Clause 973: Amount of income treated as received

2461.     This clause sets out the amount of income treated as received by a unit holder from an unauthorised unit trust scheme under clause 972(2). It is based on section 469 of ICTA. The corresponding rule for income tax is in section 548 of ITTOIA.

2462.     Subsection (2) contains a method statement setting out the steps to be taken to calculate the gross amount of income on which the unit holder is charged to tax.

Chapter 6: Sales of foreign dividend coupons

Overview

2463.     This Chapter rewrites the charge to tax in section 18(3B) to (3E) of ICTA on the proceeds of the sale of coupons attached to foreign shares, where the sale is made through a bank in the United Kingdom or to a dealer in coupons in the United Kingdom.

2464.     Although these provisions include coupons on both securities and shares, for corporation tax purposes the charge applies in effect to the sale of coupons on shares only.

2465.     Chapter 2 of Part 4 of FA 1996 charges to tax all profits and gains arising to a company from its loan relationships. Profits and gains include (section 81(5) and 84(1) of that Act) payments payable in pursuance of any rights under a loan relationship. The sale of a coupon on a security is charged to tax in the same way as any sale in pursuance of a right under a loan relationship. Section 18(3B) of ICTA as it applies to coupons on securities is therefore unnecessary for corporation tax purposes and section 80(5) of FA 1996 applies to give the loan relationship provisions precedence in any event.

2466.     Section 18(3B) of ICTA requires Schedule D Case IV in section 18(3) to be read as including proceeds of the sales of coupons for foreign dividends. Subsection (3B) does not explain how the charge is allocated between Schedule D Case IV and Case V. The obvious assumption is that where the coupon is issued in respect of a security out of the United Kingdom it falls within Case IV (which charges income from overseas securities) and otherwise within Case V (which charges income from possessions outside the United Kingdom).

2467.     Section 18(3A) of ICTA requires “Case III” as set out in that subsection to be substituted for “Case IV” in section 18(3) of ICTA. The effect of this is to bring the extended meaning of Case IV required by section 18(3B) of ICTA into a Case III charge which incorporates a charge under the loan relationships provisions which, as explained above, already charges to tax the sale of coupons in respect of securities.

2468.     Whether or not it was intentional that a Case IV charge for corporation tax should remain within section 18(3B) to (3E) of ICTA to be brought within Case III by section 18(3A) of ICTA is unclear. Subsections (3B) to (3E) were introduced in FA 1996, the same Finance Act that introduced section 18(3A) of ICTA. Either way the effect of section 18(3B) to (3E) of ICTA is simply to bring within the loan relationships provisions the sale of coupons on securities even though they are already within the provisions on first principles.

2469.     For these reasons section 18(3B) to (3E) of ICTA has been rewritten to exclude the sales of coupons on foreign securities.

Clause 974: Charge to tax under this Chapter

2470.     This clause applies the charge to corporation tax to income which is treated as arising from foreign holdings where a dividend coupon attached to the holding is (a) sold or otherwise realised by a bank in the United Kingdom or (b) sold to a coupon dealer in the United Kingdom by someone other than a bank or a coupon dealer. It is based on section 18(3), (3B) and (3E) of ICTA. The corresponding rule for income tax is in section 570 of ITTOIA.

2471.     Subsection (3) applies where the coupon is sold by the bank on behalf of another. See Change 75 in Annex 1.

2472.     Subsection (4) applies where a person who is neither a bank nor another coupon dealer sells the dividend coupons to a coupon dealer in the United Kingdom. Section 18(3B)(b) of ICTA refers to a dealer in coupons in the United Kingdom. See Change 75 in Annex 1.

Clause 975: Meaning of “foreign holdings” etc

2473.     This clause gives the meaning of “foreign holdings” and “dividend coupons”. It is based on section 18(3B), (3C), (3D) and (3E) of ICTA. The corresponding rule for income tax is in section 571 of ITTOIA.

