Explanatory Notes

Income Tax (Earnings and Pensions) Act 2003

2003 CHAPTER 1

6th March 2003

Commentary on Sections

Example 3

The exchange sum E is £50

The provision expense PE is £150

The cost of providing the sickness benefits is £60.

£150(Pe) – £50(E) = £100

The cost of providing the sickness benefits is £60, so D = £60.

Putting these values into the formula: £150(PE) – £60(D) = £90

£50(E) is substantially less than £90, so the voucher is not a cash voucher.

304.Subsection (3) defines “sickness benefits” for the purposes of the section.

Section 77: Apportionment of cost of provision of voucher

305.This section provides a rule for apportionment of the expense incurred by the provider where vouchers are provided for two or more employees. It derives from section 144(3) of ICTA.

306.As in section 75 of this Act, this section makes explicit that the “voucher” provided at the expense of the person bearing the cost includes a “stamp or similar document”. See Note 15 in Annex 2.

Section 78: Voucher made available to public generally

307.This section excepts a cash voucher from the application of this Chapter where the voucher is made available to the public generally and the employee (or family member) does not get it on preferential terms.

308.This exception is a minor change to the law. See Change 18 in Annex 1.

Section 79: Voucher issued under approved scheme

309.This section excepts a cash voucher from the application of this Chapter where an employee receives the voucher under an Inland Revenue approved scheme. Such an approved scheme provides for deduction of income tax under PAYE. The practical effect of approval of a scheme is that tax is deducted when the voucher is exchanged instead of when it is received. This section derives from section 143(5) of ICTA.

310.The section reflects existing administrative practice when it refers to approval by the “Inland Revenue” rather than “the Board”. This is a minor change in the law. See Change 158 in Annex 1.

Section 80: Vouchers where payment of sums exempt from tax

311.This section derives from section 143(3) of ICTA which provides that certain vouchers are not included in cash vouchers. This section prevents the application of any provisions of this Chapter to such vouchers. In paragraph (a) of this section the words in section 143(3)(a) which say the sum intended to be obtained is “mentioned in the document” have been omitted as unnecessary since, if it is “intended to enable the person to obtain”, it must be mentioned in the document.

Section 81: Benefit of cash voucher treated as earnings

312.This section provides the means of charging the benefit of the voucher to income tax. It derives from section 143(1) of ICTA.

313.Subsection (1) treats the cash equivalent of that benefit as earnings from the employment. Amounts treated as earnings under this Chapter are employment income charged under Part 2 of this Act. They are earnings for the tax year in which the voucher is received – see Note 7 in Annex 2. For the purposes of Chapters 4 and 5 of Part 2 they are treated as received in that year – see sections 19(2) and 32(2) of this Act.

314.Subsection (2) defines “cash equivalent” as the sum of money for which the voucher may be exchanged.

Section 82: Non-cash vouchers to which this Chapter applies

315.This section sets out the non-cash vouchers to which this Chapter applies. It derives from section 141 of ICTA.

316.If an employer who is an individual provides such a voucher for personal reasons, it is not regarded as provided by reason of the employment. The disregard of vouchers provided by an individual for personal reasons is a minor change to the law. See Change 18 in Annex 1.

Section 83: Provision for, or receipt by, member of employee’s family

317.This section extends provision for or receipt by the employee of a non-cash voucher to provision for or receipt by a member of the employee’s family. It derives from section 144(4) of ICTA.

Section 84: Meaning of “non-cash voucher”

318.This section defines “non-cash voucher” for the purposes of this Chapter. It derives from section 141(7) of ICTA.

319.Subsection (1) sets out the definition in terms of three types of voucher, but excludes a cash voucher.

320.Subsection (2) further clarifies what is a non-cash voucher for the purposes of this Chapter.

321.Subsection (3) defines “transport voucher”. The definition of a “transport voucher” reflects the fact that it may only have to be shown, rather than exchanged, to obtain services.

322.Subsection (4) defines “cheque voucher” as a cheque intended for use in payment for goods and services. It describes a particular type of cheque which is limited in its purpose. The distinction is made between that and non-cash vouchers to prevent any argument that the type of voucher which required completion of the amount, and perhaps a signature as well, did not fall within the definition of non-cash voucher. That definition of non-cash voucher is extended by the definition of cheque voucher to include such deviations from the norm.

Section 85: Non-cash voucher made available to public generally

323.This section excepts a non-cash voucher from the application of this Chapter where the voucher is made available to the public generally and the employee (or family member) does not get it on preferential terms.

324.This exception is a minor change to the law. See Change 18 in Annex 1.

Section 86: Transport vouchers under pre-26th March 1982 arrangements

325.This section excepts a transport voucher from the application of this Chapter where it is provided, under arrangements in operation on 25 March 1982, to enable an employee (or family member) to obtain cheap or free travel provided by their employer or another passenger transport undertaking. It derives from section 141(6) of ICTA.

326.Where a transport voucher, such as a season ticket, is provided other than under such arrangements, the benefit of the voucher is chargeable to tax.

327.Paragraph 27 of Schedule 24 to F A 1994 provided for the exception to continue for employees of British Rail transferred to new rail franchises following privatisation. Paragraph 224 of Part 2 of Schedule 6 to this Act makes consequential amendments to those provisions.

Section 87: Benefit of non-cash voucher treated as earnings

328.The section provides the means of charging the benefit of the voucher to income tax. It derives from section 141 of ICTA.

329.Subsection (1) treats the cash equivalent of that benefit as earnings from the employment. Amounts treated as earnings under this Chapter are employment income charged under Part 2 of this Act. They are earnings for the tax year in which the voucher is received – see Note 7 in Annex 2. For the purposes of Chapters 4 and 5 of Part 2 they are treated as received in the tax year mentioned in section 88 of this Act - see sections 19(3) and 32(3) of this Act.

330.Subsection (2) defines “cash equivalent” as the net cost of provision after deducting the amount made good by the employee.

331.Subsections (3) and (4) define “cost of provision”.

332.Subsection (5) provides an apportionment rule.

Section 88: Year in which earnings treated as received

333.This section gives the timing rules for the receipt of the amount treated as earnings. It derives from section 141(1) and (2) of ICTA.

334.Subsection (1) deals with non-cash vouchers other than cheque vouchers. In most cases the cost of provision will have been incurred before the voucher is received. The earnings will therefore be treated as received in the year in which the employee receives the voucher. If that is not the case and the cost of provision is incurred at a later time, the amount will not be known. That may cause a particular problem if the amount cannot be ascertained until a tax year after the voucher is received. This section defines the receipt for the purposes of sections 19 and 32 of this Act as being at the time the cost is known.

335.Subsections (2) and (3) are provisions specific to cheque vouchers which provide a similar rule to that for other non-cash vouchers.

Section 89: Reduction for meal vouchers

336.This section excepts, subject to the conditions of the exception, 15 pence for each working day on which a meal voucher is provided to an employee. It derives from ESC A2 (“luncheon vouchers”), but adapts the ESC to meet the terms of this Chapter.

337.Subsection (3) excludes an overlap with the exemption in section 266(3) of this Act for a non-cash voucher, equivalent to the exemption for direct provision in section 317 of this Act (subsidised meals).

338.Legislating ESC A2 is a minor change to the law. See Change 19 in Annex 1.

Section 90: Credit-tokens to which this Chapter applies

339.This section sets out the credit-tokens to which this Chapter applies similarly to the provisions in section 73 of this Act for cash vouchers and in section 82 of this Act for non-cash vouchers. It derives from section 142(1) of ICTA.

340.Where an employer who is an individual gives such a credit-token for personal reasons, it is not regarded as provided by reason of the employment.

341.The disregard of credit-tokens provided by an individual for personal reasons is a minor change to the law. See Change 18 in Annex 1.

Section 91: Provision for, or use by, member of employee’s family

342.This section extends provision for or use of a credit-token by the employee, to provision for, or use by a member of the employee’s family. It derives from section 144(4) and (4A) of ICTA.

Section 92: Meaning of “credit-token”

343.This section defines “credit-token” for the purposes of this Chapter.

344.Subsection (1) provides the definition. It derives from section 142(4) of ICTA.

345.Subsections (2) and (3) amplify the definition for particular circumstances.

346.Subsection (4) excludes cash and non-cash vouchers from the definition.

Section 93: Credit-token made available to public generally

347.This section excepts a credit-token from the application of this Chapter where the credit-token is made available to the public generally and the employee (or family member) does not get it on preferential terms.

348.This exception is a minor change to the law. See Change 18 in Annex 1.

Section 94: Benefit of credit-token treated as earnings

349.This section provides the means of charging the benefit of the token to income tax. It derives from section 142(1) of ICTA.

350.Subsection (1) treats the cash equivalent of that benefit as earnings from the employment. Amounts treated as earnings under this Chapter are employment income charged under Part 2 of this Act. They are earnings for the tax year in which the credit-token is used – see Note 7 in Annex 2. For the purposes of Chapters 4 and 5 of Part 2 they are treated as received in that year – see sections 19(2) and 32(2) of this Act.

351.The timing rule for receipt of the cash equivalent of credit-tokens is different from that for non-cash vouchers. The focus is on when the token is used. This is because expense is incurred each time a credit-token is used, even if it is not paid at that time. Regardless of when the provider of the credit-token pays for the goods or services, the amounts treated as earnings for the tax year in which the credit-token is used are treated as received in that year.

352.Subsection (2) defines “cash equivalent” as the net cost of provision after deducting any amount made good by the employee.

353.Subsection (3) defines “cost of provision”.

354.Subsection (4) provides an apportionment rule equivalent to that in sections 77 and 87(6) of this Act.

355.Section 91 of this Act, along with this section, extends the charge to treat the benefit of use of a credit-token by a member of the employee’s family as earnings of the employee.

Section 95: Disregard for money, goods or services obtained

356.This section eliminates any charge on the money or money’s worth or cost of the goods or services received in exchange for vouchers, or through the use of a credit-token, where the cash equivalent of the benefit is treated as earnings under this Chapter (or would be, but for a dispensation under section 96) of this Act.

357.It derives from sections 141(1)(b), 142(1)(b) and 143(1)(b) of ICTA.

358.Subsection (1) sets out the circumstances in which this section operates. The addition of subsection (1)(b) prevents the goods and services obtained by use of the voucher being within Chapter 10 of Part 3 of this Act if a dispensation is given. This is a minor change to the law. See Change 20 in Annex 1.

359.Subsection (2) provides that the money, goods or services obtained are disregarded for the purposes of the Income Tax Acts.

360.That disregard extends to goods or services obtained through use of a cash voucher. Normally, a cash voucher is exchanged for a sum of money and tax is charged on that sum. If goods or services are provided, tax will not be charged on the value of those goods or services.

361.Extending that disregard to goods and services obtained by use of a cash voucher is a minor change to the law. See Change 20 in Annex 1.

362.The disregard has been extended to things obtained by the use of vouchers and tokens in certain cases where the benefit thus obtained itself is exempt and that exemption depends on the goods and services obtained by the use of the vouchers or tokens themselves being exempt if obtained direct. (The exemptions in question are those given by section 266(1)(a) or (e) of this Act (exemption of non-cash voucher where used to obtain parking provision or third party entertainment), section 267 of this Act where subsection (2)(a) or (f) of that section applies (exemption of credit-token where used to obtain parking provision or third party entertainment) and section 268 of this Act (exemption of non-cash voucher or credit-token where used for incidental overnight expenses)). It is simpler to extend the disregard in this way than to allow the things obtained by the use of these vouchers and tokens to fall into other charging provisions, only to be exempted by the exemptions that apply in those cases.

363.Subsection (3) ensures that deductions available under sections 362 and 363 of this Act (deductions where non-cash voucher or credit-token provided) are not affected by the disregard.

364.Subsection (4) clarifies the application of the disregard for transport vouchers.

Section 96: Dispensations relating to vouchers or credit-tokens

365.This section provides for the Inland Revenue to give a notice (commonly called a dispensation) where they are satisfied that no additional tax is payable under the provisions of this Chapter. The section also provides for such notices to be revoked and for the tax charge to apply accordingly.

366.This section derives from section 144(1) and (2) of ICTA.

367.Subsection (1) sets out when the section applies, which is when a person applies for a dispensation. The reference to the Inland Revenue replaces references to the inspector. See Change 158 in Annex 1.

368.Subsection (2) requires the Inland Revenue to give a dispensation if they are satisfied that no additional tax would arise in the particular circumstances from the application of this Chapter.

369.Subsection (3) defines “dispensation”. That term is the commonly used name for the written notification that the Inland Revenue gives the employer to authorise the application of the provisions in this section to the benefit of vouchers and credit-tokens. The section also characterises the dispensation as a notice which, by virtue of the definition of that word in section 832(1) of ICTA, means that it must be in writing. These two changes to formalise the common name for the authorisation given and to require that it must be in writing are minor changes to the law. See Change 16 in Annex 1.

370.Subsection (4) sets out the effect of a dispensation.

371.Subsections (5) to (8) authorise the Inland Revenue to revoke a dispensation “if in their opinion there is reason to do so”, and set out the consequences of such a revocation. The consequences depend on the date from which the revocation has effect (which may be as far back as the date the dispensation was given).

372.A notice revoking a dispensation is “given” rather than “served”. This is in line with current practice and consistent with the usage for notices in CAA 2001. This is a minor change to the law. See Change 16 in Annex 1.

Chapter 5: Taxable benefits: living accommodation
Overview

373.This Chapter deals with the benefit which arises from the provision of living accommodation. It begins by defining in what circumstances the Chapter applies. It then sets out the circumstances in which it does not apply, so that anyone who falls within the exceptions does not need to go any further. The Chapter then deals with the method of calculating the cash equivalent of the benefit. It derives from sections 145, 146 and 146A of ICTA.

Section 97: Living accommodation to which this Chapter applies

374.This section sets out the general statement to indicate that when living accommodation is provided for an employee this Chapter applies.

375.Subsection (2) prevents a charge arising on family and household members living at home who are employed by the home-owner who is an individual. It also covers the case where the living accommodation is not the family home, and the employer is providing the accommodation in a capacity other than as employer.

376.This section derives from sections 145(1), (6), (7), 146(1)(a) and (10) of ICTA.

Section 98: Accommodation provided by local authority

377.This section provides for an exception to prevent a charge where a local authority employee is provided with accommodation and the conditions are met.

378.It derives from sections 145(7)(b) and 146(10) of ICTA.

Section 99: Accommodation provided for performance of duties

379.This section sets out two exemptions from the charge on provided living accommodation. The exemptions derive from sections 145(4)(a) and (b) of ICTA.

380.These exemptions apply to directors only if the conditions set out in subsections (3) to (5) are met. This rider to the exemptions derives from section 145(5) and (8) of ICTA.

381.When the exemptions in this section or that in section 98 of this Act apply, there are further exemptions which may be available by virtue of sections 314 and 315 in Part 4 of this Act.

Section 100: Accommodation provided as result of security threat

382.This section ensures that living accommodation provided because of a special threat to an employee does not give rise to a charge to tax. It derives from section 145(4)(c) of ICTA.

Section 101: Chevening House

383.This section provides an exemption from a charge to tax on provided living accommodation for a nominated person occupying Chevening House. It derives from section 147 of ICTA.

Section 102: Benefit of living accommodation treated as earnings

384.This section makes the cash equivalent of the benefit of the living accommodation chargeable to tax, by treating it as earnings. It derives from sections 145(1) and 146(1) of ICTA.

385.Subsection (1) sets out the year for which the cash equivalent is to be treated as earnings. See Note 7 in Annex 2.

386.The period for which the cash equivalent is calculated is given the label “the taxable period”. See Note 16 in Annex 2.

Section 103: Method of calculating cash equivalent

387.This is a signpost section, introducing sections 104 to 106. It also sets out where to find the meaning of various terms used throughout this Chapter. It is new.

Section 104: General rule for calculating cost of providing accommodation

388.This section sets out the method for determining whether the cost of providing the accommodation exceeds £75,000. It contains material deriving from section 146(4), (5) and (11) of ICTA.

Section 105: Cash equivalent: cost of accommodation not over £75,000

389.This section sets out how to calculate the cash equivalent of the benefit of provided living accommodation costing no more than £75,000. It derives from section 145(1) and (2) of ICTA.

Section 106: Cash equivalent: cost of accommodation over £75,000

390.This section sets out how to calculate the cash equivalent of the benefit of provided living accommodation costing more than £75,000 by means of a method statement as set out in subsection (2). It derives from section 146(1) to (5) and (11) of ICTA.

391.Step 1 calculates the basic charge under section 105 of this Act. This includes taking into account any sums made good by the employee, as provided for in section 105(5).

392.Step 2 calculates the additional yearly rent of the accommodation based on the extent to which the cost of providing the property exceeds £75,000.

393.Step 3 reduces the additional yearly rent to that for “the taxable period”.

394.Step 4 brings together the results of Steps 1 and 3 and also allows any excess of rent paid to be brought into account.

395.Subsection (3) defines excess rent and sets out the circumstances in which it can be taken into account at Step 4.

Section 107: Special rule for calculating cost of providing accommodation

396.If a property has been owned for some time before the year in which the benefit of provided living accommodation arises, the value of the property may have risen significantly. This section substitutes market value for cost in certain circumstances. It derives from section 146(4) to (6) and (11) of ICTA.

397.This rule applies only for the purposes of the calculation in section 106 of this Act, and does not have any application to accommodation within section 105 of this Act.

398.Subsection (3) sets out how to calculate the cost of providing the accommodation. Consultation leading up to this Act has resulted in the addition in paragraph (a) to the definition of P in respect of payments made. See Change 21 in Annex 1.

399.Section 146(8) of ICTA provides that section 146(6) does not apply if the employee first occupied the property before 1983. Due to the length of time since that date the provision is now in paragraph 21(1) of Schedule 7 to this Act.

Section 108: Cash equivalent: accommodation provided for more than one employee

400.This section allows an apportionment of the cash equivalent when the accommodation is provided for more than one employee. It derives from ESC A91A. See Change 22 in Annex 1.

Section 109: Priority of this Chapter over Chapter 1 of this Part

401.This section applies in the event that there is a possibility of a charge both under Chapter 1 and under this Chapter in respect of the same living accommodation.

402.This section ensures that the charge under this Chapter takes precedence. If the amount of earnings that would be chargeable by virtue of section 62 of this Act is less than the amount of the cash equivalent under this Chapter, then the cash equivalent applies. If the earnings exceed the cash equivalent, only the excess is treated as earnings. The section derives from section 146A of ICTA.

Section 110: Meaning of “annual value”

403.This section defines “annual value” for the purposes of this Chapter. It derives from section 837 of ICTA which in turn draws on section 23 of the General Rate Act 1967 (although that Act was repealed in 1988).

404.This section does not affect the Inland Revenue practice of using the gross rateable value as a proxy for “annual value”. That practice will continue. The main use of this section is to provide guidance on how to arrive at the annual value of properties for which rent is not paid and in practice is only needed in cases where no gross rateable value can be found.

405.Subsection (1) defines “annual value”. Section 837(1) refers to “rates and taxes” on the premises. This section includes a fuller and more updated description of domestic property charges: “taxes, rates or charges”. See Change 24 in Annex 1.

406.The following subsections set out the adjustments to make in order to arrive at the rent to be used for living accommodation. They derive from section 23 of the General Rate Act 1967 which was repealed in 1988. As a consequence of that repeal the reference to that Act in section 837(2) has not been included in this section. Instead the general thrust of the rules has been rewritten here. See Change 23 in Annex 1.

407.Subsection (2) applies in relation to subsection (1). It ensures that the annual value does not include the cost of anything which is not provided in the case of unfurnished property. This is important in cases where the only available comparisons are rents paid for fully furnished and serviced properties. If, in considering what the rent of the accommodation would be, the nearest comparison is rent for a property for which services are provided at an inclusive rent, in order to reduce the rent to that for unfurnished, non-serviced accommodation the cost of the services provided are deducted. This means that if there is a profit element in the provision of the services it is treated as rent in arriving at the annual value.

408.Subsections (3) and (4) extend the process of comparison and adjustment. They follow the thrust of section 23(3) and (4) of General Rate Act 1967 which ensured that when a property is valued by reference to comparative rents of similar properties the value was not distorted by the existence (in the comparative case) of separate payments for services in addition to what one might call the basic rent. In particular it added the separate payments to the rental payments and allowed for certain deductions to be made. It did not allow any deduction in computing the value based on a comparative rent for amounts paid in respect of repairs, insurance or maintenance of other property belonging to or occupied by the landlord. In the case of payments for other types of services only the cost element of them was deducted. These subsections follow that method of comparison and adjustment.

409.Subsection (5) has the effect that the services whose cost of provision may be deducted are those which are not normally met by a landlord in the provision of unfurnished property. Again, the wording is not derived directly from section 23 of the General Rate Act 1967 but follows the general thrust of provisions of that section.

410.This section does not affect the limited exemption in section 315 which applies to the amount of earnings or the amount treated as earnings based on the cost of certain services

Section 111: Disputes as to annual value

411.This section sets out the procedure for resolution of disputes about the annual value of accommodation for the purposes of this Chapter. It derives from section 837(3) of ICTA.

Section 112: Meaning of “person involved in providing the accommodation”

412.This definition makes it clear that it is necessary to look beyond the employer and the apparent owner of an interest in the accommodation. This is anti-avoidance legislation to counter schemes which depress the cost to the employer by using intermediate owners of interests. It derives from section 146(7) of ICTA.

Section 113: Meaning of “the property”

413.This section simply confirms that “the property” means the living accommodation in question. It derives from section 146(11) of ICTA.

Chapter 6: Taxable benefits: cars, vans and related benefits
Overview

414.Employees may be taxable on the benefit of the availability for private use of a car or van, or car fuel that their employers provide. If so, the cash equivalent of the benefit is taxed as the employee’s earnings.

415.This Chapter contains the rules to calculate the cash equivalent of that benefit.

416.Sections 114 to 119 set out the basic principles of the car, car fuel and van benefit rules.

417.Sections 120 and 121 provide for the cash equivalent of the car benefit to be taxed as earnings and the method for calculating that cash equivalent.

418.Sections 122 to 148 give detailed rules in support of the calculation of the cash equivalent of the car benefit.

419.Sections 149 to 153 deal likewise with car fuel benefits.

420.Sections 154 to 166 deal likewise with van benefits.

421.Sections 167 and 168 give special rules that apply to pool vehicles.

422.Section 169 deals with situations where the same employer employs more than one member of a family or household.

423.Section 170 provides for the Treasury to make orders relating to provisions in this Chapter.

424.Sections 171 and 172 give definitions.

Section 114: Cars, vans and related benefits

425.This section sets out the scope of this Chapter and gives signposts to the groups of provisions dealing with the various aspects of the car, car fuel and van benefit rules. The section derives from sections 157(1) and 159AA(1) of ICTA.

426.Subsection (1) states when this Chapter applies.

427.Subsection (1)(b) avoids the use of the phrase “the employee’s employment”. Section 66(2)(a) of this Act identifies for this (and for other sections) the employee to whose employment the legislation applies.

428.Subsection (2) gives signposts to the groups of provisions applying to car, fuel and van benefits.

429.Subsection (3) prevents a double tax charge arising on car, car fuel or van benefits.

430.Subsection (4) gives signposts to provisions providing exceptions to the main rules.

Section 115: Meaning of “car” and “van”

431.This section defines “car” and “van” and related terms for the purposes of this Chapter. The section derives from parts of sections 168(5) and 168(5A) of ICTA.

432.Subsection (1) defines “car” and “van”.

433.Subsection (2) defines terms relevant only to the definitions of “car” and “van”, so that all such terms are located together.

Section 116: Meaning of when car or van is available to employee

434.It is the availability to an employee of a car or van for private use that may give rise to a tax charge. This section explains what a car or van being available to an employee means. The section derives from sections 168A(12), 168AA(4), 168B(8), 168C(3) and 168F(10), paragraph 10 of Schedule 6 and paragraph 12 of Schedule 6A to ICTA.

435.Subsection (1) extends the meaning of a car or van being available to an employee to include its being made available to members of the employee’s family or household.

436.Subsection (2) defines when such cars first became available at all and when they are last available in the year.

437.Subsection (3) provides that this section does not apply to section 138 of this Act. That section therefore applies only to an employee who is disabled and not to members of that employee’s family or household as well.

Section 117: Meaning of car or van made available by reason of employment

438.To give rise to a tax charge, the car or van must be made available to the employee by reason of the employment. This section provides that a car or van made available by an employer is regarded as made available by reason of the employment unless the circumstances in paragraphs (a) and (b) apply. The section derives from part of section 168(6) of ICTA.

Section 118: Availability for private use

439.This section explains what is meant by availability for private use of a car or van. The section derives from parts of section 168(5), 168(5A), and 168(6) of ICTA.

440.Subsection (1) provides that the car or van is regarded as available for private use unless the circumstances in paragraphs (a) and (b) apply.

441.Subsection (2) defines “private use”.

Section 119: Where alternative to benefit of car offered

442.This section identifies the relationship between this Chapter and the provisions in Chapter 1 of Part 3 of this Act. The section derives from section 157A of ICTA.

Section 120: Benefit of car treated as earnings

443.This section provides that the cash equivalent of the benefit arising from the provision of a car is treated as an employee’s earnings. The section derives from part of section 157(1) of ICTA.

444.Subsection (1) brings the cash equivalent of the car benefit into charge as part of the employee’s earnings. The rewrite of the source legislation has clarified the timing of the charge. See Note 7 in Annex 2.

445.Subsection (2) allows concise expression in this Chapter of the link between the employee and the taxable benefit.

Section 121: Method of calculating the cash equivalent of the benefit of a car

446.This section states how to calculate the cash equivalent of the car benefit. The section derives from sections 157(2) and 168G(1) and paragraph 1 of Schedule 6 to ICTA.

447.Subsection (1) sets out the steps involved in the calculation by using a method statement.

448.Subsection (2) gives signposts to two special cases when the calculation is modified.

449.Subsection (3) gives a signpost to the reduction that may be made when employees share a car.

Section 122: The price of the car

450.This section states what is meant by “the price of the car” and, in particular, introduces the concept of “the notional price” for the case where a car has no list price. It links to other provisions for the calculation of the cash equivalent of the car benefit. The section derives from part of section 168A(1) of ICTA.

Section 123: The list price of a car

451.This section deals with the most common case where there is a published list price for a car. The section derives from section 168A(2) and part of section 168A(9) of ICTA.

452.Subsection (1) defines “list price” by referring to the characteristics of an ordinary retail sale.

453.The phrase “(as the case may be)”, from section 168A(2), is retained as the simplest way of determining whose list price is to be taken. The user looks first to the manufacturer, secondly to the importer and thirdly to the distributor to find a list price.

454.Subsection (2) makes it clear that “list price” includes delivery charges and taxes.

Section 124: The notional price of a car with no list price

455.This section deals with the less common case where there is no published list price within section 123. The legislation then falls back on the concept of the “notional price”. The section derives from section 168A(8) and part of section 168A(9) of ICTA.

456.Subsection (1) defines the “notional price” of a car and the assumptions to be made in determining it. Those assumptions reflect the circumstances listed in section 123(1) where there is an actual list price.

457.Subsection (2) makes it clear that a notional price must, like a list price, include delivery charges and taxes.

Section 125: Meaning of “accessory” and related terms

458.This section defines “accessory”. The section derives from parts of sections 168A(9), (10) and (11), 168AB(1) and (4), 168B(8), 168C(3), 168D(5) and 168F(9) of ICTA.

459.Subsection (1) defines “qualifying accessory”.

460.Subsection (2) lists certain items that are not treated as accessories.

461.Subsection (3) states an exception to one item in subsection (2).

462.Subsection (4) distinguishes between a “standard accessory” and a “non-standard accessory”. The term “equivalent to” in the definition of “standard accessory” does not mean “identical to”. It accommodates slight changes to the specification of particular models of cars, which manufacturers may make from time to time but which do not result in changes to their published prices.

Section 126: Amounts taken into account in respect of accessories

463.This section identifies the types of accessories for which the prices are added at Step 2 of the calculation in section 121(1) of this Act. The section derives from parts of sections 168A(1), (4), (5), (6) and (7), 168B(1), (2) and (3), and 168C(1), (2) and (4) of ICTA.

464.Section 168A(3) of ICTA (which deals with a car to which only standard accessories were fitted at the time it was first made available to the employee) has not been rewritten. It seems unnecessary given that standard accessories (as defined in section 168A(9)(c)) are necessarily taken into account when ascertaining the list price of the car under section 168A(2). The structure of the new method statement in section 121 is such that, having ascertained the list price of the car under Step 1, Step 2 is only concerned with adding on the price of accessories not included in that price.

465.Subsection (1) states the basic rule and introduces the terms “initial extra accessory” and “later accessory”.

466.Subsection (2) defines “initial extra accessory”.

467.Subsection (3) defines “later accessory”.

468.Subsection (4) identifies the price of the accessory as the list price or, if there is no list price, a notional price. This follows the same approach as for the car in section 122 of this Act.

469.Subsection (5) gives a signpost to a modifying rule that applies when accessories are replaced.

Section 127: The list price of an accessory

470.This section defines the list price of an accessory. The section derives from parts of sections 168A(4), (5), (6) and (7), 168B(2) and 168C(2) of ICTA.

471.Subsection (1) gives the rule when the accessory is an “initial extra accessory”. The list price is the published price of either the manufacturer, importer or distributor of the car or, when there is no such published price, the published price of the manufacturer, importer or distributor of the accessory in a normal, retail sale.

472.Subsection (2) gives the rule when the accessory is a “later accessory”. The list price is the published price of the manufacturer, importer or distributor of the accessory.

Section 128: Accessory: published price of the car manufacturer etc.

473.This section states how to arrive at the price of an accessory, when it is derived from the published price of the manufacturer, importer or distributor of the car. The section derives from parts of section 168A(4) and (9) of ICTA.

474.Subsection (1) gives the main definition. As in section 123 of this Act (see paragraph 453) the phrase “(as the case may be)” from the source legislation is retained.

475.Subsection (2) defines “inclusive price”. Car tax is excluded from the “relevant taxes” to be taken into account in arriving at the price of the accessory in subsection (2)(b). That is because it is clear from the context of section 168A that, when applied to an accessory, the reference in section 168A(9) to “any car tax” is irrelevant when considering the “inclusive price” of the accessory as defined in section 168A(9)(a).

Section 129: Accessory: published price of the accessory manufacturer etc.

476.This section states how to arrive at the price of an accessory when it is derived from the published price of the manufacturer, importer or distributor of the accessory. The section derives from parts of section 168B(4), (6) and (7) and section 168C(4) of ICTA.

477.Subsection (1) defines the “published price of the manufacturer, importer or distributor of the accessory”. As in section 123 of this Act (see paragraph 453), the phrase “(as the case may be)” from the source legislation is retained.

478.Subsection (2) defines “inclusive price”. Car tax is excluded from the “relevant taxes” to be taken into account in arriving at the price of the accessory in subsection (2)(b). That reproduces the effect of section 168B(7)(b), which differs from section 168A(9) in that respect.

479.Subsection (2)(c) contrasts with section 128(2)(c) in identifying the person by whom the fitting charge is made. That reflects section 168B(6).

480.Subsection (3) states an interpretation rule for this section about timing. The reference to “time” here (and in subsection (1)(e) to which it relates) contrasts with the reference to “day” in section 128(1)(e). That reflects the distinction between section 168A(9)(b), which refers to “day” and section 168B(4), which refers to “time”. A brand new car is generally on sale prior to its first registration. The act of registration often results in an immediate loss in value. This is equally true of an optional accessory provided with the car by the car manufacturer. The legislation adopts the price of such an accessory in relation to the day immediately before first registration as it does for the car itself (see section 123(1)(e) of this Act). In the case of an accessory that is made by someone other than the car manufacturer that may not be appropriate. That is because the accessory might be attached to the car only on the first day the accessory goes on sale. So this section refers to a particular time rather than a particular day.

Section 130: The notional price of an accessory

481.This section defines the “notional price” of an accessory. It applies when an accessory does not have a list price. The section derives from section 168B(5), (6) and (7) and section 168C(4) of ICTA.

482.Subsection (1) defines the notional price of the accessory by setting out the assumptions to be made in determining it. Those assumptions reflect the circumstances listed in section 129(1) where there is an actual list price.

483.Subsection (2) defines “inclusive price” to reflect what is referred to in section 129(2) when there is an actual list price.

484.Subsection (2)(c) follows section 129(2)(c) in identifying the person by whom the fitting charge is made. That reflects section 168B(6).

485.Subsection (3) follows the timing rule in section 129(3).

Section 131: Replacement accessories

486.This section sets out the rules for calculating the cash equivalent of a replacement accessory. The section derives from the Income Tax (Car Benefits) (Replacement Accessories) Regulations 1994 (SI 1994 No 777). Those Regulations were made under powers provided by section 168E of ICTA. As there is no longer any reason to retain those powers, section 168E has not been rewritten.

487.Subsection (1) states when the section applies.

488.Subsection (2) applies when the new accessory is not superior to the old accessory.

489.Subsection (3) applies when the new accessory is superior to the old accessory and the conditions in subsection (4) are met.

490.Subsection (4) states the conditions referred to in subsection (3).

491.Subsection (5) states what is meant by “superior” in this section.

492.Subsection (6) states what is meant by the “price of an accessory” in this section.

Section 132: Capital contributions by employee

493.This section provides for the deduction that can be made at Step 3 of section 121(1) of this Act in calculating the cash equivalent of the car benefit. The section derives from section 168D(1), (2), (3) and (4) of ICTA.

494.Subsection (1) states when the section applies. That is when the employee contributes to the capital cost of the car or its qualifying accessories.

495.Subsection (2) states for which tax years the deduction can be made.

496.Subsection (3) states the maximum deduction that can be made under this section for any tax year.

Section 133: How to determine the “appropriate percentage”

497.This section is the first of a group of ten defining “the appropriate percentage” to be used in Step 6 of section 121(1) of this Act to calculate the cash equivalent of the car benefit. The “appropriate percentage” depends on the type of car involved, when it was first registered, what fuel or fuels it uses and whether it has a CO2 emissions figure. The section derives from paragraph 2 of Schedule 6 to ICTA.

498.Subsection (1) identifies the date of the car’s first registration as the initial governing factor.

499.Subsection (2) applies different provisions to cars first registered after 31 December 1997, depending on whether or not they have a CO2 emissions figure and/or whether they are diesels. It gives signposts to the relevant provisions in each case.

500.Subsection (3) gives a signpost to the provision that applies if the car was first registered before 1 January 1998.

Section 134: Meaning of car with or without a CO2 emissions figure

501.This section determines whether a car is a car with or without a CO2 emissions figure for the purposes of these provisions. The section derives from parts of paragraphs 3(1) and (2), 5 and 5C(1) of Schedule 6 to ICTA.

502.Subsection (1) defines a “car with a CO2 emissions figure” by reference to its date of first registration and other sections that specify a CO2 emissions figure for the particular combination of car type and date of first registration.

503.Subsection (2) defines a “car without a CO2 emissions figure” by reference to its date of first registration, not being a car within subsection (1).

Section 135: Car with a CO2 emissions figure: pre-October 1999 registration

504.This section gives a rule to determine the CO2 emissions figure for certain cars first registered after 31 December 1997 and before 1 October 1999. The section derives from parts of paragraph 3(1) and (2) of Schedule 6 to ICTA.

505.Subsections (1) and (2) define a CO2 emissions figure by reference to the appropriate European or United Kingdom certification schemes that were in place at the time of a first registration that occurred on or after 1 January 1998 and before 1 October 1999.

506.Subsection (3) makes this section subject to a further rule that applies to the provision of an automatic car for an employee who is disabled.

Section 136: Car with a CO2 emissions figure: post-September 1999 registration

507.This section gives a rule to determine the CO2 emissions figure for certain cars first registered after 30 September 1999. The section derives from parts of paragraph 3(1) and (2) of Schedule 6 to ICTA.

508.Subsections (1) and (2) define the CO2 emissions figure by reference to the appropriate European or United Kingdom certification schemes that were in place at the time of a first registration on or after 1 October 1999.

509.Subsection (3) makes this section subject to further rules that apply to the provision of a car capable of running on more than one type of fuel or of an automatic car for an employee who is disabled.

Section 137: Car with a CO2 emissions figure: bi-fuel cars

510.This section gives a CO2 emissions figure for bi-fuel cars (cars capable of running on more than one type of fuel) first registered after 31 December 1999. Such cars will have at least two CO2 emissions figures. The section derives from paragraph 5 of Schedule 6 to ICTA.

511.Subsection (1) refers to the CO2 emissions figures of a bi-fuel car by reference to the appropriate European or United Kingdom certification schemes that were in place at the time of a first registration after 31 December 1999.

512.Subsection (2) determines which figure must be used.

513.Subsection (3) makes this section subject to a further rule that applies to the provision of an automatic car for an employee who is disabled.

Section 138: Car with a CO2 emissions figure: automatic car for a disabled employee

514.This section gives a special rule for identifying the CO2 emissions figure for an automatic car provided for a disabled employee. The section derives from paragraph 5A(1), (2), (3) and (4) of Schedule 6 to ICTA.

515.The CO2 emissions figure for an automatic car is generally higher than for its manual equivalent. So as not to penalise a disabled employee whose disablement means that the car he or she drives must have an automatic gearbox, this section provides that the CO2 emissions figure to be used is that of the nearest equivalent manual version of the car.

516.Subsection (1) states when the section applies. This subsection refers to the employee as “E” to avoid repeated use of the word “employee”.

517.Subsection (2) provides for the substitution of the CO2 emissions figure of the manual equivalent of the automatic car if it is lower.

518.Subsection (3) defines “equivalent manual car”.

519.Subsection (4) defines a car with automatic transmission. This subsection incorporates a suggestion made during the process of consultation leading up to this Act. The definition turns on the central idea that an automatic car is a car that does not have a clutch needing to be operated by some physical action by the driver.

520.Subsection (5) avoids the use of the phrase “the employee’s employment”. This provision contrasts with section 116(1) of this Act in that it only applies to a car made available to the employee personally and not to members of the employee’s family or household.

Section 139: Car with a CO2 emissions figure: the appropriate percentage

521.This section identifies the “appropriate percentage” to be used at Step 6 in section 121(1) of this Act to calculate the cash equivalent for a car that has a CO2 emissions figure. The section derives from paragraphs 3(3), (4) and (5), and 4(1) and (3) of Schedule 6 to ICTA.

522.Subsection (1) states the starting point for arriving at the appropriate percentage, which is the car’s CO2 emissions figure.

523.Subsection (2) gives the appropriate percentage if the car’s CO2 emissions figure is no higher than “the lower threshold”. This is the “basic percentage”, initially set at 15%.

524.Subsection (3) gives the appropriate percentage if the car’s CO2 emissions figure is higher than “the lower threshold”. The basic percentage is increased by one percentage point for each additional (full) five grams per kilometre of CO2 emitted, up to a maximum appropriate percentage of 35%. The reference in paragraph 3(4) to “the basic percentage increased by 1%” is rewritten as “the basic percentage increased by one percentage point”. That makes the intention of the legislation clearer, as it avoids any suggestion that the “minimum percentage” must be increased by 1% of itself (to 15.15%).

525.Subsection (4) states what is “the lower threshold” for different tax years.

526.Subsection (5) provides for the rounding down of the car’s CO2 emissions figure to the nearest multiple of five. Its effect is that the basic percentage is increased under subsection (3)(a) by one percentage point only for every additional full five grams per kilometre of CO2 emitted.

527.Subsection (6) makes the section subject to other provisions relating to diesel cars and to Treasury powers to amend the amounts involved.

Section 140: Car without a CO2 emissions figure: the appropriate percentage

528.This section gives the “appropriate percentage” to be used at Step 6 in section 121(1) of this Act to calculate the cash equivalent for a car first registered after 31 December 1997 that does not, for whatever reason, have a CO2 emissions figure. The section derives from paragraphs 5C(2), (3) and (4) and 5G of Schedule 6 to ICTA.

529.Subsection (1) applies the section to determine the appropriate percentage for cars without a CO2 emissions figure. They include, for example, electrically propelled cars and cars with an internal combustion engine that does not have one reciprocating piston or more.

530.Subsection (2) applies to cars with an internal combustion engine that does have one reciprocating piston or more. The appropriate percentage increases with engine size.

531.Subsection (3) gives the appropriate percentage for cars not within subsection (2).

532.Subsection (4) defines an “electrically propelled vehicle” for the purposes of this section.

533.Subsection (5) makes the section subject to other provisions relating to diesel cars and to any regulations made under Treasury powers to amend the amounts involved.

Section 141: Diesel cars: the appropriate percentage

534.This section gives the “appropriate percentage” to be used at Step 6 in section 121(1) to calculate the cash equivalent for a diesel car. The section derives from paragraph 5D(1), (2) and (4) of Schedule 6 to ICTA.

535.Subsection (1) states to which cars the section applies, namely diesel cars first registered after 31 December 1997.

536.Subsection (2) uses a method statement to set out the steps in the calculation of the appropriate percentage.

537.Subsection (3) defines “diesel car” for the purposes of this section.

538.Subsection (4) makes the section subject to any regulations made under Treasury powers to amend the amounts involved.

Section 142: Car first registered before 1st January 1998: the appropriate percentage

539.This section gives the “appropriate percentage” to be used at Step 6 in section 121(1) of this Act to calculate the cash equivalent for a car registered before 1 January 1998. Such cars are less likely to have a recognised CO2 emissions figure, so a different and consistent basis is used for all such cars. The section derives from paragraphs 5F(1), (2) and (3) and 5G of Schedule 6 to ICTA.

540.Subsection (1) states to which cars the section applies, namely those first registered before 1 January 1998.

541.Subsection (2) applies to cars with an internal combustion engine that has one reciprocating piston or more. The appropriate percentage increases with engine size. For cars driven by an internal combustion engine with one reciprocating piston or more the “appropriate percentage” is the same, irrespective of the fuel used.

542.Subsection (3) gives the appropriate percentage for cars not within subsection (2).

543.Subsection (4) defines an “electrically propelled vehicle” for the purposes of this section.

Section 143: Deduction for periods when car unavailable

544.This section quantifies a deduction that can be made at Step 7 of section 121(1) of this Act in calculating the cash equivalent, because a car is not available at some time during the tax year. The section derives from part of paragraph 6 and paragraph 9 of Schedule 6 to ICTA.

545.Subsection (1) provides for the deduction.

