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 128: Enactment of the European Investment Bank (Designated International Organisation) Order 1996 (SI 1996/1179): clauses 812, 925 and Schedule 1 (section 840A of ICTA)

This change enacts the provisions of the European Investment Bank (Designated International Organisation) Order 1996 (SI 1996/1179) (the Order).

Under section 840A(1)(d) of ICTA the Treasury has powers to designate a "relevant international organisation" as a bank. That provision is rewritten for income tax in clause 925(4) of this Bill.

To date the power has only been used in relation to the European Investment Bank (the EIB). The operative provisions of the Order are in Articles 3 and 4. Article 3 of the Order designates the EIB as a bank. This is enacted by this Bill, so that:

• for income tax purposes, the EIB is now specifically included in the definition of "bank" in clause 925(2)(d); and

• for corporation tax purposes, the definition of "bank" in section 840A of ICTA includes the EIB (see new subsection (1)(ca) of that section).

Article 4 modifies the normal rules about the deduction of a sum representing income tax from interest in the case of interest paid to the EIB.

Under clause 807(1), certain persons paying yearly interest must deduct from the payment a sum representing income tax. Clause 812(1) provides an exception to that duty if the person beneficially entitled to the interest is within the charge to corporation tax. Article 4 of the Order withdraws, in the case of the EIB, the condition that the person must be within the charge to corporation tax. This allows interest on advances from the EIB to be paid gross.

This is enacted in clause 812(3). As a result of this Change, the Order is revoked by this Bill.

The Treasury powers to designate further international organisations will remain as before, both for income tax and corporation tax purposes.

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 129: Deduction of tax: statutory interest: clause 821

This change makes specific provision that payments of "statutory interest" are not subject to deduction of tax under clause 807.

The Late Payment of Commercial Debts (Interest) Act 1998 requires payment of "statutory interest" in certain circumstances. Tax Bulletin 42 (August 1999, interpretations) indicated that where such interest is paid, it would not be regarded as yearly and would not, therefore, be subject to deduction of tax under section 349(2) of ICTA.

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 130: Deduction of tax: payments of UK public revenue dividends: application for deduction of tax: clause 828

This change extends the definition of "registered" to include dividends which are "recorded" in the books of the Registrar of Government Stock, in order to provide legislative support for deduction at source applications under clause 828 in respect of UK public revenue dividends held in CREST.

Section 50(2) of ICTA provides that holders of any registered securities may apply to have income tax deducted at source. Section 50(7) of ICTA defines "registered" as meaning entered in the register of the Registrar of Government Stock in accordance with the regulations under section 47(1)(b) of FA 1942 (see regulation 3 of the Government Stock Regulations 2004 (SI 2004/1611)).

UK public revenue dividends which are held in CREST are not entered in the register of the Registrar of Government Stock. The Registrar of Government Stock only maintains a record of entries made in CREST's register. This means that, strictly, dividends held in CREST cannot be the subject of an application for deduction at source as they are not "registered" (ie they are not entered on the register of the Registrar of Government Stock).

But current practice is that UK public revenue dividends held in CREST are paid net of tax on application. In order to legislate for this, the definition of "registered" has been extended to include dividends entered in a register maintained in accordance with regulations made under section 207 of the Companies Act 1989. Regulation 21 of the Uncertificated Securities Regulations 2001 (SI 2001/3755) (as amended), introduced under that section, requires the Registrar of Government Stock to maintain a record of entries made in CREST's register.

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 131: Charges on income: year in which payments taken into account: rates for deduction of tax: clauses 833, 834, 835 and 836

This change requires a sum representing income tax to be deducted from certain annual payments and patent royalties at the basic rate (or, in some cases, the savings rate) in force in the tax year they are made. It also ensures the payments will always be taken into account in the payer's tax calculation for the tax year in which they are made.

