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

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1634.     In section 195 of ICTA there are references to a person's "usual place of abode" and this expression is then defined (in section 195(9)) as "the country (outside the United Kingdom) in which he normally lives". The provisions in this Bill take a simpler approach, referring just to "the country outside the United Kingdom in which the employee normally lives".Clause 374: Non-domiciled employee's spouse's or child's travel costs and expenses where duties performed in UK

1635.     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.

1636.     The clause derives from provisions in section 195(1), (2) and (6) to (10) of ICTA.

1637.     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 made by the employee's spouse or child, or the reimbursement of expenses incurred by the employee on such a journey.

1638.     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) to (5) are met.

1639.     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.

1640.     Subsection (6) provides that if the journey is wholly for the purpose specified in subsection (5), the deduction allowed is equal to the included amount; and subsection (7) provides that if the journey is only partly for that purpose, the deduction allowed is only a proportion of the included amount.

1641.     As in the case of clause 373, references to an employee's "usual place of abode" have been replaced by references to the country outside the United Kingdom in which the employee normally lives.

Clause 375: Meaning of "qualifying arrival date"

1642.     This clause explains the meaning of the expression "qualifying arrival date", which is used in clauses 373 and 374. It derives from section 195(2), (3) and (4) of ICTA.

1643.     Subsection (4) provides that if there are two or more dates in a tax year which are capable of being a "qualifying arrival date", the qualifying arrival date is the earliest of those dates.

Clause 376: Foreign accommodation and subsistence costs and expenses (overseas employments)

1644.     This clause provides that a deduction is allowed for costs or expenses in respect of accommodation or subsistence while an employee is working abroad.

1645.     The clause derives from section 193(2) and (4) of ICTA.

1646.     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 duties of the employment are performed wholly outside the United Kingdom;

  • the employee is resident and ordinarily resident in the United Kingdom;

  • in a case where the employer is a foreign employer (see clause 721(1)), the employee is domiciled in the United Kingdom; and

  • the earnings include an amount in respect of the provision of accommodation or subsistence outside the United Kingdom for the purpose of enabling the employee to perform the duties of the employment, or the earnings include an amount in respect of the reimbursement of expenses incurred by the employee on such accommodation or subsistence for that purpose.

1647.     Subsection (2) provides that if the accommodation or subsistence is wholly for the purpose of enabling the employee to perform the duties of the employment, the deduction is equal to the included amount; and subsection (3) provides that if the accommodation or subsistence is only partly for that purpose, the deduction allowed is only a proportion of the included amount.

1648.     The expression "board and lodging" in section 193(4) of ICTA has been replaced in this Bill by the expression "accommodation or subsistence". It is not necessary for both elements mentioned in section 193(4) to be present for the deduction to be allowed.

1649.     In the detail of the wording used, this clause departs from the legislation it replaces to a significant extent. Some of these changes reflect the decision to dispense with the term "foreign emoluments" and to use the term "foreign employer".

1650.     Subsections (4) and (5) derive from section 132(2) of ICTA. These subsections ensure that a deduction under this section is still available if duties of the employment are performed in the United Kingdom which are merely incidental to the duties of the employment performed outside the United Kingdom.

Clause 377: Costs and expenses in respect of personal security assets and services

1651.     This clause provides that a deduction is allowed for costs and expenses in respect of personal security assets and services.

1652.     The clause derives from sections 50 to 52 of FA 1989.

1653.     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:

  • there is a special threat to the employer's personal physical security which arises wholly or mainly because of the employee's employment;

  • an asset or service which improves personal security is provided for or used by the employee to meet the threat;

  • the employee's earnings include an amount in respect of the asset or service because some or all of the costs are borne by the provider; and

  • the provider's sole object in bearing the whole or part of the cost or reimbursing the expenses is meeting the threat.