546.Subsection (2) defines the periods of non-availability. They cover the period from the beginning of the tax year involved to the date on which the car first became available and the period from the date when the car ceased permanently to be available to the end of the tax year. There can also be one or more periods of temporary non-availability for each period of continuous non-availability of 30 days or more. Such periods can span two tax years, ie the 30 days or more do not have to fall wholly within one tax year.

547.Subsection (3) gives a formula to calculate the appropriate deduction.

548.Subsection (4) makes this section subject to a further provision that applies if the car is temporarily replaced.

Section 144: Deduction for payments for private use

549.This section provides for a deduction to be made in calculating the cash equivalent at Step 8 of section 121(1) of this Act, to take account of the employee having paid for private use of the car. The section derives from paragraph 7 of Schedule 6 to ICTA.

550.Subsection (1) states when the section applies. That is when, as a condition of the car being made available for private use, the employee is required to pay, and does pay, for that private use.

551.The words “(whether by way of deduction from earnings or otherwise)” have been retained as they remove a potential area of doubt about whether a deduction from earnings can amount to a payment. The same approach is used in sections 159(1)(a) and 165(1)(a) of this Act.

552.Subsections (2) and (3) provide for the deduction of the appropriate amount at Step 8 of the calculation in section 121(1).

553.Subsection (4) extends the section to private use of a car by a member of the employee’s family or household.

554.Subsection (5) makes this section subject to a further provision that applies if the car is temporarily replaced.

Section 145: Modification of provisions where car temporarily replaced

555.This section modifies the effect of the two previous sections if a car is temporarily replaced. The section derives from the Income Tax (Replacement Cars) Regulations 1994 (SI 1994 No 778). Those Regulations were made under powers provided by paragraph 8 of Schedule 6 to ICTA. As there is no longer any reason to retain those powers, that paragraph has not been rewritten.

556.Subsections (1) to (3) deal with the conditions to be met for the section to apply. Condition A in subsection (2) relates to the quality of the replacement car as compared with the car it replaces. This Act uses a slightly different form of wording from the source legislation. See Change 25 in Annex 1.

557.Subsection (4) makes the necessary modifications to sections 143 and 144 of this Act when this section applies.

558.Subsection (5) defines “materially better”. The possible introduction of a numerical measure of improvement (a maximum percentage increase above the interim sum, for example) to remove the inherent uncertainty of “materially” was considered but rejected. That approach might produce “hard cases”. It is better to retain the flexibility that a common sense interpretation of “materially” allows.

Section 146: Cars that run on road fuel gas

559.This section provides for a deduction to be made from the price of the car at Step 1 of the calculation of the cash equivalent in section 121(1) of this Act if the car has been manufactured to run on road fuel gas and is not a bi-fuel car. The deduction that can be made is the amount that is reasonably attributable to the car being manufactured to run on road fuel gas, rather than only on petrol. The section derives from section 168AB(2) and (4) of ICTA.

560.Subsection (1) states when the section applies.

561.Subsection (2) provides for the appropriate deduction from the price arrived at after Step 1 of the calculation in section 121(1). This is a slight variation on the calculation used in the source legislation. See Change 26 in Annex 1.

Section 147: Classic cars: 15 years of age or more

562.This section provides for modifications to the calculation of the cash equivalent of the car benefit in section 121(1) of this Act if the car is a classic car. The section derives from section 168F(1) to (8) of ICTA.

563.The section heading emphasises that the provision applies to modern classics as well as to vintage or veteran cars.

564.Subsection (1) states when the section applies by reference to the age and market value of the car. A car that is 15 or more years old, with a market value of £15,000 or more and in excess of the amount carried forward from Step 3 of the “normal” calculation in section 121(1) falls within this provision.

565.Subsection (2) applies the modification provided for in this section to the calculation in section 121(1). This is the substitution of the market value (after adjustment for any capital contributions by the employee) of the car on the last day of the tax year involved (or the last day the car is available to the employee in that year, if earlier) for the amount arrived at after Step 3 under the normal calculation method.

566.Subsections (3) and (4) define the market value of the car.

567.Subsections (5) to (7) provide for a deduction (limited to £5,000 in any tax year) from the market value to reflect any capital contributions by the employee.

Section 148: Reduction of cash equivalent where car is shared

568.This section provides for a reduction of the cash equivalent of the benefit of a car where that car is shared by at least two employees who are chargeable to tax in respect of its availability. This section derives from paragraph 3 of ESC A71.

569.The concession was couched in terms of the apportionment of “a single car benefit charge”. This Act adopts a different approach by providing for a reduction of the relevant cash equivalent for each employee to whom the section applies. See item B of Change 27 in Annex 1.

570.This section, by virtue of the provisions in section 5, applies to office-holders as well as employees. See item D of Change 27 in Annex 1.

571.Subsection (1) states when the section applies. That is when two or more employees are chargeable to tax in respect of the provision of the car (of which they each have shared private use) by their employer. No reduction will be necessary if the car is shared between one such an employee and another employee who is not chargeable in respect of the provision of the car. That is because there will be only one cash equivalent arising from the provision of the car.

572.Converting the concession to legislation has produced a subtle change to how section 218 of this Act (which determines whether an employee is lower-paid) will apply, compared with how the source legislation in section 167(2) of ICTA worked with the concession. See item C of Change 27 in Annex 1.

573.Subsection (2) provides for the reduction of each employee’s cash equivalent of the car benefit, initially calculated ignoring the fact that the car is shared, on a just and reasonable basis. See item B in Change 27 in Annex 1.

574.Subsection (3) modifies how subsection (2) is to be interpreted.

575.Subsection (4) extends the section to cover private use of a car by a member of the employee’s family or household.

Section 149: Benefit of car fuel treated as earnings

576.This section brings into charge, as an employee’s earnings, the cash equivalent of the benefit arising from the provision of fuel for a car to which section 120 of this Act applies. The section derives from section 158(1), (9) and part of (3) of ICTA.

577.Subsection (1) states the main principle, which is that any fuel benefit associated with a car benefit is taxed as earnings. The rewrite of the source legislation has clarified the timing of the charge. See Note 7 in Annex 2.

578.Subsection (1)(b) now refers to “that person”, rather than “the employee” to avoid a repetitive reference to “the employee” that might have been regarded as indicating that the car must have been made available by reason of the same employment as that providing the car fuel. There is no such stipulation on the face of section 158(1) of ICTA.

579.Subsection (2) applies the provisions that determine how the cash equivalent of the fuel benefit is calculated.

580.Subsection (3) gives examples of what constitutes the provision of fuel. The definitions of “non-cash voucher” and “credit-token” used in subsection (3)(b) and (3)(c) are listed in Schedule 1 to this Act.

581.Subsection (4) excludes the provision of electrical energy from the benefit charge.

Section 150: Car fuel: calculating the cash equivalent

582.This section defines the cash equivalent of the benefit of the provision of car fuel. The section derives from section 158(2) of ICTA.

583.Subsection (1) gives the basis of calculation, which is to take the “appropriate percentage” of £14,400.

584.Subsection (2) states the meaning of “appropriate percentage” in this section. That is the same percentage as is used to calculate the cash equivalent of the car for which the fuel is provided.

585.Subsection (3) gives signposts to three sections that modify the cash equivalent in particular circumstances.

Section 151: Car fuel: nil cash equivalent

586.This section prevents a benefits charge when there is no private use of fuel or the employee pays for the private use. The section derives from section 158(6) of ICTA.

587.Subsection (1) provides that the cash equivalent will be nil if either of the conditions defined in subsections (2) or (3) is met.

588.Subsection (2) applies to cases where the employee is required to pay for, and does pay for, all fuel for private use.

589.Subsection (3) applies when fuel is provided only for business travel.

Section 152: Car fuel: proportionate reduction of cash equivalent

590.This section provides for a proportionate reduction in the cash equivalent of the fuel benefit for particular circumstances, which may apply during part of a tax year. This section derives from section 158(5), (6A), (6B), and (8) of ICTA.

591.Subsection (1) applies when the car for which the fuel is provided is unavailable.

592.Subsection (2) covers circumstances where the fuel is not available for private use or its cost has to be and is reimbursed by the employee.

593.Subsection (3) is to prevent unintended advantage being obtained from the legislation by repeated changes in the circumstances that apply to the provision of the fuel.

594.Subsection (4) gives a formula to calculate the reduced cash equivalent. The formula uses “Y”, defined as “the number of days in the tax year in question”, instead of the fixed figure of “365” in the source legislation. That copes automatically with leap years. See item A of Change 28 in Annex 1.

Section 153: Car fuel: reduction of cash equivalent

595.This section provides for a reduction of the cash equivalent of the fuel benefit in certain circumstances when a car is shared. The section is new. It is an extension of the change referred to in paragraph 569. See items B and D of Change 27 in Annex 1.

Section 154: Benefit of van treated as earnings

596.This section states the principle that the cash equivalent of the benefit arising from the provision of a van is treated as the employee’s earnings from the employment. The section reflects the approach in section 120 of this Act, the corresponding section for cars. The section derives from section 159AA(1) of ICTA. The rewrite of the source legislation has clarified the timing of the charge. See Note 7 in Annex 2. See also item A of Change 2 in Annex 1 in relation to when the earnings are treated as received.

Section 155: Method of calculating the cash equivalent of the benefit of a van

597.This section states the principles involved in calculating the cash equivalent of the benefit of a van. The section derives from paragraphs 1(1), 4(1) and 5(6) and (10) of Schedule 6A to ICTA.

598.Subsection (1) states the starting point of the calculation. That is whether or not the van is shared at any time in the tax year.

599.Subsection (2) identifies the provision that contains the basis of calculation that applies if the van was not a shared van, as defined in section 156 of this Act, for any period in the tax year.

600.Subsection (3) identifies the provision that contains the basis of calculation that applies if the van was a shared van, as defined in section 156, for the whole of the tax year.

601.Subsection (4) applies when the van is shared for only part of the year, and simplifies the proposition set out in the source legislation. See item C of Note 17 in Annex 2.

602.Subsections (5) and (6) make it clear which vans are counted in the calculation of the value of shared availability under, respectively, the normal and alternative methods of calculation.

603.Subsection (7) states the rule for calculating the total value of shared availability when an employee shares more than one van.

604.Subsection (8) gives a signpost to a section that imposes an overall limit on the cash equivalent of the benefit arising from the provision of a van or vans.

Section 156: Meaning of “shared van”

605.This section defines the term “shared van”. The section derives from paragraph 4(2), (3), (4) and (5) of Schedule 6A to ICTA.

606.Subsections (1) to (3) determine, for the purposes of sections 155 to 165 of this Act, whether a van is a “shared van”. Subsection (3)(a) emphasises, by its reference to “different employees”, that it denotes a group of employees that may vary over the period.

607.Subsection (4) provides that if a van is available to only one employee for a period of 30 days or more the van will not count as a “shared van” for that period.

608.Subsection (5) requires shared use for any part of a day to be counted as shared use for that day.

Section 157: Value of exclusive availability

609.This section gives the value of the benefit of a van that is available to only one employee. It sets out the steps involved in the calculation using a method statement. The section derives from paragraph 1(2) and parts of paragraphs 2(1) and 3(1) of Schedule 6A to ICTA.

Section 158: Deduction for periods of unavailability or shared use

610.This section provides for an adjustment of the value calculated under section 157 if the van is not available or is shared for any period in the tax year. The section derives from parts of paragraph 2(1) and from paragraph 2(2) and (3) of Schedule 6A to ICTA.

611.Subsection (1) provides for a deduction to be made from the value calculated at Step 2 of section 157 when there are “excluded days” in relation to the van.

612.Subsection (2) defines “excluded days” as days when the van is unavailable or shared.

613.Subsection (3) gives a formula to calculate the deduction. The formula uses “Y” for the number of days in the year instead of “365” in the source legislation. This is the same change in principle as that described in paragraph 594. See item A of Change 28 in Annex 1.

614.Subsection (4) defines the periods of non-availability. Apart from periods relating to the van first being available or ceasing finally to be available, such periods must last for a continuous period of at least 30 days. They can run from the beginning of the tax year involved to the date on which the van first became available or from the date when the van ceased permanently to be available to the end of that tax year. There can also be one or more periods of temporary non-availability for each continuous period of 30 days or more. Such periods can span two tax years, ie the period of 30 days or more does not have to fall wholly within one tax year.

Section 159: Deduction for payments for private use

615.This section provides for adjustment of the value calculated under section 157 of this Act for payments made by the employee for private use of a van. The section derives from paragraph 3(1), (2) and (3) of Schedule 6A to ICTA.

616.Subsection (1) states when the section applies. That is when, as a condition of the van being made available for private use, the employee is required to pay for, and does pay for, that use. The words “(whether by way of deduction from earnings or otherwise)” avoid any doubt about whether a deduction from earnings can amount to a payment. The same approach is used in sections 144(1)(a) and 165(1)(a) of this Act.

617.Subsections (2) and (3) provide for the deduction of the appropriate amount at Step 4 of the calculation in section 157.

618.Subsection (4) specifies that for cases where the van is shared for part of the tax year, the deduction relates to the period(s) when it is not shared.

619.Subsection (5) extends the section to private use of a van by a member of the employee’s family or household.

Section 160: Value of shared availability

620.This section introduces the two methods of calculating the value of shared availability, the second of which has to be claimed by the employee. This section is new.

Section 161: Value of shared availability: normal calculation

621.This section gives the normal rule used to calculate the value of the shared availability of one or more vans. The section derives from paragraphs 5(1), (4) and (5), 7 and part of paragraph 9(1) of Schedule 6A to ICTA.

622.Subsection (1) sets out the steps involved in the calculation using a method statement. This is the calculation that applies if the employee does not claim the alternative calculation under section 164 of this Act.

623.The words in parentheses in Step 1 make it clear that “made available by the same employer” means made available to any of the participating employees, whether or not including the one whose liability is being calculated.

624.The second sentence at the end of Step 2 states explicitly what was formerly implicit. See item B of Note 17 in Annex 2.

625.Subsection (2) focuses primarily on the employee whose tax liability is being calculated, rather than on all the shared vans and all the participating employees in relation to those vans. See item A of Note 17 in Annex 2.

Section 162: Shared van: meaning of “participating employee”

626.This section defines the term “participating employee”, which is used in section 161. The section derives from paragraph 5(2) and (3) of Schedule 6A to ICTA.

627.Subsection (1) applies when only one van is involved.

628.Subsection (2) applies when more than one van is involved.

629.Subsection (3)(a) and (b) extends the section to private use of a van by a member of the employee’s family or household.

Section 163: Shared van: basic value

630.This section provides for the calculation of the basic value of a shared van. The section derives from paragraph 6(1), (2), (3) and (4) of Schedule 6A to ICTA.

631.Subsection (1) sets out the steps involved in the calculation using a method statement. The value that is calculated is applied at Step 4 of section 161 of this Act.

632.In subsection (1) the formula at Step 3 provides for adjustments to the basic value for periods when the van was not a shared van and for any period of 30 days or more when it was incapable of use. The formula uses “Y” for the number of days in the year instead of “365” in the source legislation. This is the same change in principle as that described in paragraph 594. See item A of Change 28 in Annex 1.

633.Subsections (2) and (3) identify the days that must be excluded at Step 3.

Section 164: Value of shared availability: alternative calculation

634.This section provides for an alternative way to calculate the value of the shared availability of a van. The section derives from paragraph 8(2), (3) and (4) and parts of paragraph 8(1) and 9(1) of Schedule 6A to ICTA. Paragraph 8(1)(a) of Schedule 6A to ICTA has not been rewritten, as it is no longer necessary.

635.Subsection (1) applies the section only when an employee makes a claim for it to apply instead of section 161 of this Act (value of shared availability: normal calculation).

636.Subsection (2) sets out the steps involved in the calculation using a method statement. Step 1 (b) excludes vans other than vans made available to the employee and the employee’s family or household. That is because subsection (3)(b) defines relevant days, an essential part of the calculation, by reference only to vans made use of privately by the employee or a member of the employee’s family or household.

637.Subsection (3) identifies the days that must be counted in the formula at Step 3 of subsection (2).

638.Subsection (4) provides that a claim under this section is treated under section 95 of TMA 1970 as a claim for relief. Section 42 of TMA 1970 applies to this claim.

Section 165: Deduction for payments for private use

639.This section provides for an adjustment to the value of the shared van availability to take account of payments the employee makes for the private use of a shared van. The section derives from paragraph 9(2) and (3) and part of paragraph 9(1) of Schedule 6A to ICTA.

640.Subsection (1) provides that a deduction is to be made in the calculations in section 161 or section 164 of this Act if the employee is required to pay, and does pay, for private use. The words “(whether by way of deduction from earnings or otherwise)” avoid any doubt about whether a deduction from earnings can amount to a payment. This follows the approach that is used in sections 144(1)(a) and 159(1)(a) of this Act.

641.Subsections (2) to (4) state how to calculate the deduction. The wording of these subsections closely follows that of the source legislation. The possible argument that subsection (4) operates to prevent any deduction at all where a global sum is paid for private use of any of the vans was considered. Such a restrictive interpretation would be unreasonable. It is better not to complicate further these already complex provisions by seeking to address this subtle point. It can be dealt with using the “care and management” provisions in section 1 of TMA 1970.

642.Subsection (5) extends the section to private use by a member of the employee’s family or household.

Section 166: Vans: limit of cash equivalent

643.This section sets a maximum cash equivalent on an employee’s van benefit for a tax year, in particular circumstances. The section derives from paragraph 11 of Schedule 6A to ICTA.

644.The limit applies only if no more than one van is available, for private use, to the employee or the employee’s family or household at any one time in the tax year.

Section 167: Pooled cars

645.This section determines how pooled cars are treated under the benefits provisions. The section derives from section 159(1), (2) and (3) of ICTA.

646.Subsection (1) applies the provisions to a car that is a pooled car.

647.Subsection (2) treats pooled cars as not having been available for private use of any of the employees concerned. It also prevents them from being treated as an employment-related benefit for the purposes of Chapter 10 of Part 3 of this Act. See Note 18 in Annex 2.

648.Subsection (3) sets out the conditions for a car to be treated as a pooled car.

649.Subsection (3)(b) uses the term “the employee’s employment”. Generally use of that term has been avoided but here it helps clarity.

Section 168: Pooled vans

650.This section determines how pooled vans are treated under the benefits provisions. This section works in relation to vans as section 167 works in relation to cars. This section derives from section 159AB of ICTA.

651.Subsection (1) applies the provisions to a van that is a pooled van.

652.Subsection (2) treats pooled vans as not having been available for private use of any of the employees concerned. It also prevents them from being treated as an employment-related benefit for the purposes of Chapter 10 of Part 3 of this Act. See Note 18 in Annex 2.

653.Subsection (3) sets out the conditions for a van to be treated as a pooled van.

654.Subsection (3)(b) uses the term “the employee’s employment”. Generally use of that term has been avoided but here it helps clarity.

Section 169: Car available to more than one member of family or household employed by same employer

655.This section removes a car or car fuel benefit charge on an employee who would otherwise be taxed on the car benefits relating to a member of his or her family or household. The section derives from paragraphs 1 and 2 of ESC A71. See items A and D of Change 27 in Annex 1.

656.Subsection (1) states the circumstances in which the section can apply.

657.Subsection (2) removes the tax charge on the employee in two specified cases.

658.Subsection (2)(a) specifies the first case, which is when the family or household member is chargeable on the benefit in his or her own right.

659.Subsections (2)(b)(3) and (4) specify the second case, which is when the family or household member is not chargeable on the benefit in his or her own right and the car is provided for reasons that do not arise out of the family or household relationship.

Section 170: Orders etc. relating to this Chapter

660.This section provides the Treasury with powers to make regulations affecting the legislation in this Chapter. It brings together various provisions from various individual sections dealing with different aspects of car and van benefit charges in the source legislation. The section derives from sections 158(4), 168C(5), 168D(6), 168F(11) and 168G(2) of ICTA and from paragraphs 4(2) and 5E of Schedule 6 to ICTA.

661.The wording of subsection (2) has not been aligned with subsection (6). The section accurately reproduces the legislation from which it derives and further internal alignment could, in certain cases, work against the taxpayer’s interests, as for example in section 132(3)(b) and section 147(1)(b) of this Act.

Section 171: Minor definitions: general

662.This section gives definitions of terms that are used widely in this Chapter. The section derives from parts of sections 168(5) and (5A), 168A(9), 168AA(3), and 168AB(3) of ICTA and from paragraphs 5A(5), 5B and 5D(3) of Schedule 6 to ICTA.

Section 172: Minor definitions: equipment to enable a disabled person to use a car

663.This section brings together the definitions that relate specifically to a car available for use by a disabled person. The section derives from section 168AA(1) and (2) of ICTA.

Chapter 7: Taxable Benefits: Loans
Overview

664.This Chapter deals with the benefits that may arise from loans obtained by reason of an employee’s employment. These benefits may be due to a low rate of interest charged on the loan, or the writing off of a loan. The cash equivalent of the benefit of a loan is treated as earnings of the employee’s employment.

Section 173: Loans to which this Chapter applies

665.This section describes the loans to which the Chapter applies. It derives from section 160 of ICTA.

666.Subsection (1) applies this Chapter to loans if they are employment-related.

667.Subsection (2) defines “loan” and sets out what is meant by making a loan.

668.Subsection (3) is a reminder that sections 288 and 289 of this Act (limited exemption for certain bridging loans connected with employment moves) may mitigate the charge under these provisions.

Section 174: Employment-related loans

669.This section sets out the basis on which a loan comes within the provisions of this Chapter. It derives from sections 160 and 161 of and paragraphs 1 and 2 of Schedule 7 to ICTA.

670.Subsection (1) describes loans which are employment-related. The fact that the loan is made to “an employee or a relative of an employee” indicates that at the time the loan is made there must be an employment.

671.Subsection (2) defines “employment-related loans” and the working of this subsection is illustrated by the flow diagram on page 76.

672.Subsection (3) provides that if a loan is made to an employee in anticipation of the employment commencing it is an employment-related loan, provided the employment is taken up. It derives from paragraph 2 of Schedule 7 to ICTA.

673.Subsection (4) provides that loans made by a person who was not the original lender or who facilitates the continuation of an existing loan fall within the section.

674.Subsection (5) excludes from the charge certain loans of a personal or domestic nature.

675.Subsection (6) defines what is meant by a “relative” for the purposes of the section.

Section 175: Benefit of taxable cheap loan treated as earnings

676.This section brings within the charge to tax the benefit arising on certain employment-related loans (each of which is referred to as a “taxable cheap loan”) on which no interest is paid or interest is paid at a low rate.

677.Subsections (1) and (2) provide that the cash equivalent of the benefit of a taxable cheap loan is treated as earnings from an employment. They also describe the circumstances in which an employment-related loan is a “taxable cheap loan”. They derive from section 160(1) of ICTA. Subsection (1) sets out for which year the cash equivalent is to be treated as earnings. See Note 7 in Annex 2.

678.Subsection (3) gives the broad rule for computing the cash equivalent of the benefit. Subsection (4) provides that in considering whether a loan falls within this Chapter it must be looked at separately from any other loan. They derive from section 160(4) and paragraph 3(1) of Schedule 7 to ICTA.

679.Subsection (5) is a signpost to section 180 of this Act (threshold for benefit of loan to be treated as earnings) which sets out the £5,000 threshold and to section 186 of this Act (replacement loans) which makes an exception to subsection (4).

Section 176: Exception for loans on ordinary commercial terms

680.This section deals with employers whose business includes the lending of money by preventing loans made on ordinary commercial terms from being taxable cheap loans. It derives from section 161B of, and Schedule 7A to, ICTA.

681.Subsection (1) provides that a loan on commercial terms is not a taxable cheap loan.

682.Subsection (2) provides a definition of “loan on ordinary commercial terms” which includes three conditions.

683.Subsections (3) to (7) set out those conditions and define terms used in them.

684.Subsection (8) provides that certain incidental expenses are to be ignored in determining, for the three conditions in subsection (2), whether loans are made or exercisable on the same terms or conditions.

685.Subsection (9) requires that certain amounts arising from variation of a loan are ignored for the purposes of ascertaining, for the second and third conditions, whether loans are held or exercised on the same terms.

686.Subsection (10) defines “member of the public” for the purposes of this section.

Section 177: Exceptions for loans at fixed rate of interest

687.This section exempts certain types of fixed interest loan. It derives from section 161(2) and (3) of ICTA.

688.Subsection (1) applies to loans made on or after 6 April 1978 at fixed rates for fixed periods. It applies when there is an increase in the official rate of interest for a year subsequent to that in which the loan was made. When that happens a calculation under section 182 or section 183 of this Act might show that the interest paid on the loan was less than what would have been paid if the official rate of interest had applied to the loan. In such a case, provided nothing other than the official rate of interest has changed, and provided the condition in subsection (2) is met, the loan is not to be regarded as a taxable cheap loan.

689.Subsection (2) provides as a condition for subsection (1) that the interest paid on the loan for the year in which it was made was not less than what would have been paid at the official rate for that year.

690.Subsection (3) exempts fixed rate loans from being taxable cheap loans if they were made before 6 April 1978, when there was no official rate of interest, and the condition in subsection (4) applies.

691.Subsection (4) sets out the condition for subsection (3), that the interest should be at an arm’s length rate when the loan was made.

692.Subsection (5) defines “fixed rate loan”.

Section 178: Exceptions for loans where interest qualifies for tax relief

693.This section provides that loans which would qualify for tax relief in a tax year if interest were paid on them are not taxable cheap loans for that year. Paragraphs (a) to (d) set out the types of interest. It derives from section 161A(2) of ICTA.

Section 179: Exception for certain advances for necessary expenses

694.This section provides that, where certain conditions are met, small temporary advances of expenses by an employer to an employee for necessary expenditure are not taxable cheap loans. It derives from Inland Revenue Statement of Practice 7/79. It is a minor change to law. See Change 29 in Annex 1.

695.Subsection (1) provides that advances by an employer to an employee for necessary or incidental overnight expenses are not taxable cheap loans where certain conditions are met. Subsection (2) sets out those conditions.

696.Subsections (3) and (4) provide that the limits for two of the conditions can be extended.

697.Subsections (5) to (7) define terms used.

Section 180: Threshold for benefit of loan to be treated as earnings

698.This section prevents a tax charge on small amounts by providing a £5,000 threshold which applies in two circumstances. It derives from sections 161 and 161A(1) of ICTA.

699.Subsection (1) sets out the circumstances in which the cash equivalent is not treated as earnings.

700.Subsection (2) provides that all taxable cheap loans are aggregated to find whether the normal £5,000 threshold is exceeded for the purposes of subsection (1)(a).

701.Subsection (3) describes how the alternative threshold in subsection (1)(b) is calculated. This applies when the loan is a non-qualifying loan and total taxable cheap loans exceed the threshold. If qualifying loans are deducted and the total is then less than £5,000 the cash equivalent of the non-qualifying loans is not treated as earnings. That reflects the Inland Revenue practice of ignoring excepted loans and is a minor change to the law. See Change 30 in Annex 1.

702.Subsections (4) and (5) define “non-qualifying loan” and “qualifying loan”.

Section 181: The official rate of interest

703.This section provides for the setting of the official rate of interest under section 178 of FA 1989 and allows special rates to be used for foreign currency loans. It derives from section 160(5) of ICTA.

704.Subsection (1) defines “the official rate of interest”.

705.Subsection (2) allows regulations made under section 178 of FA 1989 to specify a different official rate in the case of loans in another currency. “Normally lives” and “has lived at some time” are not defined in section 160(5) of ICTA. They therefore take their normal meaning. SE 26105 in the Inland Revenue Schedule E Manual provides guidance on this.

706.Subsection (3) provides that the power given under subsection (2) does not affect the general power under section 178 of FA 1989 to make different provisions.

Section 182: Normal method of calculation: averaging

707.This section sets out the normal method for calculating the amount of interest that would be payable at the “official rate for a tax year” by the averaging method. It derives from paragraph 4(1) of Schedule 7 to ICTA.

708.This method of calculation does not explicitly apply in deciding whether a loan is within sections 160(1) or 161(2) of ICTA, although it is applied for those purposes in practice. Stating that the methods of calculation are used for all purposes of this Chapter legislates that practice. This is a minor change to the law. See Change 31 in Annex 1.

709.A method statement sets out how to do the calculation, which applies the average official rate for the period to the average amount outstanding to arrive at the notional interest for that period.

Section 183: Alternative method of calculation

710.This section allows the use of a more precise method of calculating the interest at the official rate on a loan than the method given in section 182. It derives from paragraphs 5 and 5A of Schedule 7 to ICTA.

711.Subsection (1) allows either the Inland Revenue or the employee to choose this method of calculation. This is for the purposes of the Chapter and is not confined to the calculation of the cash equivalent. See Change 31 in Annex 1. For the reference to the Inland Revenue see Change 158 in Annex 1.

712.Subsection (2) sets out the time limit for making the election. This is different from the way the limit is expressed in paragraph 5(2) of Schedule 7 to ICTA which provides that the election must be made “before” the end of the period of 12 months beginning with 31 January following the end of the tax year. This subsection allows it to be made “on or before” that date. This is a minor change to the law. See Change 32 in Annex 1.

713.Subsection (3) shows the calculation as a method statement. This arrives at the precise amount of interest on a day-to-day basis using the exact amount of the loan outstanding for each day. In paragraph 5(3)(c) of Schedule 7 to ICTA the total is divided by 365 days. As in a leap year the daily total would be based on 366 days, this subsection divides the total by the number of days in the tax year. This is a minor change to the law. See Change 28 in Annex 1.

714.Subsection (4) requires that the alternative method should apply in certain circumstances where the cash equivalent of the benefit on the same loan is treated as the earnings of two or more employees.

Section 184: Interest treated as paid

715.This section treats the cash equivalent of an employment-related loan as if it were interest paid so that tax relief can be given where the loan is for a qualifying purpose. It derives from parts of section 160(1) and section 160(1A) of ICTA.

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

717.Subsection (2) treats the employee as having paid interest equal to the cash equivalent of the benefit.

718.Subsection (3) prevents a claim that the interest should be treated as paid and so qualify as a deduction from the amounts treated as earnings by another chapter of the benefits code.

719.Subsection (4) provides the mechanism for allocating to a tax year the cash equivalent to be treated as interest.

720.Subsection (5) makes it clear that, although the cash equivalent is treated as if it were interest paid by the employee, it is not treated as interest received by the lender.

Section 185: Apportionment of cash equivalent in case of joint loan etc.

721.This section allows the apportionment of the cash equivalent of a loan between two or more employees who are chargeable under this Chapter in respect of the same loan. It derives from paragraph 5A(1) of Schedule 7 to ICTA.

Section 186: Replacement loans

722.This section prevents manipulation of the averaging method in section 182 of this Act where a loan which is later replaced is repaid part way through the month. So that complete months are included in the calculation the section treats the replacement loan as the original loan. It derives from paragraph 4(2) to (4) of Schedule 7 to ICTA.

723.Subsection (1) sets out the circumstances in which the provisions apply and deals with both the replacement by a further employment-related loan and the insertion of a loan which is not employment-related between two that are.

724.Subsection (2) treats all loans falling within subsection (1) as if they were one continuous loan.

725.Subsection (3) follows the practice of applying the treatment of one continuous loan not just to the calculation of the official rate of interest which would be paid for the year but also to any interest paid on the loans for the purpose of calculating the cash equivalent. This is a minor change to the law. See Change 33 in Annex 1.

726.Subsection (4) defines “further employment-related loan”.

Section 187: Aggregation of loans by close company to director

727.This section provides for the aggregation of certain loans on an election where the borrower is a director of a close company which is the lender. It derives from section 160(1B) and (1BA) of ICTA.

728.Subsection (1) sets out the circumstances when the section applies.

729.Subsection (2) allows the lender to elect for aggregation for a tax year to apply to the borrower.

730.Subsection (3) explains the effect of the election.

731.Subsection (4) places a restriction on which loans may be aggregated.

732.Subsection (5) says by whom and how and within what time limit the election may be made. See Change 158 in Annex 1 regarding the reference to “the Inland Revenue”.

Section 188: Loan released or written off: amount treated as earnings

733.This section treats employment-related loans which are released or written off as earnings. It derives from section 160 of ICTA.

734.Subsection (1) applies in the case of a continuing employment and treats the amounts written off as earnings for the year in which the loan is released or written off. It derives from section 160(2) but that section does not specify the tax year. See Note 7 in Annex 2.

735.Subsection (2) applies subsection (1) where an employment-related loan is released or written off after the employment has ceased or at a time when the employee is lower-paid in accordance with Chapter 11 of Part 3 of this Act. If the employment has ceased there is no taxable employment and the section would not apply. Deeming that the employment has not ceased allows the section to apply in the case of a release or writing off for the year in which the event occurs. It is also necessary for the employment to be one which is not an “excluded employment”; otherwise the section would not apply. Where the employment has become an “excluded employment” this subsection deems it not to be “excluded”. This derives from section 160(3) of ICTA.

736.Subsection (3) preserves chargeability where subsection (2) applies and a loan replaces the employment-related loan. It derives from section 160(3A) of ICTA.

Section 189: Exception where double charge

737.This section ensures that where the release or writing off of a loan might be chargeable to tax under other provisions there is only one charge to tax. It derives from section 161(5) of ICTA.

738.Subsection (1) provides the general rule that if another provision in the Income Tax Acts applies this section does not.

739.This clarifies the position that there will be no double charge if a loan made to a participator in a close company is written off and section 421 of ICTA applies. It is a minor change to the law. See Change 34 in Annex 1.

740.Subsections (2) and (3) provide exceptions to subsection (1). In both cases it is made explicit which provision takes precedence when there is a possible double charge. This change in approach is described more fully in Note 19 in Annex 2.

Section 190: Exclusion of charge after death of employee

741.This section provides a general exemption from the provisions of the Chapter if the employee dies. It derives from section 161 of ICTA.

742.Subsection (1) removes the charge on a taxable cheap loan for the period from the date of death where the employee has died but the loan is not repaid. It provides that the loan is treated as no longer outstanding as from the date of death for the purposes of calculating the cash equivalent. This change in approach is described more fully in Note 20 in Annex 2.

743.Subsection (2) removes the charge if the loan is released or written off on or after the death of the employee.

Section 191: Claim for relief to take account of event after assessment

744.This section allows adjustments to the figures in cases where subsequent events affect the amount chargeable. It derives in part from section 160(4A) of ICTA.

745.Subsection (1) introduces the claim.

746.Subsection (2) allows for the fact that interest may be paid after the tax liability for the year has been determined.

747.Subsection (3) allows for repayment of a loan that has been released or written off. Allowing a claim for a loan that has been released or written off is a minor change to the law. See Change 35 in Annex 1.

748.Subsection (4) provides for the situation where tax payable has been decided on the basis that the condition in section 288(1)(b) of this Act in respect of bridging loans will not be met and that condition is in fact met. It derives from section 191B(13) of ICTA.

749.Subsection (5) allows the adjustment to be made.

Chapter 8: Taxable benefits: notional loans in respect of acquisitions of shares
Overview

750.This Chapter deals with a benefit which may arise on certain acquisitions of shares by employees. It derives from those parts of section 162 of ICTA which deal with acquisition of shares at undervalue. The legislation is included in the benefits code because the benefit is treated as a notional loan and, as such, some of the provisions in Chapter 7 of Part 3 apply to it.

Section 192: Application of this Chapter

751.This section sets out the subject of the legislation. It derives from section 162(1) and (9) and section 168(3)(b) of ICTA and also contains new material.

752.Subsection (1) describes the circumstances relating to an acquisition of shares which will bring it within the provisions of this Chapter.

753.Subsection (2) makes it clear that the shares can be in a company other than the employer.

754.Subsection (3). It derives from section 168(3)(b) of ICTA. It is now explicit that a right or opportunity to acquire shares, or an interest in shares, which is made available by an employer, is to be regarded – with certain exceptions – as being made available by reason of the employee’s employment. This change in approach is described more fully in Note 21 in Annex 2.

755.Subsection (4) defines the term “the acquisition” and gives shares acquired the label “employment-related shares”.

Section 193: Notional loan where acquisition for less than market value

756.This section is derived from parts of section 162(1), (2) and (9) of ICTA and contains new drafting material.

757.Subsection (1) outlines the circumstances in which a benefit arises. It also provides that payments made before the acquisition will be allowable. This is a minor change to the law. See Change 36 in Annex 1.

758.Subsection (1)(a) applies the section to employment-related shares for which no payment is made.

759.Subsection (1)(b) covers the situation in which some payment is made. The subsection prevents shares which are not fully paid at the time of issue (but which later become fully paid) from being valued as part-paid shares.

760.Subsection (3) provides that the benefit is treated, under Chapter 7 of Part 3, as an employment-related loan on which no interest is payable.

761.Subsection (4) lists the provisions in Chapter 7 of Part 3 which apply to the notional loan. This is a minor change to the law. See Change 37 in Annex 1.

762.The provisions listed include section 175 of this Act, which specifies the tax year for which the cash equivalent is treated as earnings. See Note 7 in Annex 2.

763.Subsection (5) lists the provisions of the Act which may exempt a person from liability to tax under this section.

Section 194: The amount of the notional loan

764.This section shows how the initial amount of the loan is calculated, and how the amount is reduced or subsequently varied in certain circumstances. It is derived from section 162(2), (3), (9) and (11) and section 185(8) of ICTA and includes new drafting material. See Note 22 in Annex 2.

765.The amount of the notional loan is used in the calculation of the cash equivalent of the benefit in accordance with section 182 or section 183 of this Act.

766.Subsection (1) sets out how to arrive at the initial amount of the loan. The value taken is that of fully paid up shares. The value is reduced by any “deductible amounts”.

767.Subsection (2) sets out what are the deductible amounts. Paragraph (a) allows the payment made for the acquisition as a “deductible amount”. A payment may be made before the shares are acquired and it has always been the practice to allow any advance payment of this sort as well as any payment made at the actual time of the acquisition. The words “or before” have been added to make this clear. This is a minor change to the law. See Change 36 in Annex 1.

768.Paragraphs (b)(c)(i) and (c)(ii) of subsection (2) derive from the words “so much of the undervalue on acquisition as is not chargeable to tax as an emolument of the employee” in section 162(3) of ICTA. This change in approach is explained in Note 22 in Annex 2.

769.Paragraph (c)(iii) of subsection (2) provides that an amount that counts as employment income under sections 476 or 477 of this Act is a deductible amount. This is a minor change to the law. See Change 38 in Annex 1.

770.Subsection (3) provides for the amount of the notional loan to be reduced where payments are made for the shares after the time they are acquired. The reduced amount is used in the calculation of the benefit in sections 182 or 183 of this Act, which entail ascertaining the maximum amount of the loan outstanding on a particular day.

Section 195: Discharge of notional loan: amount treated as earnings

771.This section covers the circumstances in which a notional loan is treated as discharged and the consequences of that treatment. It is derived from section 162(3), (4) and (5) of ICTA and contains new drafting material.

772.Subsection (1) sets out circumstances in which the notional loan is treated as discharged. The words “is released, transferred or adjusted” in section 162(4)(b) of ICTA have been left out on the grounds that they are unnecessary. There is no other way that the obligation could cease to bind the employee. The words “by surrender or otherwise” in section 162(4)(c) of ICTA have not been used in paragraph (c) because they are unnecessary.

773.Subsection (2) provides that the amount of a notional loan discharged in the circumstances described in subsection (1)(b) and (c) is treated as earnings.

774.Subsection (3) ensures that the amount in subsection (2) can be chargeable in a tax year after the year in which the employment has ended or has become an excluded employment as defined in section 63(4) of this Act. This derives from section 160(3) of ICTA, which is applied to the termination of a notional loan by section 162(5) of ICTA. If the employment has ceased there is no taxable employment and the section would not apply. Deeming the employment not to have ceased allows the section to apply in the case of the discharge of a notional loan for the year in which the event as a result of which it is discharged occurs. It is also necessary for the employment to be one which is not an “excluded employment” otherwise the section would not apply. Where the employment has become an “excluded employment” this subsection deems it not to be “excluded”.

Section 196: Effects on other income tax charges

775.This section derives from section 162(11) of ICTA which operates to give priority to any section by virtue of which an acquisition of shares results in an amount being chargeable to tax as emoluments.

776.Paragraph (b) of this section refers to sections 476 and 477 of this Act, which are derived from section 135 of ICTA. This is a minor change to the law. See Change 38 in Annex 1.

Section 197: Minor definitions

777.This section defines terms which are used in the sections and clarifies what counts as payment for shares.

778.The section is derived from section 162(1), (9) and (10) of ICTA and contains new drafting material.

779.Subsection (2) makes the meaning of “acquisition” very wide to discourage schemes intended to avoid chargeability under this Chapter. The meaning of “market value” is as in Part 8 of TCGA 1992.The wording of the definition has been changed to bring it into line with definitions of market value used elsewhere in this Act. See Note 23 in Annex 2.

780.Subsection (3) ensures that payment for shares made in kind or by any other means is included and that legal liability to make it is not needed for it to count as a payment.

Chapter 9: Taxable benefits: disposals of shares for more than market value
Overview

781.This Chapter deals with the benefits which may arise from certain disposals of shares. It derives from those parts of section 162 of ICTA which deal with the disposal of shares at a price greater than their market value.

Section 198: Shares to which this Chapter applies

782.This section sets out the subject of the legislation. It derives from parts of sections 162(1), (6) and (9) and 168(3) of ICTA.

783.Subsection (1) describes the circumstances which bring shares within the provisions of this Chapter.

784.Subsection (2) labels the shares “employment-related shares”.

785.Subsection (3) makes it clear that the employment-related shares can be in a company other than the employer. It derives from section 162(1)(a).

786.Subsection (4) applies to determine, in a similar way to the “provision” of other benefits, whether the right or opportunity to acquire shares made available by the employer is “by reason of the employment”. This change in approach is explained more fully in Note 21 in Annex 2. It derives from section 168(3)(b).

Section 199: Disposal for more than market value: amount treated as earnings

787.This section sets out the circumstances in which a benefit arises and how it is to be chargeable to tax. It derives from parts of section 162(6), (7), (8), and (9) of ICTA.

788.Subsection (1) applies the provisions of the section in the case of a disposal of the employment-related shares. The words in section 162(6)(a) of ICTA “by surrender or otherwise” have not been used as they are unnecessary.

789.Subsection (2) derives from section 162(8) of ICTA. It prevents chargeability when the disposal takes place after the death of the employee. In rewriting this the words “whether by his personal representatives or otherwise” have been left out. These words do not add anything and are unnecessary.

790.Subsection (3) provides a formula to arrive at the amount to be treated as earnings. If any part of that amount is earnings by virtue of section 62 of this Act any possible double charge is prevented by section 64(1) and (2) of this Act.

