Taxation (International And Other Provisions) Bill - continued          House of Commons

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Change 2: References to “officer of Revenue and Customs”:

clauses 6, 81, 89, 91, 92, 134, 232, 235, 249, 252, 255, 256 and Schedule 7 (sections 59F, 77C, 77F and 77H of TMA)

This change replaces references to “the Board” and “the Commissioners for Her Majesty’s Revenue and Customs” (“the Commissioners”) in the source legislation with references to “an officer of Revenue and Customs”.

References in the source legislation to the “Board” are treated by section 50(1) of CRCA as references to the Commissioners for HMRC. The rest of this note accordingly refers to the Commissioners rather than to the Board.

The provisions affected by this change will in future authorise or require things to be done by or in relation to an officer of Revenue and Customs rather than by or in relation to the Commissioners. This reflects the way in which HMRC is organised and operates in practice. Section 13 of CRCA allows nearly all functions conferred on the Commissioners to be exercised by any officer. All of the functions affected by this change, which are in the main concerned with administrative processes, are in fact exercised by officers of the Commissioners, and the Commissioners themselves are not personally involved in their exercise.

Section 788(6) of ICTA requires a claim for relief under section 788(3)(a) of that Act to be made to the Commissioners if the claim is not for an allowance by way of credit in accordance with Chapter 2 of Part 18 of that Act. Clause 6(6), which is based on section 788(6), does not expressly state to whom the claim should be made. Where a notice to deliver a tax return has been issued, section 42(2) of TMA or paragraphs 57 and 58 of Schedule 18 to FA 1998 require the claim to be made in the return or by amendment of the return if possible. A return must be made to the officer who issued it. A notice amending a return must be made to an officer. Similarly, where the claim is made outside a return or amendment, paragraph 2(1) of Schedule 1A to TMA requires the claim to be made to an officer.

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 3: Double taxation relief: unilateral relief for tax on profits of UK branch, agency or permanent establishment: limit: clause 30

This change brings into line with practice the law concerning unilateral relief for overseas tax on the income or gains of UK branches, agencies and permanent establishments of non-UK residents.

In certain circumstances in which DTR under a tax treaty is not available, section 794(2)(bb) of ICTA allows credit by way of unilateral relief for overseas tax in respect of the income or gains of a branch or agency of a non-UK resident person who is not a company or of a permanent establishment of a non-UK resident company.

One of the conditions which must be met is imposed by section 794(2)(bb)(ii) of ICTA, namely:

that the amount of relief claimed does not exceed (or is by the claim expressly limited to) that which would have been available if the branch or agency had been a person resident in the United Kingdom and the income or gains in question had been income or gains of that person.

On a strict interpretation, this could be taken as meaning that if the taxpayer’s claim was excessive no unilateral relief would be allowed at all. In practice, however, HMRC do not adopt this strict interpretation - which would, in any case, not sit easily with Self Assessment.

Clause 30(4), which is based on section 794(2)(bb)(ii) of ICTA, therefore rewrites the provision as a limit on the amount of relief which may be allowed, rather than as a condition which must be met if relief is to be allowed at all.

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

Change 4: Double taxation relief: income tax and capital gains tax: order in which credit relief is allowed: clauses 36 and 40

This change puts on a clear statutory footing the practice that, where relief by way of credit is allowed against income tax in respect of income from more than one source or against capital gains tax in respect of more than one capital gain, the sources of income or capital gains are to be taken in the order which provides the greatest reduction in the liability to income tax or capital gains tax for the tax year.

Section 796 of ICTA ensures that a foreign tax credit is only deducted from income tax on the income to which the foreign tax credit relates, and cannot be used to shelter any other income from income tax.

Section 796(2) deals with the case where the taxpayer is to be allowed credit for foreign tax in respect of income from more than one source. It requires such income to be dealt with separately, source by source.

Section 796(2) requires income from each source to be dealt with successively. But it does not specify the order in which such items of income are to be taken. HMRC’s practice, as published in the International Manual paragraph 165040, is to take such items of income in the order most favourable to the taxpayer’s claim for DTR.

Clause 36 puts this practice on a clear statutory footing.

Section 277(1) of TCGA extends section 796 of ICTA to capital gains tax. HMRC’s practice in applying section 796 of ICTA to capital gains tax, as published in the International Manual paragraphs 169120 and 169130, is to deal with capital gains in the order which provides the greatest reduction in the taxpayer’s capital gains tax liability for the year.