Section 4 of ICTA requires any deduction made to be at the basic or savings rate in force for the relevant tax year. That year is defined in section 4(2) of ICTA and depends on whether the payment is paid wholly out of income brought into charge to income tax. If it is, the relevant year is the tax year in which the payment is due to be paid. If not, the relevant year is the tax year in which the payment is made.

In either case, the relevant year is also the year against the income of which the payment is treated as a charge by virtue of the rule in section 835(6)(b) of ICTA which links into section 4 of ICTA.

These rules give rise to two awkward points.

The first is that the payer may not know the level of his income for the tax year at the time of payment and so there may be uncertainty about whether it will be treated as being paid wholly out of income brought into charge to income tax. Not knowing which tax year is relevant at the time of payment means that the payer may not know the rate for deduction at that time. (This uncertainty is also referred to in connection with Change 81).

The second concerns the case where the payer has insufficient income in the year the payment was due but has ample income in the following year and (whether or not for that reason) makes the payment in that following year. Here, a sum representing income tax will be deductible at the rate for the year in which the payment was due. And section 835(6)(b) provides that the payment is treated as a charge against the payer's income of that year. That is potentially disadvantageous to a payer who has insufficient income in that year to cover the charge.

Under this change, the provisions of section 4 of ICTA are not rewritten so far as they address these issues, but instead the rule is that deduction is made at the applicable rate in force for the year of payment. And the clauses providing for the collection of the tax (in later Chapters of Part 14) and for relief for the payments themselves in calculating net income (Chapter 4 of Part 8) follow suit. The self-assessment return and guidance material already effectively adopt this approach, by simply asking for details of payments without considering whether a payment is late.

Moving to a deduction at the rate in force for the year of payment may benefit the taxpayer in the second case cited above. But the taxpayer is not disadvantaged in the reverse scenario, where a payment is made late and the payer had ample income in the year the payment was due, but has less total income than the amount of the payment in the year of payment. That is because the payer's income would not have been enough to cover the charge (before the change) and (after the change) it is only possible for some of the payment to be deducted in calculating net income.

Nothing in this new rule affects the year in which a payment subject to deduction of tax at source is assessable on the recipient. That is fixed by provisions such as sections 580(1) and 684(1) of ITTOIA.

This change is in taxpayers' favour in principle and may benefit some in practice. It also affects when tax is paid. But the numbers affected and the amounts involved are likely to be small.

Change 132: Charges on income: no deduction of tax from certain patent royalty payments: clause 836

This change removes any requirement to deduct sums representing income tax from patent royalty payments that are exempt under section 347A of ICTA or section 727 of ITTOIA.

Those sections exempt certain annual payments (defined as "qualifying annual payments" by clause 832) if they are paid by an individual other than in connection with that individual's trade. Because of those exemptions, the deduction at source provisions in section 348(1) and 349(1)(a) of ICTA do not apply to the annual payments covered by section 347A of ICTA and section 727 of ITTOIA.

Deduction at source might arguably still apply under sections 348(2) and 349(1)(b) of ICTA on the grounds that the payment is in respect of a patent, in the absence of a parallel proviso to that in sections 348(1A)(a) and 349(1A)(a) of ICTA. But it is not sensible for deduction at source to apply to a payment that is exempt regardless of who receives it. Moreover, sections 348(2) and 349(1) of ICTA require deduction of "a sum representing the amount of income tax" on the payment. It is doubtful whether this requirement could have any application in the case of payments that are cannot be taxable income of the payee.

Accordingly, clause 836, which is based on sections 348(2) and 349(1)(b) of ICTA, requires sums representing income tax to be deducted only from patent royalty payments that are not qualifying annual payments. If a qualifying annual payment (whether in respect of a patent or not) is paid by an individual in connection with the individual's trade, deduction is made under clause 833. If paid by a person other than an individual, deduction is made under clause 834. But none of the rewritten deduction at source provisions applies to a patent royalty payment that is an exempt annual payment.

This change will affect very few cases. Most patent royalty payments by individuals will be made in the course of the individual's trade. Furthermore, the exemption only applies to patent royalties that are also annual payments. Most patent royalties will not be pure income in the recipient's hands, but will instead be taxable trading receipts.

