House of Lords - Explanatory Note
Income Tax (Earnings And Pensions) Bill - continued          House of Lords

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Clause 688: Agency workers

2780.     This clause ensures that agency workers are, broadly speaking, treated in the same way as other workers for the purposes of this Part. It derives from section 203L(1A), (1B) and (1C) of ICTA.

2781.     Subsection (1) provides that where clause 44 (agency workers) applies then this Chapter (except clause 691), Chapter 4 and clause 710 apply as if the agency employed the worker.

2782.     Subsection (2) treats the client rather than the agency as the employer if a payment is made by an intermediary of the client.

Clause 689: Employee of non-UK employer

2783.     This clause concerns employees working in the United Kingdom for someone who is not their employer. It derives mainly from section 203C of ICTA.

2784.     The clause provides for tax to be accounted for under PAYE by the person for whom the employee is working if the employer does not do so. An example is an employee of an overseas company who comes to the United Kingdom to work for a subsidiary but not as an employee of the subsidiary. The employer remains overseas and cannot be required to operate PAYE. It may also be impracticable for it to do so.

2785.     Subsection (1)(d) follows the approach taken in clause 687. See Note 58 in Annex 2.

2786.     Subsection (4) deals with the possibility that income is provided to the employee in the form of a voucher, credit card, readily convertible asset or other way which gives rise to a "notional payment". It treats any such notional payments in the same way as actual payments for the purposes of this clause. But (as with notional payments generally) there is no requirement to "gross up" the notional payment for PAYE purposes.

Clause 690: Employee non-resident etc.

2787.     This clause makes special provisions for PAYE for employees who are both non-resident (or not ordinarily resident) and working partly in the United Kingdom and partly not. It derives from section 203D of ICTA.

2788.     An employee in these circumstances may be chargeable to income tax on only some of the employment income. Payments which were partly of PAYE income and partly not would not be subject to deductions. This clause provides that payments (or a proportion of payments) are subject to PAYE.

2789.     Subsection (2) provides for a direction to be made, on application by the "appropriate person" (see subsection (3)) to the Inland Revenue. The direction states what proportion of income from that employment is to be subject to PAYE deductions. It contains two minor changes:

  • directions under this clause affect only PAYE income paid by or on behalf of the employer. This change is then followed through in subsections (3)(b), (7) and (8). See Change 148 in Annex 1.

  • it allows a direction to be made where the income which is not assessable is ascertainable. See Change 149 in Annex 1.

2790.     Subsection (7) ensures that when a payment to which a direction under subsection (2) applies is made to the employee, PAYE deductions are made from the proportion of the payment specified in the direction. This is achieved by deeming the proportion to be PAYE income.

2791.     Subsection (8) sets out the position if no direction is made. Then all the payment is subject to PAYE.

2792.     Subsection (9) makes sure that this clause does not affect the employee's tax liability.

2793.     Subsection (10) is new. It deals with how this clause is modified if both it and clause 689 apply to the same employment. This could happen if the employer (or an intermediary of the employer) is outside the UK tax net. Clause 689 might then lead a person in the United Kingdom for whom the employee is working to have to operate PAYE. See Change 149 in Annex 1.

Clause 691: Mobile UK workforce

2794.     This clause provides that where, in the case of a contractor providing their employees to a person, it is unlikely that PAYE will be deducted or accounted for, the Board of Inland Revenue may direct that that person must deduct and account for tax. It derives from section 203E of ICTA.

2795.     Subsection (1) sets out the conditions for the clause to apply and labels as the "relevant person" the person for whom the employees work. Subsection (1)(c) follows the approach taken in clause 687. See Note 58 in Annex 2.

2796.     Subsection (2) sets out what the Board may do by way of a direction. This is broadly to require the relevant person to deduct tax when making payments for the work. This need not be a payment to the employees. It may be a payment to the contractor.

2797.     Subsection (3) sets out what the direction must do and how it may at any time be withdrawn.

2798.     Subsection (4) requires the Board to try to give the contractor a copy of any direction.

2799.     Subsection (5) deals with the effect of a direction under subsection (2). When there are employees of the contractor working for the relevant person then the relevant person is to make deductions in accordance with PAYE regulations from any payment made for the work done (whether a payment to the contractor or another person). This is to be done by treating the amount of the payment attributable to each employee's work as if it were a payment of PAYE income to that employee.