Clause 40 puts this practice on a clear statutory footing.

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

Change 5: Requiring an apportionment, or a reduction, to be just and reasonable: clauses 37 and 44 and Schedule 4 (sections 681DE and 681DJ of ITA)

This change requires any apportionment or reduction that is not required by the source legislation to be made on a just and reasonable basis to be made on such a basis.

In some cases where there is an apportionment under legislation rewritten in this Act, the apportionment is required by the source legislation to be made on a just and reasonable basis. In other cases, it is required to be made only on a just basis or only on a reasonable basis. In new tax legislation it is now the practice to require an apportionment to be just and reasonable. For example, before it was replaced by ITEPA, section 140B(4) of ICTA (inserted by FA 1998) required a just and reasonable apportionment to be made of any consideration given partly in respect of one thing and partly in respect of another. There is no reason why an apportionment should not be on a just and reasonable basis. And it is desirable that all apportionments should be made on the same basis.

Similarly, section 784(4) of ICTA provides that “the amount to be deducted .. shall be such proportion of the capital expenditure which is still unallowed as is reasonable” (rather than such proportion as is just and reasonable).

Accordingly, where an apportionment under legislation rewritten in this Act is not required to be made on a just and reasonable basis, the rewritten provision requires the apportionment to be made on a just and reasonable basis. The changes are as follows.

  • Section 783(8) of ICTA (leased assets: capital sums) requires apportionments to be just. As rewritten in new section 681DJ of ITA (inserted by Schedule 4), it requires apportionments to be not only just but also reasonable.

  • Sections 798(3) and 798A(3)(b) of ICTA (double taxation relief: limitations on credit against income tax and corporation tax) require apportionments to be reasonable. As rewritten in clauses 37 and 44 respectively, they require apportionments to be not only reasonable but also just.

Similarly, new section 681DE(5)(a) of ITA (inserted by Schedule 4), which is based on section 784(4) of ICTA, requires the unallowed amount to be reduced to a proportion which is not only reasonable but also just.

The same change has been made in previous rewrite Acts to provide a uniform expression of the basis on which apportionments are to be made.

This change makes minor amendments to a number of existing rules, but is expected to have no practical effect as it is in line with generally accepted practice.

Change 6: Double taxation relief: limit on total credit against income tax and capital gains tax: interaction with gift aid: clause 41

This change relates to section 796(3) of ICTA, which restricts DTR by way of credit relief in order to ensure that tax refunded to charities on gift aid donations is covered by tax paid by the donor. The change gives statutory effect to the practice of taking the donor’s income tax and capital gains tax liabilities together in applying the limit set by section 796(3).

Before ITA, section 796(3) of ICTA read:

Without prejudice to subsections (1) and (2) above, the total credit for foreign tax to be allowed to a person against income tax for any year of assessment under all arrangements having effect by virtue of section 788 shall not exceed the total income tax payable by him for that year of assessment, less any income tax which he is entitled to charge against any other person.

Section 796(3) of ICTA was initially repealed by ITA, without being rewritten, on the basis that its effect was replicated in Chapter 3 of Part 2 of ITA (calculation of income tax liability).

It was then realised that section 796(3) of ICTA, as applied for capital gains tax purposes by section 277(1) of TCGA, should not have been repealed. Accordingly, section 796(3) of ICTA was restored (without break in continuity) for capital gains tax purposes by article 3(5) and (6) of the Income Tax Act 2007 (Amendment) (No. 3) Order 2007 (SI 2007/3506). The wording restored was unchanged from the pre-ITA wording, so the final phrase of the restored section 796(3) continued to refer to charges on income (despite their having become deductions in the income tax calculation). Prior to ITA, that final phrase had been extended by section 25(6)(b) and (7)(b) of FA 1990 so as to include a reference to tax treated as deducted from gift aid donations. Section 25(6) and (7) of FA 1990 were also repealed by ITA, and SI 2007/3506 did not restore the effect of section 25(6)(b) and (7)(b) of FA 1990.

Subsequently, the Income Tax Act 2007 (Amendment) (No. 2) Order 2009 (SI 2009/2859) has caused section 796(3) of ICTA to be restored as if it had never been repealed by ITA but as if ITA had from the outset amended the final phrase so as to rewrite the effect of section 25(6)(b) and (7)(b) of FA 1990. It is this restored version of section 796(3) of ICTA that is now rewritten in clause 41. This order also amends section 424 of ITA to restore the effect for capital gains tax purposes of section 25(9)(d)(ii) and (iii) of FA 1990 (which, like section 796(3) of ICTA, concern DTR).