1654.     If the provider of an asset within subsection (1) intends that asset to be used solely for the purpose of improving personal physical security, a deduction equal to the included amount is allowed (subsection (2)). Use incidental to this purpose is ignored (subsection (3)). If the provider of the asset intends it to be used only partly to improve personal physical security, the deduction allowed is only a proportion of the included amount (subsection (4)). In determining whether or not this section applies, certain matters may be disregarded (subsection (5)).

1655.     In the case of a service within subsection (1), if the benefit resulting to the employee consists wholly or mainly of an improvement of the employee's physical security, a deduction equal to the included amount is allowed (subsection (6)).

1656.     Subsection (7) provides that the fact that an asset or a service improves the personal physical security of a member of the employee's family or household, as well as that of an employee, does not prevent a deduction being allowed under this section. In subsection (7), the expression "member of the employees' family or household" is not defined in the source legislation; but in this Bill this expression is covered by the general definitions in clause 721(4) and (5). See Note 39 in Annex 2.

1657.     Subsection (8) omits the reference to "living accommodation" in section 52(3)(b) of FA 1989 on the basis that this expression is already encompassed by the word "dwelling".

Chapter 6: Deductions from seafarers' earnings

1658.     This Chapter rewrites section 192A of and Schedule 12 to ICTA. These provide a deduction, commonly called the Foreign Earnings Deduction ("FED") for seafarers against earnings for a year in which the seafarer is resident and ordinarily resident in the United Kingdom. This deduction has something of the flavour of an exemption in that the amount deductible is equal to an amount of earnings rather than any costs or expenses incurred.

Clause 378: Deduction from seafarers' earnings: eligibility

1659.     This clause sets out the conditions for eligibility for the deduction. Broadly speaking, seafarers must spend no less than half of a qualifying period of at least 365 days outside the United Kingdom and not more than 183 consecutive days in the United Kingdom during the qualifying period.

1660.     It is possible to combine various periods of absence from the United Kingdom to determine whether the test has been satisfied. Paragraph 3 of Schedule 12 to ICTA deals with this by using the terms "qualifying period", "relevant periods", "a single qualifying period", "the last qualifying period" and the "intervening period". These concepts and their various combinations are difficult to follow.

1661.     So, in subsection (2) the new term "eligible period", which consists of either a period of continuous absence from the United Kingdom or a "combined period" (another new term which is itself defined in subsection (3)) has been introduced.

Clause 379: Calculating the deduction

1662.     This clause sets out the amount of the deduction which may be allowed from the earnings attributable to the eligible period. Subsection (1) derives from section 192A(1) of ICTA.

1663.     Subsection (2) derives from the rule in paragraph 3(3) Schedule 12 to ICTA concerning earnings for a period of leave immediately following an eligible period. That rule says that the emoluments for such a period of leave may be taken as attributable to the qualifying period, but only to the extent that this would not mean having to treat any emoluments for one tax year as belonging to a different tax year. Essentially this rule allows emoluments for a period of leave to be attributed to the qualifying period to the extent that they are emoluments for the tax year during which the qualifying period ends.

1664.     Subsection (3) makes the deduction subject to the limit contained in the following clause.

Clause 380: Limit on deduction where UK duties etc. make amount unreasonable

1665.     This clause derives from paragraph 2 of Schedule 12 to ICTA. It contains anti-avoidance provisions against attempts to manipulate the amount of the earnings to take advantage of the relief.

1666.     The rules in paragraph 2(3) of Schedule 12 to ICTA for determining associated employments end with the words "but paragraph (b) above shall not be construed as requiring an individual to be treated in any circumstances as under the control of another person". These words did not appear to have any policy or practical purpose and have been omitted as unnecessary. The rules are now the same as in clause 24 and rather than repeat them here subsection (4) contains a cross-reference to that clause.

Clause 381: Taking account of other deductions

1667.     This clause contains the rules for calculating the amount of the earnings for the purposes of this Chapter. It derives from paragraph 1A of Schedule 12 to ICTA.