791.Subsection (4) derives partly from section 162(7) of ICTA. The references to the employment becoming excluded employment are new. Note 24 in Annex 2 explains why they are necessary.

792.Subsection (5) explains how to arrive at the market value of an interest in shares.

Section 200: Minor definitions

793.This section defines various terms used in this Chapter. It derives from section 162(1), (9) and (10) of ICTA.

794.The meaning of “market value” is defined. The wording of the definition has been changed to bring it into line with definitions of market value used elsewhere in this Act. See Note 23 in Annex 2.

Chapter 10: Taxable benefits: residual liability to charge
Overview

795.This Chapter derives from the provisions of sections 154 and 156 of ICTA, but has a very different structure. The structure of the benefits code is outlined in the overview of Chapter 2 Part 3 of this Act.

796.Sections 201 and 202 together identify the benefits which are within this Chapter.

797.Section 203 provides that the cash equivalent of the benefit is treated as earnings and gives details of how to calculate its amount.

798.Sections 204, 205 and 206 indicate how to calculate the cash equivalent for each different way of providing an employment-related benefit.

799.Sections 207, 208, 209 and 210 are the supplementary provisions.

800.Sections 212, 213, 214 and 215 provide that certain scholarships are benefits within this Chapter.

Section 201: Employment-related benefits

801.This section derives from parts of sections 154 and 168(3) of ICTA.

802.Subsections (1) and (2) derive from section 154(1) of ICTA and introduce the labels “employment-related benefit” and “excluded benefit”.

803.Subsection (3) derives from section 168(3) of ICTA.

804.Subsections (4) and (5) make it explicit that if the employment is held at some time in the tax year it is immaterial whether or not the employment is held at the time the benefit is provided. Subsection (4) further clarifies this proposition by stating that references to an employee may therefore include a former or a prospective employee. These provisions derive from and clarify the meaning of the words “where in any year a person is employed” in section 154(1) of ICTA. This change in approach is explained more fully in Note 14 in Annex 2.

Section 202: Excluded benefits

805.This section derives from section 154(1)(b) and part of section 154(2) of ICTA. It clarifies what is meant by “the cost of the benefit is not (apart from this section) chargeable to tax as his income.” Benefits which are within, or specifically excepted from, other chapters of the benefits code are not within this Chapter. This section does not exclude benefits which are earnings within section 62 of this Act. That is not necessary because section 64 of this Act applies to prevent any element of double charge. See Change 15 in Annex 1. The identification of excluded benefits is explained more fully in Note 25 in Annex 2. The benefit of certain transport vouchers in section 86 of this Act is not excluded from this Chapter because Chapter 4 of Part 3 provides an exemption only for the lower paid.

Section 203: Cash equivalent of benefit treated as earnings

806.This section establishes that the cash equivalent is to be treated as earnings, and provides guidance on how to work out the cash equivalent.

807.Subsection (1) derives from the closing words of section 154(1) of ICTA. It provides that the cash equivalent is the amount treated as earnings. The words “for the tax year in which it is provided” are not in section 154. This clarification of the timing rule is explained more fully in Note 7 in Annex 2.

808.Subsection (2) derives from section 156(1) of ICTA. It provides the basic rule that the cash equivalent is the cost of provision less amounts made good.

809.Subsection (3) derives from section 156(2) to (7) of ICTA and indicates which sections provide the rules for finding the cost of the benefit.

Section 204: Cost of the benefit: basic rule

810.This section derives from section 156(2) of ICTA. The benefits within this Chapter can be provided in different ways. The “cost of the benefit” is the basic amount and this section sets out what that is.

811.The words “(including a proper proportion of any expense relating partly to provision of the benefit and partly to other matters)” provide for apportionment of the cost of the benefit in appropriate circumstances. A case before the Special Commissioners reported recently has made that possibility clear.

Section 205: Cost of the benefit: asset made available without transfer

812.This section, which derives from section 156(5) to (7) and (9)(b) of ICTA, explains how to quantify the cost of the benefit when the ownership of the asset is not transferred to the employee.

813.Subsection (1) derives from the opening words of section 156(5) of ICTA. It establishes the circumstances in which the following provisions of this section will apply.

814.Subsections (2) to (5) derive from section 156(5)(a) and (b) to (7) of ICTA and provide the rules for determining the cost of the benefit.

Section 206: Cost of the benefit: transfer of used or depreciated asset

815.This section derives from section 156(3), (4) and (9)(b) of ICTA. Under the normal rules for determining the cash equivalent for the purposes of this Chapter, the cost of the asset would be used. This section provides that market value at the time of transfer may be used instead of cost.

816.Subsections (1) and (2) provide for the alternative of market value to be used. They derive from section 156(3) and the opening words of section 156(4).

817.Subsections (3) to (5) derive from section 156(4) and (9)(b). As the relief provided by subsections (1) and (2) of this section could be abused by providing an asset for use and subsequently transferring it when the market value was very small, the relief is limited. This provision applies only to assets within section 205. In the case of an asset provided before this Act comes into force the transitional provision in paragraph 32 of Schedule 7 to this Act will apply.

818.Subsection (5) is derived from section 156(4)(a) and (b).

Section 207: Meaning of “annual rental value”

819.This section defines “annual rental value” for the purposes of this Chapter. It does not replace the use of gross rateable value, which will continue. It derives from section 156(6) and section 837 of ICTA which in turn draws on section 23 of the General Rate Act 1967 (although that Act was repealed in 1988).

820.This section does not affect the Inland Revenue practice of using the gross rateable value as a proxy for “annual value”. That practice will continue. The main use of this section is to provide guidance on how to arrive at the annual value of properties for which rent is not paid and in practice is only needed in cases where no gross rateable value can be found. It provides the definition of annual rental value for land. Schedule 1 to the Interpretation Act 1978 defines “land” as including “buildings and other structures”. Chapter 5 of Part 3 of this Act applies to living accommodation, so this Chapter applies only to accommodation which is not living accommodation.

821.Subsection (1) defines “annual rental value”. Section 837(1) refers to “rates and taxes” on the premises. This section includes a fuller and more updated description of domestic property charges: “taxes, rates or charges”. See Change 24 in Annex 1.

822.The following subsections set out the adjustments to make in order to arrive at the rent to be used for land. They derive from section 23 of the General Rate Act 1967 which was repealed in 1988. As a consequence of that repeal the reference to that Act in section 837(2) has not been included here. Instead the general thrust of the rules have been rewritten in this section. See Change 23 in Annex 1.

823.Subsection (2) applies in relation to subsection (1). It ensures that the annual value does not include the cost of anything provided which is not provided in the case of unfurnished property. This is important in cases where the only available comparisons are rent of fully furnished and serviced properties. If, in considering what the rent of the property would be, the nearest comparison is rent for a property for which services are provided at an inclusive rent, in order to reduce the rent to that for an unfurnished, non-serviced property the cost of the services provided are deducted. This means that if there is a profit element in the provision of the services it is treated as rent in arriving at the annual value.

824.Subsections (3) and (4) extend the process of comparison and adjustment. They follow the thrust of section 23(3) and (4) of General Rate Act 1967, which ensured that when a property was valued by looking at comparative rents of similar properties the value was not distorted by the existence (in the comparative case) of separate payments for services in addition to what one might call the basic rent. In particular it added the separate payments to the rental payments and allowed for certain deductions to be made. It did not allow any deduction in computing the value based on a comparative rent for amounts paid in respect of repairs, insurance or maintenance of other property belonging to or occupied by the landlord. In the case of payments for other types of services only the cost element of them was deducted. These subsections follow that method of comparison and adjustment.

825.Subsection (5) has the effect that the services whose cost of provision may be deducted are those which are not normally met by a landlord in the provision of unfurnished property. Again, the wording is not derived directly from section 23 of the General Rate Act 1967 but follows the general thrust of provisions of that section.

Section 208: Meaning of “market value”

826.This section derives from section 168(7) of ICTA and defines market value.

Section 209: Meaning of “persons providing benefit”

827.This section derives from section 154(3) of ICTA and identifies the person providing the benefit.

Section 210: Power to exempt minor benefits

828.This section derives from section 155ZB of ICTA, which allows regulations to be used to introduce minor exemptions from section 154 of ICTA where the benefits in question are generally available to all employees on similar terms. Before FA 2000 introduced this provision all exemptions from a charge under section 154 had to be introduced through a Finance Act.

Special rules for scholarships
Overview

829.This group of sections derives from section 165 of ICTA.

Section 211: Special rules for scholarships: introduction

830.This is mainly an introductory section which explains the layout and provides the meaning of scholarship.

Section 212: Scholarships provided under arrangements entered into by employer or connected person

831.This section extends the circumstances in which a scholarship is a benefit provided by reason of the employment.

832.Subsection (1) derives from section 165(2) of ICTA. A scholarship is an employment-related benefit by virtue of section 201 of this Act if it is provided by reason of the employment. That would not be the case if the provision of the scholarship did not fall within the normal meaning of “by reason of the employment” because of the way in which it was provided. This section extends the meaning of “by reason of the employment”.

833.Subsection (2) derives from the closing words of section 165(2) of ICTA. It prevents claims being made that the scholarship is not within subsection (2)(b) because no cost to the employer or connected person is involved.

834.Subsection (3) is a minor change to the law. It is possible that the extended meaning of “by reason of the employment” could result in arrangements made by individuals to provide for the education of members of their family or household being employment-related benefits because of the terms of subsection (1) of this section. An example would be an educational trust set up by a grandparent and the parent of someone who benefited from the trust was an employee in the grandparent’s business. See Change 39 in Annex 1.

835.Subsection (4) prevents subsection (1) from disapplying the opening words of section 201(3) of this Act.

Section 213: Exception for certain scholarships under trusts or schemes

836.This section, which derives from section 165(3) of ICTA, provides an exception for certain full-time scholarships. This may apply where the scholar is a member of the employee’s family or household but where the scholarship has been awarded on merit and is one which satisfies the conditions of section 331 of ICTA.

837.Subsection (1) derives from the opening words of section 165(3) of ICTA.

838.Subsection (2) derives from section 165(3)(c). It states one of the conditions which must be met for the exception to apply. That condition is that if the opening words of section 201(3) of this Act were disregarded, or the extension to the usual definition of “by reason of the employment” in section 212 were disregarded, the scholarship would not be an employment-related benefit.

839.Subsection (3) derives from section 165(3)(b) and provides the terms to satisfy the condition.

840.Subsection (4) derives from section 165(3)(a). The exception can apply only to scholarships provided from a trust fund or scheme.

841.Subsection (5) derives from the closing words of section 165(3). It ensures that for the exception to apply only a limited amount of the total amount paid out is on scholarships for members of the household or family of employees. The scholarships included are those provided by reason of any employee’s employment. For this purpose subsection (6) explains the meaning of employment.

842.Subsection (6) derives from section 165(6)(b). “Employment” for the purposes of condition D has a special meaning. It includes all employments even if the employee is not resident and not ordinarily resident in the United Kingdom and performs the duties of the employment outside the United Kingdom. It also includes scholarships which are payable by reason of “excluded” employments.

843.Subsection (7) provides definitions of terms used in the section.

Section 214: Scholarships: cost of the benefit

844.This section derives from SE 30003 in the Inland Revenue Schedule E Manual. It provides a special rule for determining the cost of the benefit of an employment-related scholarship which is provided from a trust fund. Incorporating this practice is a minor change to the law. See Change 40 in Annex 1. The application of the normal rule for the cost of the benefit in section 204 of this Act could result in the whole of the amount of capital paid into such a trust fund being taken into account. This section prevents that and provides that the cost of the benefit is to be the total of payments made to the scholar.

Section 215: Limitation of exemption for scholarship income in section 331 of ICTA

845.This section derives from section 165(1) of ICTA. Section 331 of ICTA gives exemption from income tax for scholarship income where the holder of the scholarship is in full-time education. The cases of Wicks v Firth and Johnson v Firth (1982) 56 TC 318 in the House of Lords decided that scholarship income was exempt from all income tax charges if it fulfilled the conditions in section 331. This section prevents section 331 from applying to a scholarship which is an employment-related benefit within section 212 if the scholar is not an employee.

Chapter 11: Taxable benefits: exclusion of lower-paid employments from parts of benefits code
Introduction

846.Most of the provisions that form part of the benefits code derive from Chapter 2 of Part 5 of ICTA. Those provisions do not apply to all Schedule E taxpayers. Until changes introduced by the FA 1989, Chapter 2 was entitled “Supplementary charging provisions applicable to directors and higher-paid employees and office holders”. This title reflected the origins of the legislation but the threshold for the application of these provisions certainly had not kept pace with inflation. By 1989 it had become difficult to contend that all the employees within the scope of Chapter 2 were necessarily “higher-paid”. Thus, in 1989, the title of the Chapter was changed to “Employees earning £8,500 or more and directors”.

847.However, the basic concept of the Chapter remained unchanged. It began from the position that no-one was within the scope of the Chapter and then brought in those employees who met its criteria. But it is now the case that by far the majority of employees do earn over £8,500. The benefits code therefore reverses the basic concept so that the benefits provisions apply to all employees, unless they fall within the class of excluded employees.

848.The purpose of this Chapter is to identify those employees who are not within the scope of certain of the benefits provisions.

849.This change of approach is described in full in Note 26 in Annex 2.

Section 216: Provisions not applicable to lower-paid employments

850.Subsection (1) is the legislative statement of the new approach that is being made in the benefits code, reproducing the effect of section 167(1) of ICTA, although by a different route. The code applies to all employees (including office-holders) except that the provisions specified in subsection (4) do not apply to any employee in lower-paid employment who also meets one of conditions A or B.

851.Subsection (2) sets out condition A – that the employee is not a director.

852.Subsection (3) sets out condition B which applies to employees who are directors, and is satisfied if

853.These special rules for certain directors in condition B derive from section 167(1) and (5) of ICTA.

854.Subsection (4) lists the Chapters that do not apply to the lower-paid. These are the charging provisions that derive from Chapter 2 of Part 5 of ICTA.

855.Subsection (5) limits the meaning of “employee” in the Chapters listed in subsection (4) to exclude any employees satisfying the tests in subsection (1). It is new.

856.Subsection (6) provides signposts to provisions elsewhere that affect the operation of subsection (1).

Section 217: Meaning of “lower-paid employment”

857.This section defines the concept of “lower-paid employment” that was introduced in the previous section. It introduces the concept of an earnings rate for the employment for the year of less than £8,500.

858.The concept of the “earnings rate” enables Inland Revenue practice as set out in the Schedule E Manual at SE 20101 to SE 20111 to be more easily incorporated in the calculation set out in section 218. By focusing on the “earnings rate” for a particular year it is clear that it is entitlement for the year that is relevant rather than actual receipts. There is no necessary correlation between the amounts included in the calculation of the £8,500 and the amount actually charged to tax in that year. The latter computation is on a receipts basis.

859.This wording makes it clear that there can be only one earnings rate for any employment for any one year. A single tax year cannot be apportioned into separate periods counting as lower-paid and not lower-paid for the same employment.

860.This section derives from section 167(1)(b), as expanded upon by Inland Revenue practice set out in the Schedule E Manual at SE 20110 in particular.

Section 218: Calculation of earnings rate for a tax year

861.Subsection (1) of this section contains a method statement that sets out what is taken into account when calculating the annual rate. It derives from section 167(2) of ICTA. Further guidance on the interpretation of the method of calculation is available in the Schedule E Manual at SE 20101 to SE 20111.

862.Paragraph (b) in Step 1 of the statement makes clear that one must assume, for the purposes of the calculation, that the employment is not lower-paid so that the cash equivalents of any of the benefits specified in section 216(4) are included in the calculation. The cash equivalent of any benefits that are chargeable on the lower-paid are also included in the calculation.

863.Step 2 adds in any extra amount required under the special rules relating to the provision of a car, set out in full in section 219.

864.Step 3 subtracts any authorised deductions. It derives from section 167(2)(b), but it seems more sensible to list what deductions may be allowed, rather than just listing prohibited deductions as in section 167(2)(b). In the Schedule E Manual SE 20104 makes clear what deductions can be made in calculating the earnings rate for the year. This change in approach is described in detail in Note 26 in Annex 2.

865.Subsection (2) makes sure that section 216(1) is disregarded for the purposes of Step 1 of the method statement.

866.Subsection (3) draws attention to special rules that apply if the benefits in question are the provision of living accommodation.

867.Subsection (4) lists the “authorised deductions” that may be subtracted at Step 3 of the method statement. The list reflects SE 20104 of the Schedule E Manual.

868.There follows a flow diagram that demonstrates the decisions that must be made in the process of determining whether an employment is lower-paid.

Section 219: Extra amounts to be added in connection with a car

869.This section sets out the special rules applicable to Step 2 in section 218 and deals with the treatment of car benefit. It derives from section 167(2)(a), (2B), (2C) and (2D) of ICTA.

870.Subsection (1) sets out that the extra amounts are to be added in connection with a car where a car is made available by reason of the employment in the tax year in question.

871.Subsections (2) to (4) describe the first type of extra amount to be added. This is the higher of:

872.Subsections (5) and (6) set out the second kind of extra amount to be added. These are amounts which would come into charge under Chapters 3 and 4 if it were not for the effect of the exemptions in sections 239 or 269. This derives from the effect of disapplying section 157(3) in section 167(2)(a) and from 167(2D).

873.Subsection (7) makes sure that section 216(1) is disregarded for the purposes of computing any extra amounts to be added in connection with a car.

Section 220: Related employments

874.Subsection (1) explains that this section applies if a person has two or more related employments.

875.Subsection (2) sets out that none of the related employments are lower-paid if when the earnings rates of all related employments are added together they total £8,500 or more, or if any of the related employments would not itself satisfy the conditions in section 216(1).

876.Subsection (3) sets out how to determine whether employments are “related”. Broadly, where an employee has employments with separate entities that are under common control, the employments are treated as being with the same employer. The result reached by applying this subsection to the facts of a particular case can then be fed into subsection (2).

877.This section derives from section 167(3) and (4).

878.Subsection (3)(b)(ii) reproduces the effect of section 167(4) of ICTA in a neater way. Section 167(4) applies to treat employees of a partnership or body (“A”) over which an individual or another partnership or body (“B”) has control as if the employment were with B. If B controls another body (“C”), and one applies section 167(4) to employees of C, they are also treated as if their employment is with B. Thus employees of both A and C (bodies under common control of B) are treated as if their employment is with B. Section 220(3)(b)(ii) reproduces this effect without having to look first at employees of A and then at employees of C separately.

Chapter 12: Payments treated as earnings
Overview

879.This Chapter deals with certain distinct types of payments that are treated as earnings. Thus the chargeable amounts to which these sections give rise constitute “general earnings” within section 7 of this Act.

Section 221: Payments where employee absent because of sickness or disability

880.Sick pay paid to an employee by an employer under the contract of employment will usually be chargeable as earnings under Chapter 1 of Part 3. This section derives from section 149 of ICTA and provides for payments in the nature of sick pay financed by employers through insurance policies and trust funds to be taxed in the same way. If the particular payment already falls within the scope of Chapter 1 of Part 3, this section does not apply.

881.It has to be inferred from section 149(1) of ICTA that a sickness payment is deemed to be earnings for the period of absence. Subsection (3) makes the position explicit.

882.Subsection (4) derives from section 149(2) of ICTA and ensures that where both the employer and the employees contribute towards the cost of providing sick pay, the benefits paid to employees are taxed only to the extent that the employer finances them.

883.Subsection (6) derives from section 149(1) and (3) of ICTA and ensures that payments to the sick employee’s family or third parties on behalf of the employee (or his family) are also taxable. The source provision uses the term “family or household”. In this section the reference to “household” has been dropped because the term has a different meaning in the benefits code. The range of persons covered is instead included in the definition of a person’s family in section 721(4) of this Act. This is a change of approach explained more fully in Note 27 in Annex 2.

Section 222: Payments by employer on account of tax where deduction not possible

884.This section derives from section 144A of ICTA, which was part of a series of provisions intended to counter difficulties in the application of PAYE where an employee was “paid” in a readily convertible asset eg a gold bar. Many of the provisions made changes to the PAYE vires. Broadly the effect of the changes was to treat the employer as making a payment equal to the amount of income represented by the readily convertible asset. These deemed payments are known as “notional payments” and the PAYE rules apply to them as they do to straightforward cash payments.

885.This particular section deals with one of the consequences of imposing PAYE on “notional payments”. It would not always be possible to “deduct” tax from such “notional payments” and PAYE tax may well be accounted for separately. In order to prevent the employee obtaining a tax advantage it is necessary to adjust the employee’s tax liability. If the employee does not reimburse the employer in respect of that liability within 30 days the section imposes an additional liability on the employee receiving the “notional payment”. The basic conditions for the section to apply are set out in subsection (1), which derives from section 144A(1) of ICTA. The PAYE provisions in Part 11 of this Act, as referred to in subsection (1)(a), omit those that are not about notional payments or contain only definitions.

886.Subsection (2) specifies that the amount of income tax due in respect of the notional payment is treated as earnings from the employment. It therefore reflects the amendment to section 144A(1) of ICTA made by paragraph 4 of Schedule 6 to FA 2002.

887.Subsection (3) derives from section 144A(2) of ICTA. The list of provisions referred to here matches those mentioned in subsection (1)(a) and (1)(b).

Section 223: Payments on account of director’s tax other than by the director

888.This section derives from section 164 of ICTA and denies a tax advantage to directors where their company pays their fees without deduction of PAYE and the company (or another person) then separately pays the PAYE due. If this were done, the cost to the company would be less than paying the equivalent gross fee subject to deduction of PAYE. The amount assessable on the director would be the amount actually received.

889.The section counters this device by treating the amount paid to the Board of Inland Revenue as earnings of the employment chargeable to income tax. It applies only to payments that fall within section 203 of ICTA. It does not apply to “notional payments” in respect of readily convertible assets that fall within section 222 above. It is the different nature of the respective payments that provides the main borderline between this section and section 222. The reference to “the Board” has been retained here (rather than changing to “the Inland Revenue”) so as to be consistent with the provisions dealing with the payment of tax.

890.The section applies only to directors. However the same device in the case of non-directors could fall within the scope of Chapter 10 of Part 3 of this Act (taxable benefits: residual liability to charge).

891.Subsection (1) derives from section 164(1) of ICTA and sets out the basic conditions for the section to apply. The source legislation says that the section applies where “the whole of that amount is not so deducted” (“amount” there means the tax due). This section makes it clear that the provision is not restricted to cases where nothing is deducted, but also applies where not all of the amount is deducted. The fact that section 164 of ICTA applies to partial deductions is clear from the reference in section 164(1) to the amount “so deducted”.

892.Subsections (2) and (3) clarify how the words in section 164(1) of ICTA “where in any year” are interpreted. This change in approach is explained more fully in Note 14 in Annex 2.

893.Subsection (4), which also derives from section 164(1) of ICTA, makes the amount of tax accounted for to the Board of Inland Revenue count as earnings of the director. The year of charge is made explicit. See Note 7 in Annex 2. The amount charged is subject to possible reduction under subsection (6).

894.Subsection (5) derives from the first proposition in section 164(3) of ICTA and provides a timing rule where the tax is accounted for in a year after the employment has ceased.

895.Subsection (6) brings together the provisions regarding the amounts to be deducted in arriving at the net taxable amount. Two of the rules derive from the last part of section 164(1) of ICTA and the other rule from the second proposition in section 164(3) of ICTA.

896.Subsection (7) derives from section 164(2) of ICTA.

897.Subsection (8) derives from section 168 of ICTA. It is necessary to bring the definitions into this section because this provision is not in the benefits code.

Section 224: Payments to non-approved personal pension arrangements

898.This section provides that an employer’s payments under non-approved personal pension arrangements made by the employee are treated as earnings. It derives from section 648 of ICTA.

899.It contrasts with section 308 of this Act, which exempts from income tax as earnings an employer’s contributions under approved personal pension arrangements made by the employee.

900.Subsection (1) sets out that the payments are treated as earnings from the employment. In view of the content of Chapter 2 of Part 2, it is unnecessary to add (as in section 648 of ICTA) that the payments are so treated “for all the purposes of the Income Tax Acts”. The year of charge is made explicit. See Note 7 in Annex 2.

901.Subsection (2) provides that the employer’s payments are not treated as earnings under this section to the extent they are otherwise chargeable to income tax. For example, if contributions are so made that only a charge by virtue of section 62 of this Act (earnings) otherwise applies, section 224 will apply to the extent, if any, that section 62 does not apply.

902.Conversely, if a charge would only arise otherwise by virtue of section 203 of this Act (cash equivalent of benefit treated as earnings), but the payments are wholly or partly exempted from that charge by section 307 of this Act (death or retirement benefit provision), a charge under this section will apply on the amount so exempt.

903.Subsection (3) provides relevant definitions by cross-reference to section 630(1) of ICTA.

904.The Board of Inland Revenue may approve a personal pension scheme. The provisions for approval of a pension scheme are set out in section 631 of ICTA.

Section 225: Payments for restrictive undertakings

905.This section deals with the situation where a monetary payment is made in return for the giving of a restrictive undertaking. It derives from section 313(1), (2), (3) and (6)(a) of ICTA.

906.The sum described as “ … an emolument of the office or employment … ” in section 313(1) has become “ … earnings from the employment … ” in subsection (3). That reflects the general change in terminology in this Act.

907.The section has a timing provision of its own in subsection (3). If there is no employment at the time the payment is made the timing rule in whichever is appropriate of section 17 or 30 of this Act will operate.

908.Section 313(6)(a) restricts the application of section 313 to employments from which the income was or would have been chargeable under Case I or Case II of Schedule E.Subsections (6) and (7) reproduce that restriction for this and the following section.

Section 226: Valuable consideration given for restrictive undertakings

909.This section brings together the provisions that apply when the payment for the restrictive undertaking is in a non-monetary form. That is more logical and convenient than their present separation. It derives from section 313(4) and (6)(b) of ICTA.

910.The use of two sections emphasises the way the section relating to a non-monetary consideration operates through the preceding one.

Part 4: Employment income: exemptions
Chapter 1: Exemptions: general
Section 227: Scope of Part 4

911.This section introduces Part 4, setting out the effect of the exemptions within it. It is new.

912.Subsections (2) and (3) explain that there are two different kinds of exemption. An “earnings-only exemption” is an exemption that removes either any charge to tax under Part 2 as general earnings or a particular charge to tax as general earnings, for example, by removing a charge under a particular chapter of the benefits code.

913.An “employment income” exemption removes any charge to tax under Part 2.

914.There is considerable variety in the forms of words used to express exemptions in ICTA. However, not all the differences in wording signify an actual difference in the effect. Close examination of the various exemption provisions in ICTA shows that an exemption can only affect a possible charge to tax under Schedule E in three ways:

(1A)

Section 154 does not apply to a benefit consisting in the provision for the employee of a car parking space at or near his place of work.

(2)

Subject to section 200C, the emoluments of the employee from the office or employment shall not be taken to include….

(1)

There is no charge to tax under Schedule E in respect of approved mileage allowance payments for a qualifying vehicle.

915.In this Act the effects described in the first two bullets only impact on general earnings, and exemptions which have those effects are described as “earnings-only” exemptions. The type of exemption that, in ICTA, removes any charge to tax under Schedule E is labelled an “employment income” exemption in this Act.

916.If a benefit is received in circumstances to which Chapter 3 of Part 6 (payments and benefits on termination of employment etc) could apply, any “earnings-only” exemptions are ignored in deciding whether or not the benefit is within that Chapter.

917.But if the benefit or income is the subject of an “employment income” exemption, there is no possibility of any charge to tax on that benefit or income under Chapter 3 of Part 6, nor under any other provision in this Act.

918.There are also some exemptions that have a wider effect and remove the possibility of any charge to tax at all. These are described in section 228(2).

Section 228: Effect of exemptions on liability under provisions outside Part 2

919.All of the exemptions in this Part operate to remove a charge to tax under Part 2 of this Act. Subsection (1) sets out the proposition that, in general, this is the only kind of charge to tax that these exemptions affect.

920.However, Part 4 includes a number of exemptions that have a wider effect. There are various phrases used in the exemption provisions in ICTA which make it clear that they operate to remove any charge to income tax. Examples are:

…shall not be regarded as income for any purpose of the Income Tax Acts – section 200(1) (expenses of Members of Parliament)

…shall be exempt from income tax – section 322(2) (consular officers and employees)

921.Some of the exemptions set out in ESCs are also worded so that they remove any charge to income tax on the income in question. Examples are:-

Income tax is not charged on…. – ESC A6 (Miners: free coal and allowances in lieu)

…the employee will not be charged to income tax….. – ESC A66 (Payments for employees’ journeys home: late night travel and breakdown in car-sharing arrangements).

922.Subsection (2) includes a list of all the exemptions in Part 4 that have this wider application and provides that they have effect to remove any charge to income tax.

923.The move to a common formulation, “no liability to income tax arises”, for all exemptions, including those listed in section 228(2), is explained in detail in Note 28 in Annex 2.

Chapter 2: Exemptions: mileage allowances and passenger payments
Overview

924.This Chapter rewrites the provisions for the exemption from tax as earnings of mileage allowance payments and passenger payments. Section 57 of FA 2001 introduced those provisions, which are effective from 2002-03 onwards. The Chapter also rewrites the provisions relating to mileage allowance relief that section 57 introduced. Given that those latter provisions mean that employees can get a deduction from their earnings if their circumstances permit, it might be thought that they should more properly appear among the travel-related expenses in Chapter 2 of Part 5 of this Act. The provisions for mileage allowance relief appear in this Chapter for the following reasons:

925.The provisions that, by virtue of Part 1 of Schedule 12 to FA 2001, were introduced as Schedule 12AA to ICTA have been incorporated in the rewritten sections. That accords with the policy of avoiding the use of schedules, if possible.

926.The consequential amendments in Part 2 of Schedule 12 to FA 2001 have been incorporated into the rewritten sections as relevant.

Section 229: Mileage allowance payments

927.This section sets out the basic availability of the exemption for approved mileage allowance payments. The section derives from section 197AD of ICTA.

928.Subsection (1) has a reordered wording compared with the source legislation. When terms or labels first appear in this and subsequent subsections signposts to where they are defined accompany them.

929.Subsection (2) explains what are mileage allowance payments, in the process excluding passenger payments from them.

930.Subsection (3) explains what are approved mileage allowance payments.

931.Subsection (4) gives details of two circumstances in which the exemption does not apply.

Section 230: The approved amount for mileage allowance payments

932.This section gives details of the approved amount for mileage allowance payments. The several ideas contained in paragraph 4(2) of Schedule 12AA to ICTA now appear in separate subsections. The section derives from paragraph 4 of Schedule 12AA.

933.Subsection (1) gives a formula to calculate the approved amount for mileage allowance payments for a given type of vehicle.

934.In subsection (2) the mileage rate information has been converted to tabular form.

935.Subsection (3) qualifies what is meant by the expression “the first 10,000 miles” in subsection (2), dealing particularly with the possibility that the same person might undertake business travel in respect of two or more associated employments.

936.Subsection (4) gives details of when one employment is associated with another.

937.In subsection (5) the reference to the definition of “control” is now direct, rather than diverting the user to section 168(12) of ICTA, only to find that that in turn refers to section 840 of ICTA.

938.Subsection (6) provides the Treasury with powers to make regulations to alter the rates or rate bands in subsection (2).

Section 231: Mileage allowance relief

939.This section explains what mileage allowance relief is and how the employee may be entitled to it. The section derives from section 197AF of ICTA.

940.Subsection (1) describes the circumstances in which entitlement to mileage allowance relief can arise.

941.Subsection (2) states how to calculate the amount of mileage allowance relief to which the employee is entitled.

942.Subsection (3) gives details of two circumstances in which mileage allowance relief is not available.

Section 232: Giving effect to mileage allowance relief

943.This section deals with the mechanics of giving effect to mileage allowance relief. The main difference between it and the source legislation is the absence of any reference to the Cases of Schedule E. The consequences of this are most evident in subsections (2) and (3). The section derives from section 197AG of ICTA.

944.Subsection (1) relates the deduction to a tax year.

945.Subsection (2) corresponds with the references to Cases I and II of Schedule E in section 197AG(2).

946.Subsection (3) corresponds with the references to Case III of Schedule E in section 197AG(3).

947.Subsection (4) contains some assumptions supplementary to the operation of subsection (3).

948.Subsection (5) gives an order of precedence as between deductions available under subsections (2) and (3).

949.Subsection (6) prevents a double deduction.

950.Subsection (7) defines two terms used in this section by reference to provisions in another Part of this Act.

Section 233: Passenger payments

951.This section sets out the basic availability of the exemption for passenger payments. The section derives from section 197AE of ICTA.

952.Subsection (1) gives details of the circumstances in which the exemption for passenger payments is available.

953.Subsection (2) qualifies part of the provisions in subsection (1).

954.Subsection (3) explains what are passenger payments.

955.Subsection (4) explains what are approved passenger payments.

956.Subsection (5) supplies additional information in relation to subsection (2).

Section 234: The approved amount for passenger payments

957.This section gives details of the approved amount for passenger payments. The section derives from paragraph 5 of Schedule 12AA to ICTA.

958.Subsection (1) gives a formula to calculate the approved amount for passenger payments.

959.Subsection (2) explains how the calculation is affected if there are times in the tax year when two or more passengers for whom the employee is entitled to passenger payments are carried concurrently.

960.Subsection (3) provides the Treasury with powers to make regulations to alter the rate in subsection (1).

Section 235: Vehicles to which this Chapter applies

961.This section defines the vehicles to which this Chapter applies. The section derives from paragraph 3 of Schedule 12AA to ICTA.

962.Subsection (1) simply names the types of vehicle within the Chapter.

963.Subsections (4) and (5) contain definitions of the meanings of “motor cycle” and “cycle” that refer to the Road Traffic Act 1988. When this Act was published as a draft Bill for consultation it included an expanded version of this section in which those definitions were reproduced in full. If either of the Road Traffic Act 1988 definitions were to change then, assuming the policy is to keep the definitions aligned, an amendment to the rewritten legislation would be required to maintain that alignment. That would have to be done by way of primary legislation, for which it might be difficult to find parliamentary time. That is an undesirable side effect of the expanded definitions. The Act therefore reverts to definitions that refer to the Road Traffic Act 1988.

964.As at February 2003, the definition of “motor cycle” in section 185(1) of the Road Traffic Act 1988 is as follows:

“motor cycle” means a mechanically propelled vehicle, not being an invalid carriage, with less than four wheels and the weight of which unladen does not exceed 410 kilograms;

965.and the definition of “cycle” in section 192 of that Act is as follows:

“cycle” means a bicycle, a tricycle or a cycle having four or more wheels, not being in any case a motor vehicle.

966.Subsection (6) contains some additional definitions of terms used in subsection (3).

Section 236: Interpretation of this Chapter

967.This section contains additional information needed to interpret the provisions in this Chapter. The presentation of this material varies slightly from the source legislation to make it easier to use. The section derives from parts of paragraph 1 and paragraphs 2 and 6 of Schedule 12AA to ICTA.

968.Subsection (1) gives signposts to three definitions used in this Chapter.

969.Subsection (2) defines what is a “company vehicle” by reference to other provisions in this Act.

970.Subsection (3) gives signposts to the provisions that define what is meant by when cars and vans are made available for private use and when they are made available by reason of the employment.

Chapter 3: Exemptions: other transport, travel and subsistence
Section 237: Parking provision and expenses

971.This section derives from the provisions in sections 197A and 155(1A) of ICTA, which provide an exemption from tax in respect of the provision of car parking, and the equivalent provisions for motor cycle parking and facilities for parking bicycles in section 49(2) of FA 1999. It only applies to parking places at the place of work. In this section the defined expression “workplace” has been used instead of “place of work”. See Note 29 in Annex 2.

972.There are definitions of “motor cycle” and “cycle” in section 49(3) of FA 1999. But there is no definition of “car” in sections 155(1A) or 197A of ICTA. As the subject of the exemption is a parking space, definitions of what might be put in it did not appear to add anything, so they have not been reproduced here.

Section 238: Modest private use of heavy goods vehicles

973.This section derives from section 159AC of ICTA which prevents a benefit being chargeable where there is modest private use of a heavy goods vehicle. The exemption here goes wider and provides for no liability to income tax however that liability may arise. See Change 41 in Annex 1.

974.The exemptions in section 159AC(2)(b), (3)(a) and (3)(c) of ICTA, dealing with expenses in connection with the vehicle, are dealt with in section 239.

Section 239: Payments and benefits connected with taxable cars and vans and exempt heavy goods vehicles

975.When an employee is chargeable to tax under the provisions in Chapter 6 of Part 3 in respect of a car or van that charge is intended to cover all the expenses in connection with the vehicle, other than the provision of a driver and, in relation to a car, of fuel. Subsections (1), (2) and (4) of this section provide various exemptions from tax. They derive from sections 157(3) and 159AA(3) of ICTA.Subsection (3) preserves the charge for car fuel.

976.If a heavy goods vehicle, which is not used wholly or mainly for private use, is exempted from the Chapter 6 of Part 3 charge by section 238 it is also exempt in respect of expenses connected with it. This rule derives from section 159AC(3) of ICTA.

977.As exemptions for all types of vehicle are expressed in the same terms in ICTA, they have been brought together in this section as a single exemption. Furthermore, the exemptions have been widened so that they now apply however the liability may arise. See Change 42 in Annex 1. The use of “taxable” car or van, and “exempt” heavy goods vehicle are labels to assist in identifying the basis on which the exemption is due.

978.In the source legislation, the exemption for the discharge of liability and certain expense payments in connection with an exempt heavy goods vehicle only applies in a case where there would otherwise have been a charge to tax under Chapter II of Part V of ICTA – applicable only to employees earning £8,500 or more and directors. In subsection (8), the exemption has been extended to employees in “excluded employment”. See Change 43 in Annex 1.

Section 240: Incidental overnight expenses and benefits

979.This section sets out the exemption for incidental overnight expenses. In so far as it relates to earnings and as expenses it derives from section 200A of ICTA. The exemption from a charge to tax under the benefits code derives from section  155(1B) of ICTA.

980.In the source legislation, sums paid by way of incidental overnight expenses are not eligible for the exemption in if the employee is already allowed a deduction under one of the provisions listed in section 200A(1)(b) of ICTA. That list includes all the provisions under which a deduction may be available. However, the approach in ICTA of listing all the references is long-winded and not necessarily easy to follow. It is simpler to say in subsections (1)(c) and (2)(b) “would not be deductible under Part 5”. This substitution of a general reference is analysed in Change 44 in Annex 1.

981.In subsection (1)(b) a new label of “the overnight stay conditions” has been used to describe the conditions which have to be satisfied in identifying a “qualifying period”. Those conditions are explained in subsection (4).

982.Subsection (2) exempts the charge on benefits under Chapter 10 of Part 3 where relief for the cost of the benefit could not be obtained under section 365, if the employee had paid for it. Subsection (2) derives from section 155(1B) of ICTA.

983.In setting out the condition about deductibility of travelling costs, section 200A(3)(b)(i) of ICTA contains a list of deduction provisions which are regarded as satisfying the test. In line with the simplification above, subsection (5) replaces this list and instead refers to expenses “deductible under Part 5 (otherwise than under any of the excepted foreign travel provisions)”. The “excepted foreign travel provisions” are listed in subsection (7).

Section 241: Incidental overnight expenses and benefits: overall exemption limit

984.The exemption for incidental overnight expenses in section 240 is a limited exemption. This section sets out the limit on the exemption and how it is applied and mainly derives from section 200A(2), (4) and (5) of ICTA. The cap on the exemption applies to the sum of the expenses and benefits exempted under section 240 and the amount exempted for non-cash vouchers and credit-tokens under section 268. The label “the exemption provisions total” in subsection (2) is used to refer to the aggregate total eligible for exemption under both of these sections.

985.Subsection (3) sets out “the permitted amount” for each qualifying period. The “permitted amount” is a new label for the amount described as the “authorised maximum” in section 200A(4) of ICTA.

Section 242: Works transport services

986.This section rewrites most of section 197AA of ICTA as extended by section 60 of FA 2001. That provision excludes from the charge to tax under section 154 the benefit arising from the provision of a works bus or minibus service for employees. This section goes wider and provides for no liability to income tax. See Change 45 in Annex 1.

987.The definitions of “qualifying journey” and “workplace” in section 197AA(3) and (7) have been taken to a new interpretative section, section 249, which applies to the whole Chapter. The definition of “qualifying journey” reflects the amendment to section 197AB of ICTA (support for public transport bus services) made by section 33 of FA 2002. It will enable bus and minibus journeys which start or end at pick-up points to qualify.

988.The only part of section 197AA of ICTA that has not been rewritten in this section is subsection (6). This deals with the exemption from the charge to tax under section 141 of ICTA (non-cash vouchers) where the employee is given a non-cash voucher to evidence entitlement to use the works transport service. That exemption is covered in section 266.

Section 243: Support for public bus services

989.This section derives from section 197AB of ICTA. That section excludes from the charge under section 154 the benefit arising from any financial or other support provided by one or more employers for a public bus service that their employees use for journeys to and from the workplace, or between workplaces. The section takes into account the amendments made by section 33 of FA 2002. Certain definitions are now in section 249. In providing for no liability to income tax the exemption in ICTA has been widened in the same way as in section 242. See Change 46 in Annex 1.

Section 244: Cycles and cyclist’s safety equipment

990.This section derives from section 197AC of ICTA. This prevents an employee being chargeable to income tax under section 154 in respect of the provision of a cycle or associated safety equipment. The part of section 197AC dealing with the provision of a voucher entitling the employee to use a cycle or safety equipment is covered in section 266.

991.The exception only applies where the employer provides the cycle or safety equipment for the employee’s use rather than transferring it to him. If the cycle or equipment is given to the employee to keep, the benefit arising is still chargeable to tax in the normal way.

992.The definition of “qualifying journey” in section 197AB(4) of ICTA has been taken to a new interpretative section, section 249, and in doing so has been extended by adopting the amendment to section 197AB made by section 33 of FA 2002.

993.Section 197AC(6) of ICTA includes an interpretation of “employment”. This has not been rewritten because the extension of the term to include “offices” is dealt with in section 5.

Section 245: Travelling and subsistence during public transport strikes

994.This section derives from ESC A58. It exempts payments and benefits in respect of travelling and subsistence when there is a disruption in public transport. Legislating the concession is a minor change to the law. See Change 47 in Annex 1.

995.In the normal way when the employer pays the cost of, or provides transport for, “ordinary commuting” it would in most cases be chargeable to tax and no deduction would be allowed. Nor would deductions be allowed for accommodation and subsistence paid for or provided near to the permanent workplace. This section provides an exemption for payments and benefits provided to employees to ensure they are able to get to work when there is a public transport strike.

