1. As explained in paragraph 13 of this
memorandum, a number of clauses in this Bill have been italicised
to indicate that they incorporate a possible increase in the burden
of tax (and for this purpose the "in principle" effect
is considered as well as the effect in practice).
2. In many cases the italicisation of a
provision represents a theoretical increase in the burden of tax
rather than a real possibility. In others the increase is likely
to occur only in isolated instances. None of the provisions in
this Bill would increase the tax burden on any individual by any
significant amount, nor would any of the provisions apply to increase
the tax burden of all employees.
3. The following table summarises the changes
(using the numbers from Annex 1 to the Explanatory Notes) that
have led to provisions being italicised (wholly or in part) in
the Bill, with a brief description of the likely impact of the
|Change No||Clauses italicised
||Likely impact of change|
|1||18, 31||Time when general earnings are received: this change will only change the time when an amount is treated as being received in the case of a cash benefit that is|
chargeable under Chapter 10 of the benefits code rather than under clause 62; and
credited to a director's account with the company before the director becomes entitled to payment.
Cash benefits chargeable under Chapter 10 are likely to be very rare (most cash payments are chargeable under clause 62 or Chapter 2 of the benefits code). It is very unlikely (although possible) that such a cash benefit would to be credited to a director's account in advance of entitlement.
If this combination of circumstances did arise, it would change the time when the cash benefit is brought into account. If it moved it from one tax year to another, in a minority of cases a different (higher or lower) rate of tax might be applied as a result.
Any overall tax effect would be both rare and negligible.
|6||35||Relief for delayed remittances: referring to income "received" instead of "arising": this relief works by reallocating income to earlier tax years to avoid a large lump of delayed remittances all being taxed in one year (pushing the taxpayer into a higher tax band). Currently the relief is worded so that it reallocates the remitted income to the earlier tax year(s) in which it arose (dating back to the time when Schedule E was charged on an "arising" basis). In practice, since the receipts basis has applied, the income is instead allocated to the previous tax year in which it is received.|
There may be cases where income is received in a different tax year to that in which it arises, and in a minority of cases a different (higher or lower) rate of tax might be applied as a result.
As this change is in line with current Inland Revenue practice it will have no actual impact on tax liabilities.
|14||55||Intermediaries: applying normal rules to decide when a non-cash benefit is received: the current rule to determine when a non-cash benefit should be treated as received for the purposes of calculating the deemed Schedule E payment is that it should be treated as received when it is used or enjoyed. But there are cases where a non-cash benefit can be used and enjoyed over a period rather than at any one point. This change provides rules (in line with normal charging provisions) to determine when such payments should be treated as received. It is difficult to see what other method could have been used to determine timing of receipt, but if there was some other method and this was used to change the time of receipt from one tax year to another. In a minority of cases, this could lead to a different (higher or lower) rate of tax being applied as a result; any overall tax effect would be both rare and negligible.
|152, 158, 163
||Using Y = days in a year rather than a fixed 365 days: in the calculations relating to benefits arising on the provision of cars, vans and fuel in clauses 143(3), 152(4), 158(3) and 163(1) "Y" is used to represent the number of days in a year. In the first of those instances that is a direct rewrite of the source legislation. In the other three instances "Y" replaces an unvarying "365". The change means that the calculation can deal accurately with a leap year.|
The effect of the replacement is marginally unfavourable to the taxpayer in each of the last three instances. There is more detail on this point in Change 28 in Annex 2 to the Bill. This change (and its proposed application across the whole of the Bill) was approved by respondents to the consultation on the Draft Bill.
In Step 3 of the calculation in clause 183(3) the same approach has been used, although there "Y" is not used, the clause referring instead to "the number of days in the tax year". In this instance the change works in the taxpayer's favour, as it does in clause 183(3)(loans). There is, therefore, an element of "swings and roundabouts" to this change, but all amounts involved are small.
|240||Incidental overnight expenses exemption: deductibility of expenses: this expenses and benefits exemption is only due where a deduction is not available under certain listed provisions. We have substituted general references to deductibility for the current references to deductibilty under those specific provisions. By doing so we have widened the list of deductions and have therefore theoretically restricted the scope of this exemption. In practice the current lists in the legislation identify the only deductions covered by the general reference that are likely to be relevant so that the use of a general reference will not affect anyone's tax liability.
|Sch 6, Para 47
||Deduction of expenses of ministers of religion: ICTA allows deductions against profits, fees or emoluments of the profession or vocation of a minister of religion in assessing the income tax chargeable whether under Schedule E or any other schedule. |
The provisions of this Bill do not allow such cross-schedular deductions.