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 133: Deduction of tax: scope of duty to deduct from certain royalties: clauses 836 and 839

This change enacts a principle of case law that determines the scope of the duty to deduct in certain cases involving payments in respect of royalties, patents, copyrights, design rights and public lending rights.

Where such payments are annual payments, the scope of the duty to deduct from annual payments can be seen from Earl Howe v CIR, (1919) 7 TC 289, CA. In that case Scrutton LJ said:

The result of these Sections [corresponding to what is now section 348 of ICTA] seems to be that the "annuities, interest, and other annual payments" which can be deducted to obtain exemption are those from which the claimant can deduct tax on behalf of the recipient; being in effect the profits of the recipient who bears the tax they are not also to be treated as profits of the person paying them. If no tax can be deducted on behalf of the recipient, they cannot be treated as profits of the recipient, and must be treated as paid out of profits of the person paying, who is therefore to be taxed on them.

This principle was confirmed in the case of Bingham v CIR, (1955) 36 TC 254, ChD. In that case, a man resident in the United Kingdom made maintenance payments to his former wife who was resident in the Netherlands. The payments had been ordered by a Dutch court and so were not UK source income. He claimed to deduct those payments (which at that time were annual payments) from his income for surtax purposes. It was held that, since his former wife was not liable to UK taxation on the maintenance payments, sums representing income tax could not be deducted from the payments under what is now section 348 of ICTA, and they were not allowable as a deduction.

In the case of copyrights, design rights and public lending rights, sections 536, 537 and 537B of ICTA apply section 349(1) of ICTA as if the payments were annual payments. (The duty to deduct in such cases is rewritten in clause 839.) So it follows that if the person whose income it is has no liability to UK tax on the payments, the duty to deduct under section 349(1) of ICTA cannot apply.

There is nothing specific to apply the same principle to payments in respect of a patent (clause 836). But Scrutton LJ's discussion of the principle is wide enough to encompass patent payments. And there would be no logic in a policy that demanded deduction at source if a patent payment was also an annual payment, but not otherwise.

This change enacts the relevant case law in both clauses 836 and 839 and aligns the statute with practice.

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 134: Deduction of tax: manufactured overseas dividends: periods for accounting for tax: clause 858

This change brings the law into line with practice in relation to the periods by reference to which overseas dividend manufacturers may set off amounts of overseas tax against their United Kingdom tax liabilities.

Paragraph 4(7) of Schedule 23A to ICTA provides:

Dividend manufacturing regulations may make provision for a person who, in any chargeable period, is an overseas dividend manufacturer to be entitled in prescribed circumstances to set off in accordance with the regulations and to the prescribed extent, amounts falling within paragraph (a) of sub-paragraph (7AA) below against the sums falling within paragraph (b) of that sub-paragraph, and to account to the Board for, or as the case may be, claim credit in respect of, the balance.

Section 832(1) of ICTA defines "chargeable period" as an accounting period of a company or a year of assessment. It defines "year of assessment", with reference to income tax, as a year for which such tax is granted by any Act granting income tax.

Clause 858 rewrites paragraph 4(7) of Schedule 23A to ICTA in terms of a "prescribed period" rather than a "chargeable period". This will enable the Treasury to make regulations about set-off in relation to a period other than a tax year if that is thought desirable. This flexibility is potentially beneficial to taxpayers, as it enables regulations to prescribe periods (such as periods of account) which will be to their administrative convenience.

The 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 135: Deduction of tax: collection: deposit-takers, building societies and certain companies: building society return periods: clause 880

This change removes any doubt about whether paragraph 2(2)(b) of Schedule 16 to ICTA and regulation 10(3)(d)(b) of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231) (the building society regulations) have the same meaning.

Under the source legislation regulation 10(3)(d) of the building society regulations modifies paragraph 2(2)(a) to (c) of Schedule 16 to ICTA in respect of building societies, so that complete payment quarters and any part of an accounting period will be treated as a return period. But where a complete accounting period is wholly contained within a return period, there is no return period. This means, for example, that a complete accounting period running from say 1 January to 31 January will not be caught by regulation 10.

