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

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Clause 10: Meaning of "taxable earnings" and "taxable specific income"

54.     "Taxable earnings" and "taxable specific income" are two more new labels to help identify income at the various stages from when it arises to when it becomes chargeable to tax in a particular tax year. This clause explains each of those terms, setting out where to find the other provisions that set out particular rules for arriving at either "taxable earnings" or "taxable specific income".

Clause 11: Calculation of "net taxable earnings"

55.     Subsection (1) sets out how to calculate "net taxable earnings" in a tax year.

56.     This explicit explanation of the calculation is new. See Note 4 in Annex 2.

57.     The definition of "DE" is a pointer to the comprehensive list of all deductions available from earnings which appears in the opening Chapter of the Part dealing with deductions.

58.     Subsection (3) is a signpost to what happens in the exceptional case that loss relief is available.

59.     Subsection (4) gives effect to the general proposition that deductions may only be made from the earnings of the employment to which they relate. For example, section 198(1) says:

    (1) If the holder of an office or employment is obliged to incur and defray out of the emoluments of the office or employment

    (a) qualifying travelling expenses, or

    (b) any amount (other than qualifying travelling expenses) expended wholly, exclusively and necessarily in the performance of the duties of the employment,

    (c) there may be deducted from the emoluments to be assessed the amount so incurred and defrayed.

60.     It is clear from such wording that in order to arrive at "net taxable earnings" where there is more than one employment, there must be a separate calculation for each employment.

Clause 12: Calculation of "net taxable specific income"

61.     This clause performs a similar function to clause 11 but in respect of specific employment income, and so uses different letters of the alphabet to designate the two elements of the calculation. Like clause 11, it is new. See Note 4 in Annex 2.

Clause 13: Person liable for tax

62.     This clause identifies the person liable for tax on the various kinds of employment income, and the various circumstances in which that tax charge arises. Subsections (1) to (3) are new. See Note 5 in Annex 2.

63.     Although the idea of identifying the person liable for tax on employment income is new, it does not change the current position where the employer has the primary liability to deduct tax under the PAYE provisions. Under ICTA employees are liable for the tax, but are entitled to pay only the net amount after taking off payments on account and deductions at source (see section 59B TMA 1970).

64.     Subsections (4) and (5) set out who is liable for tax on earnings received or remitted to the United Kingdom after the employee's death. They derive from section 202A(3) of ICTA.

Chapter 4: Taxable earnings: rules applying to employee resident, ordinarily resident and domiciled in UK

Overview

65.     This Chapter sets out how to work out the amount of general earnings from an employment which are charged to tax in a particular tax year if the employee is resident, ordinarily resident and domiciled in the United Kingdom. Under ICTA such employees come within Case I of Schedule E.

66.     This category of employees represents the vast majority of the people who are taxed in the United Kingdom on their employment income. All the rules relating to such employees appear together in one Chapter, leaving all the provisions for cases involving a non-UK element, such as non-resident employees or income representing chargeable overseas earnings ("foreign emoluments" in the language of ICTA), to be covered in Chapter 5. This means that the bulk of employees and their advisers will have to read no further than Chapter 4 of this Part to determine the amount of general earnings charged to tax in a year.

67.     This approach does mean that some of the supplementary rules (for example about the meaning of receipt of money earnings) appear in both Chapters 4 and 5. The aim is that the reader will only have to look at one chapter to be able to work out what are the taxable earnings in any given year for any given employment.

Clause 14: Taxable earnings under this Chapter: introduction

68.     This introductory clause sets out how the Chapter deals with the calculation of the taxable earnings in a year for an employee who is resident, ordinarily resident and domiciled in the United Kingdom. It is new.

Clause 15: Earnings for year when employee resident, ordinarily resident and domiciled in UK

69.     This clause sets out the basic rule that the taxable earnings in such a year are all general earnings received in that year. It derives from Case I of Schedule E as set out in paragraph 1 of section 19(1) and section 202A(1) of ICTA.