2474.     For reasons given above the extended definition of “dividends” to include interest or other annual payments has been omitted as part of the exclusion of coupons in respect of securities. It is considered that “dividends” alone in section 18(3D) of ICTA is sufficient to refer to any income from shares.

2475.     The definition in subsection (1) of “foreign holdings” as shares outside the United Kingdom which are issued by or on behalf of a non-UK resident body of persons reflects the wording of section 18(3C) of ICTA. Section 18(3B) states that the references in Schedule D Cases IV and V to income arising from securities or possessions out of the UK are to be taken in the case of relevant foreign holdings as including the various categories of proceeds detailed under paragraphs (a) and (b). This is construed as meaning that where the securities or possessions are out of the United Kingdom and are relevant foreign holdings references to income from them include the proceeds under those paragraphs (but not in other cases). In other words there is no assumption of a complete overlap between securities or possessions out of the United Kingdom and relevant foreign holdings. Whether a security or possession is within Cases IV and V as a security or possession out of the United Kingdom may depend on a number of factors (see Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA (1970), 46 TC 472 HL).

Chapter 7: Annual payments not otherwise charged

Overview

2476.     The Chapter sets out the charge to corporation tax on income on any annual payments that are not charged to tax by any other provision of this Bill or any other legislation. It is based on the part of section 18 Schedule D Case III (b) of ICTA which deals with annual payments and the part of section 18 Schedule D Case V of ICTA which deals with foreign annual payments. The corresponding rules for income tax are in Chapter 7 of Part 5 of ITTOIA.

2477.     Annuity payments made under purchased life annuities and distributions from unauthorised unit trusts (which in the source legislation are treated as annual payments) are generally regarded as investment income. A company which is the recipient of a payment under a purchased life annuity contract is deemed to be a party to a creditor relationship (see clauses 561 and 562 of this Bill). The application of the charge to corporation tax on income for distributions from unauthorised unit trusts is in clause 972 of this Bill. As the application of the charge to corporation tax on income for annual payments in this Chapter takes effect only if an amount is not otherwise charged to corporation tax, there is no overlap between the various provisions.

2478.     The phrase “annual payment” is retained but is not defined in the Bill or in the source legislation. Instead it derives its meaning from an extensive body of case law. That case law illustrates that the phrase has a meaning for tax purposes far different from its natural one. Replacing that phrase would risk breaking the link to case law without making the law any clearer or easier to understand.

Clause 976: Overview of Chapter

2479.     This clause provides an overview of the Chapter and signposts other relevant provisions. It is new.

Clause 977: Charge to tax on annual payments not otherwise charged

2480.     This clause applies the charge to corporation tax on income to annual payments not charged elsewhere. It is based on sections 9 and 18 of ICTA. The corresponding rule for income tax is in section 683 of ITTOIA.

2481.     Subsection (1) applies the charge to corporation tax on income to residual annual payments. The charge to tax in the source legislation is in respect of “any annuity or other annual payment”. The reference to “any annuity or other” is omitted because most annuities are charged to tax not under this Chapter but under Part 5 (loan relationships). Including a reference to annuities might therefore be misleading.

2482.     The words “whether inside or outside the United Kingdom” in Schedule D Case III (b) are also omitted. The place of payment is only one of a number of factors derived from case law which may be taken into account in determining the source of annual payments.

2483.     The source legislation excludes “any payment chargeable under Schedule A”. It is not necessary to rewrite this as clauses 209, 270, 277 and 280 apply the charge to corporation tax on income to property income.

2484.     Subsection (2) ensures that any exemption resulting from the application of the charge to corporation tax on income to other income is not reversed by the application of that charge under this Chapter.

2485.     Subsection (3) rewrites “or whether annually or at shorter or longer intervals”.

Clause 978: Exemption for payments by persons liable to pool betting duty

2486.     This clause gives an exemption from corporation tax for annual payments made by persons liable to pool betting duty. It is based on section 126 of FA 1990 and section 121 of FA 1991. The corresponding rule for income tax is in section 748 of ITTOIA.