996.If the employee is working at a temporary workplace, or on a training course, the provision of transport, accommodation and subsistence is not exempt, but a deduction is allowed under Part 5.

Section 246: Transport between work and home for disabled employees: general

997.This and the following section derive from ESC A59 and some practice as published in the Inland Revenue guidance manuals. Legislating the concession is a minor change to the law. See Change 48 in Annex 1.

998.The section provides a complete exemption from income tax where an employer provides help with home to work commuting for a disabled employee, except where a car is provided. No special mention of travelling to training is necessary because such travelling (except where it is in substance “ordinary commuting” eg when the training is held at the normal workplace) is exempt for everyone. Where that example involves a disabled employee this section provides an exemption.

Section 247: Provision of cars for disabled employees

999.This section also derives from ESC A59 and established Inland Revenue practice and concerns cases where a car is provided for a disabled employee. Legislating the concession and practice is a minor change to the law. See Change 48 in Annex 1.

Section 248: Transport home: late night working and failure of car-sharing arrangements

1000.This section derives from ESC A66. It grants an exemption from income tax in the cases of exceptional late night working and the failure of car-sharing arrangements. Legislating the concession is a minor change to the law. See Change 49 in Annex 1.

1001.The concession is limited to 60 occasions overall in the tax year. For each occasion after the sixtieth there is liability in the normal way.

1002.The journeys concerned are from work to home only. The term “ordinary commuting” cannot be used as this would include journeys from home to work.

1003.The conditions for the exemption require judgements about when it is “not…reasonable to expect” an employee to use public transport – subsection (2)(c)(ii), and what are “unforeseen and exceptional circumstances” in subsection (3)(b). It is not possible to define these questions of judgement further.

Section 249: Interpretation of this Chapter

1004.This section brings together definitions which apply to several provisions in this Chapter. The definition of “qualifying journey” has been extended by the addition of the words “the whole or part of” as made by section 33 of FA 2002 in relation to section 197AB of ICTA (support for public transport bus services). Adopting this extended definition in sections 242 and 244 is a minor change to the law. See Change 50 in Annex 1.

Chapter 4: Exemptions: education and training
Overview

1005.This Chapter contains exemptions from income tax on the provision of education and training for an employee by employers and third parties. It derives from sections 200B to 200D of ICTA (work-related training provided by employers etc), and from sections 200E to 200J of ICTA (education and training funded by employers etc).

1006.The sections first describe the provision and costs to which they apply. They then define the type of training or education with which they are concerned. Finally, they set out circumstances in which exemption from tax does not apply.

Section 250: Exemption of work-related training provision

1007.This section provides there is no liability to income tax on the provision of work-related training for an employee by the employer or by a person other than the employer.

1008.It derives from sections 200B (expenditure by the employer) and 200D (expenditure by a third party) of ICTA.

1009.Although it is possible for an employee to be exempt from tax under both section 250 and section 311 (retraining courses), it is not necessary (as in section 200C(4) of ICTA) to exclude provision exempted elsewhere, as exemption can be given under either. See Note 30 in Annex 2.

1010.Subsection (1) sets out the exemption. It covers both the provision and the payment or reimbursement of the cost of provision of the training (and any benefit incidental to the training) plus specified related costs.

1011.To accord with Inland Revenue practice, the exemption is expressed to cover training and training costs, whether provided or incurred by the employer or by a third party. See Change 52 in Annex 1.

1012.The exemption is so expressed that no charge arises under Part 2, whether as general earnings or specific employment income, on the provision and costs of work-related training. This reflects Inland Revenue practice not to apply any employment income charge which might arguably apply (say, a specific employment income charge, such as Chapter 3 of Part 6 where the training relates to a change of duties). See Change 51 in Annex 1.

1013.Subsection (2) specifies the ancillary costs within subsection (1)(b)(ii) to which the exemption applies. See Change 53 in Annex 1.

Section 251: Meaning of “work-related training”

1014.This section defines “work-related training” for the purposes of the exemption. It derives from section 200B of ICTA.

1015.The definition covers both the objectives of the training and the employment (or related employment) to which the benefit of that training must be relevant.

Section 252: Exception for non-deductible travel expenses

1016.This section deals with travel and subsistence to which the exemption does not apply. It derives from section 200C of ICTA.

1017.Subsection (1) sets out the conditions to be satisfied if travel and subsistence are not to be excepted from the exemption. Travel must meet condition A or B; subsistence must meet condition B.

1018.The section dispenses with a requirement that the expenses are incurred wholly, exclusively and necessarily in undertaking the training. Instead, as a result of cross-reference to other provisions in this Part and in Part 5, it simply requires amounts to be necessarily expended on travelling or subsistence. This accords with Inland Revenue practice and aligns the rules relating to travel and subsistence expenses in this section with those in sections 310 and 311 in Chapter 10 of this Part (exemptions: termination of employment). See Change 53 in Annex 1.

1019.Subsections (2) and (3) set out conditions A and B respectively.

1020.Travel and subsistence expenses meeting condition B include expenses that, on the assumptions in subsection (4), would be deductible under any provision of Part 5. Under ICTA, expenses within the exemption are restricted to expenses deductible only under selected sections of those rewritten in that Part. See Change 54 in Annex 1.

1021.This section is listed in section 332 (meaning of “the deductibility provisions”). Various provisions in Part 5 then ensure that certain rules in Part 5 do not adversely restrict expenses, deductible under that Part, for the purposes of condition B.

1022.Subsection (4) sets out the assumptions to be made for the purposes of subsections (2) and (3).

1023.Subsection (5) provides definitions for the purposes of the section.

Section 253: Exception where provision for excluded purposes

1024.This section deals with provision to which the exemption does not apply. It derives from section 200C of ICTA.

1025.Subsection (1) disapplies the exemption to provision for excluded purposes.

1026.Relief under section 32 Finance Act 1991 (vocational training) was repealed by Finance Act 1999, with effect from 1 September 2000 (SI 2000 No 2004, Finance Act 1999, section 59(3)(b), (Appointed Day) Order). As the exclusion from the exemption of amounts eligible for vocational training relief is obsolete, this Act does not rewrite section 200C(5) of ICTA.

1027.Subsections (2) to (4) list and define the excluded purposes.

Section 254: Exception where unrelated assets are provided

1028.This section excepts provision of assets from the exemption, where the assets are not training-related. It derives from section 200C of ICTA.

1029.Subsections (2) and (3) define “training-related asset” and “training materials”.

1030.The definition of “training materials” consists of an illustrative, rather than exhaustive, list to cater for future development in the means of delivering training without having to amend the list. See Note 31 in Annex 2.

Section 255: Exemption for contributions to individual learning account training

1031.This section provides there is no liability to income tax, from a current or former employment, on the provision of, and payment or reimbursement of the costs of, individual learning account training given by a person other than the trainee’s employer (or former employer).

1032.It derives from sections 200E (education and training funded by employers) and 200J (education and training funded by third parties) of ICTA.

1033.Although an employee may be exempt from tax under section 255 and either or both of sections 250 (work-related training) and 311 (retraining courses), provision exempted elsewhere need not be excluded (as in section 200H of ICTA), because exemption can be given under any of these. This Act does not therefore rewrite section 200H. See Note 30 in Annex 2.

1034.Subsection (1) sets out the exemption, which covers the provision of training by a training provider, funding of that training, incidental benefits of training and specified other costs paid or reimbursed.

1035.To accord with Inland Revenue practice, the exemption is expressed to cover the provision, funding and benefit of individual learning account training, whether funded or provided by the employer (or former employer) or a third party. See Change 52 in Annex 1.

1036.The exemption is so expressed that no charge arises under Part 2, whether as general earnings or specific employment income, on the funding and provision of individual learning account training. As with work-related training (section 250), it is Inland Revenue practice not to apply any employment income charge which might arguably apply. See Change 55 in Annex 1.

1037.Subsection (2) defines the trainees eligible for the exemption as account holders under the Learning and Skills Act 2000 and parties to arrangements under the Education and Training (Scotland) Act 2000.

1038.Subsection (3) specifies the ancillary costs within subsection (1)(d) to which the exemption applies. See Change 53 in Annex 1.

Section 256: Meaning of “individual learning account training”

1039.This section defines “individual learning account training” for the purposes of the exemption by reference to the Learning and Skills Act 2000 and the Education and Training (Scotland) Act 2000.

1040.It derives from section 200E of ICTA.

Section 257: Exception for non-deductible travel expenses

1041.This section deals with travel and subsistence to which the exemption does not apply. It derives from section 200F of ICTA.

1042.Subsection (1) sets out the conditions to be satisfied if travel and subsistence are not to be excepted from the exemption. Travel must meet condition A or B; subsistence must meet condition B.

1043.The section dispenses with a requirement that the expenses are incurred wholly, exclusively and necessarily in undertaking the training. Instead, as a result of cross-reference to other provisions in this Part and in Part 5, it simply requires amounts to be necessarily expended on travelling or subsistence. This accords with Inland Revenue practice and aligns the rules relating to travel and subsistence expenses in this section with those in sections 310 and 311 in Chapter 10 of this Part (exemptions: termination of employment). See Change 53 in Annex 1.

1044.Subsections (2) and (3) set out conditions A and B respectively.

1045.Travel and subsistence expenses meeting condition B include expenses that, on the assumptions in subsection (4), would be deductible under any provision of Part 5. Under ICTA, expenses within the exemption are restricted to expenses deductible only under selected sections of those rewritten in that Part. See Change 54 in Annex 1.

1046.This section is listed in section 332 (meaning of “the deductibility provisions”). Various provisions in Part 5 then ensure that certain rules in Part 5 do not adversely restrict expenses, deductible under that Part, for the purposes of condition B.

1047.Subsection (4) sets out the assumptions to be made for the purposes of subsections (2) and (3).

1048.Subsection (5) provides definitions for the purposes of the section.

Section 258: Exception where provision for excluded purposes

1049.This section deals with provision to which the exemption does not apply. It derives from section 200F of ICTA.

1050.Subsection (1) disapplies the exemption to provision for excluded purposes.

1051.Subsections (2) and (3) list and define the excluded purposes.

Section 259: Exception where unrelated assets are provided

1052.This section excepts provision of assets that are not training-related from the exemption. It derives from section 200F of ICTA.

1053.Subsections (2) and (3) define “training-related asset” and “training materials” similarly to section 254(2) and (3).

1054.The definition of “training materials” again consists of an illustrative, rather than exhaustive, list to cater for future development in means of delivering training without having to amend the list. See Note 31 in Annex 2.

Section 260: Exception where training not generally available to staff

1055.This section sets out the requirement that individual learning account training be generally available to an employer’s staff or former staff. It derives from section 200G of ICTA.

1056.Subsection (1) limits the exemption to funding and other costs incurred under “existing arrangements” which cover the making of contributions to such funding and other costs of individual learning account training for employees generally.

1057.The section extends contributions made to “existing arrangements” to contributions made by a third party as well as an employer (or former employer).

1058.Subsection (2) defines “existing arrangements” so as to link the making of contributions to arrangements in place at the time the contributions are made, whether by the employer (or former employer) or by a third party. See Note 32 in Annex 2.

1059.Subsections (3) to (5) authorise the Treasury to make regulations to determine the employer of Crown servants for the purposes of this section.

Chapter 5: Exemptions: recreational benefits
Recreational facilities

1060.The first three sections in this Chapter deal with the exemption where an employer provides certain sporting or recreational facilities for employees. These sections derive from section 197G of ICTA. The final two sections cover annual parties and functions and third party entertainment, the first deriving from an ESC and the second from section 155(7) of ICTA.

1061.The material in section 197G of ICTA has been reordered. The first section sets out the benefits to which the exemption applies, and the conditions that must be met for the exemption to apply to those benefits and the second the benefits to which the exemption does not apply. The third section notes how Treasury powers can apply or not apply these rules.

1062.In these three sections “facilities” in the plural has replaced “facility”, used in section 197G(3)(c) to (f) and in the opening words to and in section 197G(4)(b) of ICTA, to denote that it is the tangible facilities which are meant and not the opportunity to use them.

Section 261: Exemption of recreational benefits

1063.Subsection (1) provides for the exemption from income tax. Subsection (2) makes it clear that both the use of the facilities and the right or opportunity to use them are within the exemption. The availability and use of the facilities must meet the conditions set out in subsections (3) to (5) for the benefit to be exempt.

1064.The simplest case where this exemption can apply is that of a single employer. If all the conditions in subsections (3) to (5) are met, the exemption applies. In that case “the employer in question”, (subsection (3)), is the single employer.

1065.Two or more employers may provide facilities jointly. In such a case each employer is looked at separately. The condition in subsection (3) requires that the facilities must be available generally to the employees of that employer, the “employer in question”. If one employer restricts the availability to certain employees, none of the employees of that employer can claim the exemption.

1066.The use of the words “members of the public generally” in subsection (4), is to indicate that the exemption cannot apply to facilities available for public use, whether these are public facilities or in-house facilities made available to the “public generally”. However, in-house facilities made available for use to a particular sector of “the public”, meaning people other than employees, such as a local school allowed to have swimming lessons, does not prevent the exemption from applying, provided the condition in subsection (5) is met.

1067.The test at subsection (5) looks at actual use of the facilities rather than the people to whom they are made available. There are several different things taken into account here. To simplify this, subsection (5) uses the expression “employment-related” and subsection (6) then defines what that means.

1068.Under subsections (6) and (7), use by former employees and their families is included, provided the employer has made the facilities available generally to the employees.

1069.The words in brackets in subsection (5) indicate that where there is provision for the employees of more than one employer, all users must be considered. If an employer has restricted use, so that the test at subsection (5) fails for that employer, it does not prevent the use test being satisfied for other employers. Provided the restricting employer has only small numbers actually using the facilities, the “mainly” test is satisfied. This can best be explained using an example.

1070.Example. Suppose a facility is:

The exemption does not apply to A’s employees because the condition in subsection (3) is not satisfied. Subsection (3) is satisfied for B’s employees.

The opportunity to use the facilities may be employment-related for B’s employees but not for A’s. If B’s employees who use the facilities substantially outnumber the employees of A, who use them, they will be used mainly by employees whose opportunity to use them is employment-related. The condition in subsection (5) is then satisfied for B’s employees, and the exemption will apply for them.

1071.An employer may provide a non-cash voucher, which the employee must present to use the facilities provided. If the facilities meet the conditions set out, and the voucher can only be used for that purpose, section 266(3) provides that there is no liability to income tax on the cost of provision of the voucher.

Section 262: Benefits not exempted by section 261

1072.Subsection (1) sets out the benefits that are not within the exemption and subsection (2) explains some of the terms in subsection (1).

Section 263: Power to alter benefits to which section 261 applies

1073.This section gives the Treasury the power to limit or extend the scope of the exemption. The administrative procedure is contained in section 828(3) of ICTA.

Section 264: Annual parties and functions

1074.This section derives from, and gives statutory effect to, ESC A70B (Staff Christmas parties). That concession operates to exempt the employee from any income tax liability on specified office parties. See Change 56 in Annex 1. The section covers office-holders as well as employees although the concession does not expressly do so. See section 5(2).

1075.Although the heading to the concession is “Staff Christmas Parties”, the extension of the original concession to other parties indicates that it refers to annual functions in general. This is reflected in the less specific heading to this section: “Annual parties and functions”.

1076.Subsection (1) provides that the section applies to functions available to employees generally. In accordance with how the ESC was understood, it is made clear that there is scope for parties to be held in different locations.

1077.Subsections (2) to (5) show how the monetary limit is applied. Subsection (4)(b), read together with the whole section, makes it clear that the exemption effectively applies to persons attending as guests of the employees.

1078.When an ESC contains monetary limits, changes in those limits are made by press release or by republishing the ESC with different amounts. This is not possible for legislation. There are a number of exemptions in current legislation for which the Treasury fixes an amount. This Act adopts the same approach for rewritten concessions and includes a general power for the Treasury to increase the amounts in section 716. This provision is listed there.

1079.The equivalent exemption for the provision by way of a non-cash voucher (for example, a ticket for entry to a function is a voucher) is included in section 266(3) rather than within this section.

Section 265: Third party entertainment

1080.This section derives from the exemption in section 155(7) of ICTA. If the provision of the benefit in this case is “by reason of the employment” it would be within the terms of section 201 without the exemption in subsection (1).

1081.The conditions in subsections (2) to (5) make it clear that the reason for the entertainment must be gratuitous, and not in any way a reward for past or future services, nor from anyone connected with the employer. If these conditions are not met, there is no exemption.

1082.The exemption is expressed as there being “no liability to income tax”. This is wider than section 155(7) of ICTA which is expressed as an exemption from section 154 of ICTA, the general charging provision for benefits in kind. See Change 57 in Annex 1.

1083.If the provision of the entertainment is by way of a non-cash voucher or a credit-token, there are corresponding exemptions in sections 266 and 267. In ICTA these exemptions are in sections 141(6B) and 142(3B).

Chapter 6: Exemptions: Non-cash vouchers and credit-tokens
Overview

1084.This Chapter provides exemptions which apply to non-cash vouchers and credit-tokens. Anything provided by way of a non-cash voucher or credit-token which is not in the exemptions provided by this Chapter remains chargeable, even if it would be exempt where provided direct. Bringing these exemptions together is a change in approach.

1085.The derivations of the exemptions in this Chapter are those given for the exemptions applying to equivalent direct provision.

1086.The different wording used in each section and subsection in this Chapter reflects the different ways in which vouchers and credit-tokens may be used and the circumstances in which the exemption will apply.

Section 266: Exemption of non-cash vouchers for exempt benefits

1087.Subsection (1) derives from sections 141(6A), and (6B) and 197A of ICTA, section 49(1) of FA 1999, and ESCs A59 and A66. All these exemptions apply to non-cash vouchers to the extent that they are used to obtain the exempt item. The inclusion of the exemptions provided by the ESCs is a minor change to the law. See Changes 48 and 49 in Annex 1.

1088.Subsection (2) derives from sections 197AA, 197AB(5) and 197AC(5) of ICTA. In each of these provisions the voucher is not handed over, but is used as evidence of entitlement.

1089.Subsection (3) derives from sections 197(2) and 197G(1) of ICTA and ESCs A58, A70B and A74. For each of these the voucher is used only for the exempt purpose. The inclusion of the exemptions provided by the ESCs is a minor change to the law. See Changes 47, 56 and 58 in Annex 1.

1090.Subsection (4) provides the voucher exemption in respect of something exempted by use of the regulations in respect of minor benefits.

1091.Subsection (5) ensures that exemptions under this section apply even if the employee is in lower-paid employment. Unlike other benefits charges, chargeability for non-cash vouchers and credit-tokens applies to all employees.

Section 267: Exemption of credit-tokens used for exempt benefits

1092.This section derives from section 142(3A) and (3B) of ICTA, section 49(1) and (2) of FA 1999, and ESCs A58, A59, A66 and A74. The inclusion of the exemptions provided by the ESCs is a minor change to the law. See Changes 47, 48 and 49 in Annex 1.

Section 268: Exemption of vouchers and tokens for incidental overnight expenses

1093.This section exempts from charge by virtue of Chapter 4 of Part 3 both non-cash vouchers and credit-tokens used to meet “incidental overnight expenses”. It derives mainly from sections 141(6C) and 142(3C) of ICTA.

1094.Subsection (1) sets out the terms of the exemption where the voucher or token is used to obtain goods, services or money.

1095.Subsections (2) to (5) set out the conditions to be satisfied.

1096.Subsection (6) provides definitions of terms used in the section by cross-reference to the exemption in sections 240 (incidental overnight expenses and benefits) and 241 (incidental overnight expenses and benefits: overall exemption limit) for equivalent direct provision.

Section 269: Exemption where benefits or money obtained in connection with taxable car or van or exempt heavy goods vehicle

1097.This section exempts from charge by virtue of Chapter 4 of Part 3 both non-cash vouchers and credit-tokens used for expenditure on taxable cars or vans, or on exempt heavy goods vehicles.

1098.Subsection (1) sets out the exemption. It derives from sections 157(3)(b), 159AA(3)(b) and 159AC(3)(b) of ICTA.

1099.Subsection (2) qualifies the exemption by reference to the provisions of section 149 (benefit of car fuel treated as earnings) where what is obtained is fuel for a car.

1100.Subsections (3) and (4) provide definitions of terms used in the section and make clear the tax year for which the car, van or heavy goods vehicle is taxable or exempt. See Note 33 in Annex 2.

1101.The definition of how a heavy goods vehicle is “exempt” for the purposes of this section ensures that the exemption applies where the employee is in lower-paid employment. This is a minor change to the law. See Change 43 in Annex 1.

Section 270: Exemption for small gifts of vouchers and tokens from third parties

1102.This section provides there is no liability to tax by virtue of Chapter 4 of Part 3, in respect of small gifts from third parties which take the form of a non-cash voucher or credit-token, where conditions are satisfied. It derives from ESC A70A and is a minor change to the law. See Change 59 in Annex 1.

1103.Subsection (1) sets out the terms of the exemption where the conditions are satisfied.

1104.Subsections (2) to (4) set out the conditions, in part by cross-reference to the provisions of section 324 (small gifts from third parties).

Chapter 7: Exemptions: Removal benefits and expenses
Section 271: Limited exemption of removal benefits and expenses: general

1105.This section gives details of the limited exemption for removal expenses. It sets out the general proposition that no liability to income tax arises in respect of any removal benefits or reimbursed removal expenses listed in this Chapter, up to the limit set out in section 287 of this Act. The section derives from parts of paragraph 1 of Schedule 11A to ICTA.

1106.Subsection (1) sets out the basic proposition that the exemption is available. The opening words of paragraph 1(1) of Schedule 11A, “where by reason of a person’s employment” have not been rewritten. Those words are not necessary because there is no tax charge in respect of benefits or reimbursed expenses unless they arise “by reason of a person’s employment”. The exemptions in this Chapter only apply where there is the possibility of such a charge.

1107.Subsection (2) reproduces the effect of the exclusion, by virtue of paragraph 1(1) of Schedule 11A, of certain income from the exemption because it is within Case III of Schedule E. Paragraph 2 of Schedule 11A ensures that the exemption from charge under Cases I and II of Schedule E does not result in the benefits or expenses being chargeable under Case III of Schedule E, as a result of the operation of section 131(2) of ICTA. In this Act, by virtue of the provisions that define “taxable earnings” for the purposes of Chapter 4 of Part 2, it is no longer possible for the same earnings to fall within one of those provisions and also within “taxable earnings” as defined for the purposes of Chapter 5 of Part 2. As a consequence there is no need to rewrite paragraph 2.

1108.Subsection (3) gives a signpost to the section containing the limit on the exemption.

Section 272: Removal benefits and expenses to which section 271 applies

1109.This section identifies the types of benefits and expenses that qualify for the exemption. It derives from paragraphs 3, 4, 7 and 16 of Schedule 11A to ICTA.

1110.Subsection (1) lists all the benefits potentially within the scope of the limited exemption set out in section 271. It gives signposts to the sections that contain the detailed descriptions of those benefits and states the overriding conditions that must be satisfied.

1111.Subsection (2) ensures that if a voucher or credit-token is used to obtain goods or services or money to pay for them such benefits are within the scope of the exemption. See Change 60 in Annex 1.

1112.Subsection (3) lists the types of expenses that qualify for the exemption. It relies largely on the list in subsection (1) and adds, in paragraph (c), one expense for which there is no corresponding benefit.

1113.One of the conditions for the exemption to be available is that the benefits must be provided or that the reimbursed expenses must be incurred on or before a particular day. In the source legislation that day is called the “relevant day” and is defined in paragraph 6 of Schedule 11A to ICTA. That label has been changed to “the limitation day”, which is defined in section 274 of this Act.

Section 273: Conditions applicable to change of residence

1114.This section gives more details about the three conditions referred to in section 272(1)(a). The section derives from paragraph 5 of Schedule 11A to ICTA. The words in brackets in paragraphs 5(1)(b) and (c) of Schedule 11A have not been reproduced, as they do not add anything.

1115.Subsection (1) introduces the three subsections that give details of the conditions.

1116.Subsection (2) identifies the three possible events that can trigger the exemption.

1117.Subsection (3) is concerned with the reason for the change of residence.

1118.Subsection (4) contains a restriction on the application of the exemption if a change of residence would be unnecessary.

Section 274: Meaning of “the limitation day”

1119.This section defines “the limitation day”, which rewrites the idea labelled “the relevant day” in ICTA, using a reference to a new concept, “the employment change”. The section derives from paragraph 6 of Schedule 11A to ICTA.

1120.Subsection (1) defines “the limitation day”, subject to subsection (2).

1121.Subsection (2) gives scope for the Inland Revenue to extend the period before the limitation day, if it seems reasonable to do so. The reference to “Inland Revenue” reflects the practice whereby the Board of Inland Revenue delegates the initial decision on this matter to the Officer in Charge of the local office concerned. See Change 158 in Annex 1.

Section  275: Meaning of “the employment change”

1122.This section is pure drafting, which defines the new label “the employment change”.

1123.A number of the later paragraphs in Schedule 11A to ICTA refer to the circumstances set out in paragraph 5(1). The relevant change in those circumstances, now rewritten in section 273(2), has been given the label “the employment change” to make the rewriting of those references more straightforward.

Section 276: Meaning of “residence”, “former residence” and “new residence” etc.

1124.This section defines three labels related to the employee’s various possible residences, including a definition of “residence” itself. The section derives from section 191B(16) of ICTA and paragraph 25 of Schedule 11A to ICTA.

1125.In subsection (1) there is no longer a reference to an employee’s “sole or main residence”. Instead the residence in question is defined more closely as being the employee’s main residence.

1126.Subsection (2) defines “former residence” and “new residence”.

1127.Subsection (3) defines what is meant by “an interest in a residence”.

Section 277: Acquisition benefits and expenses

1128.This section combines two similar provisions and so cuts out duplication. It sets out the benefits and expenses associated with the acquisition of a residence that come within this Chapter. The same approach (of combining the rules for benefits and expenses) has been adopted in a number of the following sections. The section derives from paragraphs 9 (expenses) and 18 (benefits) of Schedule 11A to ICTA.

1129.Subsection (1) makes it clear that the interest in the new residence need not be held exclusively or indeed at all by the employee, provided it is held (either exclusively or jointly) by one or more members of the employee’s family or household.

1130.Subsection (2) identifies the types of benefit within the section.

1131.Subsection (3) identifies the types of expenses within the section, by building on the description of some of the benefits covered and adding those expenses where there is no equivalent benefit.

1132.Subsection (4) broadens the scope of who can raise a loan, other than or as well as the employee, in similar terms to those applying to an interest in the new residence covered in subsection (1).

1133.Subsection (5) defines terms used in subsection (3)(d).

Section 278: Abortive acquisition benefits and expenses

1134.This section brings together in one section the provisions relating to expenses and benefits connected with an abortive acquisition of a new residence. It describes the circumstances that could lead to it being applied and relates back to section 277 to identify the type of benefits or expenses covered. The section derives from paragraphs 10 (expenses) and 19 (benefits) of Schedule 11A to ICTA.

Section 279: Disposal benefits and expenses

1135.This section brings together in one section the provisions relating to expenses and benefits connected with the disposal of the employee’s former residence. The section derives from paragraphs 8 (expenses) and 17 (benefits) of Schedule 11A to ICTA.

1136.Subsection (1) describes the circumstances in which the section applies.

1137.Subsection (2) identifies the types of benefit within the section.

1138.Subsection (3) identifies the types of expenses within the section, by building on the description of some of the benefits covered and adding those expenses where there is no equivalent benefit.

1139.Subsection (4) broadens the scope of who can have an interest in the former residence, other than or as well as the employee, in similar terms to those applying to an interest in the new residence as covered in section 277(1), dealt with in paragraph 1129.

1140.Subsection (5) defines what is meant by “related loan” for the purposes of this section. This Act widens the scope of loans that qualify for exemption under this section. See Change 61 in Annex 1.

Section 280: Transporting belongings

1141.This section brings together in one section the provisions relating to expenses and benefits connected with the transportation of belongings. It derives from paragraphs 11 (expenses) and 20 (benefits) of Schedule 11A to ICTA.

1142.Subsection (1) identifies the types of benefit within the section.

1143.Subsection (2) identifies the types of expenses within the section, by reference to the description of the benefits covered.

1144.Subsection (3) defines “domestic belongings” and “transportation”.

Section 281: Travelling and subsistence

1145.This section brings together in one section the provisions relating to expenses and benefits connected with travelling and subsistence. It derives from paragraphs 12 (expenses), 21 (benefits) and 28 of Schedule 11A to ICTA.

1146.Subsection (1) identifies the types of benefit within the section. Subsection (1)(f) introduces a new label “education-linked living accommodation”. Subsection (1)(g) introduces a new label “the employee’s accommodation”. It also widens the scope of the exemption for travel to and from such accommodation. See Change 62 in Annex 1.

1147.Subsection (2) defines “education-linked living accommodation”.

1148.Subsection (3) defines “the employee’s accommodation”.

1149.Subsection (4) identifies the types of expenses within the section, by reference back to the description of the benefits covered.

1150.Subsection (5) identifies some exclusions from the exemptions provided by this section, by reference to circumstances described in subsequent sections.

1151.Subsection (6) defines “new duties”, “former area”, “new area”, “relevant child” and “subsistence”.

Section 282: Exclusion from section 281 of benefits and expenses where deduction allowed

1152.This section identifies benefits and expenses that are excluded from the exemptions provided for in this Chapter. It derives from paragraphs 12(4) and 21(7) and (8) of Schedule 11A to ICTA.

1153.Subsection (1) states the general proposition about exclusion of certain benefits or expenses by reference to an amount being deductible under other provisions.

1154.Subsection (2) identifies those provisions.

1155.Subsection (3) deals with the circumstance where a deduction might be allowed for only part of a benefit provided. In that case the other part of the benefit might still be exempt.

Section 283: Exclusion from section 281 of taxable car and van facilities

1156.This section provides that the exemption does not apply to car or van benefits. It derives from paragraphs 21(2) and (4) to (6) of Schedule 11A to ICTA.

1157.Subsection (1) provides that the exemption in section 281(1) does not apply to car or van benefits. The Act widens the scope of the exemption when compared with a strict interpretation of the source legislation. See Change 63 in Annex 1.

1158.Subsection (2) identifies the sections containing the definitions of the terms used in subsection (1).

Section 284: Bridging loan expenses

1159.This section deals with bridging loan expenses (interest) connected with an employee’s change of residence resulting from an employment change. It derives from paragraph 13 of Schedule 11A to ICTA.

1160.Subsection (1)(a) combines the first two conditions that the bridging loan must satisfy, which are in paragraph 13(1)(a) and (b) of Schedule 11A. Subsection (1)(b) and (c) list the other conditions.

1161.Subsection (2) gives a restricted definition of interest that falls within the section. Paragraphs 13(4) and (5) of Schedule 11A set out the purpose for which the loan must have been used. The Act combines those provisions without any change in effect. The same change as described in paragraph 1140 in relation to section 279 has been made here. See Change 61 in Annex 1.

1162.Subsection (3) places a further restriction on the amount of interest that can come within the section.

1163.The source legislation does not specify how to allocate the total loan interest between exempt and non-exempt parts of the loan where paragraph 13(3) and (4) of Schedule 11A both apply. Subsection (4) recognises that possibility by introducing the idea of “the appropriate fraction”. See Change 64 in Annex 1.

1164.Subsection (5) includes a method statement to explain how to arrive at the appropriate fraction. See Change 64 in Annex 1.

1165.Subsection (6) combines in one subsection the provisions from paragraph 13(7) of Schedule 11A that extend the meaning of interest payable by an employee and paragraph 13(8) of Schedule 11A that apply a parallel extension in meaning to references to a loan being raised by the employee.

Section 285: Replacement of domestic goods

1166.This section brings together in one section the provisions relating to expenses and benefits connected with replacing domestic goods. The heading in the source legislation, “duplicate expenses”, does not really describe what this provision is about. The new heading is more informative. The section derives from paragraphs 14 (expenses) and 22 (benefits) of Schedule 11A to ICTA.

1167.Subsection (1) describes the circumstances in which the section operates. Under paragraph 14(2) of Schedule 11A if an employee sells any of the domestic goods replaced by the new goods covered by paragraph 14(1) of Schedule 11A, the sale proceeds have to be deducted from the amount that qualifies under that paragraph. This subsection does not reproduce that requirement to deduct the sale proceeds of replaced domestic goods. See Change 65 in Annex 1.

1168.Subsection (2) broadens the scope of who can have an interest in the new and/or former residence(s), other than or as well as the employee, in similar terms to those applying to an interest in the new residence as covered in section 277(1), dealt with in paragraph 1129.

Section 286: Power to amend sections 279 to 285

1169.This section brings together the provisions dealing with the Treasury’s regulation-making powers. It derives from paragraphs 15 (expenses) and 23 (benefits) of Schedule 11A to ICTA.

1170.Subsection (1) provides powers that allow the Treasury to make regulations to extend sections 279 to 285 to bring within their scope benefits or expenses not otherwise covered.

1171.Subsections (2) and (3) allow the Treasury some latitude in what they may do and how they may do it.

Subsection (4) prevents the Treasury from making retrospective regulations under the powers in this section.

Section 287: Limit on exemption

1172.This section sets out the limit on the total amount of the exemption available under this Chapter. It derives from paragraph 24 of Schedule 11A to ICTA.

1173.Subsection (1) states the limit that applies to the amount of benefits and expenses that can be exempted.

1174.Subsection (2) includes a list of items that count towards the £8,000 limit. Subsection (2)(b) states that the benefit code earnings, which in this Act includes amounts related to the use of vouchers and/or credit-tokens, are to be counted towards the value of the exemption. See Change 60 in Annex 1.

1175.Subsection (3) explains what is meant in subsection (2) by “the section 62 earnings”.

1176.Subsection (4) explains what is meant in subsection (2) by “the benefits code earnings”. In combination with subsection (2)(b) it prevents any possible double counting of an amount. See Change 66 in Annex 1.

1177.The source provisions also go into great detail about how to quantify the amount of benefit relating to the provision of living accommodation in paragraph 24(4) to (8) of Schedule 11A. Subsection (5) amalgamates all that detail. It brings together the various permutations for the computation of amounts chargeable in such cases.

Section 288: Limited exemption of certain bridging loans connected with employment moves

1178.This section gives details of what kind of loan is covered. It contains a formula for working out the day by which the loan must be repaid if there is to be no charge to tax under what was section 160 of ICTA (rewritten in Chapter 7 of Part 3 of this Act, mainly in section 175). It also includes some interpretative provisions. The section derives from section 191B(1) to (6), (10) to (12) and parts of (8), (9) and (13) of ICTA.

1179.Subsection (1) describes the circumstances in which the exemption arises.

1180.Subsection (2) describes in what circumstances a loan is within the term “a removal benefit” as used in subsection (1).

1181.Subsection (3) describes how there can be “unused removal benefit exemption” as mentioned in subsection (1).

1182.Subsection (4) shows how to calculate the amount of “the exempted loan discharge period”, as mentioned in subsection (1).

1183.Subsection (5) broadens the scope of who can raise a loan that qualifies for the exemption. Similarly it broadens who can have an interest in the new and/or former residence(s), other than, or as well as, the employee. It does that in similar terms to those applying to an interest in the new residence as covered in section 277(1), dealt with in paragraph 1129.

1184.Subsection (6) provides for the tax payable to be decided on a provisional basis, should the whole circumstances surrounding the loan not be known at the time the need to make a decision arises.

Section 289: Relief for certain bridging loans not qualifying for exemption under section 288

1185.This section provides a measure of relief for those loans that do not qualify under the provisions of the section 288. It derives from section 191B(8) and (13) of ICTA.

1186.Subsection (1) describes the circumstances in which this section applies.

1187.An employee who has a bridging loan that would otherwise come within the provisions of the preceding section may not repay that loan until after the day determined by the formula set out in section 288(4). If so, the employee would not come within the exemption now set out in that section. In such a case the employee’s liability in respect of the beneficial loan under section 175 of this Act is worked out as if the loan had been made on the day determined by that formula. Subsection (2) rewrites the corresponding provision from the source legislation.

1188.Subsection (3) maintains the position in the source legislation whereby that extension only applies to those matters covered by what was section 160 of ICTA and not to the matters covered by what was section 161 of ICTA.

1189.Subsection (4) provides for the tax payable to be decided on a provisional basis, should the whole circumstances surrounding the loan not be known at the time the need to make a decision arises.

Chapter 8: Exemptions: Special kinds of employees
Section 290: Accommodation benefits of ministers of religion

1190.This section provides that there is no liability to tax in respect of benefits arising in connection with accommodation provided for a full-time minister (defined at subsection (5)) in premises owned by a charity or ecclesiastical corporation.

1191.It derives from section 332 of ICTA.

1192.Subsection (1) provides that no liability to tax arises in respect of the payment or reimbursement of a statutory amount or statutory deduction. Both these terms are defined at subsection (5).

1193.Subsection (2) provides that no liability to tax arises in respect of expenses paid or reimbursed in connection with the provision of the accommodation where the minister is in “excluded employment”. “Excluded employment” is defined in section 239(9).

1194.Subsection (3) excludes from the exemptions any parts of the property for which the minister is in receipt of rent.

1195.Subsection (4) defines the premises in respect of which benefits qualify for the exemption.

1196.Subsection (5) provides definitions for terms used in the section, including a definition of “charity” drawn from section 506(1) of ICTA. See Note 34 in Annex 2.

Section 291: Termination payments to MPs and others ceasing to hold office

1197.This section derives from section 190 of ICTA. It refers to Acts that give MPs, MEPs and certain other political office-holders an entitlement to termination payments. That entitlement, established prior to termination, makes the payments chargeable to tax as earnings. The payments are in fact compensation for loss of office. If it were not for the predetermined entitlement they would normally fall within section 148 of ICTA and tax would be chargeable on an amount above the £30,000 threshold.

1198.This section ensures that such payments are not treated as earnings and are instead taxed as termination payments under Chapter 3 of Part 6 (which derives from section 148 of ICTA), subject to the threshold set out in that Chapter.

1199.Section 190(3) of ICTA applies to “grants and payments if they are not pension payments”. The reference to pension payments is unnecessary because section 190 applies to “emoluments” and pension payments are not taxed as emoluments. The reference to pension payments has not been included in the rewritten section because they are not taxed as employment income.

1200.The reference to the Parliamentary Pensions Act 1984 has been omitted as it was repealed by the Ministerial and other Pensions and Salaries Act 1991 and would only apply where the loss of office was before 28 February 1991. It is now spent.

1201.The meaning of “a relevant office” is set out in section 4(6) of the Ministerial and Other Pensions and Salaries Act 1991. Broadly it covers all Government Ministers, Opposition Leaders and Whips, the Chairman and Deputy Chairmen of Ways and Means, and the Chairman and Deputy Chairman of Committees of the House of Lords.

Section 292: Overnight expenses allowances of MPs

1202.This section derives from part of section 200 of ICTA. It provides an exemption from income tax for certain allowances paid to Members of Parliament which without the exemption would be chargeable to tax as earnings.

1203.The allowances that qualify are those provided for by a resolution of the House of Commons covering the overnight expenses set out in the section, where an MP has to stay away from home overnight either in London or in the constituency in order to carry out Parliamentary duties.

1204.The material in sections 200 and 200ZA of ICTA has been rearranged. Overnight expense allowances to members of the House of Commons are dealt with in this section. Those paid to members of the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly are covered in section 293. Travel by members to European Union institutions or to the parliament of another member State is dealt with in section 294.

1205.Although the allowances are exempt from tax this section does not prohibit a deduction for an MP’s expenses in respect of which the allowances are paid. That prohibition is in section 198(4) of ICTA, which is rewritten as section 360.

Section 293: Overnight expenses of other elected representatives

1206.This section derives from the overnight expenses part of section 200ZA of ICTA in respect of elected representatives of the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly.

1207.This exemption has not been combined with the similar one for Members of the House of Commons because the detailed rules are different. It is clearer to keep them separate. Again, this section is supplemented by section 360.

Section 294: EU travel expenses of MPs and other representatives

1208.This section brings together the exemption for European Union travelling expenses paid to MPs and members of the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly. It derives from parts of sections 200 and 200ZA of ICTA.

1209.The definition of European Union travel expenses is the same in both section 200 and section 200ZA of ICTA. It incorporates the extension to EU candidate countries made by section 41 of FA 2002. Combining the relevant parts of the two sections cuts out duplication. Again this section is supplemented by section 360.

Section 295: Transport and subsistence for Government ministers etc.

1210.This section provides an exemption in respect of transport or subsistence provided for certain Government office-holders, mainly Ministers, and members of their families or households. It derives from section 200AA of ICTA. The exemption also covers payments and reimbursements of travel and subsistence expenses if they are made by or on behalf of the Crown.

1211.The exemption was extended in FA 1999 to apply to Ministers and similar office-holders serving in the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly.

1212.For the purposes of this exemption, the provision of transport includes the provision of a car, which would otherwise give rise to a charge to tax under the benefits code. The source legislation applies the exemption specifically to cars, but then goes on to define a car as “any mechanically propelled road vehicle” – a phrase which could include, for example, a van or a motorbike. This slight incongruity has been removed by applying the exemption to the provision of a “vehicle”, and defining “vehicle” in the same way as “car” is defined in the source legislation. It therefore applies to vans and motorbikes as well as cars.

Section 296: Armed forces’ leave travel facilities

1213.This section provides there is no liability to tax on armed forces’ leave travel facilities. It derives from section 197 of ICTA.

1214.Subsection (1) sets out the exemption. It covers the various travel warrants and allowances, including allowances for the use of private cars, made available to service personnel.

1215.The section substitutes “the armed forces of the Crown” for the wording, “the naval, military or air forces of the Crown”, in section 197 of ICTA. The two terms are construed as having the same meaning and include all United Kingdom service personnel, both members of a regular force and members of a reserve force. References to the “armed forces” now also include the women’s services, which was not the position in 1977 when the exemption was introduced. The same term is used in this section and in section 297 for the same body of taxpayers.

1216.Subsection (2) excludes the provision of a vehicle for leave travel. Such provision remains taxable as a benefit under Chapter 6 of Part 3 (taxable benefits: cars, vans and related benefits). “Travel facilities” are not otherwise defined or limited.

Section 297: Armed forces’ food, drink and mess allowances

1217.This section provides that no liability to income tax arises in respect of allowances paid to members of the armed forces, if those allowances are paid instead of food or drink, or as a contribution to the expenses of a mess. The section is the first of two that derive from parts of section 316 of ICTA.

