Section 35: Relief for delayed remittances

136.     This section provides relief for employees whose earnings are taxable when remitted to the United Kingdom and who have been unable to remit their earnings in an earlier year because of local law or the impossibility of obtaining currency that could be transferred to the United Kingdom.

137.     It derives from section 585 of ICTA.

138.     Subsection (1) allows a claim for relief for delayed remittances. The claim may be for all or part of the delayed remittances. See Change 5 in Annex 1.

139.     Subsection (2) defines "delayed remittances" as earnings which are taxable when remitted to the United Kingdom, were received in an earlier year but remitted to the United Kingdom in a later year and which could not have been remitted before that later year.

140.     Section 585 refers to income "arising". This becomes "income received" in this section to reflect the receipts basis used for Schedule E. See Change 6 in Annex 1.

141.     In section 585(1)(c) the third condition for a claim to be made is that the inability to transfer the income to the United Kingdom "was not due to any want of reasonable endeavours" on the part of the employee. This condition has been omitted in rewriting this subsection. See Change 5 in Annex 1.

142.     The final condition in section 585(1)(b) is the impossibility of obtaining foreign currency in that territory. "Foreign currency" has been rewritten in subsection 2(c)(iii) as "currency other than the currency of that country or territory". See Note 11 in Annex 2.

143.     In rewriting that same condition the words "that could be transferred to the United Kingdom" have been added. See Change 5 in Annex 1.

144.     Subsection (3) explains the result of the claim for relief. The amount chargeable for the tax year in which the delayed remittances are received in the United Kingdom is reduced and the amount of the reduction becomes chargeable for an earlier year. The amount allocated to earlier years is in accordance with either subsection (4) or an election under section 36 (election in respect of delayed remittances).

145.     Subsection (4) sets out the allocation to tax years if no election is made. In cases where the employment income of only one year cannot be remitted the amount of the income remitted in a later year is treated as if it had been remitted in the year in which it was received. The same applies when there is more than one year in which the income was received.

Section 36: Election in respect of delayed remittances

146.     This section sets out in detail how the election allowed by section 35(3)(b) operates. It is new. See Change 7 in Annex 1.

147.     Subsection (1) explains that the section applies when a claim is made and the claimant has blocked earnings.

148.     Subsection (2) defines "blocked earnings".

149.     Subsection (3) allows the claimant to decide to which year the delayed remittances are to be allocated.

150.     Subsection (4) places a restriction on the tax year to which the income can be allocated.

151.     Subsection (5) requires the amount to be allocated to a particular year to be specified in the election if more than one year is specified.

152.     Subsection (6) requires that the amounts allocated to an earlier year must not exceed the amount of earnings which could not be remitted in that year.

153.     Subsection (7) makes the election part of the claim and irrevocable.

154.     Subsection (8) ensures that personal representatives are able to make the election.

Section 37: Claims for relief on delayed remittances

155.     This section sets out the administrative provisions regarding the claim under section 35.

156.     It derives from section 585 of ICTA.

157.     Subsection (1) sets out the time limit within which the claim must be made.

158.     Subsection (2) allows tax adjustments to be made for earlier years to implement the claim and election.

159.     Subsection (3) overrides anything in the Income Tax Acts which would otherwise prevent the adjustments from being made, such as time limits.

160.     Subsection (4) allows the claim to be made by the personal representatives of someone who would have been entitled to make it.

161.     Subsection (5) provides for the collection and repayment of tax in the case of someone who has died. The personal representatives are liable in respect of the tax which has become chargeable for an earlier year. This is the case, because of subsection (3), even where that year is otherwise time-barred.

162.     Subsection (6) provides for additional tax to be assessed on the personal representatives and to be a debt of the estate.

Section 38: Earnings for period of absence from employment

163.     The place where the duties of an employment are performed is relevant in determining which section in Chapter 5 applies for the purposes of calculating the taxable earnings for the year. This section sets out how to treat earnings for a period of absence from the employment, when there are, of course, no duties performed. It derives from section 132(1) of ICTA.

