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

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Clause 356: Disallowance of business entertaining and gifts expenses

1544.     This clause prevents a deduction from earnings of expenses incurred in providing entertainment or a gift in connection with the employer's trade, business, profession or vocation. This general prohibition is subject to the exceptions in clauses 357 and 358.

1545.     This clause derives from section 577(1)(b), (5), (7) and (8) of ICTA and contains new drafting material.

1546.     Subsection (1) contains the general prohibition on deducting expenses incurred in providing entertainment or a gift.

1547.     This clause makes it clear that the trade, business, profession or vocation to which the business entertainment expenses relate is the trade etc of the employer. See Change 94 in Annex 1.

1548.     Subsection (2) refers to certain exceptions from the general prohibition in subsection (1).

1549.     Subsection (3) extends the meaning of "entertainment" and brings incidental expenses within the scope of the clause.

Clause 357: Business entertainment and gifts: exception where employer's expenses disallowed

1550.     This clause contains an exception to the general prohibition on deducting business entertainment and gifts expenses in clause 356. It derives from section 577(1)(a) and (3) of ICTA and contains new drafting material.

1551.     Subsection (1) disapplies the prohibition on deducting entertaining and gifts expenditure in clause 356 where certain conditions are met and refers to further alternative conditions in subsections (2), (3) and (4).

1552.     Subsection (2) requires that the deduction of the expense must fall to be disallowed in calculating the employer's profits because of section 577 where the employer is carrying on a trade, profession or vocation. In practice, this condition is treated as met where the expense would have been disallowed apart from any exemption in section 505(1)(e) of ICTA (exemption from tax under Schedule D in respect of the profits of any trade carried on by a charity where the profits are applied solely to the purposes of the charity etc.) or because of another relief applying to the profits of the employer. Subsection (2) spells out this treatment.

1553.     Subsection (3) contains an alternative requirement that the expense must fall to be disallowed in calculating the employer's expenses of management because of section 577. Again, it is made clear that the fact the disallowance does not operate because a relief applies is ignored.

1554.     Subsection (4) contains the other alternative requirement that the expense would fall to be disallowed in calculating the employer's "relevant shipping profits" apart from the making by the employer of a tonnage tax election. See Change 95 in Annex 1.

1555.     Subsection (5) contains cross-references to Schedule 22 to the Finance Act 2000 to explain the terms used in subsection (4) relating to tonnage tax.

1556.     The reference in section 577(3)(b) to "in whole or in part" has been omitted. See Note 38 in Annex 2.

Clause 358: Business entertainment and gifts: other exceptions

1557.     This clause contains the other exceptions from the general prohibition on deducting business entertaining and gifts expenses in clause 356. It derives from section 577(5), (7)(c) and (8) of ICTA and contains new drafting material.

1558.     Subsection (1) provides that the general prohibition on deducting expenses in clause 356 does not apply, with some exceptions, if the sums are incurred in providing entertainment or gifts for the employer's employees. But the prohibition in clause 356 does still apply in the circumstances set out in paragraphs (a) and (b) of subsection (1).

1559.     Subsection (2) treats directors and persons engaged in the management of a company as employed by it for the purpose of this clause.

1560.     Subsection (3) provides that the general prohibition on deducting entertaining and gifts expenses in clause 356 does not apply, with some exceptions, if the sums relate to the provision of a gift which incorporates a conspicuous advertisement for the employer. But the prohibition in clause 356 does still apply in the circumstances set out in subsection (3)(a) or (b) of clause 358.

1561.     The subsection also provides that where the employer is a company, the general prohibition does not apply, with some exceptions, if the expenses are incurred in providing a gift which incorporates a conspicuous advertisement for another company which belongs to the same group as the employer. See Change 96 in Annex 1. This exception will not apply, however, in the circumstances set out in subsection (3)(a) or (b) of this clause.

1562.     This subsection also removes any doubt there might be about whether an employee is excepted from the prohibition in clause 356 where the terms of the exception are met. See Change 96 in Annex 1.

