Corporation Tax Bill - continued          House of Commons

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Chapter 4: Relief from corporation tax on patent income

Clause 924: Relief for expenses: patent income

2333.     This clause provides relief for certain expenses in connection with patents. It is based on sections 526 and 528 of ICTA. The corresponding rule for income tax is in section 600 of ITTOIA.

2334.     The relief is on the basis of expenses incurred. This relaxes any requirement in the source legislation that fees have to be paid before a deduction can be made.

2335.     Subsection (2) defines “patent application and maintenance expenses” for the purposes of this clause. Relief for such expenses is excluded from the scope of this clause if the expenditure is incurred for the purposes of a trade carried on by the payer. This is because there is a similar provision for trading expenses connected with patents (in clause 89 of the Bill).

2336.     Subsection (4) gives a signpost to clause 926 which deals with contributions to expenditure. This is necessary because section 532 of ICTA treats section 526 and 528 of ICTA as if those provisions were contained in CAA.

Clause 925: How relief is given under section 924

2337.     This clause sets out how relief is given when a claim is made under clause 924 for patent expenses to be set against patent income. It is based on sections 526, 528 and 533 of ICTA. The corresponding rule for income tax is in section 601 of ITTOIA.

2338.     Subsection (2) allows relief for expenditure against patent income in the accounting period in which the expenditure is incurred. However, if the expenses exceed the patent income in the accounting period, the surplus expenses cannot be used to create a loss under this clause. Any such surplus is dealt with in accordance with subsection (3).

Chapter 5: Supplementary

Clause 926: Contributions to expenditure

2339.     This clause restricts expenditure allowable under clause 910, clause 913 and clause 924 to the extent that the expenditure is met by a public body or someone other than the company. It is based on section 532 of ICTA and section 532 of CAA. The corresponding rule for income tax is in section 603 of ITTOIA.

2340.     Subsection (3) is new and excludes the application of this clause to incidental expenses incurred by the seller of patent rights (see clause 913(2)(b)). This is because section 524 of ICTA only bites in the first place on the net proceeds of a sale.

Clause 927: Contributions not made by public bodies nor eligible for tax relief

2341.     This clause qualifies the general rule in clause 926 by providing that contributions not made by public bodies may still be eligible as deductible expenditure in certain circumstances. The clause is based on section 532 of ICTA and section 536 of CAA. The corresponding rule for income tax is in section 604 of ITTOIA.

Clause 928: Exchanges

2342.     This clause extends the definition of a sale of property to include exchanges of property for the purposes of this Part. It is based on section 532 of ICTA and sections 453 and 572 of CAA. The corresponding rule for income tax is in section 605 of ITTOIA.

Clause 929: Apportionment where property sold together

2343.     This clause provides for the apportionment of sale proceeds and expenditure on a just and reasonable basis if property within the scope of this Part is sold with other property. It is based on section 532 of ICTA and sections 453 and 562 of CAA. The corresponding rule for income tax is in section 606 of ITTOIA.

Clause 930: Questions about apportionments affecting two or more persons

2344.     This clause provides for questions relating to apportionment under clause 929 that affect two or more persons to be determined by the body prescribed by section 563 of CAA. It is based on section 532 of ICTA and section 563 of CAA. The corresponding rule for income tax is in section 607 of ITTOIA.

Clause 931: Meaning of “capital sums” etc

2345.     This clause applies section 4 of CAA (which defines “capital expenditure” and “capital sums”) for the purposes of the Part. It is based on section 532 of ICTA. The corresponding rule for income tax is in section 608 of ITTOIA.

Part 10: Miscellaneous income

Chapter 1: Introduction

Clause 932: Overview of Part

2346.     This clause describes the function and contents of the Part. It is new.

Chapter 2: Dividends from non-UK resident companies

Clause 933: Charge to tax on dividends of non-UK resident companies

2347.     This clause sets out the charge to corporation tax on dividends from a company that is not resident in the UK. It is based on sections 9, 18 and 70 of ICTA. The corresponding income tax provision is section 402 of ITTOIA.

2348.     The approach adopted in ICTA is to compute income for corporation tax from each type of source in the same way as for income tax, and then apply any specific corporation tax rules. Following the enactment of ITTOIA, which set up a different scheme for income tax, sources of income for corporation tax have continued to be computed under the rules of the separate Schedules and Cases. Dividends paid by a non-UK resident company were charged under Schedule D Case V.

2349.     The clause mirrors section 402 of ITTOIA by explicitly excluding capital dividends - the Schedule D Case V charge was a charge on income and the wording of the clause reflects this.

Chapter 3: Beneficiaries’ income from estates in administration

Overview

2350.     This Chapter charges to corporation tax income paid or payable by personal representatives to residuary beneficiaries from estates in administration. The Chapter rewrites sections 695 to 702 of ICTA. The corresponding rules for income tax are in Chapter 6 of Part 5 of ITTOIA.