Section 796(3) of ICTA provides that the total credit for foreign tax allowed against a person’s income tax for a year of assessment is given by -

  • the amount of the person’s total income tax for the year, less

  • the amount of tax (i.e. income tax at basic rate) treated as deducted under section 414 of ITA from gift aid donations made by the person in the year.

This rule operates without prejudice to (ie in addition to) the rules in section 796(1) and (2) about the amount of credit against income tax on income from individual sources.

Section 796(3) of ICTA also has effect for capital gains tax purposes as applied by section 277(1) of TCGA. Section 277(1) of TCGA operates on Chapters 1 and 2 of Part 18 of ICTA (DTR) by, in particular, turning references to income tax into references to capital gains tax. Under section 796(3) as so applied, the starting point for the total credit for foreign tax allowed against a person’s capital gains tax for a year of assessment is the total amount of the person’s capital gains tax for the year. Section 796(3) suggests that although the total amount of capital gains tax for the year is the starting point for the limit on credit, the actual limit is given by reducing that total amount by tax treated as deducted under section 414 of ITA from gift aid donations.

The application of section 277(1) of TCGA to the reference to the tax treated as deducted under section 414 of ITA is not completely straightforward. In particular, the deemed deduction under section 414 of ITA is treated as a deduction of income tax at the basic rate. Given that the deemed deduction is of income tax, it might be thought that it makes no sense for that reference to income tax to be converted by section 277(1) of TCGA so as to become a reference to capital gains tax treated as deducted under section 414 of ITA. After all, section 414 of ITA makes no provision for capital gains tax to be treated as deducted.

In practice, it will rarely be the case that a person’s entitlement to DTR will be affected by whether the person’s capital gains tax liability is, or is not, reduced by tax treated as deducted under section 414 of ITA from gift aid donations made by the person. Yet the result of leaving the final phrase as a reference to the income tax treated as deducted under section 414 means that, in a case where a person has foreign income and foreign capital gains, the amount of the person’s entitlement to DTR by way of credit is reduced by up to twice the amount of the deemed deduction under section 414 of ITA. This clearly goes beyond the purpose of the deemed deduction, which is to ensure that tax reclaimed by a charity under the gift aid scheme is covered by tax paid by donors.

Despite that, reading the final phrase as an unconverted reference to the income tax treated as deducted under section 414 of ITA does mean that the words of the final phrase are given some effect. This is a strong argument for reading the phrase in this way.

Alternatively, it could be said that, to avoid the double reduction of entitlement to credit relief, it must have been intended that the final phrase of section 796(3) of ICTA should be omitted in its application for capital gains tax purposes. Or again, it could be said that there is no reason why section 277(1) of TCGA should not convert the reference to income tax treated as deducted under section 414 of ITA into a reference to capital gains tax treated as deducted under section 414 of ITA, despite that conversion having the result that the final phrase of section 796(3) of ICTA would have no effect for capital gains tax purposes.

The difficulty with these alternative approaches, which for capital gains tax purposes in effect strip out the final phrase of section 796(3) of ICTA, is their arbitrariness. If the gift aid tax reclaim by a charity is to be covered by income tax on the donor’s foreign income, that income tax (so far as needed to cover the reclaim) cannot be reduced by DTR. Yet under these approaches, if the reclaim is to be covered by capital gains tax on the donor’s foreign capital gains, there would be nothing to stop that capital gains tax being reduced or wiped out by credit relief for foreign tax on the gains. This would run counter to the clear intention behind gift aid relief, which is that gift aid tax reclaims by charities are to be covered by income tax and capital gains tax paid by donors.

In practice, section 796(3) of ICTA is applied as if it provided for total credit relief against a person’s income tax and capital gains tax for a tax year to be -

  • the person’s total income tax and capital gains tax for the year, less

  • the total of the tax treated as deducted under section 414 of ITA on gift aid donations made by the person in the year.

Section 796(3) of ICTA is being rewritten, in clause 41, in a way which gives effect to this practice. In the light of the discussion above, this is a change in the law. Of course, this single disallowance of the amount treated as deducted under section 414 of ITA is clearly more advantageous for taxpayers than the double disallowance of that amount that could arise under what appears to be the most likely reading of section 796(3) of ICTA. But clause 41 could also be to the taxpayer’s disadvantage, as it will prevent the taxpayer arguing that credit for foreign tax charged on capital gains should be allowed against any part of the taxpayer’s capital gains tax liability which covers tax reclaims by charities on gift aid donations made by the taxpayer.

