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As a consequence of the inclusion of this definition in section 989, the definitions to the same effect in section 721(1) of ITEPA, section 279(1) of FA 2004 and section 878(1) of ITTOIA are no longer necessary and are repealed by Schedule 3. Sections 111(3) and 151(3) of FA 1989 are also repealed.
This change omits section 832(5) of ICTA, so that the general law will apply, with the result that adopted children will be treated as if they were born as the children of their adopters.
The general law is set out in the Adoption and Children Act 2002 (as regards England and Wales), the Adoption (Scotland) Act 1978 (as regards Scotland) and the Adoption (Northern Ireland) Order 1987 (as regards Northern Ireland).
Section 67 of the Adoption and Children Act 2002 provides that “an adopted person is to be treated in law as if born as the child of the adopters or adopter” and that this applies for the interpretation of enactments passed before or since the adoption, subject to any contrary indication. Similar provision is made in the Scottish and Northern Irish legislation referred to above.
It is possible that this change might very slightly alter the scope of those adoptions which are covered. For example, under the general law some overseas adoptions are only covered if they are covered by an order made by the Secretary of State. (See sections 66(1)(d) and 87(1) of the Adoption and Children Act 2002). Depending on the tax provision in question, this could in principle be either taxpayer-adverse or taxpayer-favourable. But it will make no difference in practice.
The reference in section 832(5) of ICTA to paragraph 10 of Schedule 30 to ICTA 1988 is now otiose as that paragraph has been repealed.
Given the nature of the case, the change is extended to corporation tax, by repealing section 832(5) of ICTA.
This change is about the extent to which references to “Act” are to be interpreted as including references to Scottish and Northern Irish primary legislation.
Section 990(1) defines “Act” to include Northern Ireland legislation for the purposes of the Income Tax Acts (unless the context otherwise requires: see section 988(1)). “Northern Ireland legislation” is defined in section 24(5) of the Interpretation Act 1978 (the 1978 Act) and applies by virtue of Schedule 1 to the 1978 Act. It is the term commonly used in legislation when referring to Northern Irish primary legislation. The definition of “Northern Ireland legislation” has seven limbs, (a) to (g).
Section 832(1) of ICTA defines “Act” to include Acts of the Parliament of Northern Ireland and a Measure of the Northern Ireland Assembly. So it expressly covers limbs (b) and (d) of the definition of “Northern Ireland legislation” in the 1978 Act. And, as a consequence of various deeming provisions contained in Schedule 12 to the Northern Ireland Act 1998, it also covers limbs (c), (e) and (f) of the definition of “Northern Ireland legislation”. Only limbs (a) and (g) of the definition of “Northern Ireland legislation” are not covered.
To simplify the definition of “Act” the current wording in section 832(1) of ICTA is replaced with a simple reference to “Northern Ireland legislation”. The change in law is that limbs (a) and (g) of the definition of “Northern Ireland legislation” will now be covered. This will not have any practical consequences.
Section 1018(1) provides that in certain sections of this Act “Act” is to include Acts of the Scottish Parliament. “Act” on its own does not include Acts of the Scottish Parliament (see the definition of “Act” in Schedule 1 to the 1978 Act) and the definition of “Act” in section 990 does not extend its meaning to include Acts of the Scottish Parliament.
But it is appropriate that references to “Act” in sections 66, 532, 536 and 558 should include references to Acts of the Scottish Parliament. In each of these cases the extension of the meaning of “Act” can only be advantageous to taxpayers. A similar provision is contained in section 879 of ITTOIA.
Section 1018(2) overrides the definition of “Act” in section 990 for the purposes of this Act. This is to make it easier to identify the sections where Northern Ireland legislation is relevant and where it is not, and follows the approach taken in section 880 of ITTOIA. The references to sections 66, 114, 532, 536, 558 and 802 either reflect the current law or, if they change the current law, can only be advantageous to taxpayers.
Examples of where “Act” does not include Northern Ireland legislation are to be found in sections 4(1), 459(1) and 849(2).
This change introduces an order of priority between employment termination payments and gains from life assurance contracts in treating such amounts as the highest part of income.
There are a number of provisions in the Income Tax Acts which specify that items are to be treated as the highest part of income. They are subject to the rule in section 833(3) of ICTA which says that employment termination payments within Chapter 3 of Part 6 of ITEPA and gains from life assurance contracts within section 465 of ITTOIA outrank income under all other such provisions and form the topmost slice of income. But section 833(3) of ICTA gives no order of priority between those two types of income.
