the partners) entitled to the payment are not UK resident, in line with HMRC practice.
- Payments to overseas non-corporate bodies (eg a Delaware Limited Liability Partnership) not within regulation 4(1)(a) or 4(1)(g) of the building society regulations will be made gross if all of the partners are not ordinarily UK resident.
- Payments made by building societies to partnerships (including limited liability partnerships) which are either partnerships of companies or partnerships between individuals and companies are in practice subject to deduction of sums representing income tax. This is because there is no specific gross payment category for payments made to partnerships involving companies (although it is possible that regulation 4(1)(g) of the building society regulations might allow payments made to partners which are companies to be made gross). Following alignment to the deposit-taker regime (section 481(4) of ICTA), such payments will no longer be subject to deduction of sums representing income tax.
- Payments made by building societies to Scottish partnerships where one or more of the partners are companies will be made gross under the rewritten legislation. Under the source legislation, such payments are made after deduction of a sum representing income tax as there is no gross payment category in the building society regulations to allow for the payment to be made gross (and regulation 4(1)(g) of the building society regulations will not apply as the payment cannot be described as being made to the company).
- Payments made by building societies to unapproved pension schemes (including funded unapproved retirement benefit schemes), are technically subject to deduction of sums representing tax simply because they are not listed in regulation 4. But HMRC practice is to allow such payments to be made gross, and the alignment will bring the legislation into line with this.
- Payments made by building societies to joint accounts where the holders are not all from one of the four categories of person to whom the deposit-taker regime applies will no longer be subject to deduction of sums representing income tax. (Such a case is theoretical as it is understood that building societies do not in practice permit joint accounts of such a kind.)
- Payments made by building societies to non-UK resident trustees of a discretionary or accumulation settlement will be made gross. Regulation 4(1)(bb) of the building society regulations refers to trustees of a discretionary or accumulation trust. This change in terminology brings the building society regime into line with the deposit-taker regime, which was amended by Schedule 13 to FA 2006.
This change is in taxpayers' favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small. It also affects administrative requirements, in particular in relation to building societies.
Change 121: Deduction of tax: deposit-takers and building societies: deduction by reference to beneficiary of payments: clause 789
This change aligns the way the deposit-taker and building society regimes take account of the identity of the beneficiaries of the payments concerned. It ensures that payments made by building societies will be subject to deduction at source only if the person beneficially entitled to the payment is an individual or a Scottish partnership (where all the partners are individuals) or the person is a personal representative or a trustee of a discretionary or accumulation settlement.
This means that payments made through third parties will be subject to deduction of sums representing income tax where the beneficiary falls into one of those categories.
The source legislation for building societies requires deduction from all payments (without focusing on the beneficial owner), unless the recipient falls into a gross payment category set out in regulation 4 of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231) (the building society regulations) (or the payment is referred to in section 477A(1A) of ICTA).
But, as part of the alignment of the gross payment category rules for building societies with deposit-takers (see Change 120), deduction will apply only to payments falling within the four categories of payee identified by section 481(4) of ICTA. In this context, regulation 4(1)(b) of the building society regulations (gross payments made to trustees where the beneficiary is an individual or Scottish partnership) has not been rewritten, as it makes no difference whether a payment is made to a trustee where the income of the trustee is payable to an individual or a Scottish partnership, or the payment is itself one to which an individual or Scottish partnership is beneficially entitled.
This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle and in practice) only administrative matters.
Change 122: Deduction of tax: deposit-takers and building societies: investments to be treated as being or as not being relevant investments: clause 790
This change is about the administrative effect of Changes 119 (enactment of regulations) and 120 (definition of relevant investment) on how deposit-takers and building societies decide whether or not to treat investments as relevant investments.
As part of the alignment of the building society regime and deposit-takers regime, it is necessary to have one common basis for determining when an investment should be treated as being a relevant investment. This involves changes to the rules regarding the way that building societies check whether a particular payment should be made gross.
For example, regulations 11(1), (2), (2A) and (4) of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231) (the building society regulations) state that a building society cannot treat a payment as being within one of the gross payment categories found in regulation 4(1)(a) to (g), (k) or (r) unless it has a declaration to that effect. But once it has that declaration, it can continue to treat such payments as gross until it has information that regulation 4(1) of the building society regulations may not apply.