70.     Subsection (3) sets out the rule that the receipts basis is not affected by the fact that earnings may relate to a different tax year to that in which they are received or to a year when the employment is not held. It derives from section 202A(2) of ICTA.

Clause 16: Meaning of earnings "for" a tax year

71.     This clause explains what is meant by earnings "for" a tax year. It is a new clause in response to requests made during the consultation leading up to this Bill which suggested that it would be a good idea to have this kind of clarification about what earnings are "for" a tax year. See Note 6 in Annex 2.

72.     Subsection (2) identifies the period that the earnings are "for", and subsections (3) and (4) explain how to work out the tax year that the earnings are "for" on the basis of the period determined in subsection (2). If the period spans more than one tax year then the earnings for that period should be apportioned between those years on a just and reasonable basis.

73.     Some of the provisions in Part 3 that operate to treat income as earnings specify the year "for" which the income should be so treated. Subsection (5) makes it clear that clause 16 does not displace the effect of those provisions in Part 3.

Clause 17: Treatment of earnings for year in which employment not held

74.     This clause sets out how earnings from an employment should be treated if they would otherwise be considered as earnings for a year before or after that employment is held. It derives from paragraph 4A of section 19(1).

75.     The rule in clause 17 applies only to "general earnings", ie emoluments or amounts treated as emoluments, thus subject to the Cases of Schedule E as set out in paragraph 1 of section 19(1) of ICTA.

76.     Where the Schedule E legislation provides that an amount shall be treated as an emolument of an employment only if provided in a year when the employment is held, this Bill reproduces that limitation. The clauses in the benefits code make it clear that such amounts or benefits will only be treated as earnings if they are paid/provided in a year in which the employment is held. If they are paid/provided at any other time they will not be treated as earnings and will be outside the "general earnings" to which clause 17 applies. Subsection (4) makes it clear that this clause does not apply in connection with determining amounts to be treated as earnings under the benefits code. See Note 7 in Annex 2.

Clause 18: Receipt of money earnings

77.     This clause sets out the rules for determining when money earnings should be treated as received, providing for the first time a single rule for all money earnings. It derives from the first half of section 202B of ICTA. See also Change 1 in Annex 1.

78.     Subsection (3) provides the definition of "director" used for this purpose. It derives from section 202B(5) of ICTA.

Clause 19: Receipt of non-money earnings

79.     This clause sets out the rules for determining when non-money earnings should be treated as received, excluding any money earnings. The clause derives from section 202B (7) to (11) of ICTA. The exclusion of money earnings is new. See also Change 2 in Annex 1.

Chapter 5: Taxable earnings: rules applying to employee resident, ordinarily resident or domiciled outside UK

Overview

80.     This Chapter sets out, in cases not covered by Chapter 4, how to determine what general earnings from an employment are within the charge to UK tax in any particular year. The rules are set out for each category of employee in succession.

81.     The residence, ordinary residence or domicile status and the place of and, in some cases, nature of duties are all relevant in determining the tax treatment of earnings. In the Schedule E legislation these factors and their consequences are somewhat condensed and do not appear in any logical order. This Chapter is organised so that an employee can easily see which clauses apply to the earnings for a year because they all contain in the heading a description of which residence, ordinary residence or domicile conditions apply and (if applicable) what type of earnings the clause applies to.

Clause 20: Taxable earnings under this Chapter: introduction

82.     This introductory clause sets out how the Chapter deals with the calculation of taxable earnings in a year when the employee is resident, ordinarily resident or domiciled outside the United Kingdom, showing which clause applies in which combination of circumstances. For example, an employee who is resident and ordinarily resident, but not domiciled, in the United Kingdom, can see from subsection (1)(a) and (b) that clauses 21 and 22 are the clauses to use in calculating taxable earnings for the year. The list in subsection (1) also makes it clear that there are separate rules in separate clauses to deal with chargeable overseas earnings, UK-based earnings and foreign earnings. Each of these terms is defined in the clause dealing with that kind of earnings. This introductory material is new.