So, in keeping with the alignment of the rules on deduction of tax at source for deposit-takers and building societies (see Changes 119 and 120), subsections (2) and (3) of clause 880 have been drafted so that they also apply to building societies.

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 136: Deduction of tax: collection: deposit-takers, building societies and certain companies: returns: clauses 882, 885, 886, 890 and 891

This change makes it clear that a return need be submitted only where a section 879 payment was made in that particular return period. It also clarifies related points.

Paragraph 2 of Schedule 16 to ICTA leaves it unclear whether a return need be made only for a return period in which a section 879 payment has been made or whether returns need to be made for each return period in any accounting period in which at least one section 879 payment has been made. Clause 882 makes the position clear, in line with current practice.

The related points which follow from this change affect clauses 885, 886, 890 and 891.

Clauses 885(2) and 886(4) (set-off) clarify that a payer may make a set-off claim even where no section 879 payment has been made in the return period concerned. Under the source legislation this point is unclear because paragraph 5 of Schedule 16 to ICTA requires the claim to be included in a paragraph 2 return. (As mentioned above, it is unclear when such a return needs to be submitted.)

Clause 890 (assessment in other cases) clarifies that an assessment can be made in respect of any return (including a return made only in order to make a set-off claim). Under the source legislation, this point is unclear as paragraph 4(2) of Schedule 16 to ICTA refers to returns made under paragraph 2. (As mentioned above, it is unclear when such a return needs to be submitted.)

Clause 891 (payer's duty to deliver amended return) clarifies that the payer is under a duty to correct not only returns which include a section 879 payment, but also returns where a claim for set-off has been made. Under the source legislation, this point is unclear as paragraph 7A of Schedule 16 to ICTA refers to returns made under paragraph 2. (As mentioned above, it is unclear when such a return needs to be submitted.)

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 137: Deduction of tax: collection: deposit-takers, building societies and certain companies: payments made otherwise than in an accounting period: clause 883

This change brings into line the information which is required to be included on a return if a payment is made otherwise than in an accounting period with the information which is required if a payment is made in an accounting period.

Paragraph 9 of Schedule 16 to ICTA does not have a specific information requirement. But all payments must be accounted for on returns which, according to section 113(1) of TMA, ".. shall be in such form as the Board prescribe..".

As the form prescribed already requires the information set out in clause 883 this change will have no effect 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 138: Deduction of tax: collection: deposit-takers, building societies and certain companies: payer's duty to deliver amended return: clause 891

This change extends the taxpayer's duty to submit corrected returns to payments made otherwise than in an accounting period.

Under paragraph 4(2) of Schedule 16 to ICTA, where an incorrect return is submitted in respect of payments made in an accounting period (see clause 882), there is a duty on the taxpayer to deliver an amended return.

But the source legislation does not provide for such a duty in respect of returns in respect of payments made otherwise than in an accounting period (see clause 883).

Clause 891 imposes a duty to submit a corrected return regardless of whether the return is for a payment made in an accounting period or otherwise.

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 139: Deduction of tax: collection: deposit-takers, building societies and certain companies: power to make regulations modifying this Chapter: clause 895

This change confirms that the powers to modify the provisions dealing with collection of income tax deducted at source by regulations apply to deposit-takers and building societies.

Section 350(4) of ICTA allows the Commissioners for Her Majesty's Revenue and Customs to make regulations which modify Schedule 16 to ICTA in its application to payments covered by section 349 of ICTA. These powers do not specifically mention the making of regulations which modify Schedule 16 in its application to payments made by building societies (covered by regulations under section 477A of ICTA), or payments by deposit-takers (covered by section 480A of ICTA).

But regulations made under the powers in section 350(4) of ICTA are capable of modifying Schedule 16 as it applies to deposit-taker and building society payments.