Most ministers of religion are chargeable under Schedule E although a few are chargeable under Schedule D. We are not aware of any who are chargeable under both Schedule D and Schedule E. (Income from articles or radio talks by an office-holding minister are not chargeable as income from the profession of a minister under Schedule D Case II but under Case VI.)
If a minister is chargeable under both this Bill and Schedule D and makes a loss in either his self-employment or his office then he may set off that loss against his other source of income as a minister. We believe that this will cover any possible case of hardship.
|360||Deductions: disallowances of certain accommodation expenses of MPs: this provision restricts the availability of a deduction for certain accommodation expenses, because allowances paid to meet those expenses are exempt. We have substituted general references to deductions for the current references to deductions under specific provisions. By doing so we have widened the list of deductions to which this restriction applies and so we have theoretically widened the scope of this disallowance. In practice the general reference does not include any additional provisions under which a deduction for accommodation expenses could be obtained anyway. This means that the use of a general reference will not affect anyone's tax liability.
|364||Limit of amount of deductions from benefits code earnings: |
In ICTA this limit is expressed as "such amounts as would have been... deductible if the accommodation had been paid for by the employee out of his emoluments." This could theoretically be interpreted as the amount which the employee would have had to pay regardless of the amount taken as the cost of provision to form benefit code earnings. That could result in a deduction equal to the whole of the amount charged in respect of only a small percentage use for the purposes of the employment because the gross annual value was used for the charge, but a full commercial rent is used to calculate the deduction. The source legislation is ambiguous but it is clear that the intention of the legislation must have been to allow a deduction based on the amount charged to tax in respect of the accommodation. The Inland Revenue apply this interpretation in practice, so there is expected to be no actual difference in anyone's tax liability.
|381||Taking account of other deductions for the purpose of seafarers' FED: Other deductions from income are generally allowed first (so that they are effectively allowed against all income and not wholly against the income not subject to the FED). There is a list of the other deductions in ICTA, but it is incomplete. By replacing the list by a more general reference to deductions under Part 5 we are adding to the deductions which have to be spread across the earnings for the whole year instead of being allowed wholly against income not eligible for the FED. In fact current Inland Revenue practice is to take into account these other deductions (which are few in number and relatively insignificant) so that there is not expected to be any practical effect on anyone's tax liability.
|455||Post-acquisition benefits from shares: amount of charge on increase in value of shares in dependent subsidiaries: the existing legislation is clearly defectiveit requires the gain to be measured by reference to the value of the shares at acquisition where the subsidiary only became dependent at a later date. Correcting this defect means that (as share values can go up or down over time) the change could result in a smaller or greater amount charged to tax. However, as the Inland Revenue practice is to measure the gain by reference to when the subsidiary became dependent anyway (thus informally correcting the defect), this change is not expected to have any practical effect on anyone's tax liability.
|114||457, 463||Post-acquisition benefits from shares: deemed acquisition by director or employee. This corrects two technical defects identified in the course of drafting of the Bill which we are not aware have ever been noticed before. The Inland Revenue have always considered that the charge runs where the special benefit accrues to any person in a case where the employee is treated as retaining the beneficial interest in the shares. Clause 457 makes the position clear. Clause 463 ensures that shares which were acquired by a connected person (and have been deemed to have been acquired by the employee under section 83(1)) are still deemed to be held by the employee when the connected person disposes of them other than by a bargain at arm's length with an unconnected person. That is the intention behind the source legislation and that is the way that the provision has always been interpreted and applied. As the Inland Revenue have consistently applied these interpretations (thus informally correcting the defects), this change is not expected to have any practical effect on anyone's tax liability.
|120||475||Share options: value of longer-term option to acquire convertible shares: this clarifies what value should be used for the purposes of computing tax liability on receipt of a share option where the option is over shares that may themselves be exchanged for other shares. It is in line with the Inland Revenue interpretation and so is not expected to have any practical effect on anyone's tax liability.