1563.     The word "donor" which appears towards the end of the introduction to section 577(8) has been changed to "employer" in subsection (3) of clause 358. See Change 96 in Annex 1.

1564.     The £50 limit in subsection (3)(b) of this clause is fixed at that amount by the clause. However, clause 716(2)(h) provides that the £50 limit may be increased by an order made by the Treasury. See Change 96 in Annex 1.

1565.     Subsection (4) defines "group" for the purposes of subsection (3) of this clause.

Other rules preventing deductions of particular kinds

Clause 359: Disallowance of travel expenses: mileage allowances and reliefs

1566.     This clause prohibits an employee from obtaining a deduction under the travel deduction provisions (defined as clauses 337 to 342, 351, 370, 371, 373 and 374) if mileage allowance payments are made to the employee or mileage allowance relief is available. The clause is necessary to establish the order in which the relevant provisions are to be applied and to ensure that there is no double relief.

1567.     The clause derives from section 198(5) of ICTA, added by Schedule 12, Part 2, paragraph 6 to FA 2001 (in so far as this clause relates to the travel deductions provisions other than clause 351); and from section 332(3A) and (3B) of ICTA, added by Schedule 12, Part 2, paragraph 10 to FA 2001 (in so far as this clause relates to clause 351).

1568.     Subsection (4) contains the definitions of "mileage allowance payments" and "the travel deductions provisions" and signposts the definitions of "company vehicle" and "mileage allowance payments". Mileage allowance relief is dealt with in clause 231.

Clause 360: Disallowance of certain accommodation expenses of MPs and other representatives

1569.     This clause prevents MPs and other representatives from obtaining a deduction from earnings for residential or overnight accommodation.

1570.     The clause derives from section 198(4) of ICTA.

1571.     Section 198(4) is the counterpart to provisions contained in sections 200 and 200ZA of ICTA, from which clauses 292 and 293 derive. Those clauses provide that allowances for residential or overnight accommodation are exempt from income tax: and this present clause accordingly provides that no deduction is allowed for the accommodation expenses in respect of which the allowances are paid.

1572.     Subsection (1) provides that no deduction from earnings is allowed "under this Chapter", and may, accordingly, be contrasted with section 198(4) of ICTA, which provided that no deductions should be made "under this section". See Change 97 in Annex 1.

Chapter 3: Deductions from benefits code earnings

Overview

1573.     The clauses in this Chapter allow deductions where goods or services are provided which are within the scope of the benefits code and deductions would have been allowed if the goods or services had been paid for by the employee. The clauses derive from sections 141(3), 142(2), 145(3) and 156(8) of ICTA.

1574.     All the clauses in the Chapter refer to deductions under the whole of Chapter 2 and Chapter 5 of this Part instead of restricting them to the rewritten versions of the provisions referred to in sections 141(3), 142(2), 145(3) and 156(8) of ICTA. See Change 99 in Annex 1.

Clause 361: Scope of this Chapter: cost of benefits deductible as if paid by employee

1575.     This clause sets out the general proposition for a deduction to be allowed under this Chapter. A person's earnings must include an amount treated as earnings under the relevant parts of the benefits code and a deduction must have been allowable if the employee had paid the cost of the goods or services. The clauses in this Chapter are a change in approach to provisions from which they are derived. The changes in clauses 362, 363, 364 and 365 are explained in detail in Changes 98 and 99 in Annex 1.

Clause 362: Deductions where non-cash voucher provided

1576.     This clause applies where goods or services are obtained by an employee in exchange for a non-cash voucher for which an amount is treated as earnings by virtue of clause 87(1). It derives from section 141(3) of ICTA. If, had the goods or services been provided by the employee, a deduction would be allowable by the provisions of Chapter 2 or 5 of this Part a deduction is allowable by virtue of this clause.

1577.     Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1578.     Subsection (2) quantifies the amount of the deduction. A limit is placed on the amount of the deduction allowed rather than providing the deduction is only to be set against the amount treated as earnings.