1668.     All the other employment income deductions are allowed against the full amount of earnings from the employment for the tax year in question. However, the deduction is only allowed in respect of the earnings from the employment which are attributable to an eligible period.

1669.     This means that in some circumstances only a part of a seafarer's earnings for a year may be eligible for the deduction. If the deduction was computed and allowed by reference to the gross earnings for the eligible period, this would displace any other employment income deductions, with the effect that those other deductions, which were for a full year, would be allowed against the earnings for only part of the year.

1670.     To prevent this, the clause requires that the amount of the earnings for the eligible period is to be computed by first deducting all of the employment income deductions and any capital allowances from the gross earnings of the employment for the year. The net product of this calculation is then apportioned to find the earnings for both the eligible and non-eligible periods.

1671.     Paragraph 1A of Schedule 12 to ICTA lists the deductions which are to be taken into account in determining the earnings for the purposes of the FED. However, this list is not complete. For example, it does not refer to deductions under sections 201AA or 201A of ICTA, or under sections 50 to 52 of FA 1989.

1672.     This appears to be unintended. In practice, all the other employment income deductions and capital allowances are taken into account when calculating the earnings eligible for the FED. Accordingly the list has been extended to include all those which may be made under the appropriate employment income provisions. This is a minor change to the law. See Change 103 in Annex 1.

Clause 382: Duties on board ship

1673.     This clause determines whether duties performed on particular voyages are regarded as having been performed in or outside the United Kingdom. It derives from paragraph 5 of Schedule 12 to ICTA and section 132(4)(b) of ICTA.

1674.     This clause modifies one of the rules in section 132(4)(b) of ICTA, but only for the specific purpose of identifying the duties and earnings which are eligible for the FED. For all other purposes, the rules in clause 40 are unaffected by this clause.

Clause 383: Place of performance of incidental duties

1675.     This clause derives from paragraph 6 of Schedule 12 to ICTA and sets out the rules (which apply only to the FED), regarding the performance of duties which are incidental to the main duties of the employment.

1676.     Under section 132(2) of ICTA, if the duties of an employment are mainly performed outside the United Kingdom, any duties incidental to those performed in the United Kingdom are treated as being performed outside the United Kingdom. However, this rule does not apply when deciding whether or not a seafarer is absent from the United Kingdom to determine entitlement to the FED. This exception to the section 132(2) rule is in section 132(3) and has been rewritten in subsection (4) of this clause.

Clause 384: Meaning of employment "as a seafarer"

1677.     This clause defines what this means. It derives from section 192A(2) of ICTA. The exception for earnings from Crown employments derives from section 132(4)(a) of ICTA and ensures that those earnings do not qualify for the FED.

Clause 385: Meaning of "ship"

1678.     This clause derives from section 192A(3) of ICTA. "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.

Part 6:Employment income: income which is not earnings or share-related

Chapter 1: Payments to non-approved pension schemes

Overview

1679.     This Chapter sets out the charge to tax on an employee whose employer makes payments to a non-approved pension scheme. It derives from section 595 of ICTA. It is one of the free-standing Schedule E charges presently covered by paragraph 5 of section 19(1) of ICTA and now brought into charge as "specific employment income".

Clause 386: Charge on payments to non-approved retirement benefits schemes

1680.     This clause derives from section 595(1) of ICTA and sets out the charge to tax on an employee where the employer makes certain payments to non-approved pension ("retirement benefits") schemes. Subsections (1), (2) and (3) derive from section 595(1) and (1)(a) of ICTA.

1681.     Subsection (4) reflects the amendment made to section 595 by paragraph 6 of Schedule 6 to FA 2002. This resolved the order of priority between section 595 and section 148 of ICTA.

1682.     Subsection (5) derives from section 612 of ICTA. The other provisions in Chapter I of Part XIV of ICTA are not exclusively relevant to employment income and will be rewritten at a later stage. This subsection applies the definitions of "employee" and "director" which are in section 612(1).