This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 7: Double taxation relief: corporation tax: credit relief: royalty income: clause 47

This change brings into line with practice the law concerning DTR on royalty income by way of credit against corporation tax.

Section 798B(3)(a) of ICTA provides that for the purposes of DTR by way of corporation tax, royalty income arising in more than one jurisdiction (other than the United Kingdom) in a year of assessment in respect of an asset is to be treated as income arising from a single transaction, arrangement or asset for the purposes of section 798A(2) of that Act.

But unlike income tax, corporation tax is not charged for years of assessment. Corporation tax is charged on profits which have been calculated for an accounting period of a company: see section 8 of CTA 2009.

Clause 47 therefore refers to an accounting period rather than a year of assessment.

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 8: Double taxation relief: cases about being taxed otherwise than in accordance with DTAs: capital gains tax and PRT: clauses 124 and 125

This change extends the scope of section 815AA of ICTA (DTR: mutual agreement procedure and presentation of cases under DTAs) by extending references in the section to “the Tax Acts” to include the enactments relating to capital gains tax and the enactments relating to PRT.

Taxpayers may maintain that they are being taxed otherwise than in accordance with the relevant DTA. The case may be resolved by the Commissioners for HMRC either unilaterally or else bilaterally by mutual agreement with an authority in the territory to which the DTA relates. Section 815AA of ICTA provides for such solutions and mutual agreement to be given effect.

In such cases, it will often be necessary to consider matters relating to the other territory. This can take time. Accordingly, section 815AA(3) of ICTA extends the deadline for making a claim for relief under any provision of the Tax Acts and section 815AA(5) provides that presenting a case under and in accordance with the relevant DTA is not a claim for relief under the Tax Acts. As a result, the deadlines set by section 815AA override the normal statutory deadlines set by the Tax Acts.

Section 815AA(3) and (5) of ICTA refer to “the Tax Acts” without qualification. Section 815AA of ICTA was inserted into ICTA by FA 2000. It is considered that the references in section 815AA of ICTA to section 788 of ICTA are, in reliance on section 20(2) of the Interpretation Act 1978, to be read as including references to section 788 of ICTA as applied (a) for capital gains tax purposes by section 277(1) of TCGA and (b) for PRT purposes by section 194(1) of FA 1993. In other words, section 815AA of ICTA applies across the four taxes to which DTAs under Part 2 of this Bill can apply.

Section 815AA of ICTA contains references to tax (and to being taxed). Section 832(3) of ICTA, which says that “tax” in the Tax Acts means income tax or corporation tax if neither is specified, does not apply if the context otherwise requires. Although section 815AA of ICTA is part of the Tax Acts (as defined for the purposes of ICTA by section 831(2) of that Act), section 815AA of ICTA is considered to extend to any capital gains tax elements, and any PRT elements, of DTAs. This is considered to give rise to a context in which “tax” is required to mean something other (in fact, something more) than income tax or corporation tax. The clauses which rewrite section 815AA of ICTA are not, so far as they relate to capital gains tax and PRT, part of the Tax Acts. Accordingly, those clauses, so far as they relate to capital gains tax and PRT, are not governed by section 832(3) of ICTA. As a result, it is considered that the unqualified use of “tax” (and “taxed”) in those clauses will result in those expressions having the same meaning in those clauses as in section 815AA of ICTA.

Section 815AA of ICTA refers to “the Tax Acts”. Whether and how section 20(2) of the Interpretation Act 1978 applies to those references is not beyond argument. Even though section 815AA of ICTA is legislation made in the year 2000, it is considered that the section’s references to the Tax Acts are not limited to those Acts as they stood in 2000 (which would be the result of applying the first limb of section 20(2) of the Interpretation Act 1978). Rather, those references are considered to be references to the Tax Acts as in force from time to time.

The second limb of section 20(2) of the Interpretation Act 1978 would, in the absence of contrary intention disapplying it or modifying its application, mean that the references in section 815AA of ICTA to “the Tax Acts” would include those Acts as applied or extended by legislation predating FA 2000. And applying the second limb to clauses 124 and 125 of this Bill, which are based on section 815AA of ICTA, would mean that the references in those clauses to “the Tax Acts” would include those Acts as applied or extended by legislation predating the enactment of this Bill.