Clause 692: Organised arrangements for sharing tips

2800.     This clause allows the PAYE regulations to make provision for PAYE to be operated on tips which are collected and shared among a group of employees by whoever runs that arrangement; and also to require the employer to operate PAYE in some circumstances if that person fails to operate PAYE properly. It derives from regulation 5 of the Income Tax (Employments) Regulations 1993 (S.I. 1993 No 744).

2801.     This clause is included in the Bill to give readers a more complete set of provisions which deal with who is the "employer" for PAYE purposes.

2802.     Regulation 5 originated in SI 1965 No 516. It was introduced then to make clear that a person (other than the employer) who distributes to employees money from an organised arrangement for sharing tips had the same responsibilities as an employer, unless the Board directed otherwise. This legislation was amended by SI 1994 No 775 to make clear what happens if such a person does not operate PAYE properly.

2803.     The regulations refer to the person who shares the tips as the "tronc-master". This term is still used in practice in some such schemes. It is not used in the Bill as users commented in the course of consultation that it was archaic and/or obscure. The term will be omitted from the regulations when they are rewritten.

2804.     These provisions are in the current PAYE regulations and have been for many years but their inclusion in the Bill is a minor change in the law. See Change 150 in Annex 1.

Chapter 4: PAYE: special types of income

Overview

2805.     This Chapter treats as payments of PAYE income the provision of PAYE income in the form of cash vouchers and readily convertible assets, and certain non-cash vouchers and credit tokens which are or are for readily convertible assets. It also treats as payments certain share-related employment income.

2806.     Clause 693 deals with the receipt of cash vouchers (for example traveller's cheques) by employees. It provides when the payment is made for PAYE purposes. It also provides exceptions to that rule and for the PAYE regulations to make further exceptions.

2807.     Clauses 694 to 702 deal with income provided in the form of readily convertible assets, or vouchers or credit tokens for such assets; enhancements to the value of readily convertible assets already held by employees; gains from options on shares which are readily convertible assets, or conditional interests in shares which are readily convertible assets being sold or ceasing to be conditional. These are all circumstances in which there is employment income which is taxable but which would not be a payment for PAYE purposes. The clauses treat a payment of PAYE income as made and where necessary provide also how the amount of the payment should be calculated.

Clause 693: Cash vouchers

2808.     This clause provides for PAYE to be operated on the provision of cash vouchers. It derives from section 203I of ICTA and from regulations.

2809.     Subsection (1) provides that where a cash voucher is chargeable to tax under Chapter 4 of Part 3 of this Bill then the provision of the cash voucher is treated as a payment of PAYE income. The amount of the payment is the amount treated as earnings by clause 81(1). The subsection also picks up the rule in section 143(1)(a) of ICTA that determines the time of payment. The cash voucher is treated as a payment of PAYE income at the time it is received by the employee.

2810.     Subsections (2) and (3) together keep out of PAYE such things as traveller's cheques used by employees while travelling in the performance of their duties. They deal respectively with vouchers used direct to meet expenses and vouchers used to get cash to meet expenses.

2811.     There is also no requirement to operate PAYE on cash vouchers which are subject to a dispensation (see clause 96) as Chapter 4 of Part 3 then does not apply to the voucher.

2812.     "Cash voucher" is defined in clause 721.

Clause 694: Non-cash vouchers

2813.     This clause provides for PAYE to be operated on certain non-cash vouchers. It derives from section 203G of ICTA and from regulations.

2814.     Subsection (1) provides that, if the conditions of this clause are met, then the provision of a non-cash voucher will constitute a payment of PAYE income of an amount equal to the amount treated as earnings under clause 87(1).

2815.     Subsection (2) states when the clause applies to a non-cash voucher. This is when either of the conditions in subsections (3) and (4) are met and the voucher is not excluded by PAYE regulations.

2816.     But there is no requirement to operate PAYE on non-cash vouchers which are subject to a dispensation (see clause 96) as Chapter 4 of Part 3 then does not apply to the voucher.

2817.     Subsection (3) provides for a non-cash voucher to fall within this clause, and therefore within PAYE, if it is exchangeable for a readily convertible asset.

2818.     Subsection (4) provides that a non-cash voucher falls within this clause if it would itself be regarded as a readily convertible asset for the purposes of clause 696 but for the fact that clause 696 does not apply to non-cash vouchers (because they are dealt with by this clause).

2819.     Subsections (5) and (6) derive from regulation 6(1) to (3) and 2(1) of the Income Tax (Employments) (Notional Payments) Regulations 1994 (SI 1994 No 1212). They determine when a payment is made and what "cheque voucher" and "cost of provision" mean.