2487.     The exemption applies to payments made in consequence of a reduction in pool betting duty, whenever that reduction is made (see subsection (2)). Subsection (2) combines the conditions in FA 1990 and FA 1991. Although the source legislation is restricted to the 1990 and 1991 reductions in pool betting duty, the subsection applies to payments made “in consequence of” any reduction in the duty. See Change 36 in Annex 1.

2488.     Subsection (3) sets out a further condition which needs to be satisfied. The subsection does not specify that payments in consequence of the 1990 reduction in pool betting duty must be paid for football safety and comfort (see section 126(3) of FA 1990) or that payments in consequence of the 1991 reduction must be paid to the Foundation for Sport and the Arts (see section 121(3) of FA 1991). Instead the subsection applies to a payment in consequence of any reduction in pool betting duty for either purpose. See Change 35 in Annex 1.

Chapter 8: Income not otherwise charged

Overview

2489.     This Chapter applies the charge to corporation tax on income to any income that is not so charged by any other corporation tax provision. The corresponding income tax charge is in Chapter 8 of Part 5 of ITTOIA.

2490.     The Chapter also includes exemptions from the charge applied under this Chapter.

2491.     In the source legislation, Schedule D is the residual Schedule into which income falls for corporation tax purposes if neither ITEPA nor Schedule A applies to it. The Schedule is set out in section 18 of ICTA. Section 18(1)(a) of ICTA charges “annual profits or gains arising or accruing.. from any kind of property whatever..”. Section 18(1)(b) of ICTA charges “..other annual profits or gains not charged under Schedule A or under ITEPA 2003 as employment income, pension income or social security income, and not specially exempted from tax”.

2492.     Schedule D Case VI is itself the residual Case under that Schedule. Tax is charged under Case VI “in respect of annual profits or gains not falling under any other Case of Schedule D and not charged by virtue of Schedule A or by virtue of ITEPA 2003 as employment income, pension income or social security income”. Schedule D Case V includes an identical function for the income to which that Case applies. The scope of Case V is (subject to the override in section 18(3A) of ICTA giving priority to Schedule D Case III in respect of anything chargeable under Chapter 2 of Part 4 of FA 1996 as profits or gains from loan relationships) “income arising from possessions out of the United Kingdom not being employment income, pension income or social security income on which tax is charged under ITEPA 2003”. Case law has established the comprehensive scope of Case V in relation to “income from possessions out of the United Kingdom”. So far as any amount is “income from possessions out of the United Kingdom”, Case V is the “last resort” charging provision, not Case VI. And a corollary to that rule is that income charged by Case VI (other than deemed income which is directed by provisions other than section 18 of ICTA to be taxed under Case VI) can only derive from a source in the United Kingdom.

2493.     This Chapter brings together the “sweep up” functions of Schedule D Cases V and VI.

2494.     The charge under this Chapter is restricted to amounts that are “income” on first principles. That is, in terms of the source legislation they are “annual profits or gains” under section 18(1) of ICTA, as that phrase has been interpreted by case law, and do not include profits or gains of a capital nature even if such profits are directed to be charged to tax as income.

2495.     Under section 396 of ICTA, Schedule D Case VI losses may be set against Case VI profits or gains. Although that relief is not rewritten in this Bill, consequential amendments of ICTA in Schedule 1 to this Bill ensure that the relief continues to work as before in respect of income within this Chapter despite the abolition by this Bill of the Schedules and the Cases of Schedule D.

Clause 979: Charge to tax on income not otherwise charged

2496.     This clause applies the charge to corporation tax on income to income not so charged elsewhere. It is based on sections 9(1), (2), (2B), (2C), (3) and (4) and 18(1) and (3) of ICTA. The corresponding rule for income tax is in section 687 of ITTOIA.

2497.     Schedule D Case V charges tax in respect of income from possessions out of the United Kingdom. Schedule D Case VI charges tax in respect of annual profits or gains. The scope of both Cases is derived from section 18(1) of ICTA, which refers to “annual profits or gains”. Case law does not indicate a difference, in the context of section 18 of ICTA, in the meaning of “annual profits or gains” and “income”. The choice of term appears to be dictated (although not consistently) by the degree to which a calculation of profit or loss is relevant to the calculation of the income charged. The clause uses income rather than (annual) profits or gains.