All of this is relevant because, in particular, administrative provisions in TMA that are part of the Tax Acts are applied for PRT purposes by Schedule 2 to OTA 1975. Although it is arguable that the second limb does apply, the outcome of its unmodified application would be too arbitrary to be likely to have been the legislative intention. Accordingly, the references to the Tax Acts either (a) include no such applications or extensions or (b) include all such applications and extensions.

FA 2000 inserted section 815AA of ICTA to elucidate an aspect of section 788(3)(a) of that Act, which had previously been relied on for giving effect to solutions and mutual agreements. Since section 194(1) of FA 1993 applies section 788(3)(a) of ICTA for PRT purposes, the references to the Tax Acts in section 815AA of ICTA include the administrative provisions in TMA relating to PRT (and any other extensions and applications of the Tax Acts to PRT).

But any PRT administrative provisions which do not fall within the Tax Acts, as extended for the purposes of PRT, are outside the scope of section 815AA(3) and (5) of ICTA. Accordingly, section 815AA will not override any time limits set by such provisions. This is anomalous.

Furthermore, the provisions of TMA applying for capital gains tax purposes apply directly, and not by application or extension of the Tax Acts. It follows that these provisions (and any other capital gains tax administrative provisions falling outside the Tax Acts, as extended for the purposes of capital gains tax) are outside the scope of section 815AA(3) and (5) of ICTA. Accordingly, section 815AA does not override, for example, section 43 of TMA (time limit for making claims) in its application to capital gains tax.

In practice, the scope of section 815AA of ICTA is not given such a narrow interpretation.

For example, the United Kingdom’s DTA with the United States of America (SI 2002/2848) covers income tax, capital gains tax, corporation tax and PRT. Commenting on article 26 of this DTA (mutual agreement procedure), paragraph 19887 of HMRC’s Double Taxation Relief Manual (a) states that, as a result of section 815AA of ICTA, the time limits laid down by the DTA override the normal time limits set by UK domestic tax law and (b) does not suggest that this only applies in relation to income tax and corporation tax.

Accordingly, clauses 124 and 125 give this practice a clear statutory basis by referring not only to the Tax Acts but also to the enactments relating to capital gains tax and the enactments relating to PRT.

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

Change 9: Avoidance: tax arbitrage: cases where payee not treated as not liable as a result of scheme: clause 245

This change clarifies the exception (in section 25(8) of F(No 2)A 2005) to one of the conditions which may cause the tax arbitrage legislation to apply.

Chapter 4 of Part 2 of F(No 2)A 2005 addresses avoidance involving tax arbitrage. If the statutory conditions are met in a deduction case, the company in question must calculate (or recalculate) its income and chargeable gains for the purposes of corporation tax, or its liability to corporation tax, in accordance with rule A in section 25(3) of that Act and rule B in section 25(6) of that Act. Under section 25(6)(c) of that Act, one of the conditions for rule B to apply is that:

in respect of the payment or payments that the payee receives or is entitled to receive as a result of the transaction or series of transactions [mentioned in section 25(6)(a) of that Act], or part of such payment or payments, the payee is not liable to tax or, if liable, his liability to tax is reduced as a result of provision made or imposed by the scheme [mentioned in section 25(6)(a) of that Act].

Section 25(8) of F(No 2)A 2005 makes an exception to section 25(6)(c) of that Act. It provides:

The requirement in subsection (6)(c) is not satisfied if the payee is not liable to tax because he is not liable to tax on any income or gains received by him or for his benefit under the tax law of any territory.

It is arguable that section 25(8) of F(No 2)A 2005 leaves it open for section 25(6)(c) of that Act to be satisfied if:

  • the payee is in principle liable to tax in respect of the payment or payments; but

  • this liability is extinguished by some form of tax relief which is not connected with the scheme.

But in practice HMRC do not interpret section 25(8) of F(No 2)A 2005 so narrowly.

In section 25(6)(c) of F(No 2)A 2005, it is not clear how far the phrase “as a result of provision made or imposed by the scheme” applies to “the payee is not liable to tax” as well as to “his liability to tax is reduced”. Clause 245(4) clarifies this by moving the phrase under review forward before the paragraphing and thus excluding the narrow interpretation.

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

 
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Prepared: 19 November 2009