In practice, because life assurance gains carry a notional tax credit that might otherwise be lost, it will always be to the taxpayer’s advantage to treat such gains as the highest slice. Accordingly, in rewriting section 833(3) of ICTA in section 1012 it has been made clear that, that life assurance gains outrank termination payments. See also new section 404A of ITEPA and new section 465A of ITTOIA inserted by Schedule 1 to this Act.
This change specifies that certain adjustments are to be made to the amount of a person’s net income in measuring income for particular purposes. The amount after these adjustments is the person’s “modified net income”.
The concept applies mainly to the deduction allowed for annual payments and patent royalties under Chapter 4 of Part 8 (see sections 448(4) and 449(5)).
But it also applies to:
the similar rules that determine the deductibility or otherwise of the deemed payments to unit holders made by an unauthorised unit trust under Chapter 9 of Part 9 (see section 505(7)); and
the rules that apply in respect of gift aid to certain non-resident donors and to donors who elect for a gift to be treated as made in the preceding tax year (see section 427(2)).
The link between the purposes concerned is that the issue in each case is whether there is sufficient income for a payment to be regarded (under the source legislation) as having been paid “out of” the income of the year.
In determining the amount of a person’s net income for a tax year under section 23 (which rewrites the relevant parts of section 835 of ICTA), it is necessary to:
take into account all claims and adjustments which affect the measure of income; and
make a deduction for all reliefs that are deducted from or set against income.
But it is not appropriate for all claims that have their origins in a different year to be taken into account in measuring income of the year concerned. That is because the source legislation is concerned with establishing whether, in fact, the taxpayer had sufficient taxable income “out of” which the payment could have been made.
In these cases, this change provides that certain adjustments that have their origins in a different year are disregarded in calculating the income of the year concerned.
The change does not apply to reliefs that are carried forward from an earlier year – it is well established that these do reduce the pot of income “out of” which payments can be regarded as having being made. But the position in relation to a claim or adjustment that has its origin in a later year is not explicit.
The new rule in the calculation of charged income for the purposes of relief for charges and gift aid is to disregard all adjustments (whether an increase or a decrease) that have their origins in a later year and to which Schedule 1B to TMA applies.
These adjustments are:
carry-back of losses under sections 64(2), 72(2), 89(2) and 132(1) (based on sections 380, 381, 388 and 574 of ICTA): see paragraph 2 of Schedule 1B to TMA;
relief for fluctuating profits of farming etc and of creative artists under Chapter 16 of Part 2 of ITTOIA: see paragraph 3 of Schedule 1B to TMA;
carry-back of post cessation receipts under section 257 of ITTOIA: see paragraph 5 of Schedule 1B to TMA; and
any adjustment that would have been out of time but for the extension of the deadline for claiming other reliefs as a result of a claim for fluctuating profits of farmers or creative artists: see paragraph 4 of Schedule 1B to TMA.
Change 155: Double relief for interest payments: repeal of section 368 of ICTA in relation to relief remaining under section 353 of ICTA: Schedule 1 (section 368 of ICTA)
This change relates to the repeal of section 368 of ICTA which prevents interest qualifying for relief twice.
Section 368 of ICTA prevents relief being given for the same amount of interest more than once, for example under section 353 of ICTA and as a trading deduction. The rule in section 368 has been rewritten in section 387. But that provision only applies to relief under Chapter 1 of Part 8 of this Act and will not apply to relief under section 353 of ICTA by virtue of section 365 of ICTA. As that relief is obsolescent, it has been left in ICTA, rather than being rewritten in the Act. It relates to interest on loans taken out to purchase a life annuity and is given as a tax reduction.
As the rule in section 368 of ICTA is repealed without being rewritten in relation to section 365, there is the theoretical possibility for relief on the same interest under section 353 (life annuity loans) of ICTA and either under section 383 of this Act or as a trading deduction.
In practice, however, it is extremely unlikely that the circumstances which might allow double relief will exist. The loan would have to be taken out before 9 March 1999 by an individual aged over 65 with at least 90% of the loan proceeds being applied to purchase the annuity and the remaining portion applied on another qualifying purpose. It is then possible for interest on that remaining portion (a maximum of 10% of the loan) to give rise to both a tax reduction and an allowable deduction.
In view of the fact that this possibility is so remote, no special rule to prevent double relief has been introduced on the repeal of section 368 of ICTA.
This change makes it explicit that, when a payment or transfer of the type referred to in section 555 of ICTA is made, section 556 of ICTA and section 13 of ITTOIA will apply regardless of whether there is a duty to deduct tax at source under section 555. This gives statutory effect to the majority decision of the House of Lords in Agassi v Robinson [2006 UKHL 23] (21).