2498.     Subsection (2) protects the effect of any exemption, whether provided by this Chapter or by Part 19 (general exemptions) of this Bill or by other legislation.

2499.     That subsection disapplies the charge to “deemed income”. This term refers to amounts that are treated as income by a provision of the Corporation Tax Acts, so that the charge to corporation tax on income applies to that amount. The disapplication applies in the event that such deemed income would not fall within any other application of the charge to corporation tax on income.

Clause 980: Exemption for commercial occupation of woodlands in UK

2500.     This clause exempts income arising from the occupation of commercial woodlands from any charge under this Chapter. It is based on paragraphs 2 and 3 of Schedule 6 to FA 1988. The corresponding rule for income tax is in section 768 of ITTOIA.

2501.     A consequence of this exemption is that no loss relief is available under section 396 of ICTA (losses from miscellaneous transactions). A requirement of that section is that any profit on the transaction would be liable to corporation tax.

2502.     This clause is complemented by clauses 37 and 208 of this Bill. The combined effect of these three clauses is that income from the occupation of commercial woodlands is ignored for corporation tax purposes.

2503.     The interpretation of commercial occupation of woodlands in subsection (2) is supplemented by the definition of “woodlands” in clause 1317(4) of this Bill.

Clause 981: Exemption for gains on financial futures

2504.      This section removes gains on financial futures, traded options and financial options from the charge to corporation tax on income under this Chapter. It is based on section 128 of ICTA. The corresponding rule for income tax is in section 779 of ITTOIA.

2505.     Because of this exemption, the gains in question (which do not include any gains falling within Part 3 (trading income)) are not charged to corporation tax as income but as chargeable gains (see section 143 of TCGA).

2506.     In contrast to the equivalent income tax exemption (section 779 of ITTOIA), this exemption does not cover commodity futures. Commodity futures come within the scope of the derivative contracts regime rather than the chargeable gains rules (see Part 7 of this Bill). To the extent that any of the futures or options to which this exemption would otherwise apply are also within the scope of that Part, this exemption will not apply. See the definition of a “derivative contract” in clause 576.

2507.     The section imports the definitions provided by section 143 of TCGA. The definition of “recognised futures exchange” is provided because, unlike the position in ITTOIA (see section 558(3) of that Act), there is no definition of the term elsewhere in this Bill that applies here.

Chapter 9: Priority rules

Clause 982: Provisions which must be given priority over this Part

2508.     This clause determines which Part takes priority in the event of an overlap of the charge on the profits of a trade or the profits of a UK property business and a charge under a Chapter of this Part. It is based on section 18(1), (2) and (3) of ICTA. The corresponding rules for income tax are in section 261 of ITTOIA.

2509.     In the case of such an overlap, priority is given to the charge under Part 3 (trading income) or Part 4 (property income), as the case may be.

2510.     Subsection (1) gives statutory effect to the Crown Option as regards the overlap between income charged under another Case of Schedule D and income of a United Kingdom trade charged under Schedule D Case I. See Change 55 in Annex 1.

2511.     Subsection (2) is based on the definition of the Cases of Schedule D in section 18 of ICTA so far as it gives priority to the charge under Schedule A.

Part 11: Relief for particular employee share acquisition schemes

Overview

2512.     This Part and Part 12 give specific statutory deductions for various costs associated with setting up and operating employee share schemes. These are arrangements under which employers provide incentives for their employees in the form of shares. This Part gives relief for the provision of shares under an approved share incentive plan. It also gives relief for the cost of setting up particular types of approved share scheme. It is based on sections 84A and 85A of ICTA and Schedule 4AA to ICTA.