1218.The legislation in section 316 derives from a number of different provisions originally enacted between 1946 and 1951. Those provisions were consolidated first as section 457 of ITA 1952 and then as section 366 of ICTA 1970 before becoming section 316. In the case of Lush (HM Inspector of Taxes) v Coles (1967) 44 TC 169, at 172G, Stamp J described them as containing “something of a hotchpot”.

1219.Section 316 has five subsections, which may be divided into three categories.

1220.The first category consists of subsection (3), which deals with food and mess allowances. Subsection (3) is dealt with in this section. The subsection makes provision for two different categories of allowances; and it has been found helpful to deal with the two categories separately.

1221.The second category consists of subsection (4), which deals with training expenses allowances. Subsection (4) is dealt with in section 298.

1222.The third category consists of subsections (1), (2) and (5). These subsections deal with re-enlistment bounties and gratuities under schemes set up in 1946 and 1950 for certain categories of military personnel who had seen active service, either during the Second World War or in the years immediately following it. So far as may now be discovered, these schemes all came to an end many years ago; and consultations between the Inland Revenue and the Ministry of Defence have led to agreement that these provisions should not be retained. These subsections are not rewritten in this Act on the grounds that they are obsolete.

Section 298: Reserve and auxiliary forces’ training allowances

1223.This section provides that no liability to income tax arises in respect of training allowances and bounties payable out of the public revenue to members of the reserve and auxiliary forces of the Crown. The section is the second of two deriving from provisions contained in section 316 of ICTA, and derives from subsection (4) of that section.

1224.This provision was litigated in Lush (HM Inspector of Taxes) v Coles (1967) 44 TC 169, where the taxpayer was an officer in the Civil Defence Corps who received a training bounty of £15 from local authority funds. The General Commissioners upheld his appeal against an assessment under Schedule E on the grounds that the bounty fell within what is now section 316(4). But the Inspector’s appeal to the High Court was successful, because Stamp J held that a sum paid out of local authority funds could not be described as being paid “out of the public revenue”.

Section 299: Crown employees’ foreign service allowances

1225.This section provides there is no liability to tax on allowances paid to Crown employees as compensation for the extra cost of having to live outside the United Kingdom when working abroad. It derives from section 319 of ICTA.

1226.An allowance is exempt only if a certificate as to its purpose has been given by the Treasury or by an appropriate Minister.

1227.Subsection (2) lists the persons who, in addition to the Treasury, may give such a certificate.

1228.That list derives from the Transfer of Functions (Foreign Service Allowance) Order, SI 1996 No 313 (as varied by the Transfer of Functions (Lord Advocate and Secretary of State) Order, SI 1999 No 678 with effect from 19 May 1999, and the Ministry of Agriculture, Fisheries and Food (Dissolution) Order 2002, SI 2002 No 794 with effect from 27 March 2002).

Section 300: Consuls

1229.This section provides that employment income from the office of a consul (defined in subsection (3)) in the United Kingdom in the service of a foreign state is not liable to income tax.

1230.It derives from section 321 of ICTA.

1231.Subsection (1) provides the exemption.

1232.Subsection (2) provides that the income is also disregarded in estimating income for any other income tax purpose.

1233.Subsection (3) defines “consul”.

Section 301: Official agents

1234.This section provides that employment income from an employment as an official agent (defined at subsection (5)) in the United Kingdom for a foreign state is not liable to tax if certain conditions are met.

1235.It derives from section 321 of ICTA.

1236.Subsection (1) provides that no liability arises on the employment income when two conditions are met.

1237.Subsection (2) gives the first of those conditions.

1238.Subsection (3) gives the second of those conditions.

1239.Subsection (4) provides that such income is disregarded in estimating the amount of income for any income tax purpose.

1240.Subsection (5) defines “official agent”.

1241.Subsection (6) provides a condition to the definition of “official agent” in subsection (5).

Section 302: Consular employees

1242.This section provides that employment income from an employment in the United Kingdom as a consular employee (defined at subsection (4)) of a foreign state is not liable to tax where the appropriate Order in Council has been made and certain conditions are met.

1243.It derives from section 322 of ICTA.

1244.Subsection (1) provides that no liability arises on the employment income when an Order in Council gives effect to a reciprocal arrangement (defined at subsection (4)) and one of two conditions is met.

1245.Subsection (2) gives the first condition.

1246.Subsection (3) gives the second condition. Following the enactment of the British Overseas Territories Act 2002, references to “British Dependent Territories citizen” in earlier enactments are to be read as “British overseas territories citizen”. This has been incorporated here.

1247.Subsection (4) defines “consular employee” and “reciprocal arrangement”.

1248.Subsection (5) allows an Order in Council to limit the operation of the section in such a way as is considered necessary or expedient.

1249.Subsection (6) allows the Order in Council to have effect from an earlier date than the date on which it is made and to contain transitional provisions.

1250.Subsection (7) provides that the statutory instrument containing the Order is subject to a negative resolution.

1251.Subsection (8) provides that this section operates without prejudice to section 301.

Section 303: Visiting forces and staff of designated allied headquarters

1252.This section confers income tax benefits upon visiting forces and NATO staff.

1253.The section derives from section 323 of ICTA, which confers two income tax benefits:

1254.This section deals with the first income tax benefit. It is proposed to deal with the second benefit in a future rewrite Bill.

1255.The exemption from income tax applies for several different descriptions of individuals:

1256.Section 323 of ICTA is entitled “Visiting forces”. This section has a longer title, which is designed to be more informative.

1257.Two definitions needed for this section are contained in Part 1 of the Visiting Forces Act 1952. The definitions are those of a visiting force, in section 12(1) of that Act, and of a member of a civilian component of a visiting force, in section 10 of that Act. No attempt has been made to set out those definitions in this section – partly for reasons of length and partly because there is no wish to lose the explicit link between this section and the 1952 Act.

1258.Following the enactment of the British Overseas Territories Act 2002, references to “British Dependent Territories citizen” in earlier enactments are to be read as “British overseas territories citizen”. This change has been incorporated in subsection (4) .

1259.In this section, the cross-references to the Visiting Forces Act 1952 differ slightly from those in section 323 of ICTA. Subsection (5) contains a reference to “Part 1 of the Visiting Forces Act 1952” as opposed to the reference to “the Visiting Forces Act 1952” in section 323(4). The additional words “Part 1 of” were in section 367(3) of ICTA 1970 (the predecessor of section 323(4) of ICTA 1988). These words have been reinstated, because the two most important interpretative provisions, for present purposes, are in Part 1 of the 1952 Act and apply for the purposes of that Part. Those provisions are the definitions of a member of a civilian component of a visiting force and of a visiting force.

1260.Subsection (5) also corrects another minor drafting error in section 323(4). That subsection refers to subsections (1) and (2) of section 323, and it is then stated that “those subsections shall be construed as one with the Visiting Forces Act 1952”. However, the reference to a “civilian component” of a visiting force depends entirely upon subsection (4) itself; and no requirement is imposed to construe subsection (4) as one with the 1952 Act. It is thought that there cannot be any doubt that the provisions of section 10 of the Visiting Forces Act 1952 must be applicable; and the provision has been rewritten on this basis.

1261.Section 323 is one of a number of provisions that confer tax benefits to visiting forces and NATO staff. Other provisions are:

Section 304: Experts seconded to European Commission

1262.This section provides there is no liability to tax on daily subsistence allowances paid by the European Commission to “detached national experts”.

1263.It derives from ESC A84. See Change 67 in Annex 1.

1264.Subsection (1) sets out the exemption for allowances paid to persons seconded under the “detached national experts scheme”.

1265.Detached national experts are people seconded to the Commission to advise and assist Commission officials for periods from three months to three years, under a scheme introduced on 26 July 1988.

1266.Subsection (2) defines “detached national experts scheme” and provides for the exemption from tax to continue in the event that the scheme is replaced by a new scheme having broadly the same effect.

Section 305: Offshore oil and gas workers: mainland transfers

1267.This section provides an exemption from income tax for certain benefits received by a limited number of employees who work on offshore oil or gas installations. It derives from ESC A65. Legislating the concession is a minor change to the law. See Change 68 in Annex 1.

1268.Those employees whose permanent workplace is the installation would normally be chargeable to tax in respect of any transport, accommodation and subsistence provided. That is because the travel to that workplace would be travel between home and work, so no deduction could be claimed under Part 5 for that or for any associated accommodation and subsistence. Under ESC A65 such benefits are not charged to tax.

1269.The provision of transport exempted by this section is confined to that part of the journey between home and work which starts at the mainland departure point from which the oil and gas rig workers are normally transported to the offshore installation. In subsection (3) this is defined as “transfer transport”. Apart from travel from the nearby overnight accommodation (defined in subsection (6) as “local transport”), it does not provide exemption for travel between the mainland departure point and a place other than the offshore installation.

1270.If the employee has a permanent workplace on the mainland, the provision of transport to the installation is not exempt, but a deduction under Part 5 would be available. The same applies to the accommodation and subsistence in connection with such travel. This position is preserved by subsection (5) which makes it clear that the exemption only applies to the provision of transport, accommodation and subsistence for which a deduction would not be due if the employee had met the cost.

Section 306: Miners etc.: coal and allowances in lieu of coal

1271.This section provides an exemption from income tax to free coal, and smokeless fuel, and payments in lieu of free coal given to miners and certain other colliery workers. It derives from ESC A6. Legislating the concession is a minor change to the law. See Change 69 in Annex 1.

1272.Subsection (1) identifies the scope of the exemption and who qualifies.

1273.Subsection (2) limits the scope of the exemption to the provision of free coal, or the payment of cash in lieu, of an amount that represents a reasonable level of personal consumption. But subsection (3) assumes that this condition is met unless the Inland Revenue can show that it is not. The purpose of these two subsections is to reproduce the restriction that applies to all ESCs - a concession will not be given where an attempt is made to use it to avoid tax. It is not expected that anyone benefiting from the concession will not continue to benefit from exemption under this section.

1274.Subsection (4) gives the definition of “colliery worker”. It includes all those persons who were regarded as coming within the scope of the concession.

Chapter 9: Exemptions: Pension provision
Section 307: Death or retirement benefit provision

1275.This section provides an exemption from the charge under the benefits code in respect of the provision by an employer for death or retirement benefits for an employee. It derives from a combination of the exemptions currently available under section 155(4) of ICTA and under ESC A72. That concession widens the scope of section 155(4), which only applies to death etc benefits payable to an employee’s spouse, children or dependants. The concession covers death etc benefits payable to other members of the employee’s family or household as defined in section 168(4) of ICTA. That definition is now in section 721(5).

1276.To the extent that this section legislates ESC A72 it is a minor change to the law. See Change 70 in Annex 1.

1277.An employee normally nominates the person to whom any death benefits should be paid. The exemption only applies if that nominee remains a member of the employee’s family or household.

Section 308: Exemption of contributions to approved personal pension arrangements

1278.This section provides there is no liability to income tax on contributions by an employer under approved personal pension arrangements made by the employee. It derives from section 643(1) of ICTA.

1279.Subsection (1) provides there is no liability to income tax on such contributions as earnings.

1280.Subsection (2) sets out relevant definitions by cross-reference to section 630(1) of ICTA.

1281.A personal pension scheme may be approved by the Board of Inland Revenue under section 631 of ICTA, in accordance with the rules in Chapter 4 of Part 14 of that Act.

Chapter 10: Exemptions: Termination of employment
Section 309: Limited exemptions for statutory redundancy payments

1282.This section provides for limited exemptions from income tax in respect of redundancy payments and approved contractual payments.

1283.Subsection (1) provides that there is no liability to income tax on redundancy payments and approved contractual payments as general earnings, except where subsection (2) applies. That subsection applies where the amount of an approved contractual payment exceeds the amount which would have been due if a redundancy payment had been payable. In such a case the excess is liable to income tax.

1284.Subsection (3) provides that there is no liability to income tax on redundancy payments and approved contractual payments as specific earnings, except under Part 6 Chapter 3 (payments and benefits on termination of employment).

1285.This section derives from parts of sections 579 and 580 of ICTA. It is drafted by reference to an “approved contractual payment” as opposed to the “corresponding amount of any other employer’s payment” – the expression used in section 579(1). The section also introduces the expression “statutory payment” to describe the sum specified in section 579(6). These new expressions should make the legislation easier to follow. They also have the consequence that it is possible to dispense with the definition of “the Minister” in section 580(1)(c).

Section 310: Counselling and other outplacement services

1286.This section provides there is no liability to income tax on the provision of counselling and other services in connection with the cessation of a person’s employment.

1287.It derives from sections 589A and 589B of ICTA as they apply to an employee. The provisions of 589A and 589B as they apply to an employer do not change, except that they have been amended to reflect the minor changes to the law made in this section. See paragraph 69 of Schedule 6.

1288.Subsection (1) provides the exemption and the conditions to be satisfied.

1289.Subsection (2) sets out condition A, which relates to the purpose of the provision of the services.

1290.Subsection (3) sets out condition B, which relates to the services provided.

1291.Subsection (4) sets out condition C, which relates to the qualifying two year period of continuous employment.

1292.Under the Employment Rights Act 1996, some events that involve a change in the identity of the employer are treated as not breaking the continuity of employment. The two year requirement is therefore expressed in terms of the employment that is ceasing, not of employment by the employer. See Change 71 in Annex 1.

1293.Subsection (5) sets out condition D, which relates to the availability of the services to employees generally.

1294.Subsection (6) sets out condition E, which relates to travel expenses.

1295.Travel expenses meeting condition E include expenses that, on the assumptions in subsection (7), would be deductible under any provision of Part 5. Under ICTA, expenses within the exemption are restricted to expenses deductible only under selected sections of those rewritten in that Part. See Change 73 in Annex 1.

1296.This section is listed in section 332 (meaning of “the deductibility provisions”). Various provisions in Part 5 then ensure that certain rules in Part 5 do not adversely restrict expenses, deductible under that Part, for the purposes of condition E.

1297.Subsection (7) sets out the assumptions made in applying condition E to travelling expenses. To accord with Inland Revenue practice, one of those assumptions is that the expenses are incurred and paid by the employee. But the assumption that they are paid out of emoluments has not been rewritten. See Change 81 in Annex 1.

1298.To accord with Inland Revenue practice, the section omits the condition in section 589B(2)(e) of ICTA, that the services are provided in the United Kingdom, and the apportionment rule in section 589B(3) which applies if services are provided partly in and partly outside the United Kingdom. A similar condition, in section 589(1)(d) of ICTA, has been omitted from section 311 for the same reason. Removal of this condition aligns sections 310 and 311 with the exemptions in Chapter 4 of Part 4. See Change 72 in Annex 1.

Section 311: Retraining courses

1299.This section provides there is no liability to income tax on payment or reimbursement of retraining course expenses when a person’s employment has ceased or is expected to cease.

1300.It derives from sections 588 and 589 of ICTA as they apply to an employee. The provisions of 588 and 589 as they apply to an employer do not change, other than to adopt the minor changes to the law made in this section. See paragraph 67 of Schedule 6.

1301.Subsection (1) provides the exemption and the conditions to be satisfied.

1302.Subsection (2) defines “retraining course expenses” for the purposes of the exemption.

1303.Subsection (3) sets out the course conditions.

1304.The section does not require a course to be undertaken “with a view to retraining the employee”. In practice a course is regarded as so undertaken if the conditions in the section are satisfied. This additional requirement is superfluous. See Change 74 in Annex 1.

1305.To accord with Inland Revenue practice, the section also omits the condition in section 589(1)(d) of ICTA, that all teaching and practical application forming part of the course takes place in the United Kingdom. A similar condition, in section 589B(2)(e) of ICTA, has been omitted from section 310 for the same reason. Removal of this condition aligns sections 310 and 311 with the exemptions in Chapter 4 of Part 4. See Change 72 in Annex 1.

1306.Subsection (4) sets out the employment conditions.

1307.Under the Employment Rights Act 1996, some events that involve a change in the identity of the employer are treated as not breaking the continuity of employment. The requirement that the employee be employed continuously for two years prior to retraining or, if earlier, when the employment ceased, is therefore expressed, as in section 310(4), in terms of the employment that is ceasing, not of employment by the employer.

1308.Expressing the requirement this way aligns sections 310 and 311 in their treatment of the same requirement. See Change 71 in Annex 1.

1309.Subsection (5) sets out the conditions that relate to travelling expenses.

1310.As in section 310, travel expenses meeting this condition include expenses that, on the assumptions in subsection (6), would be deductible under any provision of Part 5. Under ICTA, expenses within the exemption are restricted to expenses deductible only under selected sections of those rewritten in that Part. See Change 73 in Annex 1.

1311.This section is listed in section 332 (meaning of “the deductibility provisions”). Various provisions in Part 5 then ensure that certain rules in Part 5 do not adversely restrict expenses, deductible under that Part, for the purposes of subsection (5).

1312.Subsection (6) sets out the assumptions made in applying the condition in subsection (5) to travelling expenses. To accord with Inland Revenue practice, one of those assumptions is (as in section 310) that the expenses are incurred and paid by the employee. But the assumption that they are paid out of emoluments has not been rewritten. See Change 81 in Annex 1.

Section 312: Recovery of tax

1313.This section provides machinery for an assessment to charge the amount due if exemption under section 311 has been given and there is a subsequent failure to meet certain of the conditions in section 311(4).

1314.It derives from section 588 of ICTA.

1315.Subsection (1) sets out the circumstances in which the section applies.

1316.Subsection (2) sets out what will be assessed if the section applies, and provides the mechanism for such an assessment.

1317.Subsection (3) provides the time limit for the making of such an assessment.

1318.Subsections (4) to (6) contain provisions which:

Chapter 11: Miscellaneous exemptions
Section 313: Repairs and alterations to living accommodation

1319.This section derives from section 155(3) of ICTA. It only applies in the case of provided accommodation which falls within Chapter 5 of Part 3.

1320.In the case of alteration and additions to the property within subsection (2)(a), the cost would sometimes result in an increase in the cash equivalent under Chapter 5 of Part 3. In order to prevent a double charge to tax it is necessary to exempt the cost of the alterations and additions which fall through to Chapter 10 of Part 3 because the cost of provision was “not otherwise chargeable to tax”.

1321.The second part of this exemption at subsection (2)(b) refers to landlord’s repairs, the definition of which prevents it extending to tenant’s repairs, or improvements disguised as repairs.

Section 314: Council tax etc. paid for certain living accommodation

1322.This section derives from section 145(4) of ICTA. Without this section, a tax liability could still arise if charges in connection with the property were paid (or the cost reimbursed) by the employer.

1323.Subsection (1) applies the section when certain exceptions from a charge on living accommodation apply.

1324.Subsection (2) applies the exemption to a fuller and more updated description of domestic property charges: “council tax or rates, water or sewerage charges”, in line with Inland Revenue practice. This is a minor change to the law. See Change 75 in Annex 1.

Section 315: Limited exemption for expenses connected with certain living accommodation

1325.This section limits the amount charged to tax in respect of certain expenditure (or reimbursement of expenditure by the employee) in connection with living accommodation. It derives from section 163 of ICTA. It applies to all employees whether in excluded employment or not whereas section 163 applies only to those employments within Chapter 2 of Part 5 of ICTA. This is a minor change in the law. See Change 76 in Annex 1.

1326.Subsections (2) and (3) set out the conditions which must be satisfied for the exemption to apply.

1327.Subsection (4) provides a formula to calculate the amount to which the exemption is applied. The following example shows how the formula works, using NE, DA, DE and SMG as defined in the section.

1328.Assume an employee’s earnings are £10,000 a year (and there are no deductions) and no sums made good. The formula works to give the right pro-rata result for each of the following circumstances:

Ne = £10,000; Da = 365; De = 365; Smg = 0
Ne = £10,000; Da = 183; De = 365; Smg = 0
Ne = £5,000; Da = 183; De = 183; Smg = 0

1329.Subsection (5) is a method statement to calculate the amount of net earnings to be used in subsection (4).

Section 316: Accommodation, supplies and services used in employment duties

1330.This section derives from section 155ZA of ICTA which excludes from section 154 of ICTA the charge on benefits arising from the provision of accommodation, supplies and services mainly used to perform an employee’s duties of the employment, but also used to a minor degree for other purposes.

Section 317: Subsidised meals

1331.This section derives from section 155(5) of ICTA which provides an exemption for canteen meals and from ESC A74. The ESC provides an exemption for the provision of any free or subsidised meals on the employer’s premises, but not elsewhere, provided that all the employer’s employees are able to obtain such meals or have vouchers or tokens enabling them to obtain such meals, regardless of where those meals are obtained. To the extent that this section legislates ESC A74 it is a minor change to the law. See Change 77 in Annex 1.

1332.Section 155(5) of ICTA and the concession requires meals to be available to the staff “generally”. It was not clear how that test applies when employees work at different locations. In practice the rule is applied sensibly and the new section provides clarification by focusing on the employees at a particular location.

1333.Section 155(5) of ICTA and ESC A74 only provide an exemption from the benefits charge. This section goes further and provides a complete exemption from income tax. This is a minor change to the law. See Change 77 in Annex 1.

Section 318: Care for children

1334.This section provides there is no liability to tax on the benefit of “workplace nursery” facilities provided for the children of employees. It derives from section 155A of ICTA.

1335.Subsection (1) provides exemption for the benefit which arises by virtue of Chapter 10 of Part 3 (taxable benefits: residual liability to charge), where the provision of care for a child meets the conditions in subsections (3), (4) and (6).

1336.Subsection (2) set out the limited exemption where only part of the provision meets those conditions.

1337.Subsection (3) contains conditions applying to the child for whom care is provided.

1338.Section 155A of ICTA used the term “parental responsibility”, which is defined by cross-reference to the Children Act 1989. The definition in the latter Act is used directly in subsection (3)(c).

1339.Subsection (4) contains conditions applying to the premises at which care is provided for the child.

1340.The cross-references required for the definition in subsection (5) of the term “registration requirement” (used in subsection (4)) have been updated.

1341.Subsections (6) and (7) contain conditions applying to the employer’s involvement in providing the premises at which care is provided.

1342.Subsection (8) defines “care” for the purposes of the exemption.

Section 319: Mobile telephones

1343.This section derives from section 155AA of ICTA, which excludes from section 154 of ICTA the benefit arising from the provision of a mobile telephone. It is no longer necessary to make any special mention of mobile phones provided in connection with a taxable car, van or exempt heavy goods vehicle, as benefits provided in connection with such vehicles are adequately covered by section 239. Accordingly section 155AA(3) has not been rewritten. See Note 35 in Annex 2.

Section 320: Limited exemption for computer equipment

1344.This section derives from section 156A of ICTA, which provides a limited exemption in respect of computer equipment provided to employees or members of their families or households.

1345.The exemption only applies where the employer provides the computer equipment for the use of the employee (or members of his or her family etc) rather than transferring it to him or her. In a case where the computer is given to the employee to keep, the benefit arising is still chargeable to tax in the normal way.

1346.The exemption is not available in cases where the arrangements to provide computer equipment particularly favour directors. This does not mean that where an employer has provided computer equipment only for directors or their families, because only they have taken up an offer available to all employees, that the exemption cannot apply. The employer’s provision of computer equipment has to be deliberately restricted to directors and their families for the exemption to be withheld. This is covered in section 156A(2) of ICTA, rewritten in this section as subsection (6).

1347.The definition of director in subsection (7)(b) derives from section 168 of ICTA. It is necessary to bring the definition into this section because this provision is not in the benefits code.

Section 321: Suggestion awards

1348.This section provides that no liability to income tax arises where awards which do not exceed the limits set by section 322 are made under a suggestions scheme.

1349.It derives from ESC A57. See Change 78 in Annex 1.

1350.Subsection (1) sets out the type of scheme to which the section applies.

1351.Subsection (2) provides that no liability to tax arises on an encouragement award or a financial benefit award (defined in subsection (6)) which meets the three conditions in subsections (3) to (5), to the extent that it does not exceed the limits set by section 322.

1352.Subsection (6) defines “encouragement award” and “financial benefit award”.

Section 322: Suggestion awards: “the permitted maximum”

1353.This section provides the level, “the permitted maximum”, at or below which a suggestion award is not liable to tax.

1354.It derives from ESC A57. See Change 78 in Annex 1.

1355.Subsection (1) gives the permitted maximum for an encouragement award.

1356.Subsection (2) provides that the permitted maximum for a financial benefit award where no previous award has been made for that suggestion is the suggestion maximum or, where the award is made to more than one person, the appropriate proportion of that maximum award. The suggestion maximum is given at subsection (4) and “the appropriate proportion” is defined at subsection (6).

1357.Subsection (3) provides that the permitted maximum for a financial benefit award where an award has already been made for that suggestion is the residue of the suggestion maximum or, if more than one such award has been made previously, the appropriate proportion of that residue. “The residue of the suggestion maximum” is defined at subsection (6).

1358.Subsection (4) gives the suggestion maximum for financial benefit awards. This is the maximum of £5,000 or the financial benefit share (defined at subsection (5) ). The power to alter the limit in this provision is contained in section 716.

1359.Subsection (5) defines the “financial benefit share” as the greater of half the financial benefit likely to arise within the first year of the adoption of the suggestion or one-tenth of the financial benefit for the first five years after its adoption.

1360.Subsection (6) defines “the appropriate proportion” and “the residue of the permitted maximum” which are used at subsections (2) and (3). It also defines “the total previous exemption” used in the definition of “the residue of the permitted maximum”.

Section 323: Long service awards

1361.This section derives from ESC A22 which concerns awards made to mark long service. Where the conditions are met the concession provides an exemption from income tax. Legislating the concession is a minor change to the law. See Change 79 in Annex 1.

1362.The concession was introduced in the mid-1970s when employers had begun to give employees long service gifts other than the traditional clock or watch. It was restricted to tangible articles or shares of a defined kind to prevent cash payments that would properly be charged as earnings being dressed up as long service awards. In practice, the concession is applied more liberally than a strict interpretation of it would permit. For example, the provision by the employer of a holiday or a life membership to the National Trust as a long service award would be treated as covered by the concession. The scope of this section as set out in subsection (3) should cover all the types of award currently treated as being within the concession.

1363.When an ESC contains monetary limits, any change in those limits may be made by press release or by republishing the ESC with different amounts. This is not possible for legislation. There are a number of exemptions in the source legislation in which an amount is fixed by Treasury order and the power to alter the limit in this provision is contained in section 716.

1364.The concession does not restrict qualifying service to “the same employer” in the same way as the definition of a long service award in subsection (2). However, in practice the concession is applied so that the service must be with the same employer unless there has been a change of employer of the kind described in subsection (5).

1365.The definition of “group” adopted means that the minimum possible group relationship will enable the exemption to apply.

Section 324: Small gifts from third parties

1366.This section derives from ESC A70A. It provides an exemption from income tax in respect of certain small gifts from third parties. Legislating the concession is a minor change to the law. See Change 59 in Annex 1.

1367.The conditions for the exemption are in similar terms to the entertainment exemption in section 265. The reasons for it are the same, namely to remove the compliance problems if the conditions in subsections (2) to (6) are met. Those conditions include a limit on value of the gifts which may be varied by the Treasury power in section 716.

1368.The concession also extends to non-cash vouchers and credit-tokens. That aspect is dealt with in section 270.

Section 325: Overseas medical treatment

1369.This section derives from section 155(6) of ICTA. It originated as an ESC which was enacted in FA 1981. The exemption relates to the provision of medical treatment and the provision of insurance against the cost of medical treatment.

1370.As far as the first aspect is concerned, the exemption only applies where the provision of the medical treatment falls within benefits code. There is no exemption if the payment for the treatment is handled in such a way that chargeability arises as earnings.

1371.The same applies to the provision of insurance. It is only direct provision which is exempt, so it does not cover reimbursement of the employee’s premium for overseas medical insurance.

1372.The reference to in-patient treatment is applicable to the whole section. This is to clarify that the insurance may also provide cover for in-patient treatment.

Section 326: Expenses incidental to transfer of a kind not normally met by transferor

1373.This section exempts from income tax certain paid or reimbursed expenses which arise in connection with an asset transferred by reason of the employment. This exemption will most commonly apply where an employee, benefiting from a relocation package, transfers his or her house to an employer who pays the acquisition costs.

1374.It derives from ESC A85. See Change 80 in Annex 1.

1375.Subsection (1) provides that no liability to tax arises where expenses incidental to an “employment-related asset transfer” (defined at subsection (2)) are paid or reimbursed. The expenses must be wholly and exclusively incurred as a result of that transfer and not of a type normally met by the transferor. Thus the disposal costs of a house sold to an employer under a relocation package are not within the exemption as the vendor would normally be the one to meet these costs.

1376.Subsection (2) defines “employment-related asset transfer” as the transfer of an asset to an employer or person nominated by the employer and which arose by reason of the employment.

1377.Subsection (3) explains what is meant by “transfer”.

Part 5: Employment income: deductions allowed from earnings
Background

1378.This Part provides for deductions allowed from earnings.

1379.The charge to tax on employment income is a charge to tax on two different categories of employment income: “general earnings” and “specific employment income” (see section 6(1)); and, in the case of “general earnings”, (a term defined in section 7(3)), the amount charged to income tax is the “net taxable earnings” from the employment in the tax year (see section 9(2)). Section 11 then provides that the net taxable earnings from an employment in a tax year consist of the total amount of the taxable earnings from the employment less the total amount of any deductions allowed from those earnings (as listed in section 327(3) to (5)). And it is with this final component of “net taxable earnings” that this Part of this Act is concerned.

1380.In ICTA, the deductions provisions are very difficult to unravel. Some individual provisions are straightforward. But there are many connections between provisions. They interact in ways which are not always easy to follow. Several fictions have been adopted to make the provisions work.

1381.One major source of complexity is that the expenses of an employee may be met in several possible ways, taxed under different sections of ICTA. The mechanism for making a deduction may vary according to the circumstances.

1382.For example, consider the position of a director making a train journey to attend a meeting. The table below shows some of the various ways in which the employer might fund the trip, how the director would be taxed and how the director might obtain a deduction in respect of the expenses of the train ticket. (References to sections are to sections of ICTA.)

Employer funds trip byCharging provisionDeduction allowable under
round sum allowancesection 19(1)1section 198
specific expense paymentsection 153section 198
buying the ticketsection 141section 198 via section 141(3)
providing credit card for employee to use on ticketsection 142section 198 via section 142(3)

1383.There are other possibilities. For example, if the same director travelled to the same meeting using private transport provided by the employer, the provision of the transport would be taxed under section 154 of ICTA, with a deduction allowable under section 198 via section 156(8). And if the business journey involved foreign travel, there are further deduction provisions that may apply.

1384.Another major source of complexity is that the central provision relating to deductions, section 198 of ICTA, is used by other provisions of ICTA and is used in different ways. For example:

1385.In this Act the number of provisions that cross-refer to other deductions provisions has been much reduced. The view has been taken that it is more helpful, in the case of each deduction provision, to set out in full the conditions that must be met. In setting out those conditions, Inland Revenue practice has been followed. As a result of this approach, sections 194(10) and 195(11) of ICTA, which provide for provisions to be construed with other provisions, have no direct successors in this Act.

Overview

1386.In this Part, in order to make each individual deduction provision as simple as possible, Chapter 1 states some general propositions about deductions. This saves those propositions having to be repeated in the individual provisions, so the deductions sections can then concentrate on the rules applying for the particular deduction in question.

1387.The provisions relating to deductions are then grouped in different chapters according to the type of deduction. So there are separate chapters for:

1388.Within Chapters 2 and 5, the provisions are then grouped according to the type of expense involved. For example, in Chapter 2, sections 337 to 342 deal with travel expenses.

1389.Within this Part, very many of the sections that allow deductions are drafted in accordance with the general formula that a deduction from earnings is allowed for an amount whose characteristics are then specified.

Chapter 1: Deductions allowed from earnings: general rules
Overview

1390.This is the first of six chapters dealing with deductions allowed in charging earnings to income tax.

1391.After the introductory section 327, this Chapter sets out some general propositions which are applicable to most of the deductions dealt with in the next five chapters. Those propositions relate to:

1392.This Chapter concludes with section 332, which lists “the deductibility provisions”.

Section 327: Deductions from earnings: general

1393.This section sets the scene. It gives information about the contents of this Part, and places this Part within a wider context.

1394.The section is new, although it draws on material contained in section 131(1) of ICTA.

1395.Subsection (1) provides the essential link between this Part of this Act and section 11(1), which is in Part 2. The subsection states that this Part provides for deductions that are allowed from the taxable earnings from an employment in a tax year for the purpose of calculating the “net taxable earnings” from the employment in the tax year for the purposes of Part 2 of this Act.

1396.Subsection (2) sets out how two key expressions are used in this Part. References to the earnings from which deductions are allowed are references to the taxable earnings mentioned in subsection (1), and references to the tax year are references to the tax year mentioned there.

1397.Subsection (3) states that the deductions for which this Part provides are those allowed under Chapters 2 to 6; and the contents of those Chapters are indicated.

1398.Subsection (4) lists other provisions, not in this Part, which make further provision about deductions; and subsection (5) lists other provisions, not in this Part, which make further provision about deductions from income including employment income.

Section 328: The income from which deductions may be made

1399.This section is the first of four which sets out a general proposition relating to deductions from earnings. It deals with the income from which deductions may be made.

1400.The most important single source for this section is section 198(1) of ICTA, which includes the proposition that an amount paid “out of the emoluments of the office or employment … may be deducted from the emoluments to be assessed”. This section also draws on a considerable number of other passages in Part 5 of ICTA and in section 50 of FA 1989.

1401.Subsection (1) sets out the general rule that deductions under this Part are allowed from any earnings from the employment in question, but not from earnings from any other employment.

1402.An example of how this rule operates in practice is given in Inland Revenue guidance in SE 31658:

An individual is employed as a teacher and separately employed as coach to a local youth football team. As coach she is paid £100 a year but she incurs expenses of £1,000 a year in travelling to away matches. She pays the expenses herself and is not reimbursed by her employer.

She is only allowed a deduction of £100 for her travelling expenses under section 198(1) of ICTA. She cannot claim a loss for the remaining £900 and nor can she deduct that amount from her teaching income.

1403.The general rule is subject to a number of qualifications. These are dealt with in the rest of this section.

1404.Subsection (2) deals with one case where the general rule is not wide enough. Expenses of a minister of religion (see section 351) are allowed from earnings from any employment as a minister of a religious denomination.

1405.Subsections (3) to (5) deal with cases where the general rule is too wide: for example there are some cases where the deductions are allowed only from earnings with particular characteristics – either relating to the source of the earnings or to the manner in which the earnings are charged to tax.

1406.Subsection (3) provides that deductions under section 368 are only allowed from earnings payable out of the public revenue.

1407.Subsections (4) and (5) deal with “deductions limited to specified earnings”: for, in the cases of some provisions, deductions are allowed from earnings from the employment which qualify as taxable earnings under certain of the charging provisions of Chapters 4 and 5 of Part 2, but not from other earnings from the employment.

Section 329: Deductions from earnings not to exceed earnings

1408.This section is the second of four which sets out a general proposition relating to deductions from earnings. It deals with the proposition that deductions from earnings may not exceed earnings.

1409.As in the case of section 328 the most important single source for this section is section 198(1) of ICTA, which allows a deduction for an amount if “the holder of an office or employment is obliged to incur and defray [that amount] out of the emoluments of the office or employment”. This section also draws on a considerable number of other passages in Part 5 of ICTA and in section 50 of FA 1989.

1410.Subsection (1) sets out the general rule that deductions may not exceed the earnings from which they are deductible. That general rule is then elaborated in subsections (2) to (4).

1411.Inland Revenue guidance makes it clear that the employee does not generally have to demonstrate that an expense has literally been paid out of the emoluments rather than out of some other source of money. It is generally sufficient that the emoluments charged to tax in a particular tax year are equal to, or greater than, the deductions to be made from those emoluments. As the Inland Revenue does not generally trace the source of funds used by the employee to pay expenses, the requirement that the employee must pay the expenses out of the emoluments of the employment is not stated in general terms in this Act. See Change 81 in Annex 1.

1412.Subsection (5) deals with a matter which follows on from the fact that this Act does not reproduce any general requirement that expenses must be paid out of the emoluments of the employment. This Act rewrites numerous provisions that refer to expenses that would be allowable if the employee paid them out of the emoluments of the employment. Those provisions (“the deductibility provisions”) are listed in section 332. Since the general requirement in subsection (1) that deductions from earnings are not to exceed earnings is assumed to be met in the deductibility provisions (because of the references in them to the employee being assumed to have paid the amounts or expenses out of emoluments), this subsection provides that this section is to be disregarded for the purposes of the deductibility provisions.

1413.Subsection (6) provides a signpost to section 380 of ICTA, a section drafted on the basis that there may be Schedule E losses which may be set against other income of the tax year, or carried back to earlier tax years.

Section 330: Prevention of double deductions

1414.This section is the third of four which sets out a general proposition relating to deductions from earnings. It deals with the prevention of double deductions.

1415.The proposition in this section is not articulated in general terms in ICTA, although it seems true as a matter of income tax law. There are statements of this proposition in particular contexts in sections 194(9), 195(12) and 198(3) of ICTA.

1416.Subsection (1) sets out the general rule: a deduction from earnings under this Part is not allowed more than once in respect of the same costs or expenses.

1417.Subsection (1) is expressed to apply to “costs and expenses”. These words are intended to cover all potential deductions under this Part, even though the amount of the deduction may not be computed by reference to an actual amount of expenditure – as is the case under Chapter 4 of this Part, which deals with fixed allowances for employee’s expenses.

1418.Subsection (2) deals with the case where a cost or expense qualifies both for an allowance under Chapter 4 of this Part and for a deduction under some other provision. In such a case only one of the deductions is allowed. This provision codifies Inland Revenue practice on these topics. See Change 82 in Annex 1.

Section 331: Order for making deductions

1419.This section is the last of four which sets out a general proposition relating to deductions from earnings. It deals with the order in which deductions may be made.

1420.Subsection (1) sets out the general rule that section 835 of ICTA, which provides for deductions to be allowed in the order which results in the greatest reduction of liability to income tax, applies in the present context.

1421.Subsection (2) qualifies the general rule. The subsection specifies two provisions which impose a requirement to consider deduction provisions in a particular order.

Section 332: Meaning of “the deductibility provisions”

1422.This Act rewrites numerous provisions that refer to amounts or expenses whose deduction would be allowed if the employee incurred and paid them out of the emoluments of the employment (or in some cases just incurred or just paid them). See Change 81 in Annex 1.

1423.The provisions of the Act that rewrite these provisions are listed in this section, where they are defined as “the deductibility provisions”.

1424.The requirement that amounts or expenses be incurred and paid out of emoluments of the employment is not, in general, being rewritten: so the deductibility provisions do not rewrite the words “out of the emoluments”. Instead, they refer to amounts or expenses that would be allowed as a deduction if the employee had incurred and paid them.

1425.Since the general requirement in section 329(1) that deductions from earnings are not to exceed earnings is assumed to be met in the deductibility provisions (because of the references in them to the employee being assumed to have paid the amounts or expenses out of emoluments), section 329(5) provides that section 329 is to be disregarded for the purposes of the deductibility provisions.

1426.In the case of the deduction under section 353, where the requirement for payment out of earnings has survived, it is provided that, for the purposes of the deductibility provisions, the expenses are to be assumed to have been paid out of the earnings in question. (See section 353(4).)

Chapter 2: Deductions for employee’s expenses
Overview

1427.This Chapter deals with the most familiar situation in which deductions from earnings are allowed – where the employee has paid an expense of the employment. The Chapter also deals with the situation where someone else (usually the employer) pays the expense on the employee’s behalf. The Chapter therefore deals with section 198 of ICTA, with the related provisions in Schedule 12A of that Act, and with a number of other provisions, such as sections 201, 201AA and 201A of ICTA, which allow deductions for particular expenses paid by the employee.

1428.The Chapter may be divided into the following components:

Section 333: Scope of this Chapter: expenses paid by the employee

1429.This section sets out the distinguishing condition for the deductions allowed under this Chapter: the amount in question must have been paid by or on behalf of the employee.

1430.Subsection (1) sets out this basic proposition.

1431.The most important single source for this section is section 198(1) of ICTA, which allows a deduction for an amount where the holder of an office or employment is obliged to “incur and defray” that amount. There are also a number of other provisions in Part 5 of ICTA which have similar wording.

1432.There is, however, another point that arises in relation to this part of section 198(1) of ICTA and other corresponding provisions. A deduction may be allowed where the employee has incurred the expense but the actual liability is met by someone else, usually the employer. Where the employee’s pecuniary liability is met in this way it is an emolument. It is taxed under paragraph 1 of section 19(1) of ICTA. As the expense is met in a way that constitutes emoluments, it is accepted that it has been defrayed out of those emoluments. The employee, accordingly, is allowed a deduction if the liability met comes within the wording of section 198(1) of ICTA or some other corresponding provision. This, in practice, is how those provisions are operated. Subsection (1)(b) of this section therefore provides for a deduction to be allowed for such an amount if that amount is paid on the employee’s behalf by someone else and is included in the earnings. See Note 36(A) in Annex 2.

1433.The source legislation does not state explicitly that a deduction is allowed where the employee incurs the expense but the liability is met by someone else. Subsection (2) makes the position clearer by providing that the employee is treated as paying the expense where the actual liability is met by someone else and constitutes earnings of the employee.

1434.To be allowed a deduction under this Chapter, an employee must satisfy subsection (1), read, if necessary, with subsection (2), although there are some provisions where it is perhaps unlikely that subsection (2) will be in point. The inclusion of these propositions here means that it becomes unnecessary to say something to the same effect in each of the individual deduction provisions in this Chapter.

1435.Subsection (3) deals with the two exceptions to subsection (1). In the case of these two exceptions, subsection (2) is also disapplied.

1436.Subsection (4) consists of a signpost to the following Chapter. That Chapter deals with deductions from benefits code earnings for costs that would have been deductible if the employee had paid them. It therefore covers cases where an expense is met by the employer in the form of a taxable benefit.

Section 334: Effect of reimbursement etc.

1437.This section contains provisions dealing with the effect of reimbursement.

1438.Under the source legislation, a reimbursed amount is dealt with for income tax purposes in either of two ways:

1439.Against this background, this section has been included in this Act with the object of making explicit provision for cases where an amount is reimbursed. This section is not derived directly from the source legislation, but it reflects Inland Revenue practice in cases where amounts deductible for income tax purposes are reimbursed. See Note 36(B) in Annex 2.