In that case, the House of Lords held that a visiting performer is liable to income tax on payments made in respect of a UK performance regardless of whether the payment is made directly to the performer or to a person connected with the performer. They held that the liability to income tax on a visiting performer under section 18(1)(a)(iii) of ICTA is not determined by whether there is a duty to deduct income tax from the payment. So the operation of section 556 of ICTA does not depend on the payer having an obligation to deduct tax at source under section 555 of ICTA.
As Lord Scott said at paragraph 17(2) of the judgment:
In order to know whether for section 556(5) purposes the payment is one to which section 555(2) applies, two, and in my opinion only two, questions need to be asked. First, has a payment been made (to whatever person), not being a payment “of such a kind as [has been] prescribed” (section 555(6))? If the answer is “yes”, then, second, has the payment “a connection of a prescribed kind with the relevant activity”? If the answer to this question, too, is “yes” then, in my opinion, for section 556(5) purposes, the payment is one to which section 555(2) applies. The identity of the payer is, in my opinion, as a matter of construction of section 555(2), irrelevant to the question.
The amendments to section 556 of ICTA make it explicit that, when a payment or transfer of the type referred to in section 555 of ICTA is made, no liability to corporation tax will arise. This is regardless of whether there is a duty to deduct under section 966 of this Act.
The amendments to section 13 of ITTOIA make it explicit that when a payment or transfer of the type referred to in section 555 of ICTA is made, it is not necessary for there to be a duty to deduct under section 966 of this Act in order for the performer to be liable to income tax on the payment or transfer under Chapter 2 of Part 2 of ITTOIA (income taxed as trade profits).
As part of this amendment, section 555(5) of ICTA has been incorporated into section 13 of ITTOIA to make clear that there is no link between the primary liability to income tax under Chapter 2 of Part 2 of ITTOIA (income taxed as trade profits) and the duty to deduct tax under section 966 of this Act.
This change amends how provisions for exemption from surtax in old double taxation relief arrangements are to be interpreted in relation to dividend income.
Section 789(2)(a) of ICTA provides that any provision in double taxation arrangements made before 30 March 1971 for income to be exempt from surtax is to be applied on the basis that:
in relation to income to which section 1A of ICTA applies, the lower rate is applied instead of the higher rate; and
for all other income, the basic rate is applied instead of the higher rate.
That provision was not amended in 1997 when the dividend ordinary rate was introduced (with effect from April 1999). Since dividend income is income to which section 1A applies it follows that, in strictness, dividend income subject to these old double taxation arrangements is to be charged at the lower rate (instead of at the dividend upper rate). That is not the intention. The amendment ensures that the rate at which this income is charged in place of the dividend upper rate will be the dividend ordinary rate (instead of the dividend upper rate).
Change 158: Tax calculation: recovery of excess double taxation relief: Schedule 1 (section 804 of ICTA and paragraph 11 of Schedule 20 to FA 1994)
This change alters the way that excess double taxation relief is clawed back under section 804(5B) of ICTA and paragraph 11(3) of Schedule 20 to FA 1994.
As a result of the rules for allowing credit for overseas tax against an overlap profit, section 804(5B) of ICTA provides that in certain circumstances an excess amount of credit relief has to be identified. The taxpayer is then “treated as having received in that year a payment chargeable to income tax of an amount such that income tax on it at the basic rate is equal to the excess”. So having identified an amount of tax, it is then converted to an amount of income. Section 804(6) of ICTA provides that the amount of income is not treated as income for any other purpose.
This provision is about the recovery of excess tax credit relief. It would work much more naturally if it simply provided for an amount of income tax to be charged. And it would then be no longer necessary to have the special rule in section 804(6). Accordingly, section 804(5B) of ICTA is amended to provide for an amount of income tax to be brought into charge and section 804(6) is omitted.
Paragraph 11 of Schedule 20 to FA 1994 provides corresponding rules for businesses affected by the transitional provisions for facilitating self-assessment. Paragraph 11(3) is amended in the same way and paragraph 11(7) is omitted.
This change extends to civil partners the treatment given to spouses in certain cases where personal reliefs have been transferred and the transferor’s income tax liability is subsequently increased. It corrects an omission in the changes made by the Tax and Civil Partnership Regulations 2005 (SI 2005/3229).