2513.     Neither Part 11 nor Part 12 gives relief for the day to day costs of running a scheme. These must be considered according to the ordinary rules that apply to the calculation of business profits for corporation tax purposes. Those rules also apply if relief is not available under either of these Parts for the costs of setting up a scheme or providing the shares under the scheme.

2514.     The rule in clause 53 in Part 3 (trading income), that prevents a deduction for items of a capital nature, is subject to contrary provision. This avoids a conflict between that general rule and, in the context of this Part, the specific relief given by some clauses of this Part. For example, the cost of setting up a SIP would normally be considered to be capital expenditure.

Chapter 1: Share incentive plans

Clause 983: Overview of Chapter

2515.     This clause introduces the provisions within the Chapter. It is new.

2516.     The Chapter gives a deduction for the costs of setting up an approved share incentive plan (SIP) and for the provision of shares under the SIP. The qualifying conditions for approval of the SIP itself are in Schedule 2 to ITEPA and this Chapter is treated as part of the SIP code. See clause 984.

Clause 984: Chapter to form part of SIP code etc

2517.     This clause provides that this Chapter forms part of the SIP code. The clause also deals with the trustees’ acquisition of forfeited shares. It is based on paragraphs 1 and 6 of Schedule 4AA to ICTA.

2518.     Subsection (2) makes clear that a consequence of treating the Chapter as part of the SIP code is that the definitions in Schedule 2 to ITEPA apply to the Chapter.

2519.     Subsection (4) deals with the trustees’ acquisition of forfeited shares. The plan rules may require an employee to forfeit his or her plan shares if the employee leaves the company. No further deduction is allowed to the company if the forfeited shares are re-awarded. See clause 996 exclusion 5. But it may be necessary to identify whether these shares are included in a later award. See, for example, clause 994(6)(b). Subsection (4) identifies when forfeited shares are acquired for this purpose.

Clause 985: References to a deduction being allowed to a company

2520.     This clause explains how a deduction allowed by this Chapter is given to companies carrying on different types of business. It is based on paragraphs 1 and 13 of Schedule 4AA to ICTA.

2521.     Paragraph 1(3) of Schedule 4AA to ICTA allows a deduction in calculating trade profits. Section 21A of ICTA applies this rule to the calculation of the profits of a property business. These deductions are dealt with in subsection (2).

2522.     A property business may also be an investment business. Subsection (3) makes specific provision for a company with investment business. The deduction is allowed as an expense of management (see Chapter 2 of Part 16).

2523.     If the business is both a property business and an investment business subsection (3) gives priority to subsection (2). This priority is based on section 75(2) of ICTA which provides that a deduction as an expense of management is not given if the deduction is otherwise allowable.

Clause 986: Treatment of receipts under Chapter

2524.     This clause explains how a withdrawal of relief is taxed. It is based on section 21A of, and paragraphs 10 to 13 of Schedule 4AA to, ICTA.

2525.     If relief is withdrawn the company is treated as receiving an amount equal to the deduction. See, for example, clause 990(4). This clause sets out how this is taxed.

2526.     Subsection (3) applies if the relief is recovered after the trade or property business has ceased. It makes clear that the recoveries are taxed as post-cessation receipts. In the source legislation the amounts are taxed as trading receipts. See Change 76 in Annex 1. This change also affects clauses 990(4) and (5), 992(4) and (6), 993(2) and (4) and 998(3) and (4).

2527.     If the company is not carrying on a trade or property business or has not carried on a trade or property business the amount is one to which the charge to corporation tax on income is applied, see subsection (4).

2528.     This treatment is also applied to the recovery of relief given for contributions to a plan trust. In the source legislation paragraphs 10 and 12 of Schedule 4AA to ICTA charge these amounts as trade receipts. See Change 76 in Annex 1.

2529.     The amount charged by subsection (4) is included on the list of former Schedule D Case VI charges (in section 834A of ICTA as inserted by Part 1 of Schedule 1 to this Bill). This does not mean that loss relief is available under section 396 of ICTA against the amount charged by subsection (4). This is because the amount charged by subsection (4) does not arise from a transaction as required by that section.