1440.This section also includes wording to ensure that the provisions of this Chapter apply where a payment is made to the employee in respect of the expenses in question, and that payment is included in the employee’s earnings. This wording guards against the argument that, in such a case, it is the person making the payment to the employee who pays the amount in question, and not the employee.

1441.Subsection (3) provides that this section does not apply to expenses allowed under section 351 (expenses of ministers of religion).

1442.Subsection (4) provides that this section is disregarded for the purposes of the deductibility provisions (as defined in section 332).

Section 335: Application of deductions provisions: “earnings charged on receipt” and “earnings charged on remittance”

1443.This section provides that the availability of certain deductions under this Chapter depends on whether or not the earnings are “earnings charged on receipt” or “earnings charged on remittance”.

1444.The section is new, but it draws on material in section 198(2) of ICTA.

1445.The expressions “earnings charged on receipt” and “earnings charged on remittance” are defined in subsection (4) for the purposes of this Part of this Act. The ambit of the expression “earnings charged on receipt” is the same as that of Cases I and II of Schedule E in paragraph 1 of section 19(1) of ICTA; and the ambit of the expression “earnings charged on remittance” is the same as that of Case III of Schedule E in section 19(1) of that Act.

Section 336: Deductions for expenses: the general rule

1446.This section states the general rule relating to deductions allowed from earnings.

1447.The section derives from section 198(1)(b) of ICTA. This provision has been the subject of much litigation.

1448.Subsection (1) states the general rule: a deduction from earnings is allowed for an amount if the employee is obliged to incur and pay it as holder of the employment, and the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.

1449.Subsection (2), which is new, provides that the following sections in this Chapter contain additional rules allowing deductions for particular kinds of expenses, and rules preventing particular kinds of expenses from being deductible. This subsection, accordingly, emphasises the fact that deductions under the later sections in this Chapter do not depend on this section being satisfied first.

1450.Subsection (3) provides that no deduction is allowed under this section for an amount that is deductible under sections 337 to 342 (travel expenses).

Section 337: Travel in performance of duties

1451.This section allows a deduction from earnings for travel expenses if the expenses are necessarily incurred on travelling in the performance of the duties of the employment.

1452.The section is the first of two dealing with the proposition, contained in section 198(1)(a) of ICTA, that a deduction is allowed for “qualifying travelling expenses”. This section deals with the part of that definition in section 198(1A)(a) of ICTA.

1453.Although the label “qualifying travel expenses” appears in section 198(1)(a) of ICTA, that label is used only at the beginning of section 198(1A) of that Act. The label is not used in this Act.

1454.Subsection (1) provides that a deduction is allowed from earnings for the travel expenses. In subsection (1)(b), the word “incurred” has replaced the word “expended”; but the practical application of this section should be precisely the same as that of the legislation it replaces: subsection (1)(a) provides that the travel expenses must be both incurred and paid.

1455.Subsection (2) provides that this section needs to be read with section 359, which prohibits a deduction if a mileage allowance is paid or if mileage allowance relief is available.

Section 338: Travel for necessary attendance

1456.This section allows a deduction from earnings for travel expenses if the expenses are attributable to the employee’s necessary attendance at any place in the performance of the duties of the employment. However, the deduction allowed by this section is not available for the expenses of “ordinary commuting” or “private travel”.

1457.The section is the second of two dealing with the proposition that a deduction is allowed for qualifying travelling expenses. This section deals with the part of that definition in section 198(1A)(b) of ICTA. That provision mentions “ordinary commuting” and “private travel” in section 198(1A)(b)(ii) but those expressions are only defined in paragraph 2 of Schedule 12A to that Act. Paragraph 3 of that Schedule contains a gloss on paragraph 2 and this section also deals with that gloss.

1458.This section derives from section 198(1)(a) and (1A)(b) of ICTA and from paragraphs 2 and 3 of Schedule 12A to that Act. The statutory material has been reorganised so that the definitions of “ordinary commuting” and “private travel” are placed near the propositions to which they apply; and the gloss upon the definitions has been incorporated in the subsections setting out the effect of “ordinary commuting” and “private travel”.

1459.Subsection (6) provides that this section needs to be read with section 359, which prohibits a deduction if a mileage allowance is paid or if mileage allowance relief is available.

Section 339: Meaning of “workplace” and “permanent workplace”

1460.This section defines the terms “workplace” and “permanent workplace”, which are used in the definitions of “ordinary commuting” and “private travel” in section 338.

1461.The section derives from paragraphs 2(3) and 4 to 7 of Schedule 12A to ICTA.

Section 340: Travel between group employments

1462.This section allows a deduction from earnings for travel expenses where an employee, who has employments with more than one company in the same group, travels from a place of employment with one group company to another place of employment with another group company.

1463.The section derives from section 198(1B) of ICTA, which provides that the travel expenses are treated as necessarily expended in the performance of the duties to be performed at the destination.

1464.Subsections (2) to (5) set out all the conditions that need to be met for the deduction to be allowed. The condition that it is the holder of the employment who is obliged to incur the expenses has not been included, because the Inland Revenue does not rely on this condition before the deduction is allowed. See Change 83 in Annex 1.

1465.Subsection (6) defines the term “group” for the purposes of this section. The definition is more concise than in the legislation from which this subsection derives.

1466.Subsection (7) does not set out the general proposition, to be found in the source legislation, that the travel expenses are necessarily expended in the performance of the duties to be performed at the destination. Instead, the operation of the provision has been confined to the two sections (mentioned in this subsection) where this proposition may have an impact.

1467.Subsection (8) provides that this section needs to be read with section 359, which prohibits a deduction if a mileage allowance is paid or if mileage allowance relief is available.

Section 341: Travel at start or finish of overseas employment

1468.This section allows a deduction from earnings for starting travelling expenses and finishing travelling expenses if the duties of the employment are performed wholly outside the United Kingdom.

1469.The section derives from section 193(2) and (3) of ICTA.

1470.Section 193(3) begins with the words “For the purposes of section 198(1)”. This section sets out all the conditions that have to be met in each case, as opposed to referring to section 336, the successor provision to section 198(1).

1471.Subsections (2) to (4), however, do not reproduce the condition from section 198(1) that the holder of the employment is obliged to incur and defray the expenses, because the Inland Revenue does not rely on this condition before allowing the deduction from earnings. See Change 83 in Annex 1.

1472.Subsection (4) is one of the provisions that make use of the new term “foreign employer”, defined in section 721 for the purposes of this Act as a whole.

1473.Subsections (6) and (7) 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. See also Change 101(B) in Annex 1.

1474.Subsection (8) defines the new terms “starting travel expenses” and “finishing travel expenses”, which describe travel to take up an overseas employment and travel home after it has finished. This subsection also extends the meaning of the term “employee” to include a person who is to be, or has ceased to be, an employee.

1475.Subsection (9) provides that this section needs to be read with section 359, which prohibits a deduction if a mileage allowance is paid or if mileage allowance relief is available.

Section 342: Travel between employments where duties performed abroad

1476.This section allows a deduction from earnings for travel expenses where an employee, who has performed duties of one employment at the place of departure, travels to perform duties of another employment at the destination, and the place of departure or the destination, or both, are outside the United Kingdom.

1477.The section derives from section 193(5) and (6) of ICTA.

1478.Section 193(6) begins with the words “For the purposes of section 198(1)”. This section sets out all the conditions that have to be met in each case, as opposed to referring to section 336, the successor provision to section 198(1).

1479.Subsections (2) to (7), however, do not reproduce the condition from section 198(1) that the holder of the employment is obliged to incur and defray the expenses, because the Inland Revenue does not rely on this condition before the deduction is allowed. See Change 83 in Annex 1.

1480.Subsection (7) is one of the provisions that make use of the new term “foreign employer”, defined for the purposes of this Act as a whole in section 721.

1481.Subsection (9) provides that this section needs to be read with section 359, which prohibits a deduction if a mileage allowance is paid or if mileage allowance relief is available.

Fees and Subscriptions
Overview

1482.The following three sections rewrite section 201 of ICTA. The sorts of fees and contributions that are covered by section 201(2) have to be paid before an employee can, lawfully, begin to practise the particular profession or occupation to which the fees relate. They do not therefore meet the “in the performance of the duties” test in section 198 of ICTA, rewritten in section 336(1)(b) of this Act. The subscriptions covered by section 201(3) are voluntary in nature, in the sense that employees do not have to join the body concerned, and so do not meet the “necessarily” test in section 198, again rewritten in section 336(1)(b).

1483.There is another distinction between the expenses allowable under those two subsections. Section 201(2) of ICTA lists the fees paid that qualify for deduction. Section 201(3) gives a general description of the sorts of bodies that are eligible to apply to the Board of Inland Revenue for approval under that subsection, by reference to their character and the activities they pursue.

1484.The names of the bodies that the Board approves are published in a booklet called “Fees and subscriptions paid to Professional Bodies and Learned Societies (List 3)”. That information is also published on the Inland Revenue’s web site. The vast majority of the bodies in List 3 have been approved under section 201(3). Where fees paid to a body qualify for deduction under section 201(2) their entry in List 3 normally records that fact.

Section 343: Deduction for professional membership fees

1485.This section provides for a deduction for fees paid by employees to enable them, lawfully, to pursue their professions or occupations. The section derives from parts of section 201(1), (2) and (5) of ICTA.

1486.Subsection (1) states the basic principle that a deduction from earnings is allowed for certain specified payments. Each such payment is described as a “professional fee”. The requirement in the source legislation that, to be allowable, the payment must have been made “out of the emoluments of the employment” has not been reproduced here. Instead that general requirement is stated in the introduction to the provisions relating to deductions in Part 5 of this Act. See Change 81 in Annex 1.

1487.Subsection (2) defines what is meant by “professional fee”. More fees are listed there than appeared in section 201(2) of ICTA. See Change 84 in Annex 1.

1488.This Act presents the different types of fees payable in a table. The fees are grouped by reference to the occupational sectors to which they relate.

1489.Subsections (3) and (4) together provide a new power for the Board of Inland Revenue to make an order adding a new, qualifying fee to the Table in subsection (2). See Change 85 in Annex 1.

Section 344: Deduction for annual subscriptions

1490.This section provides for a deduction for annual subscriptions to bodies having certain specified characteristics, established for stated objects related to the advancement of knowledge, the maintenance or improvement of standards of conduct within the profession and the protection of its members against claims. The section derives from parts of section 201(1), (3), (4), (5) and (6) of ICTA.

1491.Subsection (1) states the basic principle of the availability of a deduction from earnings for subscriptions paid to approved bodies. As in section 343(1), the requirement in the source legislation that, to be allowable, the payment must have been made “out of the emoluments of the employment” has not been reproduced here. See Change 81 in Annex 1.

1492.Subsection (2) describes the types of bodies, by reference to their activities, whose subscriptions are eligible, subject to approval of the body by the Inland Revenue, to be deducted.

1493.Subsection (3) provides for the Inland Revenue to approve a body of persons. This reflects the practice on the application of section 201(3) whereby the power of the Board of Inland Revenue to approve such bodies is delegated to the technical specialist. See Change 158 in Annex 1.

1494.The requirement in subsection (4) that the Inland Revenue give notice of their decision on an application simply enacts the existing Inland Revenue practice. See Change 86 in Annex 1.

1495.Subsections (5) and (6) give the Inland Revenue the power to determine the part of a subscription that is allowable under subsection (1). That reflects the existing practice on how the power of the Board of Inland Revenue to make such a determination is exercised. See Change 158 in Annex 1.

1496.The rule in subsection (7) about when a payment is treated as having been made to an approved body makes clear how the Inland Revenue have always allowed such payments. See Change 87 in Annex 1.

Section 345: Decisions of the Inland Revenue under section 344

1497.This section provides powers for the Inland Revenue to withdraw or vary any approval given to or any determination made in respect of a body. The section derives from section 201(6) and (7) of ICTA.

1498.In subsection (1) the power to vary a decision on the approval or otherwise of a body for the purposes of section 344 rests with the Inland Revenue as opposed to the Board in the source legislation. See Change 158 in Annex 1.

1499.This Act requires the Inland Revenue to give notice of their decision. See Change 88 in Annex 1.

1500.In subsections (2) and (3) the move 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 “proceedings…to be heard and determined in the same way as an appeal”. There is therefore no real difference in law or practice in this instance 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 Changes 158 and 89 in Annex 1.

Section 346: Deduction for employee liabilities

1501.This is the first of a group of five sections that give relief for payments made against liabilities arising from an office or employment. It provides for a deduction for certain employee liabilities. The section derives from section 201AA(7), (8) and (9) and part of section 201AA(1) of ICTA.

1502.Subsections (1) and (2) define the payments for which a deduction may be claimed.

1503.Subsection (3) defines “premium” and provides some explanatory detail.

Section 347: Payments made after leaving the employment

1504.This section provides that deductions allowable under section 346 are restricted to those relating to liabilities arising in a current employment. It also gives a signpost to the corresponding provisions that deal with payments made after the employee has ceased the particular employment in relation to which the liability to make a payment arises. The section derives from part of section 201AA(1) of ICTA.

Section 348: Liabilities related to the employment

1505.This section defines the types of liability that can give rise to payments that qualify for relief. It derives from section 201AA(2) of ICTA.

Section 349: Meaning of “qualifying insurance contract”

1506.This section defines “qualifying insurance contract”. It derives from section 201AA(3)(a) to (d) and (4) of ICTA.

1507.Subsections (2) to (5) state the conditions that have to be met for an insurance contract to come within section 346(1).

Section 350: Connected contracts

1508.This section provides rules to determine whether insurance contracts are connected for the purposes of section 349. It derives from section 201AA (5) and (6) of ICTA.

1509.Subsections (1) to (3) define when insurance contracts are connected.

1510.Subsections (4) to (7) provide for such a connection to be ignored in certain circumstances.

Section 351: Expenses of ministers of religion

1511.This section allows a deduction for expenses from the earnings of a minister of religion. These include a proportion of the rent of a house used in the performance of the duties and, where premises are occupied in which a charity or ecclesiastical corporation holds an interest and those premises are used in the performance of the duties, a proportion of the expenses arising in connection with them.

1512.The section derives from section 332 of ICTA.

1513.Unlike section 332 this section does not allow an expense incurred in respect of the profession of a minister to be deducted from any income from an employment or office as a minister. Deductions are restricted to one particular class of income. See Change 90 in Annex 1.

1514.Subsection (1) allows a deduction from the earnings of a minister for amounts incurred wholly, exclusively and necessarily in the performance of the duties.

1515.Subsection (2) allows a deduction from earnings for a quarter of the rent paid where a part of the house is used mainly and substantially in carrying out the duties of a minister. Where the part of the house so used is less than one quarter of the whole house an appropriate, lower proportion of the rent paid may be deducted.

1516.Section 332(3) allows a deduction for “such part of the rent as the inspector by whom the assessment is made allows”. The inspector’s decision is subject to appeal to the Commissioners. Since this rule does not fit comfortably with Self Assessment the provision in this section makes the deduction available without reference to the inspector on a just and reasonable apportionment basis. See Change 91 in Annex 1.

1517.Subsection (3) provides for a deduction from earnings for part of the expenses borne by the minister in connection with premises which are owned by a charity or ecclesiastical corporation and in which he resides for the purposes of carrying out his duties.

1518.Subsection (4) gives the formula for the deduction allowable under the previous subsection.

1519.Subsection (5) defines “charity”. The definition of “charity” is the same as that in section 506(1) of ICTA. See Note 34 in Annex 2.

1520.Subsection (6) requires subsection (1) to be read with section 359 (disallowance of travel expenses: mileage allowances and reliefs) which prevents a deduction where mileage allowance payments are received.

Section 352: Limited deduction for agency fees paid by entertainers

1521.This section provides for a deduction for entertainers in respect of fees paid to their agents for finding them work. The section derives from part of section 201A of ICTA.

1522.Section 201A was introduced to allow entertainers who are in employment to get relief for the fees they pay to their agents for finding them work. Such fees are not deductible under the general rule for the deduction of expenses in section 198(1) of ICTA (rewritten in section 336 of this Act) for two reasons. First, they are paid to put the performer in the position to earn from the employment. They are not, therefore, expended “in the performance of the duties of the employment”. Secondly, as not every entertainer uses the services of an agent, the expense does not pass the “necessarily” test.

1523.Subsection (1) states the basic principle that a deduction is allowed, subject to certain conditions being met.

1524.In subsection (2) the way the limit of 17.5% of the taxable earnings is expressed differs slightly from the source legislation. See Change 92 in Annex 1.

1525.Subsection (4) defines “entertainer” for the purposes of this section.

1526.Subsection (5) defines “agency fees”, by reference to the contract or arrangement under which the entertainer pays them. The use of the word “paid” in this subsection means that it is not sufficient for the employee only to have incurred the liability to pay the fee. The employee has to have transferred value to the agent by way of payment for the deduction to be allowed.

1527.Subsection (6) restricts the scope of what counts as a “co-operative society” for the purposes of the section. It also gives a signpost to the external definition of “employment agency”.

1528.Section 201A(6), which contains the commencement date, has not been reproduced because it is now spent.

Section 353: Deductions from earnings charged on remittance

1529.This section deals with deductions from earnings charged on remittance, an expression defined in section 335(4).

1530.The section derives from section 198(3) of ICTA.

1531.Subsection (1) provides for a deduction to be allowed from earnings charged on remittance for expenses within subsection (2) if the condition in subsection (3) is met.

1532.Subsection (2) specifies the expenses to which this section applies. Paragraph (a) refers both to expenses paid by the employee out of the relevant earnings and to expenses paid on the employee’s behalf by another person and included in those earnings. This wording did not appear in the source legislation, but it corresponds to the wording used in section 333 (scope of this Chapter). See Note 36 in Annex 2.

1533.Subsection (3) states a condition that must be met before this section may operate: that the earnings would have been deductible under sections 336 to 342 if the earnings had been earnings charged on receipt in the tax year in which the expenses were incurred. (The expression “earnings charged on receipt” is defined in section 335(4)). The reference to “sections 336 to 342” derives from the reference to “subsection (1)” in section 198(3) of ICTA. Sections 341 and 342 do not derive directly from section 198(1) of ICTA, but these have been included in the new reference because the provisions from which they do derive (section 193(3) and (6) of ICTA) operate through section 198(1).

1534.Subsection (4), which is a drafting addition, deals with the relationship between this section and the deductibility provisions (listed in section 332). In the case of deductions under this section the requirement for payment out of earnings has survived, so it is provided that, for the purposes of the deductibility provisions, the expenses are to be assumed to have been paid out of the earnings charged on remittance. See Change 81 in Annex 1.

Section 354: Disallowance of expenses relating to earnings taxed on different basis or untaxed

1535.This section applies in certain cases where some of the earnings are taxed on one basis while the remainder are either taxed on a different basis or are not within the charge to income tax. This section prevents a deduction relating to earnings in the first category from being given against earnings in the second category in those cases. The section derives from provisions in section 198(2) of ICTA.

1536.Subsection (1) prohibits a deduction under sections 336 to 342 if the expenses relate to earnings from the employment which are either not liable to income tax or are taxed on the remittance basis under section 26.

Example

1537.Suppose that F, a Frenchman, is resident and ordinarily resident in France. He performs most of the duties of his employment in France where he receives the earnings for those duties. F does not remit any of those earnings to the United Kingdom, so they are not chargeable to income tax in the United Kingdom. As the holder of his employment, F is also obliged, while in France, to incur expenditure wholly, exclusively and necessarily in the performance of his duties there. However, F also performs a minority of the duties of his employment in the United Kingdom where he receives earnings for these other duties. These earnings are chargeable to income tax in the United Kingdom (see section 27). This section prohibits F from deducting the expenditure incurred in France from the income chargeable to tax in the United Kingdom.

1538.Subsection (2) applies if the earnings from an employment for a tax year include both earnings charged on remittance under section 26 and other earnings. The subsection prohibits a deduction under section 353 from the earnings charged on remittance if the expenses in question relate to the other earnings.

1539.Subsection (3) provides that this section is to be disregarded for the purposes of the deductibility provisions. See Note 37 in Annex 2.

Section 355: Deduction for corresponding payments by non-domiciled employees with foreign employers

1540.This section provides for a non-domiciled employee with a foreign employer to claim a deduction if certain conditions are met.

1541.This section derives from section 192(1) and (3) of ICTA.

1542.Subsections (2) to (5) sets out the conditions that must be met:

1543.Subsection (6) provides for the deduction to be allowed.

1544.Section 192(3) of ICTA provides for a successful claim to be allowed “as a deduction in computing the amount of the emoluments”; but this section provides for the claim to be allowed “as a deduction under this Chapter”. See Change 93 in Annex 1.

Section 356: Disallowance of business entertainment and gifts expenses

1545.This section 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 sections 357 and 358.

1546.This section derives from section 577(1)(b), (5), (7) and (8) of ICTA and contains new drafting material.

1547.Subsection (1) contains the general prohibition on deducting expenses incurred in providing entertainment or a gift.

1548.This section 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.

1549.Subsection (2) refers to certain exceptions from the general prohibition in subsection (1).

1550.Subsection (3) extends the meaning of “entertainment” and brings incidental expenses within the scope of the section.

Section 357: Business entertainment and gifts: exception where employer’s expenses disallowed

1551.This section contains an exception to the general prohibition on deducting business entertainment and gifts expenses in section 356. It derives from section 577(1)(a) and (3) of ICTA and contains new drafting material.

1552.Subsection (1) disapplies the prohibition on deducting entertaining and gifts expenditure in section 356 where certain conditions are met and refers to further alternative conditions in subsections (2), (3) and (4).

1553.Subsection (2) requires that the deduction of the expense must fall to be disallowed in calculating the employer’s profits because of section 577 of ICTA 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.

1554.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 of ICTA. Again, it is made clear that the fact the disallowance does not operate because a relief applies is ignored.

1555.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.

1556.Subsection (5) contains cross-references to Schedule 22 to FA 2000 to explain the terms used in subsection (4) relating to tonnage tax.

1557.The reference in section 577(3)(b) of ICTA to “in whole or in part” has been omitted. See Note 38 in Annex 2.

Section 358: Business entertainment and gifts: other exceptions

1558.This section contains the other exceptions from the general prohibition on deducting business entertaining and gifts expenses in section 356. It derives from section 577(5), (7)(c) and (8) of ICTA and contains new drafting material.

1559.Subsection (1) provides that the general prohibition on deducting expenses in section 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 section 356 does still apply in the circumstances set out in paragraphs (a) and (b) of subsection (1) of section 358.

1560.Subsection (2) treats directors and persons engaged in the management of a company as employed by it for the purpose of this section.

1561.Subsection (3) provides that the general prohibition on deducting entertaining and gifts expenses in section 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 section 356 does still apply in the circumstances set out in subsection (3)(a) or (b) of section 358.

1562.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 section.

1563.This subsection also removes any doubt there might be about whether an employee is excepted from the prohibition in section 356 where the terms of the exception are met. See Change 96 in Annex 1.

1564.The word “donor” which appears towards the end of the introduction to section 577(8) of ICTA has been changed to “employer” in subsection (3) of section 358. See Change 96 in Annex 1.

1565.The £50 limit in subsection (3)(b) of this section is fixed at that amount by the section. However, section 716(2)(h) of this Act provides that the £50 limit may be increased by an order made by the Treasury. See Change 96 in Annex 1.

1566.Subsection (4) defines “group” for the purposes of subsection (3) of this section.

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

1567.This section prohibits an employee from obtaining a deduction under the travel deduction provisions (defined as sections 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 section is necessary to establish the order in which the relevant provisions are to be applied and to ensure that there is no double relief.

1568.The section derives from section 198(5) of ICTA, added by Schedule 12, Part 2, paragraph 6 to FA 2001 (in so far as this section relates to the travel deductions provisions other than section 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 section relates to section 351).

1569.Subsection (4) contains the definitions of “mileage allowance payments” and “the travel deductions provisions” and contains signposts to the definitions of “company vehicle” and “mileage allowance payments”. Mileage allowance relief is dealt with in section 231.

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

1570.This section prevents MPs and other representatives from obtaining a deduction from earnings for residential or overnight accommodation.

1571.The section derives from section 198(4) of ICTA.

1572.Section 198(4) is the counterpart to provisions contained in sections 200 and 200ZA of ICTA, from which sections 292 and 293 derive. Those sections provide that allowances for residential or overnight accommodation are exempt from income tax: and this present section accordingly provides that no deduction is allowed for the accommodation expenses in respect of which the allowances are paid.

1573.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

1574.The sections 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 sections derive from sections 141(3), 142(2), 145(3) and 156(8) of ICTA.

1575.All the sections 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.

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

1576.This section 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 sections in this Chapter are a change in approach to provisions from which they are derived. The changes in sections 362, 363, 364 and 365 are explained in detail in Changes 98 and 99 in Annex 1.

Section 362: Deductions where non-cash voucher provided

1577.This section 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 section 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 section.

1578.Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1579.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.

Section 363: Deductions where credit-token provided

1580.This section 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 section 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 section.

1581.Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1582.Subsection (2) quantifies the amount of the deduction, with the same limit as described for section 362.

1583.The section derives from section 142(2) of ICTA.

Section 364: Deductions where living accommodation provided

1584.This section 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 section. It derives from section 145(3) and 146(9) of ICTA.

1585.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.

1586.Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1587.Subsection (2) quantifies the amount of the deduction.

Section 365: Deductions where employment-related benefit provided

1588.This section 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 Act 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 section. It derives from section 156(8) of ICTA.

1589.Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1590.Subsection (2) quantifies the amount of the deduction with the same limit as described for section 362.

1591.Subsection (3) contains an explanation of the “cost of the benefit”.

Chapter 4: Fixed allowances for employee’s expenses
Overview

1592.This Chapter contains provisions that allow deductions from an employee’s earnings for amounts fixed by the Treasury.

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

1593.This section 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.

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

1594.This section allows a deduction from the earnings of certain classes of employees for a sum fixed by the Treasury.

1595.It derives from ESC A1. See Change 100 in Annex 1.

1596.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.

1597.Subsection (2) sets out the terms under which the Treasury may fix a sum for a class of employees.

1598.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.

1599.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.

1600.Subsection (5) defines “work equipment” for subsections (1) and (2).

1601.Subsection (6) requires the section to be read with section 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 section. See Change 82 in Annex 1.

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

1602.This section allows for certain descriptions of employees a deduction of a sum fixed by the Treasury from earnings paid out of public revenue.

1603.It derives from section 199 of ICTA.

1604.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.

1605.Subsection (2) defines “fixed sum expenses”.

1606.Subsection (3) requires the section to be read with section 330(2) (prevention of double deductions). If the expense were deductible under Chapter 2 of Part 5, it would not be deductible under this section.

Chapter 5: Deductions for earnings representing benefits or reimbursed expenses
Background

1607.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.

1608.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”.

1609.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(A) in Annex 1.

1610.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

1611.As in Chapter 2 of this Part, the sections have been grouped according to the type of expense involved. After section 369, which is introductory:

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

1612.This section deals with preliminary matters relevant for this Chapter.

1613.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.

1614.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(A) in Annex 1.

1615.Subsection (2) provides that the amount described in subsection (1) is referred to in this Chapter as “the included amount”.

1616.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

1617.The next three sections 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 sections derive from provisions in section 194 of ICTA.

Section 370: Travel costs and expenses where duties performed abroad: employee’s travel

1618.This section provides that a deduction is allowed from earnings for travel costs and expenses where the journey in question is made by the employee.

1619.The section derives from provisions in section 194(1), (3), (4), (5), (6) and (8) of ICTA.

1620.Subsection (1) specifies the circumstances in which a deduction from earnings is allowed. See also Change 101(A) in Annex 1. The deduction is allowed if:

1621.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).

1622.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 section 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 section. See Change 101(B) in Annex 1.

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

1623.This section 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.

1624.The section derives from provisions in section 194(1) and (2) of ICTA.

1625.Subsection (1) specifies the circumstances in which a deduction from earnings is allowed. See also Change 101(A) in Annex 1. The deduction is allowed if:

1626.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).

Section 372: Where seafarers’ duties are performed

1627.This section provides that section 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 sections 370 and 371. It derives from section 194(7) of ICTA.

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

1628.The next three sections 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 sections derive from provisions in section 195 of ICTA.

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

1629.This section provides that a deduction is allowed from earnings for travel costs and expenses where the journey in question is made by the employee.

1630.The section derives from provisions in section 195(1), (2), (5), (7), (8) and (9) of ICTA.

1631.Subsection (1) specifies the circumstances in which a deduction from earnings is allowed. See also Change 101(A) in Annex 1. The deduction is allowed if:

1632.Subsection (2) provides for the deduction from earnings to be allowed if:

1633.Condition A insubsection (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.

1634.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.

1635.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 Act take a simpler approach, referring just to “the country outside the United Kingdom in which the employee normally lives”.

Section 374: Non-domiciled employee’s spouse’s or child’s travel costs and expenses where duties performed in UK

1636.This section 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.

1637.The section derives from provisions in section 195(1), (2) and (6) to (10) of ICTA.

1638.Subsection (1) specifies the circumstances in which a deduction from earnings is allowed. See also Change 101(A) in Annex 1. The deduction is allowed if:

1639.Subsection (2) provides for the deduction from earnings to be allowed if:

1640.Condition A insubsection (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.

1641.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.

1642.As in the case of section 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.

Section 375: Meaning of “qualifying arrival date”

1643.This section explains the meaning of the expression “qualifying arrival date”, which is used in sections 373 and 374. It derives from section 195(2), (3) and (4) of ICTA.

1644.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.

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

1645.This section provides that a deduction is allowed for costs or expenses in respect of accommodation or subsistence while an employee is working abroad.

1646.The section derives from section 193(2) and (4) of ICTA.

1647.Subsection (1) specifies the circumstances in which a deduction from earnings is allowed. See also Change 101(A) in Annex 1. The deduction is allowed if:

1648.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.

1649.The expression “board and lodging” in section 193(4) of ICTA has been replaced in this Act 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.

1650.In the detail of the wording used, this section 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”.

1651.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. See also Change 101(B) in Annex 1.

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

1652.This section provides that a deduction is allowed for costs and expenses in respect of personal security assets and services.

1653.The section derives from sections 50 to 52 of FA 1989.

1654.Subsection (1) specifies the circumstances in which a deduction from earnings is allowed. See also Change 101(A) in Annex 1. The deduction is allowed if:

1655.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)).

1656.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)).

1657.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 Act this expression is covered by the general definitions in section 721(4) and (5). See Note 39 in Annex 2.

1658.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

1659.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.

Section 378: Deduction from seafarers’ earnings: eligibility

1660.This section 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.

1661.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.

1662.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.

Section 379: Calculating the deduction

1663.This section 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.

1664.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.

1665.Subsection (3) makes the deduction subject to the limit contained in the following section.

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

1666.This section 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.

1667.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 section 24 and rather than repeat them here subsection (4) contains a cross-reference to that section.

Section 381: Taking account of other deductions

1668.This section 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.

1669.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.

1670.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.

1671.To prevent this, this section 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.

1672.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.

1673.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.

Section 382: Duties on board ship

1674.This section 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.

1675.This section 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 section 40 are unaffected by this section.

Section 383: Place of performance of incidental duties

1676.This section 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.

1677.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 section.

Section 384: Meaning of employment “as a seafarer”

1678.This section 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.

Section 385: Meaning of “ship”

1679.This section 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

1680.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”.

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

1681.This section 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.

1682.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.

1683.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).

1684.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 section 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.

1685.Subsection (7) acts as a signpost to the reliefs available under section 392 and section 266A of ICTA. The latter is a new provision inserted by paragraph 36 of Schedule 6 to this Act and derives from section 595(1)(b) of ICTA.

Section 387: Meaning of “non-approved retirement benefits scheme”

1686.This section defines such a scheme. It derives from section 596(1) of ICTA.

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

1687.This section 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.

1688.Subsection (2) introduces a formula for making the apportionment.

Section 389: Exception: employments where earnings charged on remittance

1689.This section 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 sections 22 and 26.

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

1690.This section derives from section 595(2)(b) of ICTA and provides a further exception from the charge under section 386 of this Act. 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 this section instead sets out the relevant circumstances for the exception to apply.

Section 391: Exception: seafarers with overseas earnings

1691.This section 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 Act. This is a minor change to the law. See Change 105 in Annex 1.

Section 392: Relief where no benefits are paid or payable

1692.This section 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 section the application is made to and considered by the Inland Revenue rather than the Board. See Change 158 in Annex 1.

1693.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

1694.This Chapter applies to benefits provided by non-approved retirement benefits schemes.

Section 393: Application of this Chapter

1695.This section 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.

1696.Section 596A(7) of ICTA has not been rewritten in this Act. See Note 40 in Annex 2.

Section 394: Charge on benefit to which this Chapter applies

1697.This section establishes the charge and the basis of assessment. It ensures that the charge has priority over all other charges in this Act.

1698.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.

1699.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 section 683.

1700.Subsection (4) specifies the rate of tax for the Schedule D Case VI charge. It derives from section 596A(5) of ICTA.

1701.Subsection (5) establishes the order of priority. The charge under this Chapter takes priority over all other charges in this Act. In its application to lump sums the section 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.

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

1702.This section applies if the benefit received is a lump sum. It derives from section 596A(8), (9) and (15) of ICTA.

1703.The section has two functions.

1704.First, it introduces sections 396 and 397. Section 396 exempts the charge under section 394 if certain conditions are met. Section 397 modifies the charge under section 394 if certain conditions are met.

1705.Second, it sets out the condition that is common to both sections 396 and 397 and which must be met if either section is to apply.

1706.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 section 386(1) of this Act depending on when the contribution was made.

1707.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.

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

1708.This section exempts lump sum benefits if:

1709.The section derives from sections 596A(8) and (15) of ICTA.

1710.A further requirement for the exemption to apply is that the condition in section 395(4) is met; see section 395(2).

1711.In subsection (1)(a) the phrase “brought into charge to tax” means brought into charge to United Kingdom tax.

1712.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.

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

1713.This section allows a deduction from the amount of the lump sum that is charged to tax if:

1714.The section 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.

1715.Subsection (3) gives the amount of the deduction. It is the total of:

1716.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.

1717.Subsection (7) prevents double deductions. It derives from section 596A(14) of ICTA.

1718.Subsection (8) derives from the assumptions in section 596A(15) of ICTA.

1719.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).

1720.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.

Section 398: Valuation of benefits

1721.This section provides the rules for calculating the value of the benefit.

1722.It derives from section 596A(4) and section 596B of ICTA.

1723.The language in section 596A(4) and section 596B of ICTA is almost identical to that in two other provisions:

1724.Paragraph 12 of Schedule 11 to ICTA has been rewritten as section 415 of this Act. Paragraph 10(3) of Schedule 12 to FA 2000 has been rewritten as section 55 of this Act. The rewrite of the three sections reflects the similarities.

1725.Subsection (1) gives the rule if the benefit is paid in cash. It derives from section 596A(4)(a) of ICTA.

1726.Subsection (2) gives the rule if the benefit is not paid in cash. It derives from section 596A(4)(b) of ICTA.

1727.Subsection (5) provides that references to the employer in the benefits code include the former employer. This subsection is needed because most employees will have retired before the benefit is paid and their employer will be a former employer.

1728.Subsection (6) adapts the benefits code if the benefit provided is accommodation costing over £75,000 and the person receiving the benefit makes good an amount that exceeds the rental value. It overrides the rule in section 106(3) that the taxpayer is allowed to deduct only the excess amount of rent paid. The taxpayer is allowed a deduction for the full amount of the excess.

1729.In the source legislation dealing with benefits the rules for calculating the value of living accommodation costing over £75,000 do not apply if the accommodation was first occupied before 31 March 1983. This rule has been rewritten as a saving; see paragraph 21 of Schedule 7 to this Act. The rule does not apply to section 596B of ICTA. So paragraph 21 of Schedule 7 does not apply for the purposes of this Chapter.

Section 399: Employment-related loans: interest treated as paid

1730.This section applies if the benefit provided is a loan at a rate of interest lower than the official rate.

1731.It derives from section 596C of ICTA.

1732.Tax is charged on the cash equivalent of the loan. This is calculated using the official interest rate. But the cash equivalent is not in fact interest. The section treats the taxpayer as having paid interest. The taxpayer can then claim tax relief on the deemed payment if real interest would have qualified for relief. The language in section 596C of ICTA is almost identical to that in paragraph 13 of Schedule 11 to ICTA, which deals with benefits paid on the termination of employment. That provision has been rewritten as section 416 of this Act.

1733.Subsection (4) prevents the notional interest being treated as income of the lender or as mortgage interest payable under deduction of tax in the hands of the payer.

Section 400: Interpretation

1734.This section gives the meaning of various terms used in the Chapter.

1735.It derives from definitions in Chapter 1 of Part 14 of ICTA.

1736.Subsection (1) includes a clarification of the meaning of “employee” and the definitions of “ administrator”, “relevant benefits” and “ex-spouse”.

1737.Section 611AA of ICTA defines “administrator” as follows:

(1)

In this Chapter references to the administrator, in relation to a retirement benefits scheme, are to the person who is, or the persons who are, for the time being the administrator of the scheme by virtue of the following provisions of this section.

(2)

Subject to subsection (7) below, where—

(a)

the scheme is a trust scheme, and

(b)

at any time the trustee, or any of the trustees, is or are resident in the United Kingdom,

the administrator of the scheme at that time shall be the trustee or trustees of the scheme.

(3)

Subject to subsection (7) below, where—

(a)

the scheme is a non-trust scheme, and

(b)

at any time the scheme sponsor, or any of the scheme sponsors, is or are resident in the United Kingdom,

the administrator of the scheme at that time shall be the scheme sponsor or scheme sponsors.

(4)

At any time when the trustee of a trust scheme is not resident in the United Kingdom or (if there is more than one trustee) none of the trustees is so resident, the trustee or trustees shall ensure that there is a person, or there are persons—

(a)

resident in the United Kingdom, and

(b)

appointed by the trustee or trustees to be responsible for the discharge of all duties relating to the scheme which are imposed on the administrator under this Chapter.

(5)

At any time when the scheme sponsor of a non-trust scheme is not resident in the United Kingdom or (if there is more than one scheme sponsor) none of the scheme sponsors is so resident, the scheme sponsor or scheme sponsors shall ensure that there is a person, or there are persons—

(a)

resident in the United Kingdom, and

(b)

appointed by the scheme sponsor or scheme sponsors to be responsible for the discharge of all duties relating to the scheme which are imposed on the administrator under this Chapter.

(6)

Without prejudice to subsections (4) and (5) above—

(a)

the trustee or trustees of a trust scheme, or

(b)

the scheme sponsor or scheme sponsors of a non-trust scheme,

may at any time appoint a person who is, or persons who are, resident in the United Kingdom to be responsible for the discharge of all duties relating to the scheme which are imposed on the administrator under this Chapter.

(7)

Where at any time there is or are a person or persons—

(a)

for the time being appointed under subsection (4), (5) or (6) above as regards a scheme, and

(b)

resident in the United Kingdom,

the administrator of the scheme at that time shall be that person or those persons (and no other person).

(8)

Any appointment under subsection (4), (5) or (6) above—

(a)

must be in writing, and

(b)

if made after the time when the scheme is established, shall constitute an alteration of the scheme for the purposes of section 591B(2).

(9)

In this section—

(a)

references to a trust scheme are to a retirement benefits scheme established under a trust or trusts;

(b)

references to the trustee or trustees, in relation to a trust scheme and to a particular time, are to the person who is the trustee, or the persons who are the trustees, of the scheme at that time;

(c)

references to a non-trust scheme are to a retirement benefits scheme not established under a trust or trusts, and

(d)

references to the scheme sponsor or scheme sponsors, in relation to a retirement benefits scheme and to a particular time, are references to any person who established the scheme and is in existence at that time or, if more than one, all such persons.

1738.Section 612(1) of ICTA provides that “employee”

(a)

in relation to a company, includes any officer of the company, any director of the company and any other person taking part in the management of the affairs of the company, and

(b)

in relation to any employer, includes a person who is to be or has been an employee.

1739.The definition of “ex-spouse” derives from section 659D of ICTA as inserted by section 79 and paragraph 17 of Schedule 10 to Finance Act 2000.

1740.Section 612(1) of ICTA defines “relevant benefits” as follows:

‘relevant benefits’ means any pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death, or by virtue of a pension sharing order or provision, or in anticipation of retirement, or, in connection with past service, after retirement or death, or to be given on or in anticipation of or in connection with any change in the nature of the service of the employee in question, except that it does not include any benefit which is to be afforded solely by reason of the disablement by accident of a person occurring during his service or of his death by accident so occurring and for no other reason.

Chapter 3: Payments and benefits on termination of employment etc.
Overview

1741.This Chapter contains another of the free-standing Schedule E charges covered by paragraph 5 of section 19(1) of ICTA. It derives from section 148 of, and Schedule 11 to, ICTA. The provisions apply to charge to tax payments made and benefits provided when an employment ends or the terms of it are changed. As such payments and provision of benefits may continue for a period after the event, the charge to tax continues year by year as long as they continue.

Section 401: Application of this Chapter

1742.Subsection (1) derives from section 148(1) of, and paragraph 2(1) of Schedule 11 to, ICTA. It sets out the circumstances in which payments and benefits come within the provisions of the Chapter. The reference to “relative” has been expanded to make it clear that only “blood relatives” are included.

1743.“Personal representatives” is a defined term in section 721 of this Act. It is not defined in paragraph 2(1) of Schedule 11 to ICTA. This is a minor change to the law. See Change 159 in Annex 1.

1744.Section 148(5) of ICTA has not been rewritten in this Chapter. The reason for that is explained in Note 42 in Annex 2.

1745.Subsection (2) is a signpost to the exceptions which may apply.

1746.Subsection (3) prevents a double charge to tax in cases where there may be some doubt as to whether a benefit or payment is within this Chapter or is within another charge to tax. It also ensures that anything which is not chargeable by virtue of the provisions in Part 3 of this Act will be within the provisions of this Chapter if there is a cessation of or change in the employment. It derives from part of the end-words of section 148(1) of ICTA.

1747.Subsection (4) derives from section 148(6) of, and paragraph 2(2) of Schedule 11 to, ICTA. It provides that payments to people other than the employee may be within the scope of this Chapter. It also provides that throughout the provisions which this Chapter uses to determine what and how much is chargeable, any references to employee and employer include the person whose employment has terminated and his former employer. This means that those provisions do not need to refer to former employees and former employers.

Section 402: Meaning of “benefit”

1748.This section derives from section 148(2), (2A) and (3) of ICTA and includes a minor change to the law. See Change 107 in Annex 1.