2820.     Subsection (7) is the same rule about appropriation of vouchers as in clause 82(3).

2821.     "Readily convertible asset" is defined in clause 702. "Non-cash voucher" is defined in clause 721.

Clause 695: Credit-tokens

2822.     This clause provides for PAYE to be operated on certain credit-tokens used by an employee. It derives from section 203H of ICTA and regulations.

2823.     Subsection (2) derives from paragraph 4 of SI 1994 No 1212. It excludes from the scope of the clause credit-tokens used to obtain money to meet expenses which would only be PAYE income because of clause 70.

2824.     As with vouchers, there is also no requirement to operate PAYE on credit-tokens which are subject to a dispensation (see clause 96) as Chapter 4 of Part 3 then does not apply to give rise to an amount treated as earnings under clause 94.

2825.     "Readily convertible asset" is defined in clause 702. "Credit-token" is defined in clause 721(1).

Clause 696: Readily convertible assets

2826.     This clause requires provision of PAYE income to an employee in the form of a readily convertible asset to be treated as payment by the employer, and gives the amount of the notional payment. It derives from section 203F of ICTA.

2827.     "Readily convertible asset" is defined in clause 702.

Clause 697: Enhancing the value of an asset

2828.     This clause treats as the provision of PAYE income in the form of a readily convertible asset anything which enhances the value of an asset which an employee already has if the asset (as enhanced) is a readily convertible asset. It derives from section 203FA of ICTA and regulations.

2829.     Subsection (1) sets out the circumstances in which this clause applies.

2830.     Subsection (2) then provides for clause 696 to apply as if the income were provided in the form of a readily convertible asset. Then (subject to the details of clause 696) it will be a "notional payment" on which PAYE must be operated.

2831.     Subsection (4) derives from paragraph 3B of the Income Tax (Employments) (Notional Payments) Regulations 1994, SI 1994 No 1212. It excludes from this clause things which are excluded from readily convertible assets: see clause 701(2)(c).

Clause 698: PAYE: shares ceasing to be only conditional or being disposed of

2832.     This clause deals with employment income under clause 427 (Charge on interest in shares ceasing to be only conditional or on disposal) - see paragraph Error! Reference source not found.. It derives from parts of section 203FB of ICTA.

2833.     Section 203FB of ICTA provides, in summary, that PAYE applies to share-related events where the shares are readily convertible assets. It deals with several such events. These are divided here between this clause and clauses 699 and 700 to make them easier to relate back to the way Chapters 2, 3 and 5 of Part 7 give rise to employment income in such cases. But these are complex events which involve some complex rules.

2834.     Subsections (1) and (2) set out the circumstances in which this clause applies.

2835.     Subsection (3) provides that in those circumstances the event is treated as if a further interest in shares had been provided. PAYE may then apply - although that depends on for example whether or not it is a readily convertible asset.

2836.     Subsection (4) provides that if clause 696 requires PAYE to be operated in these circumstances the amount of the notional payment for PAYE purposes is the amount which is likely to be chargeable under Chapter 2 of Part 7.

2837.     Subsection (5) applies to this clause the meaning given by Chapter 2 of Part 7 to expressions such as "shares" (see clause 434).

Clause 699: PAYE: conversion of shares

2838.     This is the second of the three clauses derived from section 203FB of ICTA. It deals with employment income under clause 438 on the conversion of convertible shares.

2839.     The clause takes broadly the same approach as clause 698.

Clause 700: PAYE: gains from share options

2840.     This is the third of the three clauses derived from section 203FB of ICTA. It deals with employment income under clauses 476 (Charge on exercise, assignment or release of option by employee) and 477 (Charge on employee where option exercised, assigned or released by another person).

2841.     The clause takes broadly the same approach as clauses 698 and 699 but includes minor changes.

2842.     Subsection (3) deals with the assignment or release of the right to acquire shares. Where this happens the consideration might be a cash payment or an asset. Clauses 684 to 691 and 696 could be relevant - depending on whether the consideration is a payment made direct, payment by an intermediary, the provision of an asset or whatever.

2843.     Subsection (3)(a) deals with consideration in the form of a payment. It treats as a payment of PAYE income a proportion of the amount chargeable under clauses 476 or 477 less any relief likely to be due under clause 481. Having regard to the relief which is likely to be due is a minor change to remove an inconsistency in section 203FB. See Change 151 in Annex 1.