For deposit-takers, declarations are only required for persons falling in the equivalent of regulations 4(1)(a) to (c). As deposit-takers do not have to obtain declarations in respect of regulation 4(1)(d) to (g), (k) or (r), once the two regimes are aligned, building societies will no longer have to obtain declarations for payments previously caught under regulations 4(1)(d) to (g), (k) and (r). Building societies will have to check only that the payment is not caught in one of the four categories and, if it is not, no further checks or declarations will be required.
This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle and in practice) only administrative matters.
Change 123: Deduction of tax: deposit-takers and building societies: declarations of non-UK residence: clauses 791, 792, 793 and 794
This change aligns the rules about declarations as between the deposit-taker and building society regimes, in line with practice, so that in all cases a declaration of non-UK residence in the prescribed or authorised format (which may or may not be in writing) will be required in order for a gross payment to be made.
Section 481(5)(k) of ICTA requires deposit-takers to have received a written declaration from an "appropriate person" confirming that the individual, deceased person or trustees are (or, in the case of a deceased person, was) non-UK resident before a gross payment can be made.
The declaration needs:
- to be in a prescribed or authorised format and contain an undertaking to notify the deposit-taker if circumstances change (see section 482(2) of ICTA); and
- to contain the names and addresses of the individuals or partners to whom the declaration applies (see section 482(2A) of ICTA).
These latter conditions are not prerequisites for the payment to be made gross. But a penalty can arise if they are not met (see section 98 of TMA).
But current practice is that the payment will only be made gross where a declaration is made in the prescribed or authorised format which contains all the above mentioned information.
For building societies the position is slightly different. Under the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231) (the building society regulations) building societies cannot make gross payments unless they have received a non-UK resident declaration (which need not be in writing) from an "appropriate person" which must contain an undertaking to notify the building society if there is a change in circumstances (regulation 11(1) to (2AB)).
But it is not a prerequisite for gross payment that the declaration contains the names and addresses of the individuals or partners concerned (regulation 11(2AC) of the building society regulations). Nor is it necessary for the declaration to be in a prescribed or authorised format (regulation 11(3)). But a penalty can arise if these conditions are not met (see section 98 of TMA).
Again, current practice is that the payment will only be made gross where a non-UK resident declaration is made in the prescribed or authorised format and it contains all the above mentioned information.
In order to align both the deposit-taker and building society regimes with current practice a number of steps have been taken.
Firstly, the clauses require in all cases a declaration of non-UK residence in the prescribed or authorised format (which may or may not be in writing) in order for a gross payment to be made.
The requirement that the declaration for deposit-takers be in writing (section 481(5)(k) of ICTA) has, therefore, not been reproduced, as it is unnecessary if the declaration is in a prescribed or authorised format. Further, the requirement, in section 482(2) of ICTA, that the declaration must contain such information as the Commissioners for Her Majesty's Revenue and Customs may reasonably require is in line with the deposit-taker rules, but goes beyond the explicit terms of regulation 11(3) of the building society regulations.
Second, declarations will need to include an undertaking (except in relation to deceased persons), and, in the case of the "individual interest condition" in clause 789(3) or the "Scottish partnership condition" in clause 789(4), it will require the names and addresses of the individuals concerned.
This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle and in practice) only administrative matters.
Change 124: Deduction of tax: deposit-takers and building societies: declarations of non-UK residence: Scottish partnerships: clauses 792 and 794
This change clarifies the operation of provisions about Scottish partnerships.
Under Scottish law, a Scottish partnership is a separate legal entity and thus capable of being the beneficial owner of a deposit. Section 481(4)(b) of ICTA states that where a deposit is owned by a Scottish partnership, and all the partners are individuals, it will be treated as a relevant investment.
But under section 481(5)(k)(i) of ICTA, the deposit will not be treated as a relevant investment where, "the person who is beneficially entitled to the interest is not .. ordinarily resident in the United Kingdom".
As the Scottish partnership is the person beneficially entitled to the deposit, this does not sit comfortably with the fact that it is the partners who each have a residence status, rather than the partnership itself. Further, existing practice (although declarations in favour of Scottish partnerships are rare) is to apply this provision by reference to whether all the partners are not ordinarily resident in the United Kingdom (rather than whether the Scottish partnership is not ordinarily resident).