Under section 257BB of ICTA (as amended by those Regulations) the unused part of a married couple’s tax reduction may be transferred to the claimant’s spouse or civil partner. The same applies to unused blind person’s allowance under section 265 of ICTA. Where there has been such a transfer and the transferor’s income tax liability is subsequently increased due to an assessment to make good a loss of tax wholly or partly attributable to fraudulent or negligent conduct, section 37A of TMA provides that a transfer to a spouse is unaffected. Section 37A was not amended by the Regulations to apply in cases where the transfer of relief was to a civil partner.
In making consequential amendments to section 37A to update the references to the personal relief provisions, the opportunity has been taken to provide that civil partners are treated in the same way as spouses.
Change 160: Loss relief: claims for set-off of trading losses, employment losses and post-cessation expenditure against capital gains: Schedule 1 (sections 261B to 261E of TCGA)
This change removes the requirement that a claim to set trading or other losses against other income must be made before it is possible for a claim to be made to set trading or other losses etc against capital gains, thus ensuring that such claims can be made in cases where there is no other income against which they could be set.
Section 72 of FA 1991 requires a person to make a loss relief claim under section 380 of ICTA before it is possible for the person to make a claim for capital gains tax relief in respect any unutilised part of that loss. And section 90 of FA 1995 requires a person to make a claim for loss relief under section 109A of ICTA before allowing the person to make a claim for capital gains tax relief in respect any unutilised part of that loss.
It is possible that the person will have no income, and so will simply make a claim under section 72 or section 90 as appropriate.
In practice, HMRC accept such claims under either or both of those sections, even though no income tax claim has been made. This change puts this practice on a statutory footing.
This change makes it explicit that a “transfer” which is subject to deduction under the rules about visiting performers in Chapter 18 of Part 15 of this Act is not subject to the rules about the provision of services through intermediaries in Chapter 8 of Part 2 of ITEPA.
Section 48(2)(b) of ITEPA provides that “payments” which are subject to deduction under section 555 of ICTA are not also subject to the operation of Chapter 8 of Part 2 of ITEPA. But it says nothing about “transfers”.
In practice “transfers” are also regarded as excluded from the operation of Chapter 8. The insertion of a reference to “transfer” into section 48(2)(b) of ITEPA makes it explicit that transfers caught by Chapter 18 of Part 15 of this Act are not also subject to the rules set out in Chapter 8 of Part 2 of ITEPA.
This change clarifies for income tax purposes the nature of sums paid out of income by personal representatives to beneficiaries.
The aim of section 698A of ICTA is to preserve the underlying character of income received by personal representatives when that income is paid out to beneficiaries for the purpose of determining what rate of tax is to be applied to the income.
The income tax charge on estate income in the hands of the beneficiary is contained in Chapter 6 of Part 5 of ITTOIA. The rules in that Chapter gross up the amount of the actual payment to the beneficiary by reference to the tax charged on the personal representatives on the income concerned. That income may have the character of dividend income, savings income or other income and will have been charged respectively at the dividend ordinary rate, the lower rate or the basic rate.
Section 698A(2) of ICTA is clear in providing that where Chapter 6 of Part 5 of ITTOIA has grossed up a payment at the dividend ordinary rate then the payment to the beneficiary is deemed to be a dividend. The beneficiary is then potentially liable at the dividend ordinary rate or the dividend upper rate on that income.
Section 698A(1) of ICTA is less clear in achieving its objective in relation to a payment that has been grossed up at the lower rate. It treats such a payment as income to which section 1A of ICTA applies otherwise than by virtue of the income being income chargeable under Chapter 3 of Part 4 of ITTOIA (dividends). But it does not necessarily follow that it is treating the payment as income to which the lower rate applies. This is because not all the “non-Chapter 3 of Part 4 of ITTOIA” income to which section 1A of ICTA applies is income chargeable at the lower rate. Some of that income is chargeable at the dividend ordinary rate.
The same point arises in relation to income paid through a trustee where section 698A(3)(b) of ICTA applies.
Section 698A of ICTA is rewritten by new section 680A in ITTOIA. By deeming income which has been treated as bearing tax at the savings rate as savings income, any doubt about the rates of tax that apply is removed.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.
This Annex is in three parts:
Table 1: a list of ESCs (and one Statement of Practice) that are rewritten in this Act;
Table 2: a list of Changes which involve enacting case law principles; and
Table 3: a list of provisions that are redundant in whole or in part and are omitted by this Act.