Section 39: Duties in UK merely incidental to duties outside UK

164.     This section sets out that if the duties of the employment are performed outside the United Kingdom but there are some incidental duties performed in the United Kingdom, then those incidental duties are to be treated as being performed outside the United Kingdom. This section does not apply to employees claiming a deduction from seafarer's earnings, for which a separate rule appears in the Chapter dealing with that deduction. This section derives from section 132(2) and (3) of ICTA.

Section 40: Duties on board vessel or aircraft

165.     This section sets out the rules for deciding where duties should be treated as being performed if they take place on a vessel or an aircraft. It derives from section 132(4)(b) of ICTA. Subsections (3) to (6) set out the rule for the treatment of seafarers carrying out duties on a ship. This derives from paragraph 5 of Schedule 12 to ICTA.

166.     "Ship" takes its everyday meaning, subject to the exception in respect of an "offshore installation" as provided by the Mineral Workings (Offshore Installations) Act 1971. Further guidance on the meaning of those terms is given in the Inland Revenue Schedule E manual at paragraphs SE 33221 to 33222.

Section 41: Employment in UK sector of continental shelf

167.     This section sets out that earnings from certain activities performed in the United Kingdom sector of the continental shelf are to be treated as earnings from duties performed in the United Kingdom. It derives from section 830(5) of ICTA.

Chapter 6: Disputes as to domicile or residence

Overview

168.     The two sections 42 and 43 provide the means for an appeal against a decision by the Board of Inland Revenue concerning a person's ordinary residence or domicile status in the United Kingdom. The sections derive from section 207 of ICTA.

Section 42: Board to determine dispute as to domicile or ordinary residence

169.     Subsection (1) introduces the purpose of the section. The phrase "is or has been" caters for the possibility that the dispute may relate to the person's domicile or residence status in a tax year prior to the dispute arising.

170.     Subsection (2) provides the means to start the process of reconciling a disagreement about the status of the employee. Either side can ask for reference to the Board of Inland Revenue. A ruling would then be issued giving the Board's decision on the matter.

171.     Subsection (3) lists the provisions which rewrite paragraph 1 of Schedule E - and section 192 of ICTA. In rewriting Schedule E a structure has been applied which uses residence, domicile and place of performance of duties to identify the basis of chargeability and year of charge. The term "foreign emoluments" is not used, nor an equivalent to that label, as used in section 192 of ICTA. Instead a full description of the status of employer and employee is given, which leads to certain earnings being excluded from chargeability. This subsection includes a list of all those provisions which rewrite or are dependent on "foreign emoluments" as well as those which rewrite the Cases of Schedule E. Three of the provisions based on section 192(1) of ICTA also contain a reference to "ordinary residence" which is not derived from that section, nor from paragraph 1 of Schedule E.

172.     Disputes relating to all these provisions will now be covered by section 42. See Change 8 in Annex 1.

Section 43: Appeal against Board's decision on domicile or ordinary residence

173.     This section provides an appeal procedure where someone is aggrieved by the ruling of the Board of Inland Revenue made under section 42. Under section 207 of ICTA an application may be made for the question to be heard and determined by the Special Commissioners in "like manner as an appeal".

174.     On the grounds that similar processes should be the same (ie they should all be appeals), subsection (1) gives the right of appeal to a person who has received notice of the Board's decision. This allows the person in question to take the matter further. The change to a straightforward appeal procedure is intended to simplify matters. Section 48(2) of TMA 1970 provides that various provisions of that Act as regards proceedings before the Commissioners apply to "appeals other than appeals against assessments" and to "proceedings..to be heard and determined in the same way as an appeal". There is no real difference in law or practice between provisions that refer to an appeal and those that refer to proceedings where the Special Commissioners shall "hear and determine the matter in like manner as an appeal". See Change 9 in Annex 1.

Chapter 7: Application of provisions to agency workers

Overview

175.     In broad terms, workers must normally be engaged under either a contract of service (in which case they are employed) or a contract for services (in which case they are self-employed). However, some workers may be contracted to an agency to perform duties for the agency's client. This Chapter, deriving from section 134 of ICTA, provides that the remuneration of such agency workers is treated as if it is employment income.