Clause 363: Deductions where credit-token provided

1579.     This clause applies where goods or services are provided using a credit-token. A deduction may be allowed where the earnings include an amount treated as earnings under clause 94(1) and the token is used to obtain goods or services. If the employee would have been allowed a deduction under Chapter 2 or Chapter 5 of this Part if he had paid for the goods or services, a deduction is allowed by this clause.

1580.     Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1581.     Subsection (2) quantifies the amount of the deduction, with the same limit as described for clause 362.

1582.     The clause derives from section 142(2) of ICTA.

Clause 364: Deductions where living accommodation provided

1583.     This clause applies where the benefit provided is living accommodation. A deduction may be allowed where the earnings include an amount treated as earnings under Chapter 5 of Part 3. If the employee would have been allowed a deduction under Chapter 2 or Chapter 5 of this Part if he had paid for the accommodation, a deduction is allowed under this clause. It derives from section 145(3) and 146(9) of ICTA.

1584.     A limit is placed on the deduction to be made. The deduction will be calculated on the basis that the amount paid by the employee for the accommodation is equal to the amount treated as earnings in respect of that accommodation.

1585.     Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1586.     Subsection (2) quantifies the amount of the deduction.

Clause 365: Deductions where employment-related benefit provided

1587.     This clause applies where an unspecified benefit is provided. A deduction may be due where the earnings include an amount treated as earnings under Chapter 10 of Part 3 of this Bill in respect of a benefit. If the employee would have been allowed a deduction under Chapter 2 or Chapter 5 of this Part if he had paid for the cost of the benefit, a deduction is allowed under this clause. It derives from section 156(8) of ICTA.

1588.     Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1589.     Subsection (2) quantifies the amount of the deduction with the same limit as described for clause 362.

1590.     Subsection (3) contains an explanation of the "cost of the benefit".

Chapter 4: Fixed allowances for employee's expenses

Overview

1591.     This Chapter contains provisions that allow deductions from an employee's earnings for amounts fixed by the Treasury.

Clause 366: Scope of this Chapter: amounts fixed by Treasury

1592.     This clause sets out the scope of the Chapter - to allow deductions from earnings for a sum fixed by the Treasury by reference to the employee's employment.

Clause 367: Fixed sum deductions for repairing and maintaining work equipment

1593.     This clause allows a deduction from the earnings of certain classes of employees for a sum fixed by the Treasury.

1594.     It derives from ESC A1. See Change 100 in Annex 1.

1595.     Subsection (1) allows a deduction from the earnings of an employee for a sum fixed by the Treasury as representing the average annual expense in respect of the repair and maintenance of work equipment incurred by employees of the class to which the employee belongs.

1596.     Subsection (2) sets out the terms under which the Treasury may fix a sum for a class of employees.

1597.     Subsection (3) prevents the allowance of the fixed-sum deduction if the expense in respect of which the sum is fixed is paid or reimbursed by the employer or would be if requested.

1598.     Subsection (4) provides that where the employer meets part of the expenses (or would do if so requested) in respect of which the fixed-sum deduction is set, the deduction is reduced by that amount.

1599.     Subsection (5) defines "work equipment" for subsections (1) and (2).

1600.     Subsection (6) requires the clause to be read with clause 330(2) (prevention of double deductions). If an expense on work equipment were deductible under Chapter 2 of Part 5, it would not be deductible under this clause. See Change 82 in Annex 1.

Clause 368: Fixed sum deductions from earnings payable out of public revenue

1601.     This clause allows for certain descriptions of employees a deduction of a sum fixed by the Treasury from earnings paid out of public revenue.

1602.     It derives from section 199 of ICTA.

1603.     Subsection (1) allows a deduction from earnings payable out of public revenue for fixed sum expenses relating to the duties that give rise to those earnings.

1604.     Subsection (2) defines "fixed sum expenses".

1605.     Subsection (3) requires the clause to be read with clause 330(2) (prevention of double deductions). If the expense were deductible under Chapter 2 of Part 5, it would not be deductible under this clause.