2351.     Personal representatives are taxable at the basic rate or the dividend ordinary rate on any income they receive during the administration period. When the income which arises to the personal representatives is paid to the residuary beneficiaries, it is treated as having borne income tax at those rates.

Clause 934: Charge to tax on estate income

2352.     This clause applies the charge to corporation tax on income to estate income. It is based on sections 695(2) to (4), 696(3) and (6), 698(3) and 701(11) of ICTA. The corresponding rule for income tax is in section 649 of ITTOIA.

2353.     The approach of Part 16 of ICTA is to deem sums to have been paid as income for all tax purposes. In the case of both UK and foreign estates, the income is not charged under a particular Schedule or Case and it is implicit that tax is charged on those sums. This clause applies to both UK and foreign estates. And it has now been made explicit that the charge to tax applies to all estate income which is treated as arising under the Chapter from a deceased person’s estate.

Clause 935: Absolute, limited and discretionary interests

2354.     This clause defines the three types of interest in the whole or part of the residue of an estate. It is based on sections 698(1) and (3) and 701(2) and (3) of ICTA. The corresponding rule for income tax is in section 650 of ITTOIA.

2355.     Subsections (1)(b) and 2(b) reflect the fact that the amount of any residue, and the income from it, can only be an estimate until the residue has been ascertained.

2356.     Subsection (4) covers the following four situations:

  • where income/capital is properly payable directly to the person with the interest;

  • where income/capital is properly payable to the person with the interest indirectly through a trustee or other person;

  • where income/capital is properly payable for the benefit of the person with the interest, to another person, and that income/capital is paid directly to that other person; and

  • where income/capital is properly payable to a person where that person is a personal representative and subsection (5) applies.

2357.     Subsection (5) deals with the situation where personal representatives would have an absolute or limited interest in the residue of another deceased person’s estate if a right they have as personal representatives were vested in them for their own benefit. In these circumstances they are treated as having that interest. The term “personal representatives” is defined in clause 968. The definition corresponds with that in section 989 of ITA.

Clause 936: Meaning of “UK estate” and “foreign estate”

2358.     This clause defines “UK estate” and “foreign estate” for the purposes of this Chapter. It is based on sections 699A(1B) and 701(9), (10) and (10A) of ICTA. The definitions in this clause underpin the whole of this Chapter. The corresponding rule for income tax is in section 651 of ITTOIA.

Clause 937: Absolute interests in residue

2359.     This clause sets out the basis on which estate income is treated as arising in an accounting period in the case of absolute interests in residue. It is based on section 696(3) and (5) of ICTA. The corresponding rule for income tax is in section 652 of ITTOIA.

2360.     Subsections (2) and (3) set out the relevant conditions. A payment need not be made in the “final accounting period” because the net amount of estate income in that period is always equal to the assumed income entitlement for that period. Under section 696(5) of ICTA, taxing a company with an absolute interest in a residuary estate depends on whether the company receives payments and, in the final year of administration, on a fictional payment under that section. The same effect is achieved in this clause by determining the liability by considering the assumed income entitlement in all accounting periods. Assumed income entitlement is dealt with in clause 948.

Clause 938: Meaning of “the administration period”, “the final accounting period” and “the final tax year”

2361.     This clause defines “the administration period”, “the final accounting period” and “the final tax year”. It is based on sections 695(1), 701(13) and 702 of ICTA. The corresponding rule for income tax is in section 653 of ITTOIA.

2362.     Subsection (2) defines when the administration of the estate is completed for Scotland. A full definition for Scotland is required because the completion of the administration of an estate would otherwise have no meaning under Scottish law (although the definition has been updated by replacing the archaic expression “for behoof of”). In contrast, there are cases under English law which have established that the administration is complete when the residue of the estate is ascertained and is ready for distribution. Case law explains what this means in particular circumstances (see, for example, R v Special Commissioners ex parte Dr Barnardo’s Homes (1921), 7 TC 646 HL, Daw v CIR (1928), 14 TC 58 HC and CIR v Sir Aubrey Smith (1930), 15 TC 661 CA).

Clause 939: Limited interests in residue

2363.     This clause deals with estate income relating to limited interests. It is based on section 695(2) and (3) of ICTA. The corresponding rule for income tax is in section 654 of ITTOIA.

2364.     The clause sets out the basis on which estate income is treated as arising in an accounting period for limited interests in residue. The clause reflects the need to deal with accounting periods before the final accounting period. Also, a limited interest might cease in an accounting period before the final accounting period and sums might be paid in respect of that interest in a later accounting period; so that situation has to be provided for.