Section 481(5)(k)(i) of ICTA and regulation 4(1)(a) of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231) (the building society regulations) have therefore been rewritten in clause 792 in such a way as to ensure that a deposit will not be a relevant investment where a declaration has been made by the Scottish partnership that all the partners of the Scottish partnership are not ordinarily resident in the United Kingdom.
In the same way, section 481(5)(k)(iii) of ICTA treats a deposit as not being a relevant investment where the trustees are not UK resident and believe that no beneficiary is an individual ordinarily resident in the UK or a UK resident company. On a strict reading of section 481(5)(k)(iii) this means that a declaration may be made where the trustees are non-UK residents and a Scottish partnership, consisting in whole or part of UK resident partners, is a beneficiary. In order to rewrite section 481(5)(k)(iii) of ICTA in a way that is consistent with the rewrite of section 481(5)(k)(i) of ICTA, it is necessary to refer to the partners of the Scottish partnership rather than the Scottish partnership in clause 794.
This aspect of clause 794 follows the approach currently taken by regulation 4(1)(bb) of the building society regulations which allows a payment to be made gross where the trustees are not UK resident and the beneficiaries are non resident or, in the case of a Scottish partnership, the partners are non-UK resident individuals. But regulation 11(2AA)(b) of the building society regulations requires the building society to obtain a declaration stating that the trustee does not have reasonable grounds for believing that the beneficiaries are UK resident. In order to rewrite regulation 11(2AA)(b) in a way that is consistent with regulation 4(1)(bb)(ii), it is necessary for the rewritten legislation to refer to the partners of the Scottish partnership rather than the Scottish partnership.
Clause 794, therefore, provides that, where the beneficiary is a Scottish partnership, the declaration must confirm that all the partners are not ordinarily UK resident.
Further, section 482(2)(a) of ICTA and regulation 11(2AB)(b) of the building society regulations require an undertaking to be included in the declaration that, if the beneficiary becomes resident, a notification will be sent to the deposit-taker or building society. In order to rewrite these provisions in a way that is consistent with the rewrite of section 481(5)(k)(i) and (iii) of ICTA and regulation 4(1)(a) and (bb) of the building society regulations, reference is made, in clauses 792(3) and 794(3), to the partners of the Scottish partnership rather than the beneficiary.
Finally, for building societies, clause 794(3)(b)(iii) departs from regulation 4(1)(bb)(ii) of the building society regulations, which in effect requires the declaration to state that no beneficiary of the trust is a Scottish partnership with a UK resident partner or a company partner (whether UK resident or non-UK resident). It appears more appropriate for regulation 4(1)(bb)(ii) of the building society regulations to be consistent with the general approach taken in regulation 4(1)(bb)(iii) dealing with trusts. Consequently, clause 794(3)(b)(iii) only refers to UK resident company partners.
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 125: Deduction of tax: deposit-takers and building societies: inspection of declarations: clause 795
This change aligns the rules about inspection of declarations as between deposit-takers and building societies.
Section 482(3) of ICTA allows an officer of Revenue and Customs to issue a notice to inspect "all" declarations made to deposit-takers. This section has been rewritten so the notice may allow the officer to inspect "any" declarations made. This change makes the position more flexible and brings the deposit-taker legislation into line with the building society legislation (regulation 11(5) of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231)).
This change may, in some circumstances, make compliance more onerous for a deposit-taker. For example, where a notice specifies particular declarations and the deposit-taker has to select the appropriate declarations.
But it is likely, in general, that this change will reduce both the compliance burden for deposit-takers and administrative costs for HMRC as it will be possible for the notice only to require specific declarations.
This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle and in practice) only administrative matters.
Change 126: Deduction of tax: deposit-takers and building societies: qualifying deposit rights: clauses 797 and 822
This change omits the provisions about deposit rights in sections 349(3A), 349(4), 477A(1A) and (10) and 481(5A) of ICTA, as these are obsolete.
These provisions were inserted by Schedule 8 to F(No 2)A 1992, alongside the insertion of section 56A of ICTA in order to pave the way for the introduction of dematerialised transactions.
Section 56A supplemented section 56 of ICTA, to ensure that the charge to tax on income from the disposal of deposits would embrace income from the disposal of such deposit rights. And the provisions inserted into sections 349, 477A and 481 extended the exceptions from the duty to deduct which applied to qualifying certificates of deposit to deposit rights satisfying the relevant qualifying conditions.