2844.     Subsections (3) and (4) together include a further minor change in the law. This is to ensure the total amount subject to PAYE does not exceed the employment income. See Change 151 in Annex 1.

2845.     Subsections (6) and (7) give "asset" in this clause a meaning which includes cash vouchers and certain non-cash vouchers and credit-tokens. See Change 152 in Annex 1.

Clause 701: Meaning of "asset"

2846.     This clause defines "asset" for the purposes of Chapter 4. It derives from section 203F(4) and (5) of ICTA and regulations.

Clause 702: Meaning of "readily convertible asset"

2847.     This clause defines "readily convertible asset" in Chapter 4. It derives from parts of sections 203F and 203K of ICTA.

2848.     Section 203F(6) defines "money" to include the European currency unit (ECU). That is no longer needed. See Note 59 in Annex 2.

Chapter 5: PAYE settlement agreements

Overview

2849.     This Chapter allows regulations to provide for an employer to agree to pay sums to the Board of Inland Revenue in respect of the income tax on certain earnings of employees. And for the employees to be correspondingly relieved of their liabilities to income tax in respect of those earnings.

2850.     Clause 703 is introductory.

2851.     Clauses 704 to 706 set parameters within which regulations can be made for PAYE settlement agreements.

2852.     Clause 707 provides definitions.

Omitted material

2853.     This Chapter derives from section 206A of ICTA. Section 206A was inserted by section 110 of FA 1996, with effect from 29 April 1996.

2854.     Section 206A(5) and (7) of ICTA relate to issues likely to arise if regulations within the scope of section 206A of ICTA ("PSA regulations") had effect for the tax year in which the PSA regulations were made.

2855.     Section 206A(5) of ICTA allowed the PSA regulations to cover an agreement even though the agreement had been made before the PSA regulations came into force. So, for the tax year in which the PSA regulations came into force, an agreement could be covered even though the agreement had been made before the PSA regulations were made. But because a fresh agreement is entered into for each tax year, section 206A(5) of ICTA was only needed for the year in which PSA regulations were made. As PSA regulations were made on 14 October 1996 and came into force on 5 November 1996 this transitional provision is spent and omitted from the Bill.

2856.     Section 206A(7) of ICTA allowed the PSA regulations to cover sums accounted for under an agreement, and the income to which the sums related, even though those sums had been accounted for before PSA regulations came into force. So, for the tax year in which the PSA regulations came into force, those sums and that income could be covered even though those sums and that income may have arisen before the PSA regulations were made. This transitional provision is also spent and omitted from the Bill because PSA regulations were made on 14th October 1996 and came into force on 5th November 1996.

Clause 703: Introduction

2857.     This clause gives an overview of the Chapter and introduces the term "PAYE settlement agreements" ("PSAs") which is used throughout the Chapter. It derives from section 206A(1) of ICTA.

Clause 704: Sums payable by employers under agreements

2858.     This clause derives from section 206A(2) and (8) of ICTA.

2859.     Subsection (1) allows PAYE Regulations to provide for an employer to enter into a PSA with the Inland Revenue under which the employer pays certain sums in place of sums that would be payable in the absence of the PSA. Subsection (1)(a) omits "Board of" in front of Inland Revenue - see Change 158 in Annex 1.

2860.     Subsection (2) allows PAYE Regulations to make the same sort of provisions about sums payable under a PSA as can be made about other sums payable under the regulations. This ensures that provision can be made for matters such as interest on sums paid late or repayable.

Clause 705: Approximations allowed in calculations

2861.     This clause contains guidance about the ways in which sums to be accounted for under a PSA can be calculated. It recognises that in practice the sums to be paid under a PSA will rarely be precisely equal to what would be the income tax liability of the employees in relation to the earnings covered by a PSA. It does this by permitting PAYE Regulations to recognise approximations as to who receives the earnings, how much those earnings would have been and how much the tax liability would have been on such earnings. It derives from section 206A(3) of ICTA.

Clause 706: Exclusions of general earnings from income etc.

2862.     This clause permits PAYE Regulations to exclude the earnings covered by a PSA from the employees' income for income tax purposes. It also allows the regulations to provide that no part of sums paid by the employer under a PSA are counted as tax paid by an employee. It derives from section 206A(4) of ICTA.