Clause 940: Discretionary interests in residue

2365.     This clause deals with estate income relating to discretionary interests in residue. It is based on section 698(3) of ICTA. The corresponding rule for income tax is in section 655 of ITTOIA.

Clause 941: UK estates

2366.     This clause sets out the amount charged to tax under clause 934 for income from UK estates. It is based on sections 695(2) to (4), 696(3) and (4) and 698(3) of ICTA. The corresponding rule for income tax is in section 656 of ITTOIA.

2367.     As there are fundamental differences between the basis of charge for income from UK and foreign estates, the rules for foreign estates have been dealt with in a separate clause (clause 942).

2368.     Subsection (2) provides that income from a UK estate is charged on the gross amount of the estate income arising for the accounting period. This is the basic amount of the income grossed up at the applicable rate. “Basic amount” is a new term. This avoids confusion with the term “net amount” since it is the “net amount” which is actually charged to tax in the case of a foreign estate (except where clause 963 (income treated as bearing income tax) applies).

Clause 942: Foreign estates

2369.     This clause sets out the amount charged to tax under clause 934 for income from foreign estates. It is based on sections 695(4), 696(6) and 698(3) of ICTA. The corresponding rule for income tax is in section 657 of ITTOIA.

2370.     Subsection (5) provides that, so far as the income is not within clause 963, the charge is on the basic amount of that income. Where the income is within clause 963, the charge is on the gross amount of the income calculated in accordance with clause 946.

Clause 943: Absolute interests

2371.     This clause explains how to calculate the basic amount of estate income for absolute interests. It is based on section 696(3) to (5) of ICTA. The corresponding rule for income tax is in section 660 of ITTOIA.

2372.     This section removes all the deeming of amounts to have been paid in Part 16 of ICTA. Instead, it looks at either amounts actually paid or the assumed income entitlement. It then catches all previously untaxed income due to the absolute interest holder by taxing the assumed income entitlement in the final accounting period. This avoids the two stage process inherent in section 696(5) of ICTA.

2373.     Subsection (3) introduces a new rule allowing excess estate deductions in the final year to be set off against the basic amount of estate income for the final accounting period. See Change 69 in Annex 1.

Clause 944: Limited interests

2374.     This clause explains how to calculate the basic amount of estate income for limited interests. It is based on section 695(2) to (4) of ICTA. The corresponding rule for income tax is in section 661 of ITTOIA.

Clause 945: Discretionary interests

2375.     This clause identifies the basic amount of estate income relating to discretionary interests. It is based on sections 695(4) and 698(3) of ICTA. The corresponding rule for income tax is in section 662 of ITTOIA.

Clause 946: Applicable rate for grossing up basic amounts of estate income

2376.     This clause provides for basic amounts of estate income to be grossed up, as appropriate, for the purposes of the clauses charging income (clause 941 for UK estates and clause 942 for foreign estates) by reference to the rate at which tax is borne by the aggregate income of the estate. It is based on sections 699A and 701(3A) of ICTA. The aggregate income of the estate is defined in clause 947. The corresponding rule for income tax is in section 663 of ITTOIA.

2377.     Subsection (5) explains the interaction between “the relevant tax year” and “accounting period” for the purposes of this Chapter.

Clause 947: Aggregate income of the estate

2378.     This clause explains what is meant by the “aggregate income of the estate” for a tax year. It is an important definition of general application. It is based on sections 701(5) and (8) and 702 of ICTA. The corresponding rule for income tax is in section 664 of ITTOIA.

2379.     Subsection (2) defines the income and amounts within the aggregate income of the estate. Subsection (2)(b) brings in foreign source income and subsection (4) provides that such income takes account of any deductions which would have been available if it had been subject to United Kingdom income tax. So subsection (4) brings foreign source income into line with United Kingdom source income.

2380.     Subsection (5) provides that two types of income are excluded from the aggregate income of the estate. The exclusion detailed in subsection (5)(a) concerning income to which any person may become entitled under a specific disposition is new to the definition of the aggregate income of the estate although it is similar to section 697(1)(b) of ICTA which deals with amounts which are deductible from the aggregate income in calculating the residuary income of the estate.

2381.     It is not considered appropriate for income from specific dispositions or income from contingent interests to be treated as part of the aggregate income of the estate. See Change 70 in Annex 1.

2382.     Section 698(1) of ICTA in part deals with the position where the deceased person (“A”), whose estate is being administered by personal representatives, had an absolute or limited interest in the residue of the estate of another deceased person (“B”). Section 698(1) of ICTA deems the personal representatives to have the same interest as “A” “notwithstanding that that right is not vested in them for their own benefit”. The substance of this is rewritten in clause 935(5). Section 698(1) of ICTA also deems any income in respect of such an interest to be part of the aggregate income of A’s estate. This part of the source legislation is not rewritten because such income will fall within the definition of the aggregate income of the estate anyway, once the personal representatives are deemed to have the interest, because it will be the income of the deceased’s personal representatives as such. It is immaterial for this purpose that that right in relation to the estate of another deceased person “is not vested in them for their own benefit”.