Clause 21: Earnings for year when employee resident and ordinarily resident, but not domiciled, in UK, except chargeable overseas earnings

83.     This clause deals with those earnings that are, under the Schedule E legislation, still within Case I because they are not excepted from it as "foreign emoluments" by the operation of section 192. The label "overseas earnings" replaces "foreign emoluments" to describe earnings for a year in which the employee is resident and ordinarily resident but not domiciled in the United Kingdom that are from an employment with a foreign employer where the duties are all performed outside the United Kingdom.

84.     This clause derives from section 202A(1) of ICTA and appears as a separate category for the first time here. See Note 8 in Annex 2.

85.     Subsection (3) sets out the rule that the receipts basis is not affected by the fact that earnings may relate to a different tax year to that in which they are received or to a year when the employment is not held. It derives from section 202A(2) of ICTA.

86.     Subsection (4) is a signpost to clause 23 which describes how to calculate the amount of chargeable overseas earnings to be excluded from this clause.

Clause 22: Chargeable overseas earnings for year when employee resident and ordinarily resident, but not domiciled, in UK

87.     This clause deals with those earnings that the Schedule E legislation excepts from Case I as "foreign emoluments" by virtue of section 192.

88.     Subsections (1) and (2) explain that, where this clause applies, "taxable earnings" are the full amount of overseas chargeable earnings that are remitted to the UK. See Note 9 in Annex 2.

89.     Subsection (3) sets out the rule that the remittance basis is not affected by the fact that the earnings may relate to a different tax year to that in which they are remitted or to a year when the employment is not held. It derives from section 202A(2) of ICTA. It also includes a signpost to possible relief under clause 35 in the cases of delayed remittances.

90.     Subsection (4) is a signpost to clause 23 which describes how to calculate the amount of chargeable overseas earnings within this clause.

91.     Normally, any deductions available would be subtracted from taxable earnings, under clause 11 to give "net taxable earnings" - the amount chargeable to tax in that year. However, deductions have already been taken off in arriving at the amount of "chargeable overseas earnings" according to the calculation set out in clause 23. Subsection (5) sets out that deductions taken off in arriving at "chargeable overseas earnings" should not be taken off again in arriving at the "net taxable earnings" relating to those chargeable overseas earnings.

92.     Those deductions are, however, still available to set against any taxable earnings that remain subject to clause 21. See Note 8 in Annex 2.

Clause 23: Calculation of "chargeable overseas earnings"

93.     This clause sets out what overseas earnings are and how to calculate "chargeable overseas earnings". It derives from the description of "foreign emoluments" set out in section 192 of ICTA.

94.     Section 192(5) of ICTA says that the amount of the excepted emoluments is the amount remaining after any capital allowance and after any deductions under a series of listed provisions. Those listed provisions do not include all the provisions under which deductions could be allowed if one were simply computing an amount of taxable income. It is not clear why some provisions are mentioned and others not.

95.     Section 192(5) has therefore been rewritten in clause 23(3) of the Bill to allow a person's "overseas earnings" to be reduced by any deductions. See Change 3 in Annex 1. An example may serve to illustrate the effect of this change:

96.     Suppose a taxpayer has foreign emoluments (overseas earnings) of £1,000, and deductions within the section 192(5) list of £200 plus other deductions of £100.

97.     Under section 192(5) of ICTA the amount of foreign emoluments excluded from Case I would be £800, leaving £200 chargeable under Case I against which £200 of the taxpayer's total £300 deductions can be set. The net result is Case I charge = Nil, Case III charge = £800.

98.     Under the rewritten legislation the amount of chargeable overseas earnings within clause 22 would be £700, leaving £300 within clause 21 against which all of the taxpayer's total £300 deductions can be set. The net result is clause 21 charge = Nil, clause 22 charge = £700.

99.     The outcome is clearly in the taxpayer's favour.

Clause 24: Limit on chargeable overseas earnings where duties of associated employment performed in UK

100.     This clause contains the anti-avoidance rules for earnings from associated employments. They derive from paragraph 2 of Schedule 12 to ICTA.