Chapter 5: Deductions for earnings representing benefits or reimbursed expenses

Background

1606.     This Chapter deals with cases where the employer, or a third party, bears the cost of something that is taken into account as part of the employee's earnings, but the employee is entitled to a deduction from those earnings in respect of that cost.

1607.     This Chapter derives from provisions in sections 193 to 195 of ICTA and in sections 50 to 52 of FA 1989. In the majority of cases dealt with, the amount of such a deduction is expressed as being "equal to so much of that cost or, as the case may be, those expenses as fall to be included in those emoluments". In the present Chapter, by contrast, it is possible to define the amount in question as "the included amount", and then to say that "The deduction is equal to the included amount.".

1608.     Another common thread in the provisions dealt with in this Chapter is that the amounts included in the employee's earnings are generally expressed in terms of provision being made "by or on behalf of the employer" (or similar). It has not been possible to establish the original policy reasons for limiting the scope of the deductions to provision made in this way. There may be circumstances where the provision is by or on behalf of someone other than the employer and the amount is still chargeable as part of the employee's earnings. As long as all the other conditions for the deductions are met, there seems no reason why a deduction should be withheld because the provision was made by a person other than the employer or someone acting on the employer's behalf. The words "by or on behalf of the employer" (or similar) which appear in the source legislation are therefore omitted. To the extent that this change has any practical effect, it will be in favour of the taxpayer. See Change 101 in Annex 1.

1609.     This Chapter does not deal with a deduction for expenses incurred and paid by the employee without any reimbursement. That kind of deduction is dealt with in Chapter 2 of this Part.

Overview

1610.     As in Chapter 2 of this Part, the clauses have been grouped according to the type of expense involved. After clause 369, which is introductory:

  • clauses 370 to 372 allow deductions for travel costs and expenses where the employee is resident and ordinarily resident in the United Kingdom, but the duties of the employment are performed abroad;

  • clause 373 to 375 allow deductions for travel costs and expenses where the employee is not domiciled in the United Kingdom, but the duties of the employment are performed in the United Kingdom;

  • clause 376 allows a deduction for costs and expenses in respect of accommodation or subsistence where the employee is resident and ordinarily resident in the United Kingdom, but working abroad;

  • clause 377 allows a deduction for costs and expenses in respect of personal security assets and services.

Clause 369: Scope of this Chapter: earnings representing benefits or reimbursed expenses

1611.     This clause deals with preliminary matters relevant for this Chapter.

1612.     Subsection (1) brings together material contained in sections 193(4), 194(1) and 195(7) of ICTA and in section 50(2) and (3) of FA 1989. Subsections (2) and (3) are drafting additions.

1613.     Subsection (1) states the general proposition that a deduction from a person's earnings is allowed under the following provisions of this Chapter where an amount has been included in the earnings in respect of provision made for the person or expenses reimbursed by another person. See Change 101 in Annex 1.

1614.     Subsection (2) provides that the amount described in subsection (1) is referred to in this Chapter as "the included amount".

1615.     Subsection (3) is concerned with the overlap between this Chapter and Chapter 3 of this Part. If the included amount is an amount treated as earnings by virtue of the benefits code, a deduction may be available under Chapter 3; and this subsection accordingly provides a signpost to that Chapter.

Travel costs and expenses where duties performed abroad

1616.     The next three clauses provide for deductions to be allowed from earnings for travel costs and expenses where the employee is resident and ordinarily resident in the United Kingdom but the duties of the employment are performed abroad. These clauses derive from provisions in section 194 of ICTA.

Clause 370: Travel costs and expenses where duties performed abroad: employee's travel

1617.     This clause provides that a deduction is allowed from earnings for travel costs and expenses where the journey in question is made by the employee.