176.     The rules have been restructured into four sections. There is an increased focus in subsection (2)(a) of section 44 on the agency contract (defined in section 47) under which the services provided to the client are treated as duties of an employment held by the worker with the agency. The agency pays the remuneration in a normal case.

Section 44: Treatment of workers supplied by agencies

177.     This section derives from section 134(1), (4) and (5) of ICTA.

178.     The conditions are set out in subsection (1). These have been set out in more colloquial English (personally providing services instead of rendering personal services) and in the case of subsection (1)(c), it has been made more obvious that the person supervising the manner of the work is not specified.

179.     If all of the conditions in this Chapter are satisfied, then it operates so that:

• the services provided by the worker under an agency contract are treated as the performance of the duties of an employment with the agency; and

• the remuneration receivable is treated as earnings from that employment.

180.     The words in brackets in subsection (2)(b), which provide that the remuneration which is treated as earnings of an employment includes any remuneration paid by the client, derive from section 134(4) of ICTA.

181.     The extra focus on the agency contract is achieved by the definition of this being taken to section 47 and more significantly by the words "with the agency" in the last part of section 44(2)(a). The duties (the services provided to the client) are the deemed duties of an employment held with the agency. See Change 10 in Annex 1.

Section 45: Arrangements with agencies

182.     This derives from section 134(5), (the reference to "excluded services"), and from section 134(6) of ICTA. The provision is aimed at remuneration paid by the agency while an agency worker is on their books, for a period in which the worker is not assigned to any particular client.

183.     This section refers to "a third person ("the agency")" in place of the phrase "another person" used in ICTA. See Change 11 in Annex 1.

Section 46: Cases involving unincorporated bodies etc.

184.     This section ensures that the agency rules apply in circumstances where the worker is a partner or member of an unincorporated body. They also apply in the situation in which the worker is a member of the agency itself, eg a professional association.

185.     It derives from section 134(2) and (3) of ICTA.

Section 47: Interpretation of this Chapter

186.     This section provides definitions of terms used in this Chapter. The agency contract is defined in terms deriving from section 134(1)(a) and (b). The scope of excluded services is set out in subsection (2) and derives from section 134(5) of ICTA.

187.     There is a definition of remuneration in subsection (3) which derives from section 134(7) of ICTA. This section draws on the language of section 62, which defines earnings in relation to an employment, but with its reference to "every form of payment" the scope appears wider. The section 62 definition is limited to money or money's worth. The definition here is restricted, however, by the words of subsection (3)(a). This makes it clear that the purpose is to capture remuneration that would have been taxed had the worker been an employee of the agency or the client, but no more than that.

188.     As with section 62 the language of this definition has been modernised, for example removing the word "perquisites", while retaining the import of the source legislation.

Chapter 8: Application of provisions to workers under arrangements made by intermediaries

Overview

189.     The provisions in this Chapter are commonly known as the "service company provisions".

190.     The material in this Chapter derives from Schedule 12 to FA 2000 and follows much the same order as that Schedule. References in the notes on this Chapter to paragraphs are all references to paragraphs of Schedule 12 to FA 2000 unless otherwise stated.

191.     This Chapter does not include anything in respect of paragraphs 17 or 18, which concern the computation of profits of the intermediary and are to be dealt with in the rewrite of the trading income provisions.

192.     This Chapter also excludes the material from paragraph 23, which is a transitional provision.

Section 48: Scope of this Chapter

193.     Subsection (1) of this section provides for the Chapter to have effect where the services of a worker are provided through an intermediary.

194.     Subsection (2) sets out that Chapter 7 of this Part, treatment of workers supplied by agencies, and section 555 of ICTA, payments to non-resident entertainers or sportsmen, both have priority over this Chapter. It derives from paragraphs 6 and 24.