The legislation in F(No 2)A 1992 was timed to coincide with the intended introduction of TAURUS (Transfer and Automated Registration of Uncertificated Stock). But in 1993 TAURUS was abandoned and so this legislation was never used.
Instead a new electronic settlement system (CREST) was proposed and began operation in 1996, under the terms of the Uncertificated Securities Regulations 1995 (SI 1995/3272) (now replaced by the Uncertificated Securities Regulations 2001 (SI 2001/3755)). In 2003, specific regulations were made to cater for electronic settlement of dematerialised rights in deposits (the Uncertificated Securities (Amendment) (Eligible Debt Securities) Regulations (SI 2003/1633)).
The references to uncertificated eligible debt security units in SI 2003/1633 were incorporated directly into the relevant provisions of ICTA by ITTOIA. These references have been rewritten in this Bill as "qualifying uncertificated eligible debt security units" (see clauses 797, 822(3)(b) and 920).
The references to deposit rights in sections 349(3A), 349(4), 477A(1A) and (10) and section 481(5A) of ICTA are therefore obsolete and have been omitted. And, accordingly, regulation 4(1)(j) of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231) is not rewritten.
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 127: Deduction of tax: interest paid by building societies: clauses 807 and 808
This change removes a drafting defect in section 349(2) of ICTA, to make it clear that Chapter 3 of Part 14 (deduction from certain payments of yearly interest) does not apply to any interest paid by building societies. 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) and regulations made under 477A(1) of ICTA).
Subject to certain exceptions that are not relevant here, section 349(2) of ICTA imposes a duty to deduct sums representing income tax from yearly interest paid (whether by or through the payer):
(a) otherwise than in a fiduciary or representative capacity, by a company (other than a building society) or local authority; or
(b) by or on behalf of a partnership of which a company is a member; or
(c) by any person to another person whose usual place of abode is outside the United Kingdom.
Under the source legislation, payments by building societies of interest on shares in, deposits with or loans to them are dealt with by regulations under section 477A(1) of ICTA. The scope of this provision is wide. But yearly interest on freely transferable securities issued by building societies are excluded from those regulations by section 477A(1A) of ICTA, being dealt with separately in section 349(3A) and (3B) of ICTA.
A building society is a body corporate, within the definition of a company in section 832(1) of ICTA, so section 349(2)(b) of ICTA could be read as catching any payments of yearly interest by a partnership of which a building society is a member. Also, section 349(2)(c) of ICTA, with its reference to payments "by any person", could be read as imposing a duty on a building society to deduct from payments of yearly interest it makes to persons abroad. But both these possibilities would duplicate duties imposed by regulations made under sections 349(3A) and 477A(1) of ICTA.
This was not always so. As originally enacted, section 476(5)(a) of ICTA excluded from sections 348 to 350 of ICTA any dividends or interest to which regulations applied, unless those regulations specifically provided for sections 348 to 350 to apply. (The current regulations make no such provision.) At that time building societies could not issue freely transferable securities.
On the abolition of the composite rate provisions by FA 1990, section 349(3) of ICTA, which provides for exceptions to the duty to deduct under section 349(2), was amended by inserting subsection (3)(e) to exclude from that duty:
any dividend or interest paid or credited in a relevant year of assessment in respect of shares in, or deposits with or loans to, a building society.
But in FA 1991 amendments were made to ICTA by locating the duty to deduct from dividends and interest on freely transferable securities in new sections 349(3A) and (3B). To pave the way for this, section 477A(1A) was inserted, ensuring that such dividends and interest were outside the scope of the regulations under section 477A. Further, the words inserted as section 349(3)(e) of ICTA by FA 1990 were repealed and the words "(other than a building society)" inserted into section 349(2)(a) of ICTA, but with no adjustment to section 349(2)(b) or (c). This inadvertently opened up the possibility that parts, but not all, of section 349(2) could apply to payments of interest by a building society.
This change restores the position of building society interest payments by excluding them from Chapter 3 of Part 14 (the rewritten equivalent of sections 349(2) and (3) of ICTA). So all payments of dividends and interest now fall under either Chapter 2 or Chapter 4 of Part 14.
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