101.     The effect of these rules is to limit the amount of overseas earnings taxed on the remittance basis because of the operation of clauses 22 and 23 in cases where there are associated employments. The reference in subsection (3) to "section 23(3)" means that this clause adopts the same approach as described in paragraph 95. See Change 3 in Annex 1.

102.     Where this clause does apply a limit to the amount of general earnings computed under clause 23 to be within clause 22, any excess of the overseas earnings above that limit falls within clause 21. This is set out in subsection (7).

Clause 25: UK-based earnings for year when employee resident, but not ordinarily resident, in UK

103.     This clause sets out how to calculate the taxable earnings in a year when the employee is resident but not ordinarily resident in the UK, and whose earnings are in respect of duties performed in the UK or from overseas Crown employment subject to UK tax (defined in clause 28).

104.     These rules derive from paragraph 1 of section 19(1) (Case II of Schedule E), section 132(4)(a) and section 202A(1)(a) of ICTA. See also Note 10 in Annex 2.

105.     Subsection (3) sets out the rule that the receipts basis is not affected by the fact that the earnings may relate to a different tax year to that in which they are received or to a tax year when the employment is not held. It derives from section 202A(2) of ICTA.

Clause 26: Foreign earnings for year when employee resident, but not ordinarily resident, in UK

106.     This clause sets out how to calculate the taxable earnings in a year when the employee is resident but not ordinarily resident in the United Kingdom, when those earnings are neither in respect of duties performed in the United Kingdom nor from overseas Crown employment subject to UK tax, and so not within clause 25.

107.     These rules derive from paragraph 1 of section 19(1) (Case III of Schedule E) and section 202A(1)(b) of ICTA. See also Note 9 in Annex 2.

108.     Subsection (3) sets out the rule that the remittance basis is not affected by the fact that the earnings may relate to a different tax year to that in which they are remitted or to a year when the employment is not held. It derives from section 202A(2) of ICTA.

Clause 27: UK-based earnings for year when employee not resident in UK

109.     This clause sets out what earnings are taxable earnings in a year when the employee is not resident in the United Kingdom. These rules derive from paragraph 1 of section 19(1) (Case II of Schedule E), section 132(4)(a) and section 202A(1)(a) of ICTA. See also Note 10 in Annex 2.

110.     Subsection (3) sets out the rule that the receipts basis is not affected by the fact that the earnings may relate to a different tax year to that in which they are received or to a tax year when the employment is not held. It derives from section 202A(2) of ICTA.

Clause 28: Meaning of "general earnings from overseas Crown employment subject to UK tax"

111.     This clause explains what is meant by "qualifying earnings from overseas Crown employment subject to UK tax" in clauses 25 to 27. It derives from section 132(4)(a) of ICTA. See also Note 10 in Annex 2.

112.     Subsections (5) to (8) derive from ESC A25. That concession operates to remove from the scope of UK income tax locally engaged low paid staff employed overseas by the Crown, in accordance with long-standing practice and in keeping with international treaty obligations. See Change 4 in Annex 1.

Clause 29: Meaning of earnings "for" a tax year

113.     This clause explains what is meant by earnings "for" a tax year. It is a new clause in response to requests made during the consultation leading up to this Bill which suggested that it would be a good idea to have this kind of clarification about what earnings are "for" a tax year. See Note 6 in Annex 2. The counterpart to this clause in Chapter 4 is clause 16.

114.     Subsection (2) identifies the period that the earnings are "for", and subsections (3) and (4) explain how to work out the tax year that the earnings are "for" on the basis of the period determined in subsection (2). If the period spans more than one tax year then the earnings for that period should be apportioned between those years on a just and reasonable basis.

115.     Some of the provisions in Part 3 that operate to treat income as earnings specify the year "for" which the income should be so treated. Subsection (5) makes it clear that clause 29 does not displace the effect of those provisions in Part 3.

