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

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Clause 34: Earnings remitted to the United Kingdom: further provisions about UK-linked debts

130.     This clause contains more provisions about UK-linked debts.

131.     Subsection (2) sets out the rules for determining when a person, defined as the "borrower", will be treated for the purposes of the clause as using the earnings towards satisfying a debt. Two conditions must be met, Conditions A and B.

132.     Condition A is that the earnings are so dealt with that the lender holds money or property representing the earnings in such a way that the money or property is available to the lender to satisfy, or reduce, the debt. This is set out in subsection (3).

133.     Subsection (4) sets out Condition B, that there is an arrangement between borrower and lender such that the quantum of the outstanding debt or the timing of the repayment of the debt depends on the amount or value the lender holds as mentioned in subsection (3).

134.     Subsection (5) explains when a debt for money lent can be treated as incurred towards satisfying another debt.

135.     Subsection (6) extends the meaning of lender to include any person for the time being entitled to repayment.

136.     Subsection (7) extends the meaning of "satisfy" (also for the purposes of clause 33) to mean satisfy wholly or in part.

Clause 35: Relief for delayed remittances

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

138.     It derives from section 585 of ICTA.

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

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

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

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

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

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

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

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

Clause 36: Election in respect of delayed remittances

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

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

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

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

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

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

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

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

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

Clause 37: Claims for relief on delayed remittances

156.     This clause sets out the administrative provisions regarding the claim under clause 35.

157.     It derives from section 585 of ICTA.

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

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

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

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

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

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

Clause 38: Earnings for period of absence from employment

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

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

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

Clause 40: Duties on board vessel or aircraft

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

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

Clause 41: Employment in UK sector of continental shelf

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

Chapter 6: Disputes as to domicile or residence


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

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

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

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

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

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

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

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

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

Chapter 7: Application of provisions to agency workers


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

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

Clause 44: Treatment of workers supplied by agencies

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

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

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

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

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

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

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

Clause 45: Arrangements with agencies

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

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

Clause 46: Cases involving unincorporated bodies etc.

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

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

Clause 47: Interpretation of this Chapter

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

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

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

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


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

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

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

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

Clause 48: Scope of this Chapter

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

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

Clause 49: Engagements to which this Chapter applies

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

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

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

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

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

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

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

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

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

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

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

Clause 50: Worker treated as receiving earnings from employment

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

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

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

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

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

Clause 51: Conditions of liability where intermediary is a company

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

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

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

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

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

Clause 52: Conditions of liability where intermediary is a partnership

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

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

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

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

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

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

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Prepared: 17 February 2003