1683.     Subsection (6) derives from section 595(5) of ICTA. It may be noted that the reference in that subsection applies to section 595 only. In the new clause the reference is applied to the whole Chapter which ensures that relief under section 596(3) of ICTA is available in cases where the benefits are intended to be provided to persons other than the employee. This is a minor change to the law. See Change 104 in Annex 1.

1684.     Subsection (7) acts as a signpost to the reliefs available under clause 392 and section 266A of ICTA. The latter is a new provision inserted by paragraph 36 of Schedule 6 to this Bill and derives from section 595(1)(b) of ICTA.

Clause 387: Meaning of "non-approved retirement benefits scheme"

1685.     This clause defines such a scheme. It derives from section 596(1) of ICTA.

Clause 388: Apportionment of payments in respect of more than one employee

1686.     This clause derives from section 596(4) of ICTA. It provides that where a single payment is made to a non-approved scheme in respect of more than one employee, that payment is apportioned between the employees. Each is taxed only on an appropriate share of the payment.

1687.     Subsection (2) introduces a formula for making the apportionment.

Clause 389: Exception: employments where earnings charged on remittance

1688.     This clause derives from section 596(2)(a) of ICTA, which provides an exception from the charge where the employee's earnings are chargeable under Case III of Schedule E. That charge is now dealt with in clauses 22 and 26.

Clause 390: Exception: non-domiciled employees with foreign employers

1689.     This clause derives from section 595(2)(b) of ICTA and provides a further exception from the charge under clause 386 of this Bill. This is where the earnings are (in the terminology of ICTA) "foreign emoluments" and the payment is to a retirement benefits scheme which corresponds to approved or relevant statutory schemes etc. As the term "foreign emoluments" has been dropped the clause instead sets out the relevant circumstances for the exception to apply.

Clause 391: Exception: seafarers with overseas earnings

1690.     This clause legislates the Inland Revenue's practice of exempting payments from the charge when they are made to seafarers who have no net chargeable earnings from the employment in question for the year as a result of the foreign earnings deduction set out in Chapter 6 of Part 5 of this Bill. This is a minor change to the law. See Change 105 in Annex 1.

Clause 392: Relief where no benefits are paid or payable

1691.     This clause derives from section 596(3) and (4) of ICTA and allows an application for relief where the relevant benefits are not subsequently received from the scheme. Under this clause the application is made to and considered by the Inland Revenue rather than the Board. See Change 158 in Annex 1.

1692.     The source legislation provides for an application for relief only from the employee. However, some benefits might not be due until after the employee has died. In practice the Inland Revenue have always accepted applications by the employee's personal representatives. Subsection (3) legislates that practice. It is a minor change to the law. See Change 104 in Annex 1.

Chapter 2: Benefits from non-approved schemes

Overview

1693.     This Chapter applies to benefits provided by non-approved retirement benefits schemes.

Clause 393: Application of this Chapter

1694.     This clause defines the scope of the Chapter. The Chapter applies to any benefit provided by a non-approved retirement benefits scheme other than pensions and annuities within the pension income Part. Subsection (1) derives from section 596A(1) of ICTA. Subsection (2) derives from section 596A(6) of ICTA.

1695.     Section 596A(7) of ICTA has not been rewritten in the Bill. See Note 40 in Annex 2.Clause 394: Charge on benefit to which this Chapter applies

1696.     This clause establishes the charge and the basis of assessment. It ensures that the charge has priority over all other charges in the Bill.

1697.     Subsection (1) applies if an individual receives the benefit. It derives from section 596A(2) of ICTA. The benefit counts as employment income of the individual for the tax year in which the benefit is received.

1698.     Subsection (2) applies if a person other than an individual receives the benefit. It derives from section 596A(3) of ICTA. There is a charge under Schedule D Case VI on the scheme administrator for the tax year in which the benefit is received. This charge is not employment income. Therefore it does not need to be excluded from the definition of "PAYE employment income" in clause 683.