The following ESCs and Statement of Practice are rewritten in this Act.
| ESC etc | Description | See Annex 1 |
|---|---|---|
| A43 | Interest relief: partnership changes | Change 75 |
| A86 | Blind person’s allowance | Change 6 |
| C4 | Fund raising events for charitable purposes | Change 95 |
| Sp A33 | Loan to invest in partnership | Change 70 |
The following table sets out those changes in the law which involve giving statutory effect to principles derived, wholly or mainly, from case law.
| Topic | Change number | Section |
|---|---|---|
| Charges - “out of profits or gains” | 82 | 450 |
| Interest in possession trusts: trustees’ expenses | 91 | 500 |
| Individuals temporarily abroad | 123 | 829 |
| Visiting performers | 156 | Schedule 1 (section 556 of ICTA and section 13 of ITTOIA) |
The omission of provisions which are redundant in whole or in part is an integral part of the rewrite process.
But, for ease of reference, those omissions worthy of specific explanation are listed in the table below. The table also sets out where those explanations can be found.
| Redundant provision | Topic | See commentary on section etc |
|---|---|---|
| TMA s.55(1)(c) | Deduction of tax | Schedule 1 |
| ICTA s.2(1) | Rates of tax | 4 |
| ICTA s.266(6) and (6A) | Relief for certain life insurance payments | Chapter 6 of Part 8 |
| ICTA s.277 | Jointly owned property | Chapter 3 of Part 14 |
| ICTA s.292 | Eis | Overview to Part 5 |
| ICTA s.294 | Eis | Overview to Part 5 |
| ICTA s.295 | Eis | Overview to Part 5 |
| ICTA s.296 | Eis | Overview to Part 5 |
| ICTA s.299(3) | Eis | 209 |
| ICTA s.305 | Eis | Overview to Part 5 |
| ICTA s.306(9) and s.307(6)(a), (aa), (7) and (8) | Eis | 239 |
| ICTA s.310(3) | Eis | 241 |
| ICTA s.350(2) | Charges on income etc | 963 |
| ICTA s.350A(2)(b) | UK public revenue dividends | 897 |
| ICTA s.360A(3) | Relief for interest paid | 395 |
| ICTA s.368(2) | Relief for interest paid | 387 |
| ICTA s.382(4) | Losses: double counting | 63 |
| ICTA s.459 to 466 | Friendly societies | Schedule 1 |
| ICTA s.467 | Trade unions | Schedule 1 |
| ICTA s.481(5A) | Qualifying deposit rights | 864 |
| ICTA s.482(11)(ab) | Deduction at source: trusts | Schedule 2 |
| ICTA s.515 | Inmarsat | Schedule 1 |
| ICTA s.575(1)(a) | Share loss relief | 131 |
| ICTA s.691(4) | Maintenance trusts: elections | 508 |
| ICTA s.704 A(f) | Transactions in securities | 686 |
| ICTA s.742(9)(c) | Transfer of assets abroad | Schedule 1 |
| ICTA s.746 | Transfer of assets abroad | Schedule 1 |
| ICTA s.775(9) | Sales of occupation income | 778 |
| ICTA s.776(13) | Transactions in land: land | 772 |
| ICTA s.777(13) | Transactions in land: receivable | 772 |
| ICTA s.777(4) | Transactions in land | 772 |
| ICTA s.777(4) | Sales of occupation income | 789 |
| ICTA s.777(8) | Transactions in land | 769 |
| ICTA s.777(8) | Sales of occupation income | 787 |
| ICTA s.778 | Transactions in land | 771 |
| ICTA s.778 | Sales of occupation income | 788 |
| ICTA s.823 | Income tax calculation | Schedule 1 |
| ICTA s.832(1)(part) | Definition: interest | 989 |
| ICTA s.832(5) | Definition: adoption | 989 |
| ICTA s.835(2),(7)(b),(8) | Income tax calculation | Schedule 1 |
| ICTA s.836 | Income tax calculation | Schedule 1 |
| ICTA Sch 16 p. 8 | Deduction of tax | Schedule 1 |
| ICTA Sch 23A p.3(2)(c)(i) | Manufactured payments and repos | 579 |
| FA 1991 s.53 | Deduction of tax | Schedule 1 |
| F (No2) A 1992 Sch 8 ps 2-4 | Qualifying deposit rights | 864 |
| FA 2002 Sch.16 p.29(4)(a) | Citr | 361 |
| FA 2003 s.151(1)(a)(ii) | Limits on liability of non-UK residents to income tax | 815 |
| FA 2006 Sch 17 p.19(2) | Real Estate Investment Trust | 974 |
[2006] STC 1056 Back [21]
Income Tax Act 2007