1749.Subsection (1) explains which benefits are within the scope of this Chapter. Subsection (1)(a) defines them as any benefits received by the employee or former employee which are received as set out in subsection (1) and which, if received as an employee for performing the duties of the employment, would be taxable earnings from the employment. This will include any benefit which would come within the definition of earnings in section 62 of this Act and any benefit for which an amount is treated as earnings by a provision in the benefits code. Subsection (1)(b) includes those benefits which would be within subsection (1)(a) but to which an “earnings-only exemption” applies.

1750.“Earnings-only exemption” is defined in section 227 of this Act. Part 4 of this Act contains most of those exemptions. Section 227(4) lists exemptions that are contained in Part 7 and apply in respect of general earnings. Some of these may be “earnings-only” exemptions. Section 227(1) and (2) may be used to identify which are “earnings-only” exemptions and which are “employment income” exemptions.

1751.Subsection (1)(b) means that the only benefits that do not come within the scope of this Chapter are those which are subject to an exemption other than an “earnings-only exemption”. These wider exemptions are labelled “employment income exemptions”, defined in section 227, and serve to exempt payments and benefits from any charge under this Chapter, provided any conditions for the exemption to apply are met.

1752.There are some benefits to which an earnings-only exemption applies, but which are not to be chargeable under this Chapter in the case of a termination of the employment. These are listed in subsection (2).

1753.Subsection (3) identifies a benefit which is exempt from the scope of this Chapter in the case of a change in the terms or remuneration of the employment. This prevents the exempted removal benefits falling into this Chapter.

1754.Not all the benefits listed in section 148(2A) of ICTA are included in subsections (2) and (3) of this section. That is because there is no need to include those benefits that are now subject to “employment income exemptions” (which operate to exempt them from all charges under the employment income Parts of this Act).

Section 403: Charge on payment or other benefit

1755.This section contains the charge to tax on termination payments and benefits where they exceed the £30,000 threshold.

1756.Subsections (1) and (4) set out the basis of the charge, the threshold and when amounts are to be taken as exceeding it. These provisions derive from section 148(1) and (3) of, and paragraphs 7(2) and 14(1) of Schedule 11 to, ICTA. Amounts brought into charge by virtue of this section come within “specific employment income” in section 7(4) of this Act. Section 6(3) of this Act provides that the rules in Chapters 4 and 5 of Part 2 do not apply to specific employment income. That derives from section 19(1), paragraph 5 of ICTA and the case of Nichols v Gibson CA 1996 at 68 TC 611.

1757.Subsections (2) and (3) set out the rules for the timing of the charge to tax, and the time when benefits are treated as received. The rules are similar to the receipts basis for earnings. In cases where payments are made over a period of time, or benefits are provided for some time after the employment has terminated, once the £30,000 threshold has been exceeded, there will be continuing liability as long as payments continue to be made or benefits provided. These provisions derive from section 148(3) and (4) of ICTA.

1758.Subsections (5) and (6) make clear who is liable for a tax charge arising by virtue of this Chapter, both in the ordinary course of events and if a payment or benefit is received after the death of the employee or former employee. The latter circumstances are covered by subsection (5), which derives from paragraph 14(2) of Schedule 11 to ICTA. “Personal representatives” is defined in section 721 of this Act. See Change 159 in Annex 1.

Section 404: How the £30,000 threshold applies

1759.This section deals with two aspects of the £30,000 threshold. The first concerns the payments and other benefits that are to be aggregated. The second concerns the way the £30,000 is to be allocated between payments and benefits received at different times. Subsections (1) to (3) deal with the first aspect, and derive from section 148(1) and (6) of, and paragraphs 7, 8 and 16 of Schedule 11 to, ICTA. Subsections (4) and (5) relate to the second aspect and derive from section 148(1) of, and paragraph 7 of Schedule 11 to, ICTA.

1760.Subsection (1)(c) sets out the circumstances in which the payments and benefits from more than one employer are aggregated. Only one sum of £30,000 is available in respect of an employment, different employments with the same employer and employments with employers who are associated.

1761.Subsection (2) explains when employers are “associated” for this purpose. Subsection (3)(a) treats the successors to the employer or the person looked at to determine control as if they were the original employer or person. Successors are not defined anywhere in the Tax Acts so the normal meaning applies, being someone who takes the place of another person to perform a like role and duties. Subsection (3)(b) defines the time at which one has to consider whether employers are associated to be the “termination or change date”.

1762.Subsections (4) and (5) explain how the £30,000 threshold is attributed to the payments and benefits in the order in which they are received.

Section 405: Exception for certain payments exempted when received as earnings.

1763.This section provides that certain payments which would otherwise fall within this Chapter are not to be included. It derives from section 148(2A) of ICTA.

1764.Subsection (1) sets out the exemption which is to be taken to apply for this Chapter in the case of a termination of employment.

1765.Subsection (2) sets out the exemption which is to be taken to apply for this Chapter in the case of a change in the terms or remuneration of the employment.

1766.Not all the payments listed in section 148(2A) of ICTA are included in subsections (1) and (2) of this section. That is because there is no need to include those benefits that are now subject to “employment income” exemptions which operate to exempt them from all charges under the employment income Parts of this Act or those that are excluded by section 402(2) or (3) of this Act.

Section 406: Exception for death or disability payments and benefits

1767.This section provides an exception where the payment or benefit is due to death, injury or disability. It derives from paragraph 3 of Schedule 11 to ICTA.

Section 407: Exception for payments and benefits under tax-exempt pension schemes

1768.This section provides an exception where the payment is made or benefit provided through certain pension schemes and is due to a change in or termination of employment owing to ill health. This exception derives from paragraph 4 of Schedule 11 to ICTA.

1769.The payment or benefit referred to in subsection (1)(b) will usually be a commutation payment calculated by reference to past service.

Section 408: Exception for contributions to tax-exempt pension schemes

1770.This section derives from Inland Revenue Statement of Practice 2/1981, which excepts special contributions to approved schemes and payments for the purchase of an annuity under an approved transaction.

1771.Subsection (1) sets out the type of contribution which is excepted.

1772.Subsection (2) provides signposts to the definitions of terms used.

1773.This is a minor change to the law. See Change 108 in Annex 1.

Section 409: Exception for payments and benefits in respect of employee liabilities and indemnity insurance

1774.This section covers the treatment of a payment or benefit received by an employee in connection with a liability arising after the employee’s employment has ceased and its interaction with this Chapter. The payments or benefits in subsection (1) are not within this Chapter if the conditions in subsections (3) to (5) are met. The section derives from section 92(10) of FA 1995.

Section 410: Exception for payments and benefits in respect of employee liabilities and indemnity insurance: individual deceased

1775.This section covers the treatment of a similar payment or benefit to that described in respect of section 409 where the employee has died. It does not matter whether the former employee’s death gave rise to the cessation of the former employment or simply occurred after that cessation. The payment is specifically excluded from any charge to tax on the personal representatives of the deceased former employee arising by virtue of this Chapter. The section derives from section 92(10) of FA 1995.

1776.“Personal representatives” is defined in section 721 of this Act. See Change 159 in Annex 1.

Section 411: Exception for payments and benefits for forces

1777.This section provides an exception for certain payments and benefits for members of the armed forces. It derives from paragraph 5 of Schedule 11 to ICTA.

Section 412: Exception for payments and benefits provided by foreign governments etc.

1778.This section provides an exception which is limited to those employed by foreign governments and to particular circumstances. It derives from paragraph 6 of Schedule 11 to ICTA.

Section 413: Exception in certain cases of foreign service

1779.This section provides an exception for payments made in certain cases of “foreign service”. The exception depends on the length of the foreign service up to the date of the termination of, or change in, employment, compared with the whole period of service.

1780.As the period involved exceeds 20 years it is necessary to define “foreign service” in a number of different ways because of the changes in the Schedule E charge over that period. This section derives from paragraphs 9 and 10 of Schedule 11 to ICTA.

1781.Subsection (3) deals with the period in which this Act will have effect.

1782.Subsection (4) deals with the period in which the “foreign earnings deduction” (in sections 192A or 193(1) of ICTA) was applicable.

1783.Subsection (6) deals with the period before the foreign earnings deduction became available and before the Cases of Schedule E were introduced. This ensures that all periods of overseas service are included.

Section 414: Reduction in other cases of foreign service

1784.The exception for foreign service in section 413 may not apply because the length of service is insufficient. If so, the amount charged to tax may be reduced under this section, which derives from paragraphs 9 and 11 of Schedule 11 to ICTA. The amount of the reduction depends on the length of foreign service compared with the total length of service.

1785.The reduction is applied to the amount which remains above the £30,000 threshold.

1786.There is, however, a limitation to the reduction. This is intended to ensure that where tax is deducted from a payment – for example a gift aid payment – enough tax remains in charge to satisfy the tax on the payment. Subsection (4) has the effect that any personal reliefs and the reduction added together must not bring the income tax payable below an amount equal to the tax on the gift aid payment.

1787.This is a change from the limit in ICTA that would “reduce the amount of income on which the taxable person is chargeable below the amount of income tax which the taxable person is entitled” to charge or deduct. It is a minor change to the law. See Change 109 in Annex 1.

Section 415: Valuation of benefits

1788.This section sets out how to value the benefits chargeable under this Chapter. It derives from paragraph 12 of Schedule 11 to ICTA. It applies the valuation rules of the benefits code as set out in Chapters 2 to 10 of Part 3 of this Act.

1789.Subsection (1) provides the rule for arriving at the amount of cash benefits.

1790.Subsection (2) provides the same rule as that in section 64 of this Act (relationship between earnings and benefits code). The amount of any earnings is considered first, and the cash equivalent under the benefits code “tops up” the earnings with the excess. This link to the benefits code is a minor change to the law. See Change 110 in Annex 1. The benefits are considered on the basis of what would be chargeable if section 15 of this Act applied.

1791.Subsections (3) to (7) of this section modify the valuation provisions used in the benefits code so that they can apply properly to work out the valuation of benefits brought into the charge to tax under this Chapter. These provisions derive from section 596B of ICTA.

1792.Subsection (4) allows the valuation of the cash equivalent to be made by reference to the person chargeable or the recipient of the benefit.

1793.Subsection (5) disapplies, for valuation purposes, section 401(4) which treats the employee as the recipient in certain circumstances.

1794.Subsection (7) applies where the benefit is living accommodation and an amount has been made good. It overrides the limitation in section 106 of this Act which restricts the deduction to the rent paid, and so allows a deduction of the whole of the amount made good for the purposes of this Chapter.

1795.One of the modifications to the benefit of provided living accommodation is that section 146(8) of ICTA does not apply for the purposes of this Chapter. This refers to accommodation first occupied by the employer before 31 March 1983. In view of the length of time since that date, the provision has been removed from section 107 of this Act. The disapplication of it has also been removed from this section. It is in paragraph 21(2) of Schedule 7 to this Act.

Section 416: Notional interest treated as paid if amount charged for beneficial loan

1796.This section is the equivalent of section 184 of this Act (interest treated as paid) in the benefits code and is written in the same terms.

1797.It allows relief in respect of the benefit of a loan which falls within this Chapter, but prevents it from being treated as real interest paid under deduction of tax.

Part 7: Employment income: share-related income and exemptions
Overview

1798.This Part contains the provisions concerning the income tax treatment of share-related remuneration. The chapters in this Part reflect the major divisions in the legislation relating to shares acquired by employees:

1799.Chapter 10 deals with a different topic: the exemption given to employees in connection with priority share allocations for employees when an offer of shares to the public is made. The material in Chapter 10 derives from section 68 of FA 1988.

1800.This Part also contains a final chapter (Chapter 11) which contains supplementary provisions relating to employee benefit trusts.

1801.This Part does not include any provisions dealing with the tax consequences of an employee acquiring employment related shares at less than market value. This topic is dealt with in section 162 of ICTA, which treats the acquisition of shares at less than market value as a notional loan to the employee, and uses the rules for beneficial loans to give a cash equivalent of the benefit. Section 162 also sets out the tax charge that arises when employment-related shares are disposed of for more than market value, treating the excess over market value as emoluments. Because of the relationship between section 162 and the rules on beneficial loans, those provisions appear, in this Act, as part of the benefits code, in Chapters 8 and 9 of Part 3, following on from the chapter concerning the treatment of employment-related loans. There are cross-references to Chapters 8 and 9 of Part 3 in section 418(1) of this Act.

Background

1802.Companies have often wished to reward employees by allowing them to acquire shares in the company on advantageous terms. As a matter of legal form, the company may achieve this objective in any one of three ways, for the employee may be given:

1803.It is well established that if an employee is given shares, or is allowed to acquire shares on advantageous terms, the amount of the advantage is chargeable to income tax as an earning from the employment. The leading case is Weight (HM Inspector of Taxes) - v - Salmon (1935) 19 TC 174 (HL), where the taxpayer took up opportunities given to him to apply for unissued shares in the company at their par value, which was always less than their market value. The House of Lords held that the difference was an emolument of the taxpayer’s employment. In the words of the basic charge to income tax under Schedule E, as it stood at that time, the taxpayer, who was a person “having or exercising an office or employment of profit” had received a “profit” from that office.

1804.As a means of avoiding the charge to tax on such arrangements, established by the decision in Weight - v - Salmon, share option schemes became increasingly popular. These schemes differed: but, typically, a company granted to employees, for a nominal sum, an option to buy a stated number of shares at a stated price, which was normally their market value at the date of the grant. If the price of the company’s shares rose, an employee could exercise the option and acquire shares at less than the market value then current.

1805.The efficacy of share option schemes was tested in the case of Abbott - v - Philbin (HM Inspector of Taxes) (1960) 39 TC 82 (HL), [1961] AC 352, where the House of Lords had to consider two assessments to income tax for different years of assessment. The first assessment was for the year in which the taxpayer received the option. The decision regarding that assessment was that the taxpayer did receive an emolument during that year of assessment, but that the taxpayer obtained no benefit from it at that time, because the option was to buy at what was then the market value. The second assessment was for the year in which the taxpayer exercised the option. The House of Lords held, for that later year of assessment, that the advantage that arose was not a perquisite or profit from the office or employment during the year of assessment. Instead it was an advantage which accrued to the taxpayer as the holder of a legal right that he had acquired in an earlier year. (It might well have been possible to say that the taxpayer had made a gain from the disposal of an asset - the option - but capital gains tax was only introduced by FA 1965.)

1806.Legislation to counteract the effect of the decision in Abbott - v - Philbin was enacted as section 25 of FA 1966, which imposed a charge to income tax when the option was exercised. This legislation was later re-enacted, and eventually became sections 135 to 140 of ICTA 1988. It now constitutes Chapter 5 of this Part of this Act.

1807.As a means of avoiding a charge under section 25 of FA 1966, share incentive schemes became increasingly popular. These schemes differed: but, typically, a company awarded shares subject to restrictions to employees. The restrictions might (for example) have the result that the shares carried no rights to receive dividends or to vote. The shares, consequently, might be expected to have only a low value. At a later date (or dates) the restrictions would be removed. The consequent increase in value, however, was not subject to the share option rules in section 25 of FA 1966: for the employee did not realise a gain by exercising an option to acquire shares. The shares were already owned.

1808.Legislation to counteract share incentive schemes by charging the employee to income tax on the increase in the value of the shares was introduced in FA 1972. That legislation was considerably amended over the years; and successor legislation was introduced by sections 77 to 89 of FA 1988. That legislation is rewritten in Chapter 4 of this Part of this Act.

1809.At a later stage, long-term incentive plans came increasingly to be used. These schemes also differed; but, typically, a company awarded shares to employees, at no cost or at nominal cost, in circumstances where the employee was only able to enjoy the benefit of those shares if performance conditions specified at the time of the award were met. Some time later, after the performance conditions had been met, the employee would become fully entitled to enjoy the benefit of the shares.

1810.It was initially assumed that there was no charge on the initial award of the shares, but that a charge arose when the employee became entitled to enjoy the full benefit of the shares. Prevailing practice reflected this assumption. However, the view was taken later that a charge arose on the initial award of the shares but not at the later time when the employee became fully entitled to enjoy the benefit of the shares.

1811.Legislation was accordingly introduced in section 50 of FA 1998, which provided for sections 140A to 140C to be inserted into ICTA. The new legislation broadly restored the position to the previous practice - this time on a statutory basis. This legislation now constitutes Chapter 2 of this Part of this Act.

1812.Further legislation was introduced in section 51 of FA 1998, which provided for sections 140D to 140F to be inserted into ICTA. This legislation was aimed at counteracting possible tax avoidance where there was a conversion of one class of shares into another. As a result of such a conversion it was possible to devise structures under which employees could be provided with valuable shares as a form of remuneration without the full value of the shares being brought into charge to income tax. This legislation imposed a charge to income tax at the time of conversion. This legislation now constitutes Chapter 3 of this Part of this Act.

1813.But not all of the legislation relating to employees who acquire shares or options in the companies for which they work is of the type so far described. Various Governments have decided that they wish to confer various advantages on a range of schemes and plans. This has meant additional legislation to set out:

1814.There are currently five different schemes or plans in existence:

Arrangement of material for share schemes

1815.This Act provides for a “code” for each of SIPs, SAYE schemes, CSOPs and EMIs. That “code” includes all the legislation relating to the particular scheme or plan, covering the tax advantages and any consequential tax charges together with all the rules relating to the qualification criteria and administration of the scheme or plan in question. The material in each “code” has been divided into two principal categories. The material dealing with the tax advantages and consequential tax charges has been placed in the main run of sections in this Part of this Act; but the administrative provisions have been placed in the supporting Schedules 2 to 5 to this Act.

1816.This approach is intended to highlight the legislation relating to the actual tax advantages offered, and any consequential tax charges, so that all the information with a direct impact on an employee’s tax liability appears in one place in the body of this Act.

1817.The provisions relating to the qualification criteria for each code are likely to be relevant to different sets of people (e.g. the company setting up the scheme and its advisers). It therefore seems logical to separate these out and to place them in a Schedule separate from the main run of sections concerning the taxation of employment income.

Chapter 1: Introduction
Overview

1818.This short introductory Chapter consists of five sections:

Section 417: Scope of Part 7

1819.This section, which is a drafting addition, introduces the provisions of this Part of this Act. Those provisions contain special rules relating to employees or directors who acquire shares in companies, or options relating to such shares, in connection with their office or employment (see subsection (1)).

1820.Subsection (2) then lists nearly all the chapters in this Part that follow this introductory Chapter. Of these, it may be said that Chapters 2 to 5 are primarily concerned with charges to income tax that may arise in certain circumstances. Chapters 6 to 9 then deal with the plans and schemes under which employees and directors may be offered shares or options on advantageous terms. And, finally, Chapter 10 deals with a particular income tax exemption that arises when employees or directors benefit from a priority allocation of shares.

1821.Subsection (3) lists the chapters in this Part that provide for amounts to count as employment income; and subsection (4) lists the chapters in this Part that provide for exemptions and reliefs from income tax. Subsection (5) records that there is also a supplementary chapter (Chapter 11) which contains provisions about employee benefit trusts.

Section 418: Other provisions about share-related income and exemptions

1822.This section, which is another drafting addition, sets out where other provisions dealing with share related income and exemptions may be found.

1823.Subsections (1) and (2) list other provisions of this Act that deal with share-related income and exemptions.

1824.Subsection (3) deals with approved profit sharing schemes (“APS schemes”). This subsection explains that, in view of the phasing out of these schemes, the legislation relating to APS schemes has not been rewritten in this Act. That legislation will accordingly continue to apply while APS schemes continue.

1825.Subsection (4) preserves the effect of sections 138 to 140 of ICTA where shares or interests in shares were acquired before 26 October 1987.

Section 419: Duties to provide information

1826.This section lists the provisions in this Part that impose duties to provide information to the Inland Revenue.

1827.This section is also a drafting addition, as, once again, it provides signposts to the various sections that are relevant in this context. As these sections are all placed near the end of the chapters in which they appear, they might otherwise be given insufficient attention.

Section 420: Negative amounts treated as nil

1828.The charges to income tax for which this Part of this Act provides constitute “specific employment income” (see sections 6(1) and 7(4) of this Act). Under ICTA this income is charged to income tax under paragraph 5 of section 19(1) of that Act.

1829.In this Part of this Act, where deductions from a chargeable amount are permitted, the relevant provision signals this fact by using a formula.

1830.This section, which is new, gives effect to the general proposition that it is not possible for an allowable loss to arise under paragraph 5 of section 19(1) of ICTA. Deductions might reduce a chargeable amount to nil; but, beyond this point, they could not be used to create a negative amount and (accordingly) an allowable loss. See Note 43 in Annex 2.

Section 421: Application of Part 7 to office-holders

1831.The general rule is that the provisions of the employment income Parts apply equally to offices, unless the contrary is stated (see section 5(1)). But, with one exception, the legislation rewritten in this Part does not apply to office-holders. This section deals with these propositions for the whole of this Part of this Act.

Chapter 2: Conditional interests in shares
Overview

1832.Where shares are awarded to employees by reason of their employment, their value (less anything paid for them) will generally be taxable as an emolument. If the shares have restrictions attached to them so that they are subject to risk of forfeiture (typically in the event of performance criteria not being met), the Inland Revenue view until 1998 was that there was not an emolument at the time of award and that liability only arose when the risk of forfeiture was lifted. Legal advice in 1998 showed that this view was wrong. Liability arose in the normal way at the time of the award on the value of the shares taking into account the risk of forfeiture. No liability as an emolument arose at the time that the risk was lifted. Nor would the legislation in sections 77 to 88 of FA 1988 generally bite as there was no event giving rise to an immediate increase in value.

1833.The legislation introduced by sections 140A to 140C of ICTA (together with supplementary provisions in sections 140G and 140H) is intended broadly to restore the position as it existed under the earlier practice. It applies to shares acquired on or after 17 March 1998. In essence the normal income tax emoluments charge on award is removed by section 140A unless the shares can still be subject to forfeiture more than five years after acquisition. The same section then imposes a charge (whether or not there is an emoluments charge) when the employee’s interest ceases to be “only conditional”, a term which is defined by section 140C. A number of situations are specifically excluded from counting as “only conditional” so that in those circumstances the normal rules of a charge on acquisition apply.

1834.Sections 140G and 140H of ICTA contain supplementary provisions some of which apply solely to the provisions concerning conditional shares (sections 140A to 140C of ICTA), some of which apply solely to the provisions concerning convertible shares (sections 140D to 140F of ICTA) which were introduced at the same time and some which apply to both. In this Act the provisions on convertible shares appear in Chapter 3. This does mean that those supplementary provisions which apply to both types of share have been duplicated, but the overall result is intended to be much easier to follow.

Section 422: Application of this Chapter

1835.Subsection (1) of this introductory section derives from section 140A of ICTA and gives the two basic conditions for the provisions to apply. First, the shares must be acquired “as a director or employee” and that term is defined in section 423. The second condition is that the employee’s interest in the shares is “only conditional” as defined in section 424. The fact that these provisions only apply to shares acquired on or after 17 March 1998 is made clear in Part 7 of Schedule 7 to this Act, to which there is also a signpost in section 418(1).

1836.Subsection (2) is new and sets out a number of useful labels which make for less cumbersome drafting. The fact that this Chapter applies to prospective and former directors and employees is made clear by the reference to the extended definition in section 434(1).

Section 423: Interests in shares acquired “as a director or employee”

1837.Subsection (1) explains the circumstances in which shares are regarded as being acquired by a person (“E”) “as a director or employee”. They are broadly equivalent to the circumstances in which a normal earnings charge would arise. The provision derives from section 140H(1) of ICTA. Subsection (1)(c) no longer says an assignment “to him” because if the assignment was to anyone else the shares would not have been acquired by E.

1838.Subsection (2) qualifies subsection (1) and derives from section 140H(2) of ICTA with only minor modifications.

1839.Subsections (3) and (4) are based on section 140H(4) of ICTA and explain the treatment when one conditional or convertible interest is exchanged for another.

1840.Subsection (5) derives from the opening words of section 140H(4) of ICTA.

1841.Subsection (6) contains the definition of “convertible shares”.

Section 424: Meaning of interest being “only conditional”

1842.Subsection (1), which derives mainly from section 140C(1) of ICTA, defines when an interest in shares is “only conditional”. While section 140C of ICTA says “for the purposes of sections 140A and 140B”, the definition is applied more widely by section 140H(5) of ICTA. Hence the definition is now applied “for the purposes of this Chapter”.

1843.Subsection (2) summarises the exceptions from subsection (1) which prevent the interest being only conditional so that the normal charge as earnings applies on acquisition. The exceptions derive from section 140C (1A), (2), (3), (3A) and (4) of ICTA.

1844.Subsection (3) derives from section 140C(5) of ICTA and expands on the circumstances falling within subsection (1)(a). They are not regarded as including cases where the terms on which the employee is entitled to the interest allow the employee to require a person to acquire the interest at undervalue.

1845.Subsection (4) relates back to subsection (1)(b) and derives from the closing words of section 140C(1) of ICTA.

1846.Subsection (5) is new and reflects the latest legal advice that the term “articles of association” includes foreign equivalents, thus widening the circumstances in which an interest is not “only conditional”. See Note 44 in Annex 2.

1847.Subsection (6) is supplementary to subsections (2)(b) and (c) and derives from parts of section 140C(3) and 140C(3A) of ICTA.

1848.Subsection (7) derives from section 140(6) of ICTA.

Section 425: Cases where this Chapter does not apply

1849.The two rules in this section derive from section 140H(3) of ICTA.

1850.The source legislation specifies that these provisions only apply to Case I employments. Subsection (1) rewrites this rule by applying the equivalent test that the earnings must be within section 15 or 21.

1851.Subsection (2) explains that the test in subsection (1) is to be applied to the final year of employment in cases where the right or opportunity to acquire the shares is conferred or offered after the employment has ceased.

Section 426: No charge in respect of acquisition of employee’s interest in certain circumstances

1852.This section concerns the five year rule and derives from section 140A(3) of ICTA. In the typical case the conditions apply for less than five years at which point the employee has an indefeasible interest in the shares. In those circumstances no charge as an emolument arises on acquisition but this does not affect any charges that may arise under section 135 of ICTA (where the shares are acquired by exercising an option) or section 162 of ICTA (where the shares are acquired at undervalue). In this Act those provisions are in section 476 and Chapter 8 of Part 3 respectively.

Section 427: Charge on interest in shares ceasing to be only conditional or on disposal

1853.Subsections (1) to (3) derive from section 140A(4) of ICTA which imposes a tax charge when the risk of forfeiture is lifted or on the earlier disposal of the shares.

1854.Subsection (4) is new and acts as a signpost to a provision removing the charge for shares awarded under an approved SIP.

Section 428: Amount of charge

1855.This section concerns the calculation of the taxable charge under section 427. It derives from section 140(5), (7), and (9) of ICTA. A formula has been introduced in subsection (1) to make the provisions more user-friendly.

1856.The deductible amount provided by section 140A(7)(b) of ICTA is any amount chargeable in respect of the acquisition of the interest. It is not immediately clear what is meant by that phrase and the approach adopted here is to specify what is allowable. The three charges that are relevant are detailed in paragraphs (b), (c) and (d) of subsection (2). See Note 45 in Annex 2.

1857.Subsection (3) provides that charges under sections 449 and 453 are deductible. It derives from section 140A(7)(c) of ICTA. The opportunity has been taken to make it clear that a charge taken under these provisions is not a deductible amount if it is generated by the same event which gives rise to the charge under this Chapter. This is because the FA 1988 provisions, from which sections 449 and 453 derive, are subject to section 140A of ICTA so that the latter takes priority.

Section 429: Amount or value of consideration given for employee’s interest

1858.This section derives from section 140B(1) to (6) of ICTA. Section 140B(7) has been taken to a separate section. This section determines, for the purposes of section 428, the amount allowable as the cost of the shares.

Section 430: Amount or value of consideration given for right to acquire shares

1859.This section derives from section 140B(7) of ICTA which is concerned with calculating the allowable cost where an original option has been exchanged for a replacement option. Section 140B(7) simply refers to the workings of section 136 of ICTA which are not easy to follow. This section spells out what the allowable cost is and the wording follows section 485 which derives from section 136. See Change 125 in Annex 1.

Section 431: Application of this Chapter where employee dies

1860.This section derives from section 140A(8) of ICTA which gives rules which apply when the employee dies holding the conditional shares. There is a deemed disposal immediately before death and a special market value rule applies.

Section 432: Duty to notify provision of conditional interests in shares

1861.This section derives from those parts of section 140G of ICTA concerning information requirements on the initial award of the conditional shares. Section 140G(1)(b)(i) has been omitted as unnecessary because the original award of the shares cannot itself result in any charge under section 140A of ICTA. Accordingly this section simply focuses on the possibility of there being subsequent events that may result in a charge.

1862.The time limits for providing information throughout Chapters 2 to 5 of Part 7 have been standardised at 92 days after the end of the year in which the matter arose or after the event concerned. In the source legislation for this section the time limit was 30 days after the end of the tax year in which the interest is provided. In addition where a time limit runs from the end of the tax year it is now expressed as “before 7th July” to give greater clarity. See Change 111 in Annex 1.

Section 433: Duty to notify events resulting in charges under section 427

1863.This section derives from those parts of section 140G of ICTA concerning information requirements on the occurrence of any of the three events (death, disposal of shares, lifting of restrictions) which may result in a charge under section 140A of ICTA. The time limit for providing information has been extended from 30 to 92 days after the end of the tax year in which the event occurred and expressed differently. See Change 111 in Annex 1.

Section 434: Minor definitions

1864.This section brings together the definitions in section 140H of ICTA and elsewhere in the provisions and adds some new labels for terms used in section 422. In the definition of “terms” the word “include” in section 140H(6) of ICTA has been replaced by “means” to make better sense of the additional words “or in any other way”.

1865.The definition of shares (which comes from section 136(5)(d) of ICTA, as applied with modifications by section 140H(8) of ICTA) includes stock “in so far as the context permits”. This rider has been omitted as unnecessary since there does not appear to be anywhere in this Chapter where the context would not so permit.

Chapter 3: Convertible shares
Overview

1866.Sections 140D to 140F of ICTA (together with supplementary provisions in sections 140G and 140H) were introduced by FA 1998 and apply to shares acquired on or after 17 March 1998. The provisions are concerned with countering possible avoidance in the award of convertible shares by reason of employment. Such shares could be issued having a low value but be later converted to shares of a different class with a higher value. The emoluments charge on award of the shares would be measured by reference to the initial low value and without these provisions the uplift in value on conversion would escape taxation.

1867.The legislation imposes a charge to tax on the market value of the shares immediately after conversion as reduced by sums paid on acquisition or conversion and by any amounts already charged to tax in respect of those shares. No charge arises if all the shares of one class are converted to shares of a new single class and immediately before conversion the company was either controlled by outside shareholders or was employee-controlled.

1868.Sections 140G and 140H of ICTA contain supplementary provisions some of which apply solely to the provisions concerning convertible shares (sections 140D to 140F of ICTA), some of which apply solely to the provisions concerning conditional shares (sections 140A to 140C of ICTA) which were introduced at the same time and some which apply to both. In this Act the provisions on conditional shares appear in Chapter 2. This does mean that those supplementary provisions which apply to both types of share have been duplicated, but the overall result should be much easier to follow.

Section 435: Application of this Chapter

1869.Subsection (1) derives from section 140D(1) of ICTA and gives the basic condition that the shares must be acquired “as a director or employee” and that term is defined in section 436. The reference to interests in shares as well as shares themselves throughout the Chapter derives from section 140F(6) of ICTA. The fact that these provisions only apply to shares acquired on or after 17 March 1998 is made clear in Part 7 of Schedule 7, to which there is also a signpost in section 418(1).

1870.Subsection (2) is mainly derived from section 140D(2) of ICTA (but also parts of section 140G(6) and section 140H(5) of ICTA) and defines the meaning of “convertible”.

1871.Subsection (3) derives from section 140F(2) of ICTA.

1872.Subsection (4) is new and sets out a number of useful labels which make for less cumbersome drafting. The fact that this Chapter applies to prospective and former directors and employees is made clear by the reference to the extended definition in section 446(1).

Section 436: Shares acquired “as a director or employee”

1873.This section derives from subsections (1), (2), (4) and (7) of section 140H of ICTA. It expands on what is meant by shares (or an interest in shares) acquired by a person “as a director or employee”.

Section 437: Cases where this Chapter does not apply

1874.This derives from section 140H(3) of ICTA. It limits the application of this Chapter to cases where the earnings from the employment are within section 15 or 21 and reproduces the restriction in the source legislation to Case I employments.

Section 438: Charge on conversion of shares

1875.This is the charging provision for this Chapter. It derives from section 140D(3) and (4) of ICTA and imposes a charge when the shares are converted to shares of a different class.

Section 439: Amount of charge

1876.This section concerns the calculation of the taxable charge under section 438. It derives from section 140D(5) and (6) of ICTA. A formula has been introduced to make the provisions more user-friendly. As with section 428 the approach now adopted is to specify precisely what deductions are allowable in respect of amounts chargeable in respect of the acquisition of the interest. The three charges that are relevant are detailed in paragraphs (c), (d) and (e) of subsection (2). See Note 45 in Annex 2.

1877.Subsection (3) provides that charges under the provisions derived from sections 78 and 79 of FA 1988 are deductible. It derives from section 140D(6)(d) of ICTA. In contrast to section 428, there is no need to refer to “a different event” here since the conversion itself does not give rise to a charge under the FA 1988 provisions.

1878.Subsection (5) gives the meaning of “market value”, the definition of which is not found in ICTA until section 140F(3).

1879.Subsection (6) derives from the definition of “taxable conversion” in section 140D(7) of ICTA.

1880.Subsection (7) is new. It meets the point that there should be no reason why a charge arising at the end of the seven-year period in section 79 of FA 1988 should not be a deductible amount. This is a minor change to the law. See Change 112 in Annex 1.

Section 440: Case outside charge under section 438: conversion of entire class

1881.In ICTA the main exemption from the charge on conversion is tucked away in subsections (8) and (9) of section 140D with related definitions in section 140F. The exemption is now in a separate section and the definitions are in subsections (4) and (5).

Section 441: Case outside charge under section 438: acquisition of conditional interest

1882.This section provides that no charge arises under this Chapter if the new shares are within the scope of Chapter 2. This ensures that where a conditional interest in shares is acquired on the conversion of other shares and under section 426 of the Act there is no charge in respect of the acquisition of the interest, there will not be a charge under this Chapter in respect of the conversion of the other shares. The section derives from section 140D(10) of ICTA.

Section 442: Amount or value of consideration given for shares or conversion

1883.This section derives from section 140E(1) to (6) of ICTA. Section 140E(7) has been taken to a separate section. It determines, for the purposes of section 439, the amount allowable as the cost of the shares or the cost of conversion.

Section 443: Amount or value of consideration given for right to acquire shares

1884.This section derives from section 140E(7) of ICTA which is concerned with calculating the allowable cost where an original option has been exchanged for a replacement option. That section simply refers to the workings of section 136 of ICTA which are not easy to follow. In order to assist readers, this section sets out what the allowable cost is and the wording follows section 485 which derives from section 136 of ICTA. See Change 125 in Annex 1.

Section 444: Conversion in consequence of employee’s death

1885.This section derives from section 140F(1) of ICTA which deems certain conversions within 12 months of death to have occurred immediately before death.

Section 445: Duty to notify conversions of shares

1886.This section derives from those parts of section 140G of ICTA concerning the information requirements when shares are converted and may result in a charge under this Chapter. The time limit for providing information has been extended from 30 to 92 days after the tax year in which the conversion takes place and expressed differently. See Change 111 in Annex 1.

Section 446: Minor definitions

1887.This section brings together the definitions in section 140H of ICTA and elsewhere in the source legislation and adds some new labels for expressions used in section 435. In the definition of “terms” the word “include” in section 140H(6) of ICTA has been replaced by “means” to make better sense of the additional words “or in any other way”.

1888.The definition of shares (which comes from section 136(5)(d) of ICTA, as applied with modifications by section 140H(8) of ICTA) includes stock “in so far as the context permits”. This rider has been omitted as unnecessary since there does not appear to be anywhere in this Chapter where the context would not so permit.

Chapter 4 – Post-acquisition benefits from shares
Overview

1889.This Chapter is concerned with the income tax charges which may arise in respect of shares (or an interest in shares) which have been awarded by reason of an individual’s office or employment.

1890.The initial award of the shares may have given rise to a Schedule E charge as an emolument or benefit or taxed as general earnings under this Act. This Chapter is not concerned with that initial charge. Instead it provides for a charge to tax in certain circumstances on the increase in value of those shares and in respect of any special benefits which are received by virtue of ownership of those shares. The increase in value charges do not apply where the shares have been issued under one of the share schemes approved by the Inland Revenue, but the special benefits charge may still apply.

1891.The provisions in this Chapter derive from sections 77 to 88 of FA 1988. They apply to shares acquired on or after 26 October 1987 and replace legislation in sections 138 and 139 of ICTA which had a similar, though rather more wide-ranging, effect. Sections 138 and 139 of ICTA, together with the interpretation provisions in section 140 of ICTA still apply to shares acquired before 26 October 1987 and that legislation remains on the statute book although it has not been rewritten. Paragraphs 55 to 57 in Part 7 of Schedule 7 to this Act contain the appropriate savings and also rewrite the transitional provisions in section 88 of FA 1988 that are still relevant.

1892.Section 84 of FA 1988 is a capital gains tax provision and is duplicated in section 120(1) of TCGA 1992. As it is not intended to include the provision in this Act, the section has not been rewritten. Amendments to section 120 of TCGA 1992 are made by paragraph 210 of Schedule 6 to this Act.

1893.The 1988 anti-avoidance legislation contains three distinct charges in sections 78, 79 and 80 of FA 1988. That ordering of the charges has been followed in this Act with the corresponding charges now in sections 449, 453 and 457. Other than that, however, much of the material has been moved to present it in a logical and more helpful order. One broad intention is that in respect of each charge the legislation sets out in the following order

Section 447: Application of this Chapter

1894.This section sets out the scope of the Chapter. Subsection (1) derives from the rule at the end of section 77 of FA 1988 that the provisions are concerned with acquisitions of shares in a company by a director or employee of that or any other company. The fact that these provisions only apply to shares issued on or after 26 October 1987 is made clear in Part  7 of Schedule 7 to which there is also a signpost in section 418(1).

1895.Subsections (2) and (3) are new. They spell out what subsequent references to “the acquisition” and “the shares” are references to. The fact that this Chapter applies to prospective and former employees is made clear by the reference to the extended definition in section 470. The definition of “the employer company” is designed to avoid some rather tortuous references to it elsewhere in this Chapter.

1896.Subsection (4) derives from the rules in section 77(1) and in section 87(4) of FA 1988 which explain that the Chapter is concerned both with shares acquired by the employee directly and with shares first issued to another person and then assigned to the employee.

1897.Subsection (5) derives from section 83(1) of FA 1988. That provision ensures that where the shares are issued to a connected person because the opportunity was offered to that person rather than the employee himself, the acquisition is treated as having been made by the employee. The charges in the Chapter generally operate by reference to beneficial interests and it is not expressly provided in section 83(1) of FA 1988 that the deeming provision applies to beneficial ownership although that is the way the subsection has always been interpreted. This section clarifies the general understanding that the opening words “For the purposes of this Chapter” imply that the shares are deemed to have been acquired by the employee as a director or employee. This clarification is explained in detail in Note 46 in Annex 2.

Section 448: Cases where this Chapter does not apply

1898.Subsection (1) derives from section 77(2) of FA 1988. It limits the scope of the Chapter to cases where the earnings from the employment are within section 15 or 21 reproducing the restriction in the source legislation to Case I employments. See Note 47 in Annex 2.

1899.Subsection (2) derives from section 77(3) of FA 1988 and is an exemption for public offers.

1900.Subsections (3) and (4) derive from section 77(4) of FA 1988 and extend the public offer exemption to certain other offers which are made to employees separate from a public offer.

Section 449: Charge on occurrence of chargeable event

1901.This is the first of the charging provisions and derives from parts of section 78(1) and (3) of FA 1988. The meaning of chargeable event, the calculation of the charge and the exceptions appear in separate sections. Subsection (5) acts as a signpost to the provisions which remove the charge under various approved schemes.

Section 450: Chargeable events

1902.This section defines what is and is not a chargeable event and derives from section 78(2), (5), (6) and (7) of FA 1988. It will be noted that a new label “outside shareholders” is used as shorthand for the persons within section 78(6)(a) of FA 1988 and the term is defined in section 469.

1903.The words in section 78(6)(c) of FA 1988 “which is not a dependent subsidiary” have been omitted in new subsection (4)(c) on the grounds that they are unnecessary. It is already clear from section 78(1)(b) of FA 1988 that no charge arises if the company is a dependent subsidiary.

1904.Subsection (6) derives from section 78(7) of FA 1988. The term “are references to such” has been used instead of “include” to make better sense of the additional words “or in any other way”.

Section 451: Amount of charge

1905.This section, which derives from section 78(3) of FA 1988, specifies the amount of the charge under section 449. The FA 1988 subsection is rather complex and so this section separates out the various ideas to make the provision easier to grasp.

Section 452: Cases outside charge under section 449

1906.This section brings together the various exceptions in sections 77 and 78 of FA 1988.

1907.Subsection (2) ensures that if a charge is taken under section 427 in respect of an event then no charge is taken under this section. It derives from the opening words of section 77(1) of FA 1988 which give priority to the charge on conditional shares in section 140A of ICTA (rewritten in Chapter 2 of this Part).

1908.Subsection (3) derives from section 78(4) of FA 1988 which contains the let-out if the employee has not been a director or employee of the company or an associated company within the seven years ending with the chargeable event. The source legislation uses the term “the person who acquired the shares” rather than the “employee”. However, since shares acquired by connected persons are treated as acquired by the employee, the effect is the same.

1909.Subsection (4) derives from section 78(1)(b) of FA 1988. Shares in dependent subsidiaries are excluded from the charge under section 449 because they are instead subject to a charge under section 453. For the sake of clarity this section replaces the word “at” in the phrase “at the time of the chargeable event” with “immediately before”. See Note 48 in Annex 2.

Section 453: Charge on increase in value of shares of dependent subsidiary

1910.This is the second of the charging provisions and derives from section 79(1) and (4) of FA 1988. Again, matters concerning what is chargeable, the calculation of the amount and the exceptions have been taken to separate sections.

1911.Subsection (3) derives from section 79(4) of FA 1988 and specifies the year of charge.

1912.Subsections (4) and (5) are new. Subsection (5) acts as a signpost to the provisions which remove the charge under various approved schemes.