1699.     Subsection (4) specifies the rate of tax for the Schedule D Case VI charge. It derives from section 596A(5) of ICTA.

1700.     Subsection (5) establishes the order of priority. The charge under this Chapter takes priority over all other charges in the Bill. In its application to lump sums the clause derives from section 596A(8) of ICTA. It also legislates the interpretation that the specific charge in section 596A takes priority over a general charge under Schedule E.

Clause 395: Application of sections 396 and 397: general rules

1701.     This clause applies if the benefit received is a lump sum. It derives from section 596A(8), (9) and (15) of ICTA.

1702.     The clause has two functions.

1703.     First, it introduces clauses 396 and 397. Clause 396 exempts the charge under clause 394 if certain conditions are met. Clause 397 modifies the charge under clause 394 if certain conditions are met.

1704.     Second, it sets out the condition that is common to both clauses 396 and 397 and which must be met if either clause is to apply.

1705.     The common condition is given in subsection (4). It derives from sections 596A(8) and (9) of ICTA. The employer has to have paid a contribution or contributions with a view to providing the benefit and the employee has to have been assessed to tax in respect of that contribution or contributions. The assessment may be under section 595 of ICTA or clause 386(1) of this Bill depending on when the contribution was made.

1706.     Subsection (5) puts the onus on the taxpayer to show that the conditions in subsection (4) are satisfied. It derives from the assumptions in section 596A(15) of ICTA.

Clause 396: Certain lump sums not taxed by virtue of section 394

1707.     This clause exempts lump sum benefits if:

  • all the profits on the scheme investments are brought into charge to tax, and;

  • the lump sum has been provided to one of the persons listed in subsection (1)(b).

1708.     The clause derives from sections 596A(8) and (15) of ICTA.

1709.     A further requirement for the exemption to apply is that the condition in clause 395(4) is met; see clause 395(2).

1710.     In subsection (1)(a) the phrase "brought into charge to tax" means brought into charge to United Kingdom tax.

1711.     Subsection (2) puts the onus on the taxpayer to show that the income and gains of the scheme are brought into charge to tax. It derives from the assumptions in section 596A(15) of ICTA.

Clause 397: Certain lump sums: calculation of amount taxed by virtue of section 394

1712.     This clause allows a deduction from the amount of the lump sum that is charged to tax if:

  • any of the profits on the scheme investments are not brought into charge to tax, and;

  • the condition in clause 395(3) is satisfied.

1713.     The clause derives from sections 591D(6) and 596A(9) to (17) of ICTA. It rewrites section 596A(9) as a free-standing provision. See Change 106 in Annex 1.

1714.     Subsection (3) gives the amount of the deduction. It is the total of:

  • any contribution the employee has paid, and;

  • any contribution the employer has paid that has been taxed on the employee.

1715.     Subsection (3) derives from section 596A(10) and is subject to subsection (4). Subsection (4) applies the formula in subsection (6) if any of the persons listed in subsection (5) has the right to receive, or expectation of receiving, a further lump sum or sums. Subsections (4), (5) and (6) derive from sections 596A(11) to (13) of ICTA.

1716.     Subsection (7) prevents double deductions. It derives from section 596A(14) of ICTA.

1717.     Subsection (8) derives from the assumptions in section 596A(15) of ICTA.

1718.     Subsection (9) derives from section 591D of ICTA. It prevents a claim that the scheme funds have been brought into charge to tax because they have suffered a charge under section 591C of ICTA (cessation of approval: tax on certain schemes).

1719.     Subsection (10) gives the meaning of "market value". It derives from section 596A(17) of ICTA and cross-refers to sections 272 and 273 of TCGA 1992. The reference to section 273 of TCGA 1992 is new. See Note 41 in Annex 2.

 
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Prepared: 17 February 2003