Clause 30: Treatment of earnings for year in which employment not held

116.     This clause sets out how earnings from an employment should be treated if they would otherwise be considered as earnings for a year before or after that employment is held. It derives from paragraph 4A of section 19(1) of ICTA. Its counterpart in Chapter 4 is clause 17.

117.     Where the Schedule E legislation provides that an amount shall be treated as an emolument of an employment only if provided in a year when the employment is held, this Bill reproduces that limitation. The clauses in the benefits code make it clear that such amounts or benefits will only be treated as earnings if they are paid/provided in a year in which the employment is held. If they are paid/provided at any other time they will not be treated as earnings and will be outside "general earnings" to which clause 30 applies. Subsection (4) makes it clear that this clause does not apply in connection with determining amounts to be treated as earnings under the benefits code. See Note 7 in Annex 2.

Clause 31: Receipt of money earnings

118.     This clause sets out the rules for determining when money earnings should be treated as received, providing for the first time a single rule for all money earnings. It derives from the first half of section 202B of ICTA. See also Change 1 in Annex 1. Its counterpart in Chapter 4 is clause 18.

Clause 32: Receipt of non-money earnings

119.     This clause sets out the rules for determining when non-money earnings should be treated as received, excluding any money earnings. The clause derives from section 202B (7) to (11) of ICTA. The exclusion of money earnings is new. See Change 2 in Annex 1. The counterpart to this clause in Chapter 4 is clause 19.

Clause 33: Earnings remitted to the United Kingdom

120.     This clause deals with the remittance of general earnings to the United Kingdom. This is relevant for general earnings charged under clause 22 (chargeable overseas earnings for year when employee resident and ordinarily resident, but not domiciled, in the United Kingdom) and general earnings charged under clause 26 (foreign earnings for year when employee resident, but not ordinarily resident, in the United Kingdom).

121.     Subsection (2) derives from section 132(5) of ICTA. Apart from using the term "remitted to" in place of "received in", the conditions are expressed in the same language. General earnings are treated as remitted to the United Kingdom if they are paid, used or enjoyed in the United Kingdom, or transmitted or brought to the United Kingdom in any manner or form.

122.     Section 132(5) also contains a cross-reference to certain anti-avoidance measures contained in section 65(6) to (9) of ICTA dealing with constructive remittances to the United Kingdom that would not otherwise fall to be taxed under the general rule.

123.     Instead of a cross-reference to those provisions, section 65(6) to (9) of ICTA have specifically rewritten, as they apply to remittances of general earnings, in subsections (3) to (7) of this clause, and in clause 34.

124.     The provisions are concerned with anti-avoidance measures to counter the practice of taking out loans in the United Kingdom and subsequently arranging for the debt (or interest on the debt) to be repaid abroad out of unremitted general earnings. They also apply to loans taken out outside the United Kingdom, where the money borrowed is subsequently received in the United Kingdom. The provisions only apply if the taxpayer is ordinarily resident in the United Kingdom.

125.     Subsection (3) states that the general earnings of a person who is ordinarily resident in the United Kingdom will be treated as remitted to the United Kingdom at the time when the general earnings are used outside the United Kingdom in or towards satisfying a UK-linked debt.

126.     Subsection (4) explains what is meant by this new label "UK-linked debt". It is: (a) a debt for money lent to the employee in the United Kingdom, or for the interest on money so lent; (b) a debt for money lent to the employee outside the United Kingdom and received in the United Kingdom or (c) a debt incurred satisfying a debt falling within (a) or (b).

127.     Subsection (5) states that, for debts falling within subsection (4)(b) or (c), it is immaterial whether the money lent is received into the United Kingdom before or after the general earnings are used to repay the debt. But, in the case of money received into the United Kingdom after the general earnings are used to repay the debt, the general earnings will not be treated as being remitted to the United Kingdom until the money lent is received there.

128.     Subsection (6) extends the meaning of the reference to money being "received" in the United Kingdom in subsections (4) and (5) to include money being "brought to" the United Kingdom.

129.     Subsection (7) is a pointer to the provisions of clause 34, which also concern UK-linked debts.

 
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Prepared: 17 February 2003