Clause 707: Interpretation of this Chapter

2863.     This clause defines terms used in this Chapter. It derives from section 206A(9) of ICTA.Chapter 6: Miscellaneous and supplemental

Overview

2864.     Clause 708 provides for the PAYE regulations to suspend the normal system of in-year repayments to persons getting jobseeker's allowance or engaged in a trade dispute.

2865.     Clause 709 provides that an assessment made more than 12 months after the end of a tax year must, for some income dealt with under PAYE, be made in accordance with the generally prevailing practice at the end of that 12 months.

2866.     Clause 710 sets out how employers must try to deduct tax, and must account for it whether or not they can deduct, in respect of "notional payments".

2867.     Clause 711 gives a person, who has suffered deduction of tax under PAYE, a right to make a tax return.

2868.     Clause 712 defines terms used in this Part and applies clause 5 for the purposes of this Part (so it applies to offices as to employments).

Clause 708: PAYE repayments

2869.     This clause allows the PAYE regulations to deny PAYE repayments to persons in two cases. It derives from part of section 204 of ICTA.

2870.     Subsection (1) gives the two cases in which regulations can prevent PAYE repayments being made to a person. The first case is during periods for which the person has claimed jobseeker's allowance. The second case is when the person is not entitled to jobseeker's allowance solely because of some connection with a trade dispute.

2871.     Subsection (2) allows regulations to treat the two cases differently.

2872.     Subsection (3) defines "the trade disputes provisions". This term has been introduced to make the clause easier to read than section 204(d). Subsection (3) also sets out what the corresponding enactment in Northern Ireland is (which could not be done at the time section 204(d) was introduced).

2873.     Section 204(a), (b) and (c) of ICTA are omitted from the Bill as they have no application to the years to which the Bill applies. See Note 60 in Annex 2.

Clause 709: Additional provision for certain assessments

2874.     This clause provides that assessments must be made on the basis of generally prevailing practice in certain circumstances. It derives from section 206 of ICTA.

2875.     The origin of section 206 was section 28(1) of FA 1961. Schedule 4 to the Income Tax Management Act 1964 extended section 28(1) of FA 1961 so that it applied to an assessment under Schedule E where it had previously applied to an assessment in respect of "emoluments". Section 28(1) of FA 1961 was consolidated first as section 206 of ICTA 1970 and later as section 206 of ICTA. Section 111(2) of FA 1995 removed "under Schedule E" after the words "an assessment to income tax" in section 206 of ICTA.

2876.     Subsection (1) sets out the circumstances in which the section applies.

2877.     Subsection (2) sets out the consequences of the section applying.

2878.     Subsection (3) defines "relevant income" - a term used to make the earlier subsections easier to read.

2879.     Section 28(1) of FA 1961 was intended to put individuals who did not receive income tax assessments (because it was thought that all their tax had been settled under PAYE) on a similar footing to others who had received assessments. People who did not get assessments previously had an advantage over other taxpayers. Their tax affairs were not final so they had a much longer period after the end of a tax year in which to take advantage of a Court decision overturning what had earlier been the generally accepted practice. Section 28(1) accordingly set out circumstances in which a "late" assessment to income tax had to be made on the basis of earlier generally accepted practice. This could work to the disadvantage of individuals compared to their position prior to section 28(1). It could also work to their advantage by preventing the individual from being assessed on the basis of a later Court decision that was less favourable than earlier generally accepted practice. In short, it gave them broadly the same finality they would have had with an assessment.

2880.     Section 206 of ICTA 1970 was considered in Walters v Tickner (1993) 66 TC 174. That case decided that section 206 could operate as a provision that charges income tax, but it could not do so in relation to an unqualified statutory exemption given to scholarship income.

2881.     Since that case was decided the framework within which section 206 operates has been altered by Self Assessment. When the case was decided the Inland Revenue were obliged, subject to the pre-Self Assessment version of 205(1) of ICTA, to make assessments when returns of income were made which were considered to be correct and complete. But under Self Assessment, assessments are normally:

  • made by the taxpayer rather than the Inland Revenue; and

  • single assessments on all income rather than multiple assessments made on income split into separate Schedules.

2882.     Section 111(2) of FA 1995 made a minor amendment to section 206 of ICTA in connection with the imminent start of Self Assessment. The amendment removed the words "under Schedule E" after the opening words "Where an assessment". That minor amendment arguably introduced some uncertainties about how section 206 of ICTA operates under Self Assessment. This clause removes those uncertainties, relating to the income in an assessment that must be based on earlier generally accepted practice. See Note 61 in Annex 2.

 
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Prepared: 17 February 2003