2383.     It is not necessary to expand on the two types of excluded income mentioned in subsection (5) of this clause (with the exception of subsection (6) of this clause) since it will be clear when such income arises. Consequently, section 701(6) and (7) of ICTA (which provide the meaning for “charges on residue”) are not rewritten.

Clause 948: Assumed income entitlement

2384.     This clause explains the new concept of the “assumed income entitlement”. It is based on section 696(3A), (3B) and (5) of ICTA. The corresponding rule for income tax is in section 665 of ITTOIA.

2385.     The concept of “assumed income entitlement” has been introduced as a tool for calculating the basic amount of estate income for absolute interests. It is similar to the “aggregated income entitlement” in section 696(3B) of ICTA but applies in a more straightforward way.

2386.     Step 4 in subsection (1) deals also with situations where a beneficiary liable to corporation tax was, at some earlier point during the administration period, chargeable to income tax. It also deals with other situations where a non-UK resident beneficiary becomes UK resident, when the estate is a foreign estate.

Clause 949: Residuary income of the estate

2387.     This clause explains how the residuary income of the estate is calculated. It is based on section 697(1) and (1A) of ICTA. The corresponding rule for income tax is in section 666 of ITTOIA.

2388.     Beneficiaries with absolute interests need to know the residuary income of the estate for a tax year in order to work out their assumed income entitlement.

2389.     Subsection (2) lists the “allowable estate deductions”. This is a new label for the items which may be deducted from the aggregate income of the estate. Subsection (2)(a) refers to “all interest paid in that year by the personal representatives ..”. Section 697(1)(a) of ICTA refers to “the amount of any annual interest, annuity or other annual payment for that year which is a charge on residue ..”. The requirements that interest must be annual and also a charge on residue have not been reproduced. See Change 71 in Annex 1.

2390.     In practice, HMRC allow income from specific dispositions to be deducted from the aggregate income of the estate in calculating the residuary income of the estate in the year of assent and later years. But it is considered simpler for it merely to be excluded from what counts as the aggregate income and not be deducted from it. See Change 70 in Annex 1.

2391.     Subsection (2)(b) deals with annual payments. Because of the restricted meaning given to annual payments, much of the wide definition in sections 701(6) and 702(d) of ICTA is otiose. Any liabilities which are annual payments will now have to meet only the requirement that they are properly payable out of residue and this is also a requirement of section 701(6) of ICTA. Omitting the remainder of the definition removes unnecessary material. As a consequence of the change, section 701(7) of ICTA, which limits the meaning of “charges on residue” in relation to specific dispositions, does not need to be rewritten either.

2392.     The clause does not contain an ordering rule for allocating allowable estate deductions against different categories of income. It is implicit in this clause that the taxpayer may choose whichever allocation is most advantageous.

Clause 950: Shares of residuary income of estate

2393.     This clause explains the rules for determining the share of residuary income treated as arising from a company’s absolute interest in the whole or part of the residue of an estate. It is based on section 696(2) and (8) of ICTA. The corresponding rule for income tax is in section 667 of ITTOIA.

Clause 951: Reduction in share of residuary income of estate

2394.     This clause provides that the share of the residuary income of the estate of a company with an absolute interest is reduced at the end of the administration period in certain circumstances. It is based on section 697(2) and (3) of ICTA. The corresponding rule for income tax is in section 668 of ITTOIA.

2395.     Until it was repealed by ITA 2007, section 4(1) of ICTA provided that sums paid during (or on completion of) the administration period were to be grossed up by reference to the basic rate for the tax year in which it was paid in the case of UK estates. Subsection (5) provides that, for the purposes of subsection (1)(b) the basic rate is used when grossing up these sums. See Change 72 in Annex 1.

Clause 952: Applicable rate for determining assumed income entitlement (UK estates)

2396.     This clause sets out the calculation of the applicable rate for the purposes of calculating income tax to be deducted from the residuary income at step 2 of clause 948(1). The clause is based on section 701(3A) of ICTA. The corresponding rule for income tax is in section 670 of ITTOIA.

Clause 953: Introduction

2397.     This clause introduces the clauses dealing with successive interests where two or more interests in the whole or part of the residue of an estate are held successively during the administration period by different persons. It is based on section 698(4) to (6) of ICTA. The income tax rules corresponding to subsections (2) and (3) are rewritten in section 671(7) and (8) of ITTOIA.

2398.     Subsection (3) ensures that where a previous holder is not a company within the charge to corporation tax, that person’s accounting periods (for the purposes of this clause) correspond with tax years.

 
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Prepared: 5 December 2008