1618.     The clause derives from provisions in section 194(1), (3), (4), (5), (6) and (8) of ICTA.

1619.     Subsection (1) specifies the circumstances in which a deduction from earnings is allowed. See also Change 101 in Annex 1. The deduction is allowed if:

  • the employee has earnings which are taxable earnings under clause 15 or 21 (which apply if the employee is resident and ordinarily resident in the United Kingdom in the tax year);

  • the earnings include an amount in respect of the provision of travel facilities for a journey made by the employee, or the reimbursement of expenses incurred by the employee on such a journey; and

  • the requirements specified in one of cases A to C are met.

1620.     Subsection (2) provides that the deduction is equal to the included amount; and cases A, B and C are set out in subsections (3), (4) and (5).

1621.     In the source legislation the provisions of section 132(2) of ICTA could affect the availability of this deduction. The application of section 132(2) would mean the disallowance of a deduction under this clause where the duties performed in the United Kingdom were merely incidental to the performance of the other duties of the employment outside the United Kingdom. In practice deductions are allowed in these circumstances; and, accordingly, material deriving from section 132(2) of ICTA has not been included in this clause. See Change 101 in Annex 1.

Clause 371: Travel costs and expenses where duties performed abroad: visiting spouse's or child's travel

1622.     This clause provides that a deduction is allowed from earnings for travel costs and expenses where the journey in question is made by the employee's spouse or child.

1623.     The clause derives from provisions in section 194(1) and (2) of ICTA.

1624.     Subsection (1) specifies the circumstances in which a deduction from earnings is allowed. See also Change 101 in Annex 1. The deduction is allowed if:

  • the employee has earnings which are taxable earnings under clause 15 or 21 (which apply if the employee is resident and ordinarily resident in the United Kingdom in the tax year);

  • the earnings include an amount is respect of the provision of travel facilities for a journey made by the employee's spouse or child, or the reimbursement of expenses incurred by the employee on such a journey; and

  • conditions A to C are met.

1625.     Subsection (2) provides that the deduction is equal to the included amount; and conditions A, B and C are set out in subsections (3), (4) and (5).

Clause 372: Where seafarers' duties are performed

1626.     This clause provides that clause 40(2) (certain duties treated as performed in the United Kingdom) does not apply for the purposes of determining whether duties performed on a vessel are performed in or outside the United Kingdom for the purposes of clauses 370 and 371. It derives from section 194(7) of ICTA.

Travel costs and expenses of non-domiciled employees where duties performed in UK

1627.     The next three clauses provide for deductions to be allowed from earnings for travel costs and expenses where the employee is not domiciled in the United Kingdom, but the duties are performed there. These clauses derive from provisions in section 195 of ICTA.

Clause 373: Non-domiciled employee's travel costs and expenses where duties performed in UK

1628.     This clause provides that a deduction is allowed from earnings for travel costs and expenses where the journey in question is made by the employee.

1629.     The clause derives from provisions in section 195(1), (2), (5), (7), (8) and (9) of ICTA.

1630.     Subsection (1) specifies the circumstances in which a deduction from earnings is allowed. See also Change 101 in Annex 1. The deduction is allowed if:

  • the employee is not domiciled in the United Kingdom;

  • the employee receives earnings from an employment for duties performed in the United Kingdom; and

  • an amount is included in the earnings in respect of the provision of travel facilities for a journey made by the employee, or the reimbursement of expenses incurred by the employee on such a journey.

1631.     Subsection (2) provides for the deduction from earnings to be allowed if:

  • the earnings are earnings charged on receipt (a term defined in clause 335(4)); and

  • the conditions set out in subsections (3) and (4) are met.

1632.     Condition A in subsection (3) reflects Inland Revenue practice in linking the five year period to the date when the journey was undertaken as opposed to the date when the expenditure was incurred. See Change 102 in Annex 1.

1633.     Subsection (5) provides that if the journey is wholly for the purpose specified in subsection (4), the deduction allowed is equal to the included amount; and subsection (6) provides that if the journey is only partly for that purpose, the deduction allowed is only a proportion of the included amount.

 
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Prepared: 17 February 2003