Section 49: Engagements to which this Chapter applies

195.     Subsection (1) sets out when the provisions of the Chapter apply. It derives from paragraph 1(1). There are three elements to be satisfied in order for the Chapter to apply:

• an individual ("the worker") personally performs, or is under an obligation to perform, services for the purposes of a business carried on by another person ("the client")

• the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party ("the intermediary"), and

• the circumstances are such that, if the services were provided under a contract directly between the worker and the client, the worker would be regarded for income tax purposes as an employee of the client.

196.     Subsection (2) expands on the interpretation of "business" given in section 61 for the purposes of subsection (1)(a). That interpretation only extends to trades, professions, vocations and Schedule A businesses. This would not normally include the activities of, say, a Government Department delivering public services, so subsection (2) is needed to bring in the other instances where individuals provide services through intermediaries. It derives from paragraph 1(2).

197.     Subsection (3) expands on the meaning of "third party" used in subsection (1)(b). If the intermediary is a partnership, the worker would be a member of that partnership - subsection (3) is needed to make sure that such a partnership (or other unincorporated association) counts as a third party for the purposes of subsection (1)(b). This material derives from the paragraph 1(1)(b).

198.     Subsection (4) ensures that the wide phrase "the circumstances" used in subsection (1)(c) can include the terms on which the services are provided and the contractual arrangements under which they are provided throughout the whole chain of relationships between worker and client, rather than focusing only on the contract to which the worker is a party. This provision is drawn from paragraph 1(4).

199.     This Chapter does not include the material in paragraph 1(5). That sub-paragraph said:

The fact that the worker holds an office with the client does not affect the application of this Schedule.

200.     Even without such a statement, the fact that a worker holds an office with the client has no relevance to the operation of these provisions. See Note 12 in Annex 2.

201.     Subsection (5) brings forward the explanation of the label "engagement to which this Chapter applies". In Schedule 12 to FA 2000 the equivalent term is not explained until paragraph 21(1), although it is used several times in the early paragraphs of that Schedule.

Section 50: Worker treated as receiving earnings from employment

202.     Subsection (1) describes what happens when all the relevant conditions (as set out in sections 51, 52 and 53) are met and the provisions of the Chapter apply. Where there is, in any tax year, a payment (or right to receive such payment) for services in circumstances as set out in section 49, and that payment is not chargeable to tax as employment income, then the intermediary is treated as making a deemed payment to the worker. That deemed payment is chargeable to income tax as earnings. (Later sections in this Chapter explain how to calculate the deemed payment).

203.     The most notable change in this subsection from its source in paragraph 2(1) of Schedule 12 to FA 2000 is the new name for what was "the deemed Schedule E payment", which has been shortened in common usage of that legislation to "the deemed payment". To chime in with the language of Chapter 2 of this Part, this is now "the deemed employment payment".

204.     Subsection (2) sets out that a single deemed employment payment is treated as being made in respect of all engagements in relation to which the intermediary is treated as making a payment to the worker during the year. This derives from paragraph 2(3).

205.     Subsection (3) sets out when the single payment mentioned in subsection (2) should be treated as being made. This derives from paragraph 2(2).

206.     Subsection (4) introduces the label "relevant engagements", which means any engagements in relation to which the intermediary is treated as making a payment to the worker during the year. This derives from paragraph 2(3).

Section 51: Conditions of liability where intermediary is a company

207.     As suggested by the heading, this section is only of interest if the intermediary is a company. It derives from paragraph 3.

208.     Subsection (1) sets out one negative condition and two alternative positive conditions. The negative condition is that the intermediary should not be an associated company of the client. If the intermediary is associated with the client then this Chapter will not apply.

209.     Subsection (2) sets out a special test for whether the company is associated with the client for the purposes of this paragraph. It derives from paragraph 3(2).

210.     It incorporates a minor change to the law. The normal meaning of "associated company" is given in section 416 of ICTA. That definition says that two companies are associated if one has control of the other, or if they are both controlled by the same person or persons. It is imported for the purposes of this Chapter by section 61. But paragraph 3(2) only envisages common control under a maximum of two people - the worker and another person. This subsection widens the definition of "associated company" for the purposes of section 51 to include companies that are under the common control of the worker together with more than one other person. See Change 12 in Annex 1.