|143||660||Incapacity benefit: this makes clear that incapacity benefit is taxable. Under section 139 of FA 1994, it is quite clear that incapacity benefit is taxable, but in the effort to make sure that this benefit was taxable only once (and not subject to a double charge), one consequential amendment was missed, which could suggest that the benefit is not chargeable at all. Thus two parts of the tax law are in conflict on this issue. This Bill resolves the conflict in line with established practice and so is not expected to have any practical effect on anyone's tax liability.
|145||678||Social security income: foreign benefits: this change introduces an explicit charge on foreign social security benefits. These are currently taxed under Schedule D, Case V, on the grounds that they arise from rights under foreign social security law. Although the creation of this explicit charge would appear to be adverse to taxpayers, it will have the same practical effect as the current charge taken under Case V of Schedule D and so is not expected to have any practical effect on anyone's tax liability.
|147 to 153|
|684, 690, 692, 700, 710|
Sch 6, para 241
|PAYE: in the normal course of events PAYE cannot impose tax|
it is a system of payments on account;
there is a reckoning after the end of the year; and
the taxpayer may then be found to owe a bit more or be owed a bit back.
but in some very exceptional circumstances it is not quite that simple and a change in the law for PAYE might in theory lead to a different person paying the tax.
For instance, a change which is generally seen as helpful because it makes clear that tax does not have to be deducted from particular payments could in theory mean that an employee is disadvantaged. That is because an employee whose employer has wilfully failed to deduct tax from any payments (salary, bonus or the particular payments) loses the ability, but purely in relation to the particular payments, to argue:
that the employer ought to have deducted tax;
so the employer (rather than the employee) should pay.
The explanatory notes which accompany the Bill draw attention to all these possibilitiesno matter how remote, and the relevant parts of the Bill are in italics. But it is (so far as the Project can tell) all hypothetical. Consultation revealed no concern that these minor changes might actually change who pays what tax.
Paras 72 & 73
|Donations to charity: payroll deduction scheme: the current legislation allows a deduction for such donations as "an expense" for the year of assessment in which they are withheld. This gives rise to a problem where the income from which the donation is withheld is not taxable in the year in which the donation is made. The "expense" would then be allowed in a different year to that in which the income is taxable. This Bill makes clear that the deduction is given in taxing the income out of which the donation has been made. In rare cases this may move the deduction from one year to another and in a minority of cases a different (higher or lower) rate of tax might be applied as a result. But since in practice deductions are allowed from the income from which the deduction is made, this change is not expected to affect anyone's tax liability.
4. In addition to the changes which have led to italicisation
of provisions in the Bill, there are three changes in Annex 1
to the Explanatory Notes where the summary in bold italics at
the end of the change contains words suggesting that it affects
the incidence an existing charge to tax. In order to clarify the
position, the changes and a brief explanation of their effect
is given below.
Change 2 The summary says the change "affects"
when tax is paid (in principle but not in practice). In fact the
burden of the text of the change is that the change will have
no practical effects, ie the effect of the new rules will be the
same as that of the old ones. So in the context "affects"
really means "concerns" rather than "has an effect
Change 135 The summary says that the change "affects"
the person who pays the tax (in principle but not in practice).
In fact we think that the provisions referred to in the change
only reflect what a court would hold the position to be if a case
ever arose. They also reflect the way that the charges to tax
are administered in practice, and respondents were happy with
them. So again "affects" equals "concerns".
Change 137 The summary says that the change "affects"
the amount of income which is liable to tax in a particular year
(in principle but not in practice). In fact, as the text of the
change indicates, there is a gap in the existing law: it is unclear
whether the annuities in question are taxed on the basis of the
amount payable in a year (the accruing basis) or the amount received
(the receipts basis). The current practice is that they are charged
on the receipts basis, and respondents were happy that this practice
should be put on a statutory footing. Given the present gap in
the law it is not possible to be sure whether or not the change
in fact amounts to a change in the law. As to whether taxpayers
would be disadvantaged by the change (assuming it were a change
in the law) we think this would happen if a particular taxpayer's
circumstances were such that receiving arrears of an annuity in
tax year X rather than in the tax year in which they were payable
would put him in a higher tax bracket. But by the same token it
might be to another taxpayer's advantage to have his tax liability
deferred to tax year X because that would mean that the amount
of the arrears did not put him in a higher tax year bracket for
the year in which they were payable.