The aim of regulation 10 of the building society regulations (SI 1990/2231) and section 480A of ICTA is that, subject to some specific modifications, the collection regime applying to section 349 payments should apply to deposit-taker and building society payments. So regulation 10 and section 480A should be read as applying Schedule 16 to ICTA as modified from time to time by regulations made under section 350(4) of that Act.

It also possible to read the power in section 350(4) as a power to modify Schedule 16 as applied by regulations under section 477A and by section 480A. And, in the case of building societies, section 477A allows regulations to be made in respect of building society payments. And regulation 10 incorporates the provisions of Schedule 16 with modifications. So clause 895 of this Bill reflects the regulation making power in section 477A by permitting regulations to modify Chapter 15 of Part 14 of this Bill in its application to building society payments.

Clause 895 allows regulations to be made modifying that Chapter in relation to any kind of section 879 payment. This reflects the general way in which the various provisions about deduction of income tax at source are brought together and rationalised in this Bill.

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 140: Deduction of tax: removal of charge to tax: clauses 872, 879, 896, 897 and 904

This change removes the charging provision in sections 42A(1), 350(1) and 582 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 relation to tax to be accounted for under Part 14 of this Bill.

Section 42A(1) of ICTA allows the Commissioners for Her Majesty's Revenue and Customs to make regulations for the "charging, assessment, collection and recovery" of prescribed amounts which may become chargeable under Schedule A or as the profits of a UK property business.

Section 350(1) of ICTA provides that the person by or through whom certain payments are made (from which sums representing income tax are required to be deducted) shall be "assessable and chargeable" with income tax on the payment. And the idea of the payer being chargeable flows through into Schedule 16 to ICTA, as applied by section 350(4) of ICTA for certain payments caught by section 349 of that Act.

Section 582 of ICTA applies the section 350(1) charge to the special case of funding bonds, where instead of making a deduction the issuer of the bonds retains enough bonds to cover the sum representing income tax.

Other legislation concerned with deduction at source does not involve the payer being chargeable. Examples include PAYE legislation, and the rules for deposit-takers and building societies (sections 477A and 480A of ICTA) which apply Schedule 16 to ICTA directly rather than through section 350 of that Act.

This change aligns the clauses rewriting sections 42A, 350(1) and 582 of ICTA with those rewriting other legislation which does not involve the idea of the payer being chargeable, rather than retaining that idea.

This, in particular, gives greater clarity to the distinction between:

• income tax charged on persons in their own right (on their own income); and

• income tax paid under deduction of tax at source provisions (where income tax is ultimately borne by the persons for whom the payments constitute 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 141: Deduction of tax: manufactured interest on UK securities: tax statements: clause 908

This change brings the rules for tax statements about manufactured interest on UK securities into line with the rules for tax statements about actual interest on UK securities.

Paragraph 3(8) and (9) of Schedule 23A to ICTA deal with statements about manufactured interest on UK securities paid under deduction of tax. Section 352 of ICTA deals with statements about actual interest on UK securities paid under deduction of tax.

Paragraph 3(8) and (9) of Schedule 23A to ICTA and section 352 of ICTA are very similar. They differ in two respects.

First, under section 352, the statement is to be provided "if the recipient so requests in writing". By contrast, under paragraph 3(8), "the interest manufacturer shall, on paying the manufactured interest, provide" the statement. But since in both cases the recipient can enforce the duty to provide the statement, this does not appear to make any practical difference.

Second, paragraph 3(8)(d) requires the statement to include the date of the payment by the interest manufacturer, but section 352 imposes no such requirement. Neither does the rule about tax statements relating to manufactured overseas dividends in regulation 15 of the Income Tax (Manufactured Overseas Dividends) Regulations 1993 (SI 1993/2004).

These differences are believed to be due to historical accident. It is therefore proposed to conform the rewritten paragraph 3(8) and (9) to section 352.

Clause 908, which is based on section 352, therefore, applies without modification to manufactured interest on UK securities paid under deduction of tax.