211.     One of the positive conditions mentioned in subsection (1) is that the worker has a material interest in the company. This catches the most obvious cases where a company is being used as an intermediary, where the worker has some say in the operation of the company. Subsection (4) sets out the definition of "material interest" for this purpose. That definition includes a reference to "a participator", a term which is defined in subsection (5).

Section 52: Conditions of liability where intermediary is a partnership

212.     As suggested by the heading, this section is only of interest if the intermediary is a partnership. It derives from paragraph 4.

213.     Subsection (2) sets out the situations where liability may arise because the worker has a say in the operation of the partnership, whether that is because:

• the worker (alone or with relatives) is entitled to more than 60% of the profits of the partnership;

• most of the profits of the partnership come from one client (or that client's associates) in respect of services provided by the worker to which this Chapter applies; or

• the worker is a member of the partnership whose share of partnership profits is based on the amount of income generated by his/her provision of services to which this Chapter applies.

214.     The alternative test set out in subsection (3) is designed to catch the cases where the worker is not paid as a member of the intermediary partnership, but rather as an individual. This condition looks at what is actually going on between the worker, the intermediary and the client. It is satisfied if the worker receives (or is entitled to receive) direct from the intermediary something that can reasonably be taken to be remuneration for services provided to the client.

Section 53: Conditions of liability where intermediary is an individual

215.     This section is only of interest where the intermediary is an individual. It is drawn from paragraph 4. The condition looks at what is actually going on between the worker, the intermediary and the client. It is satisfied if the worker receives (or is entitled to receive) direct from the intermediary something that can reasonably be taken to be remuneration for services provided to the client.

Section 54: Calculation of deemed employment payment

216.     Subsection (1) sets out a method statement to show how to calculate the deemed employment payment. It derives from paragraph 7.

217.     Steps 1 and 2 contain a cross-reference to section 55, so that readers know where to find out what amount should be taken into account in respect of any benefits.

218.     After Step 2, all the remaining steps deduct various amounts. Step 3 contains a statement to the effect that if the result of that, or any later step, is nil or a negative amount, then there is no deemed employment payment.

219.     Step 3 also contains a cross-reference to the deductions provisions in Chapters 1 to 5 of Part 5 so that the reader can see where to look to find out what kind of expenses may be deducted.

220.     Step 8 of the method statement explains the operations involved in deducting the notional national insurance contributions.

221.     The method statement concludes with a statement that the result represents the deemed employment payment.

222.     Subsection (2) explains what to include in Step 1 of the calculation of the deemed payment if the intermediary has received amounts under deduction of tax because of the operation of section 559 of ICTA (sub-contractors in the construction industry). It is drawn from paragraph 8.

223.     Subsection (3) provides that amounts deducted at Step 3 of the method statement may include certain reimbursed expenses. This derives from section 38(2) of FA 2002.

224.     Subsection (4) and (5) provide that mileage allowance relief may be included in amounts deducted at Step 3 of the method statement. This derives from paragraph 7B as introduced by section 38(2) of FA 2002.

225.     Subsection (6) is new. It applies for the purposes of working out the amount to be deducted at Step 3 of the method statement in respect of travel expenses. Entitlement to travel expenses depends on whether or not a workplace is "temporary" and where the worker is based over the course of the employment. Subsection (6) allows such travel expenses to be deducted at Step 3 as would have been available during the combined period of all the relevant engagements as if that combined period was a continuous employment with the intermediary. This new rule is a minor change to the law. See Change 13 in Annex 1.

226.     Subsection (7) allows for mileage allowance payments or passenger payments to be deducted at Step 7 of the method statement. This derives from paragraph 7B as introduced by section 38(2) of FA 2002.

227.     It is quite likely that the intermediary will receive payments from the client to cover the services of more than one worker or to cover the services of a worker and other things (such as materials, reimbursed fees to third parties etc). Subsection (8) sets out that in such a case any apportionment required to arrive at the amount attributable to the services of a single worker should be on a just and reasonable basis. It derives from paragraph 9.