Section 454: Chargeable increases

1913.This section derives from section 79(2) and (3) of FA 1988 and determines the period over which any rise in the value of the shares is measured in order to be an increase subject to charge.

Section 455: Amount of charge

1914.This section brings together all those parts of section 79 of FA 1988 which concern the calculation of the charge and in particular it makes clear what deductions should be made from the rise in value of the shareholding.

1915.Subsection (1) introduces a formula and subsection (2) specifies the items that are allowable deductions. Subsection (3) derives from section 79(6) of FA 1988 and is concerned with certain cases where the employee receives less than market value for the shares. The aim is to ensure that the employee is only charged on the difference between base value and the actual proceeds. That provision produces the right result where the chargeable increase is calculated by reference to the value of the shares at acquisition, but not where it is calculated by reference to the value of the shares at the later time that the company becomes a dependent subsidiary. The section produces the right result in both situations. It is a minor change to the law. See Change 113 in Annex 1.

1916.Subsection (4) derives from the final two lines in section 79(4) of FA 1988.

Section 456: Cases outside charge under section 453

1917.Subsection (2) reflects the opening words of section 77(1) of FA 1988 “subject to section 140A of the Taxes Act 1988”. It ensures that if a charge is taken under section 427 (conditional interests in shares) then no charge is taken under section 453. This is because if a disposal potentially gives rise to a charge under section 453 (which is more general in its application) and under section 427 then the latter charge has priority.

1918.Subsection (3) derives from section 79(7) of FA 1988 and provides a let-out if the employee has not been a director or employee of the company or an associated company in the seven years before the time that the company becomes a dependent subsidiary. As with section 452, the phrasing has been changed to produce a true exception and the reference is to “the employee” rather than “the person who acquired the shares”.

Section 457: Charge on other chargeable benefits from shares

1919.This is the third of the charging provisions and derives from section 80 of FA 1988. The term “chargeable benefit” in subsection (1) has replaced “special benefit” in order to be consistent with “chargeable event” and “chargeable increase” in the other charging provisions in this Chapter.

1920.An amount in respect of benefits attaching to shares may be charged on the employee, not only when the shares are owned by the employee (section 80(1) of FA 1988), but also when owned by other persons (section 83(1) and (4) of FA 1988). Subsection (2) brings together and clarifies how these rules are considered to operate and remedies the deficiencies in the wording of the source legislation. See Change 114 in Annex 1.

Section 458: Chargeable benefits

1921.This section derives from the rather complex rules in section 80 of FA 1988 giving further conditions as to when a benefit is a chargeable benefit.

1922.Subsection (2) introduces the following three subsections. The approach adopted is to define what are chargeable benefits, replacing the approach in FA 1988 of saying that all benefits are chargeable benefits unless paragraphs (a) and (b) of section 80 apply. This makes the rules easier to understand.

1923.Subsection (3) derives from section 80(2)(a) of FA 1988.

1924.Subsection (4) derives from section 80(1A) of FA 1988.

1925.Subsection (5) introduces the conditions in subsection (6) which derive from section 80(3) of FA 1988. Subsection (6)(a) uses the new term “outside shareholders” which was first introduced in section 450.

1926.Subsection (7) contains two definitions which apply solely for the purposes of this section. The definition of “the company” is new and clarifies which company is being referred to in subsections (4) and (6). The other definition derives from section 87(1) of FA 1988.

Section 459: Amount of charge

1927.This section specifies the amount of the chargeable benefit. It derives from section 80(4) of FA 1988 and the definition of “value” in section 87(1) of FA 1988.

Section 460: Cases outside charge under section 457

1928.This section derives from section 80(5) of FA 1988 which contains the let-out where the employee has not been a director or employee of the company or an associated company in the seven years before the benefit is received. There are two points to note. Section 80(5)(a) of FA 1988 refers to the company in subsection (1) when that subsection contains no reference to a company. It clearly means the company whose shares are mentioned in subsection (1). See Change 115 in Annex 1. Also, in section 80(5) of FA 1988 the test is expressed to apply to the person receiving the benefit. But by virtue of the connected persons rules in section 83(4) of FA 1988 the test effectively applies to the employee himself. Accordingly, the test is applied directly to the employee in this section.

Section 461: Related acquisitions of additional shares

1929.This section derives from section 82 (1) and (2) of FA 1988 and concerns the treatment of additional shares received by the employee in respect of an original holding which had been acquired by virtue of the employment. The effect is to treat the new shares as within the Chapter and as having been acquired at the same time as the original shares.

1930.An award of additional shares may give rise to a chargeable benefit within section 457. This section makes it clear that the timing rule in section 82(2)(b) of FA 1988 does not affect the date on which the charge under section 457 is taken. See Change 116 in Annex 1.

Section 462: Company reorganisations etc.

1931.This section derives from section 82(3) of FA 1988 and concerns exchanges of shares under company reorganisations. The main effect is to adopt the capital gains tax rule under which new holdings are treated as acquired as the original shares were.

1932.Subsections (3) and (4) derive from section 82(3)(b) and (c) of FA 1988. Subsection (3)(b) reflects what is meant by the rather obscure phrase “as is mentioned in section 128(1) and (2)” in section 82(3)(b).

Section 463: Disposals of shares to connected persons etc. ignored

1933.This section derives from section 83(2) and (3) of FA 1988. It is reasonably plain what section 83(2) of FA 1988 is trying to do, namely to ignore disposals which are not at arm’s length or are to a connected party so that the employee is deemed to retain the beneficial interest. However it is not clear whether the wording of that subsection achieves that result where the shares were originally issued to a connected party and so have already been subject to the deeming provision in section 83(1) of FA 1988. This has been made clear in this section by specifying that the employee retains the interest. It is a minor change to the law. See Change 114 in Annex 1.

Section 464: Application to interests in shares

1934.This section derives from section 81 of FA 1988 (which applies for the purposes of charges under sections 79 and 80 of FA 1988). It sets out the supplementary rule that where a person’s interest in shares is increased or reduced it is treated as the acquisition or disposal of a separate interest proportionate to the increase or reduction.

Section 465: Duty to notify acquisitions of shares or interests in shares

1935.This section derives from section 85 of FA 1988 which is the information requirements provision.

1936.The section makes explicit what is implicit in section 85 that the time limit runs by reference to the year in which the additional shares are acquired. This is a minor change to the law. See Change 116 in Annex 1.

1937.Subsection (3) provides that the particulars must be given to the Inland Revenue instead of to the inspector. See Change 158 in Annex 1.

1938.Subsection (4) rewrites the 92-day time limit by requiring the information to be provided before 7 July. This is in line with the new practice in Chapters 2 to 5 of this Part.

1939.Subsection (5) is new and ensures that notification of an acquisition need be made only once. This is a minor change to the law. See Change 116 in Annex 1.

Section 466: Duty to notify chargeable events and chargeable benefits

1940.This section also derives from section 85 of FA 1988 and contains the information requirements where certain charges arise.

1941.Subsection (2) provides that the particulars must be given to the Inland Revenue instead of to the inspector. See Change 158 in Annex 1.

1942.The time limit of 60 days has been extended to 92 days. See Change 111 in Annex 1.

Section 467: Meaning of “dependent subsidiary”

1943.This section derives mainly from section 86 of FA 1988. For ease of use subsection (1) is now introductory and the various conditions have been placed into four separate subsections. In subsection (4) the directors’ certificate is now to be given to the Inland Revenue rather than the inspector. See Change 158 in Annex 1.

1944.The definition of “period of account” in subsection (8) derives from section 86(3) of FA 1988. That definition was repealed by FA 2002 and a new definition was inserted into section 832(1) of ICTA. In relation to a company the definitions are effectively the same.

Section 468: Meaning of “employee-controlled”

1945.This section derives from section 87(2) of FA 1988. The definitions of “connected persons” and “control” in ICTA are applied by sections 718 and 719 respectively.

Section 469: Shares “held by outside shareholders”

1946.This section explains the new shorthand term which is used in sections 450 and 458. The definition derives from sections 78(6)(a) and 80(3)(a) of FA 1988.

Section 470: Minor definitions

1947.This section picks up the remainder of the definitions in section 87(1) of FA 1988 which are not included elsewhere. The meaning of “interest in shares” has been expanded to make it clear that it excludes a right to acquire shares eg options. See Change 117 in Annex 1.

Chapter 5: Share options
Overview

1948.This Chapter is concerned with the income tax charges which may arise in respect of a share option granted to any person by reason of an individual’s office or employment.

1949.The case of Abbott v Philbin (1960) 39 TC 82 (HL), [1960] 2 All ER 763, established that under general Schedule E rules, the only occasion of charge is on the grant (or assignment) of the option. The source of any gain arising on the later exercise of the option is the option itself, not the employment.

1950.The effect of this decision was largely reversed by legislation introduced in 1966 and now in sections 135 to 140 of ICTA. The underlying purpose of that legislation is to replace the charge on grant with one on exercise. Indeed that was what the original legislation achieved. However in 1972 the charge on grant was reintroduced for longer-term options to prevent liabilities being pushed too far into the future. At the same time the value of the grant was defined and provision made for any tax paid on grant to be deducted from the tax payable on exercise.

1951.The charging provision, section 135 of ICTA, does three main things.

1952.The charges on grant and on exercise are removed where the options are issued under one of the schemes approved by the Inland Revenue. The legislation regarding these schemes has been rewritten in Chapters 7, 8 and 9 of this Part. Those provisions do impose charges to tax in certain circumstances.

1953.The rewritten legislation sets out the scope of the Chapter in the opening sections. It then adopts a logical order by first considering the taxation issues that arise in respect of the receipt and then the issues that arise on exercise, assignment or release. The rules in section 187A of ICTA and in section 4 of the Social Security Contributions (Share Options) Act 2001 which give a deduction to the employee when under an agreement or election he meets some or all of the employer’s secondary or special national insurance contribution have been incorporated.

1954.Two provisions in the source legislation have not been rewritten.

Section 471: Share options to which this Chapter applies

1955.This section sets out which share options come within the scope of the Chapter. It introduces the term “share option” in place of the cumbersome “right to acquire shares”. In fact, although the title of section 135 of ICTA includes the words “share options”, that term is not used at all in the source legislation.

1956.Subsection (1) makes it clear at the outset that the options concerned are those granted by reason of a person’s office or employment. It derives from parts of section 135(1) and (6) and section 140(1) of ICTA.

1957.Subsection (2) makes it clear that the shares over which the option is granted can be shares in any body corporate. The normal case, of course, will be the grant of options over shares in the employing company, but the legislation can apply even if the body corporate is totally unconnected with the employment.

1958.Subsection (3) makes it clear that the option may be granted to someone other than the director or employee. It derives from section 140(1) of ICTA.

1959.Subsection (4) sets out two definitions which help to make the legislation easier to read. For example, the term “the employee” is used instead of “the director or employee of the company”. Also, the fact that this Chapter applies to prospective and former employees is made clear by the reference to the extended definition in section 487(1).

Section 472: Introduction to taxation of share options

1960.This is a new introductory section. Subsection (1) derives from the Abbott v Philbin decision. It makes clear that unless a charge is imposed by this Chapter on exercise, then the only possible charge is when the option is received. If there is a charge on grant or assignment then it arises by virtue of Chapter 1 of Part 3 as earnings or under Chapter 10 of Part 3 as a taxable benefit.

1961.Subsection (2) acts as a signpost to the major exemption from the charge in respect of receipt, ie where the options expire within ten years of being obtained.

1962.Subsections (3) and (4) draw attention to charges that may arise when the option is exercised, assigned or released and subsection (5) to the different rules that apply for options received under an approved scheme or under the EMI code.

Section 473: Share options to which this Chapter does not apply

1963.This section explains which offices and employments come within the scope of these provisions. Subsection (1) brings to the fore the idea that the Chapter is only concerned with options granted in respect of an office or employment the earnings from which fall within sections 15 or 21. This is derived from the restriction in section 140(1) of ICTA, that the legislation only applies to Case I offices and employments, although the exact scope of that restriction was not clear. Clarifying the scope of the restriction is a minor change to the law. See Change 118 in Annex 1.

1964.Subsection (2) derives from section 140(1) of ICTA and makes it clear that the legislation applies to options granted after the employment has ceased if the employment is within sections 15 or 21 in the last tax year in which the employment was held. This section makes it clear that a charge can arise where an option is granted to another person after the employment has ceased. See Note 49 in Annex 2.

Section 474: No charge in respect of receipt of shorter-term option

1965.This section derives from section 135(2) of ICTA which gives an exemption in respect of receipt of options which expire within ten years provided that any gain on exercise of the option would be chargeable. The proviso is not expressly stated in this section. It follows from the fact the reference to “share option” imports the conditions in sections 471 and 473 and therefore limits the scope of the exemption to options within the Chapter and potentially chargeable on exercise.

1966.Subsection (2) also highlights the point, referred to rather obliquely by the opening words of section 135(2) of ICTA, that charges can arise on grant under an approved CSOP scheme in certain circumstances. Other than this instance, it follows that a charge in respect of the receipt can only arise where:

Section 475: Value of longer-term option for purposes of liability to tax in respect of receipt

1967.This section derives from the rule in section 135(5)(b) of ICTA regarding the valuation of a longer-term option for the purposes of a charge to tax in respect of the receipt of the option. Section 135(5)(b) says that the value of the option is not less than the current market value of the option shares reduced by whatever the employee has to pay for the shares. In practice, a higher value is never used. Accordingly, the “not less than” part of the rule has been left out. This is a minor change to the law. See Change 119 in Annex 1.

1968.Subsection (2) derives from section 135(5)(b) of ICTA and resolves an ambiguity if the option shares carry conversion rights. It is not clear in the source legislation in such a case whether the value of the option shares or the value of the shares obtained on their conversion should be the basis of the charge. This section resolves the ambiguity by taking the higher value. This is a minor change in the law. See Change 120 in Annex 1.

1969.The definition of “market value” in subsection (3) derives from section 140(3) of ICTA. It is reasonably plain from the wording of section 140(3) that the intention is to have the same rules about market values as apply in TCGA 1992 although only section 272 is mentioned. The new definition refers to Part 8 of TCGA 1992 rather than just section 272 and is now the same as in Schedules 2, 3, 4 and 5 to this Act. This change in approach is explained in more detail in Note 23 in Annex 2.

Section 476: Charge on exercise, assignment or release of option by employee

1970.In ICTA, the rules that apply in situations where another person (rather than the employee) realises the gain are in the middle of section 135 surrounded by other material dealing with the more common case in which the gain is realised by the employee personally. In this Act the rules have been separated, this section being concerned with gains realised by the employee and section 477 with gains realised by other persons.

1971.Subsection (2) provides that an amount is to count as employment income of the employee. It derives from section 135(1) of ICTA. Such an amount is specific employment income (see section 7(4) of this Act) which replaces the free-standing Schedule E charge. It does not depend on the residence status of the employee at the time of exercise. The charge applies whether the option was originally granted to the employee or to another person and then assigned to the employee; see section 471(3) of this Act. The amount that is to count as employment income (the taxable amount) is determined under section 478.

1972.Subsection (3) is new and simply specifies the year for which the taxable amount counts as employment income. It is Inland Revenue practice to apply section 135 of ICTA to charge the gain in the year of exercise etc. See Note 3 in Annex 2.

1973.Subsection (4) refers to the exceptions that apply if the options were granted under an approved scheme or under the EMI code.

Section 477: Charge on employee where option exercised, assigned or released by another person

1974.This section derives from section 135(6) and (7) of ICTA which imposes a charge on the employee where the gain is realised by another person. Subsection (1) sets out clearly the three circumstances where an amount is to count as employment income of the employee. The amount that is to count as employment income (the taxable amount) is calculated under section 478.

1975.Subsection (3) is new and specifies the year for which the taxable amount counts as employment income. See Note 3 in Annex 2.

1976.Subsection (4) is new. It legislates the present practice of not charging the personal representatives or beneficiaries when the option is exercised following the death of the person to whom the option was granted. See Change 121 in Annex 1.

1977.Subsection (5) derives from section 135(7) of ICTA and contains an exemption where the employee was divested of the share option by operation of law. The reference in section 135(7) of ICTA to “on his bankruptcy or otherwise” has been left out as it adds nothing.

1978.Subsection (6) provides that where subsection (5) applies, the gain is chargeable under Schedule D, Case VI. The subsection also removes ambiguity by making it clear that any person charged under Case VI is entitled to the reduction derived from the closing words of section 135(6) of ICTA. This is a minor change to the law. See Change 122 in Annex 1.

Section 478: Amount of charges

1979.This section identifies those deductions which are made from the amount of the gain (calculated under section 479 or 480) in arriving at the taxable amount.

1980.Subsection (2)(a) and (b) reflects the amendments made to section 135 of ICTA by paragraph 1 of Schedule 6 to FA 2002. That changed the rule about giving relief where there had been an earlier charge in respect of the receipt of the option. The amount that is charged to tax in respect of the receipt is now deducted in calculating the taxable amount instead of giving relief in terms of tax. In strictness, a deduction is only due where the option is exercised, assigned or released by the employee. However, in practice it is appropriate to give the deduction where the option is exercised by another person, so long as the same amount is not deducted twice. The section makes any amount charged to tax in respect of the receipt of an option a deductible amount in calculating the taxable amount for the purposes of section 477 (charge where option exercised by another person), but subsection (3) prevents double deductions. This is a minor change to the law. See Change 123 in Annex 1.

1981.Subsection (2)(c) allows a deduction in calculating the taxable amount for the amount of any allowable national insurance contributions met by the employee. It derives from section 187A(4) of ICTA.

Section 479: Amount of gain realised by exercising option

1982.This section brings together the parts of section 135(3) and (6) of ICTA which provide the rules regarding the computation of the gain on exercise and a further rule in section 185(8) of ICTA. That rule allows a deduction in calculating the amount of the gain for any charge to tax under section 185(6) of ICTA in respect of the grant at a discount of a share option under an approved CSOP scheme. Those parts of section 135(3) of ICTA which relate solely to the gain on an assignment or release appear in a separate section. The method adopted leads to some repetition between this section and section 480, in order to assist the reader.

1983.Subsection (1) introduces a formula for calculating the gain.

1984.Subsection (2) specifies the items which are deductible costs in calculating the gain.

1985.Subsection (3) derives from the closing words of section 135(4) of ICTA and ensures that the amount paid for the option is deducted only once. It should be noted that section 135(9) of ICTA replicates the effect of section 135(4) of ICTA and has not been separately rewritten. This removes unnecessary material.

1986.Subsection (4) provides a signpost to the EMI provisions which modify the calculation of the amount of the gain.

Section 480: Amount of gain realised by assigning or releasing option

1987.This section mirrors section 479 and sets out the rules which apply to the computation of the gain when the option is assigned or released. As the EMI provisions do not apply when an option is assigned or released no signpost is required here.

Section 481: Deductible amount in respect of secondary Class 1 contributions met by employee

1988.Section 187A of ICTA, introduced by section 56(1) of FA 2000, provides relief against a gain chargeable under section 135 of ICTA for amounts of employer’s Class 1 National Insurance contributions payable in respect of the gain and met by the employee under arrangements set out in social security legislation. The relief has now been written as a deduction in calculating the taxable amount and does not affect the amount of the gain. It is the amount of the gain (rather than the taxable amount) that is relevant for the purposes of section  120(4) of TCGA 1992 and national insurance provisions. It is therefore not necessary to reproduce the rule in section 187A(5) of ICTA which prevented relief under section 187A from being taken into account for those purposes.

1989.Subsection (4) derives from section 4(3) of the Social Security Contributions (Share Options) Act 2001. Its effect is that one cannot get a deduction under both this section and under section 482 (special contributions).

Section 482: Deductible amount in respect of special contribution met by employee

1990.This section derives from section 4 of the Social Security Contributions (Share Options) Act 2001. That Act enabled the employer or employee as appropriate to cap exposure to employer’s Class 1 National Insurance contributions by instead paying a special contribution calculated by reference to any increase in value of the shares subject to the option on 7 November 2000. Although any special contributions had to be paid by 11 August 2001 the relief is due when the gain is realised which may not be for several years.

1991.For the same reasons as explained above in the notes on section 481, the provisions of section 187A(5) of ICTA have not been reproduced in this section. It is not necessary to prohibit a deduction made in calculating the taxable amount and not in calculating the amount of the gain.

Section 483: Extended meaning of “assign” and “release”

1992.This section brings together the two rules regarding the extended meaning of “assign” and “release” to include other situations where options are turned to account. It derives from section 135(8) and section 136(5)(a) of ICTA.

Section 484: Amount or value of consideration given for grant of share option

1993.This section contains supplementary rules for determining the amount allowable as a deduction in respect of the cost of the option in calculating the amount of the gain.

1994.Subsection (2) derives from the rule at the end of section 135(3) of ICTA regarding the apportionment of a single sum paid for both the share option and something else. The wording in that subsection is a “just” apportionment. This has been amended to “just and reasonable” to align the wording with that used in sections 429 and 442. This is a minor change to the law. See Change 124 in Annex 1.

1995.Subsection (3) derives from section 135(4) and provides that no account is taken of the value of the duties of the employment performed by the employee. As mentioned in the explanatory note to section 479, section 135(9) of ICTA has not been rewritten as it replicates the effect of the rule in the final part of section 135(4), that the cost of the option can only be deducted once. That rule is rewritten in sections 479(3) and 480(3).

Section 485: Application of this Chapter where share option exchanged for another

1996.This section derives from what is probably the most complex part of the source legislation. Section 136(1) to (3) of ICTA are concerned with creating a form of rollover treatment which applies when a right to acquire shares is effectively swapped for another such right. The effect is to ignore the swap for section 135 purposes and apply the Chapter to the replacement option. Any consideration received which is not represented by the new option is taken into account in calculating the gain in the normal way.

1997.The prevention of the early crystallisation of the charge in the case of a straightforward exchange also has an anti-avoidance effect. In the absence of the provision it could be arranged that a valuable option is exchanged for an option with an apparently lower value (thus generating an immediate, but low tax charge), and there would be no charge on exercise because the new option would not have been issued by reason of employment, but to the employee as option-holder.

1998.Section 136(1) of ICTA is not easy to follow partly because it says that the cost of the new option excludes some things, but includes others; and partly because those rules are in the same long sentence detailing other rules not concerned with working out the allowable cost of the new option. These ideas have been separated and in order to make the provision easier to use subsection (4) specifies what is in fact the consideration for the grant of the new option. Subsections (5) and (6) extend the rollover treatment to cases where the swap is achieved indirectly under arrangements described in section 136(2) and (3) of ICTA.

1999.It may be noted that section 136(2)(b) of ICTA refers to tax “chargeable under this section”. This makes no sense because tax is not chargeable under section 136, but under section 135 of ICTA. The problem stems from consolidation. Previously section 136(2) was part of the same section as section 135. When that section (section 186 of ICTA 1970) was split in two on consolidation the relevant amendment to section 136(2)(b) was missed. This error has been corrected in section 485(5)(b). See Change 125 in Annex 1.

Section 486: Duty to notify matters relating to share options

2000.This section derives from section 136(6) to (8) of ICTA. The time limit of 92 days after the end of the year of assessment has been rewritten as “before 7th July” in line with the new practice in Chapters 2 to 5 of this Part. The particulars are now to be given to the Inland Revenue rather than to the inspector. See Change 158 in Annex 1.

Section 487: Minor definitions

2001.This section brings together minor definitions from section 136(5) of ICTA and others from section 187A of ICTA in connection with the deductions for National Insurance contributions.

2002.The definition of shares in section 136(5)(d) of ICTA includes stock “in so far as the context permits”. This rider has been omitted as unnecessary since there does not appear to be anywhere in this Chapter where the context would not so permit.

Chapter 6: Approved share incentive plans
Background

2003.This Chapter, together with Schedule 2, derives from the legislation relating to share incentive plans (or “SIPs” for short). SIPs were previously known as employee share ownership plans (or “ESOPs” for short). The SIPs legislation is the result of a policy designed to bring share ownership in a company to the whole of that company's workforce.

2004.Nearly all the SIPs legislation is contained in Schedule 8 to FA 2000 (introduced by section 47 of that Act). Schedule 8 to FA 2000 was amended, to a certain extent, by Schedule 13 to FA 2001 (introduced by section 61 of that Act), and also by section 95 of that Act. Further amendments to Schedule 8 of FA 2000 were made by section 39 of FA 2002 and also by the Employee Share Schemes Act 2002.

2005.The new legislation relating to SIPs, the majority of which is contained in this Chapter and Schedule 2, is called “the SIP code”: a term introduced in section 488.

2006.The core of the SIP code is that a company establishing a share incentive plan must offer either “free shares” or “partnership shares” (or both) to its employees. Two other types of shares - “matching shares” and “dividend shares” - are dealt with in the SIP code; and either or both of these may also be offered to employees - although this is not essential. And if a SIP is to be “approved” for the purposes of the legislation (and thus obtain the tax advantages available to an approved SIP), there are general requirements to be met, and also further requirements relating to the eligibility of individuals, to the types of shares that may be awarded, and to the trustees.

2007.The SIP code, accordingly, has a number of distinguishable components:

2008.Of the components listed in the last paragraph, this Chapter deals with the tax advantages that an approved SIP possesses, and with the tax charges that may arise.

2009.Schedule 2 deals with the other components listed in that paragraph. After the introduction (in Part 1), that Schedule deals with the requirements that a SIP must meet before it may be “approved” for the purposes of the SIP code (in Parts 2 to 9); with the approval of plans and the withdrawal of approval (in Part 10); and with supplementary matters (in Part 11).

2010.Schedule 8 to FA 2000 also contained other provisions relating to corporation tax, capital gains tax and stamp duty. These other provisions are dealt with in Schedule 6 to this Act (consequential amendments). Schedule 7 to this Act includes provisions designed to avoid any transitional problems arising from the replacement of Schedule 8 by the provisions contained in this Act.

Overview

2011.In this Chapter, after an introductory section (section 488), the first major topic dealt with is the tax advantages that an approved SIP possesses (in sections 489 to 499). The second major topic dealt with is the tax charges that may arise (in sections 500 to 508). The provisions relating to each major topic have been arranged to deal with the award of shares, then with the holding of shares, and then, finally, with shares ceasing to be subject to the plan. This Chapter concludes with provisions dealing with the making of PAYE deductions in connection with the tax charges that may arise (in sections 509 to 514), and with a section referring to the other provisions in the Tax Acts that deal with SIPs (in section 515).

Section 488: Approved share incentive plans (SIPs)

2012.This section is introductory. It indicates the main components of the SIP code, and defines some terms of general application.

2013.Subsection (1) is new, and indicates the main topics dealt with in the SIP code. Subsection (2), which is also new, then indicates which of those topics are dealt with in Schedule 2.

2014.Subsection (3) contains the definition of “the SIP code”. This definition is also new.

2015.Subsection (4) defines terms used generally in the SIP code. Of these terms:

2016.Subsection (5) draws attention to the fact that there is an index relating to the SIP code at the end of Schedule 2. Expressions contained in that index have the meanings that are indicated there.

The tax advantages

2017.Sections 489 to 499 relate to the first major topic dealt with in this Chapter: the tax advantages possessed by an approved SIP.

Section 489: Operation of tax advantages in connection with approved SIP

2018.This section is introductory, being concerned with the general scope of the tax advantages applying to an approved SIP. Those advantages do not apply to an individual who is not chargeable to tax under Part 2 in respect of the eligible employment (as defined) (see subsection (2)).

2019.This section is the first of two that derive from paragraph 77 of Schedule 8 to FA 2000 (the other being section 500).

2020.Subsections (2) and (3) are derived from paragraph 77(2) of Schedule 8 to FA 2000. The material in that sub-paragraph has been divided to make it easier to understand; and the definition of “the eligible employment” is new.

Section 490: No charge on award or acquisition of shares: general

2021.This section is the first of four that deal with the tax advantages connected with the award of shares. It contains the basic proposition that the employee is not liable to income tax on the value of the beneficial interest in the plan shares that passes to the employee at the time those shares are acquired.

2022.This section derives from paragraph 78(1) of Schedule 8 to FA 2000, a sub-paragraph that has now been divided into two subsections.

Section 491: No charge on award of shares as taxable benefit

2023.This section is the second of four that deal with the tax advantages connected with the award of shares. It provides that an employee is not liable to income tax under Chapter 8 of Part 3. That Chapter forms part of the benefits code, and provides for income tax liabilities to arise on acquisitions of shares.

2024.This section derives from paragraph 78(2) of Schedule 8 to FA 2000. That sub-paragraph contains a second sentence stating that any charge to tax under section 162(6) of ICTA remained unaffected. As the provision is expressed in this section in a form that does not impinge in any way on the provisions rewriting section 162(6) of ICTA (in Chapter 9 of Part 3), this second sentence has been omitted on the basis that it is unnecessary.

Section 492: No charge on partnership share money deducted from salary

2025.This section is the third of four that deal with the tax advantages connected with the award of shares. It provides that an employee is not liable to income tax under Part 2 where partnership share money is deducted from the employee’s salary under a partnership share agreement. The expressions “partnership share agreement” and “partnership share money” are defined in Schedule 2 (in paragraphs 44 and 45 respectively); and these expressions may also be found in the index of defined expressions in paragraph 100 at the end of that Schedule.

2026.This section derives from paragraph 83 of Schedule 8 to FA 2000.

Section 493: No charge on acquisition of dividend shares

2027.This section is the last of four that deal with the tax advantages connected with the award of shares. It provides that a scheme participant is not liable to income tax on the amount applied by the trustees in acquiring dividend shares on the participant’s behalf.

2028.This section derives from paragraph 89 of Schedule 8 to FA 2000. Subsection (1) reorganises the material in paragraph 89(1); in subsection (2) the word “amount” replaces the words “amounts of dividends”; and subsections (3) to (5) vary the order of material drawn from paragraph 89(3) and (4) of Schedule 8 to FA 2000.

Section 494: No charge on removal of restrictions applying to shares

2029.This section is the first of three that deal with the tax advantages connected with the holding of shares. Subsections (1) and (2) apply where a participant’s plan shares are subject to provision for forfeiture, and that provision is varied or removed. In these circumstances a participant is not liable to income tax by virtue of sections 427 or 449. Those sections may be found, respectively, in Chapters 2 and 4 of this Part. Subsection (3) provides that a participant is not liable to income tax by virtue of section 449 when the holding period comes to an end. The expressions “provision for forfeiture” and “holding period” are defined in Schedule 2, in paragraphs 99(1) and 36 respectively.

2030.This section derives from paragraph 80(1) and (2) of Schedule 8 to FA 2000. There is a new subsection (1), setting out the circumstances in which subsection (2) applies.

Section 495: No charge on increase in value of shares of dependent subsidiary

2031.This section is the second of three that deal with tax advantages connected with the holding of shares. It provides that a participant is not liable to income tax by virtue of section 453 (charge on increase in value of shares of dependent subsidiary) in respect of any of the participant’s shares that are subject to the plan when the chargeable increase is determined for the purposes of that section.

2032.This section derives from paragraph 80(3) of Schedule 8 to FA 2000. In order to make that provision easier to understand, the rewritten legislation now consists of two subsections.

2033.Subsection (1) makes a minor change to the law. If plan shares are sold while they are still in the plan it is not the practice of the Inland Revenue to attempt to charge income tax under the dependent subsidiary charge in section 79 of FA 1988. However, there is a problem with the wording in paragraph 80 in that if the “appropriate time” for the purposes of that section is the time of sale it is debatable whether at that point the shares are still subject to the plan. In order to make it clear that no charge to income tax arises under section 453 in such circumstances, the words “or immediately before” have been added before the words “the appropriate time” at the end of this subsection. See Change 126 in Annex 1.

Section 496: No charge on cash dividend retained for reinvestment

2034.This section is the last of three that deal with the tax advantages connected with the holding of shares. It provides that a participant is not liable to income tax in respect of the amount of a cash dividend that is not reinvested but is carried forward and held by the trust with a view to reinvestment at a later date. It derives from paragraph 91 of Schedule 8 to FA 2000.

Section 497: Limitations on charges on shares ceasing to be subject to plan

2035.This section is the first of two that deal with the tax advantages connected with shares ceasing to be subject to approved SIPs. It provides that liability to income tax only arises in specified limited circumstances when shares cease to be subject to the plan.

2036.This section brings together three general propositions contained in paragraphs 81(7), 86(6) and 93(6) of Schedule 8 to FA 2000 respectively. The opportunity has been taken to bring these three sub-paragraphs into better alignment. All three subsections now refer to “income tax” (as opposed to “tax”); and in subsection (2) the reference to “the employee” has been omitted. Paragraph 77(1) of Schedule 8 to FA 2000 may be relied on for the change to the use of the term “income tax”.

Section 498: No charge on shares ceasing to be subject to plan in certain circumstances

2037.This section is the second of two that deal with the tax advantages connected with shares ceasing to be subject to approved SIPs. It provides that a participant is not liable to income tax on shares ceasing to be subject to the plan if the shares so cease because the participant ceases to be in relevant employment in the circumstances specified in subsection (2). The meaning of a participant ceasing to be in relevant employment is explained in paragraph 95 of Schedule 2 to this Act.

2038.This section derives from sub-paragraphs (1) and (2) of paragraph 87 of Schedule 8 to FA 2000. Subsection (2)(d) reorganises the material to be found in paragraph 87(3)(d) of Schedule 8.

2039.That paragraph concludes by providing two definitions. The first definition (that of “redundancy”) has now been placed in paragraph 99(1) of Schedule 2 to this Act; and the second (which appears in the rewritten legislation as a definition of “the specified retirement age”) has now been placed in paragraph 98 of Schedule 2.

2040.The material set out in subsection (2) of this section is also set out in full in paragraph 32(2) of Schedule 2. This duplication should assist the reader.

Section 499: No charge in respect of incidental expenditure

2041.This section is concerned with incidental expenditure incurred in operating the plan; and provides that an employee is not liable to income tax in respect of such expenditure of the trustees, the company that established the SIP or the employee’s employer.

2042.The section derives from paragraph 78(3) of Schedule 8 to FA 2000, which was added by paragraph 4 of Schedule 13 to FA 2001.

2043.This section makes a minor change to the law in that it is now provided that there is also no liability to income tax for incidental expenditure incurred by the company which established the plan. See Change 127 in Annex 1.

The charges to tax

2044.Sections 500 to 508 relate to the second major topic dealt with in this Chapter: the consequential tax charges that may arise in certain circumstances.

Section 500: Operation of tax charges in connection with approved SIP

2045.As in the case of section 489, this section is introductory, being concerned with the general scope of the tax charges applying to an approved SIP. Those charges do not apply to an individual who is not chargeable to tax under Part 2 in respect of the eligible employment (as defined) (see subsection (2)).

2046.This section is the second of two that derive from paragraph 77 of Schedule 8 to FA 2000 (the other being section 489).

2047.As in the case of section 489, subsections (2) and (3) are derived from paragraph 77(2) of Schedule 8 to FA 2000. Once again the material in that sub-paragraph has been divided to make it easier to understand; and the definition of “the eligible employment” is new.

Section 501: Charge on capital receipts in respect of plan shares

2048.This section is the first of three that impose tax charges connected with the holding of shares. It imposes a charge to income tax if a capital receipt is received by a participant in respect of plan shares which have been held for less than five years (three years in the case of dividend shares). The meaning of the term “capital receipt” is dealt with in the following section.

2049.This section is the first of two that derive from paragraph 79 of Schedule 8 to FA 2000. This section derives from sub-paragraphs (1) and (5) of that paragraph, and deals with the matters directly relevant to the charge. Subsections (1) to (5) of this section are all derived from paragraph 79(1) of Schedule 8 to FA 2000, which has been divided to make it easier to understand; and subsection (6) simplifies the wording of paragraph 79(5) of Schedule 8 to FA 2000.

Section 502: Meaning of “capital receipt” in section 501

2050.This section follows on from section 501, and deals with the definition of the term “capital receipt”. The term is given a very wide definition.

2051.This section is the second of two that derive from paragraph 79 of Schedule 8 to FA 2000. This section derives from the definitional provisions in sub-paragraphs (2) to (4) of that paragraph.

2052.In order to emphasise the provision that will apply most often in practice, subsection (2) begins with the words “The general rule”.

2053.In subsection (5) the words “pursuant to a direction” have been changed to “as a result of a direction”.

Section 503: Charge on partnership share money paid over to employee

2054.This section is the second of three that impose tax charges connected with the holding of shares. The section imposes a charge to income tax if an amount is paid over to an individual under any of the provisions in Schedule 2 that are listed in this section.

2055.This section derives from paragraph 84 of Schedule 8 to FA 2000.

Section 504: Charge on cancellation payments in respect of partnership share agreement

2056.This section is the last of three that impose tax charges connected with the holding of shares. The section imposes a charge to income tax if an individual receives any money in respect of the cancellation of a partnership share agreement.

2057.This section derives from paragraph 85 of Schedule 8 to FA 2000; but the wording of this section differs very substantially from the wording of that paragraph.

2058.As in the case of other sections in this Chapter, the year that is “the relevant tax year” is specified. The point at which the tax charge arises is not specified in Schedule 8 to FA 2000; but the point has been dealt with explicitly in subsection (3). See Note 3(B) in Annex 2.

Section 505: Charge on free or matching shares ceasing to be subject to plan

2059.This section is the first of three that impose tax charges connected with shares ceasing to be subject to SIPs. This section is the main charging provision for free and matching shares; and it provides for the charge to vary with the length of the period for which the shares have been held. If the shares have been held for more than five years, there is no income tax liability under this section.

2060.This section derives from sub-paragraphs (1) to (6) of paragraph 81 of Schedule 8 to FA 2000.

2061.Subsection (1) introduces two new terms, “the award date” and “the exit date”. These two terms are then deployed in subsections (2) to (5). Subsection (5), by providing that the “relevant tax year” is the tax year in which the exit date falls, has the effect that any charge to tax will arise in that year. See Note 3(B) in Annex 2.

2062.Subsection (6) combines material at present contained in sub-paragraphs (5) and (6) of paragraph 81.

Section 506: Charge on partnership shares ceasing to be subject to plan

2063.This section is the second of three that impose tax charges connected with shares ceasing to be subject to SIPs. This section is the main charging provision for partnership shares; and, as in the case of section 505, it provides for the charge to vary with the length of the period for which the shares have been held. If the shares have been held for more than five years, then once again there is no income tax liability under this section.

2064.This section derives from sub-paragraphs (1) to (5) of paragraph 86 of Schedule 8 to FA 2000.

2065.Subsection (1) introduces a new term, “the exit date”. This term is then deployed in subsections (2) to (5).

2066.As in the case of other sections in this Chapter, the year that is “the relevant tax year” is specified. The point at which the tax charge arises is not specified in Schedule 8 to FA 2000; but as there can be little doubt about the answer, the point has been dealt with explicitly in subsection (5). See Note 3(B) in Annex 2.

Section 507: Charge on disposal of beneficial interest during holding period

2067.This section is the last of three that impose tax charges connected with shares ceasing to be subject to SIPs. It applies if a participant disposes of the beneficial interest in free or matching shares during the holding period in breach of the obligations imposed by paragraph 36(1)(b) of Schedule 2 to this Act.

2068.This section derives from paragraph 82(1) of Schedule 8 to FA 2000. (Paragraph 82(2) of Schedule 8 to FA 2000 was repealed by paragraph 5 of Schedule 13 to FA 2001.) Subsection (1)(a) contains additional wording to emphasise that this section applies if free or matching shares cease to be subject to the plan during the holding period applying to those shares.

2069.As in the case of other sections in this Chapter, the year that is “the relevant tax year” is specified. As in the case of those other sections, the point at which the tax charge arises is not specified in Schedule 8 to FA 2000; the point is dealt with explicitly in subsection (3). See Note 3(B) in Annex 2.

Section 508: Identification of shares ceasing to be subject to plan

2070.This section contains provisions for identifying shares that cease to be subject to SIPs.

2071.This section derives from paragraph 122(6) of Schedule 8 to FA 2000, which is one of the supplementary provisions in Part 13 of that Schedule. It is more convenient to deal with this topic here, alongside the provisions dealing with the tax charges connected with shares ceasing to be subject to SIPs.

2072.Paragraph 122(6) of Schedule 8 is drafted in terms of shares being “awarded” to a participant; but, while it is appropriate to speak of an award of free shares, partnership shares or matching shares, it is not clear that such terminology is appropriate for dividend shares. It is, however, the intention that all shares in the trust for a particular employee should be pooled, and that shares should come out of the trust on a first in first out basis. Subsection (2) has been added to this section to deal with this point. See Change 128 in Annex 1.

PAYE implications

2073.Sections 500 to 508 deal with the various charges to income tax as employment income that may arise under the SIP code. Sections 509 to 514, which derive from paragraphs 94 to 96 of Schedule 8 to FA 2000 (as amended), deal with the circumstances in which PAYE may be applied to those payments.

Section 509: Modification of section 696 where charge on shares ceasing to be subject to plan

2074.This section, with its reference to section 696, has the effect of providing that where there is an amount that counts as employment income as the result of shares ceasing to be subject to an approved SIP, and where the shares in question are readily convertible assets, PAYE is to be applied on the amount likely to count as employment income under the SIP code.

2075.This section derives from paragraphs 94 and 128 of Schedule 8 to FA 2000, two paragraphs since amended by section 39(2) and (6) of FA 2002.

2076.This section has the consequence that the employer has to use his best estimate of the amount that will be chargeable: there is no requirement that PAYE has to be operated on the precise amount that will eventually count as employment income.

Section 510: Payments by trustees to employer company on shares ceasing to be subject to plan

2077.This section applies where any plan shares cease to be subject to the plan; where there is an amount that counts as employment income of the participant; and where there is an obligation to deduct PAYE in respect of that amount. In these circumstances the principal obligation to account for any PAYE due is that of the employer company (an expression defined in subsection (7)). The plan may require the participant to pay sufficient money to the employer company in order to meet the PAYE liability; but, to the extent that it does not do so, this section provides for the trustees to pay sums to the employer company.

2078.This section is the first of three that derive from paragraph 95 of Schedule 8 to FA 2000. That paragraph is long; and it has been thought advantageous to divide it. This section derives from sub-paragraphs (1) to (6) of paragraph 95.

2079.Subsection (7) takes account of the amendment made to paragraph 95(6) of Schedule 8 to FA 2000 by section 39(3) of FA 2002.

Section 511: PAYE deductions to be made by trustees on shares ceasing to be subject to plan

2080.This section is relevant where any plan shares cease to be subject to the plan and as a result there is an amount that counts as employment income of the participant. In such a case if either there is no employer company or the Inland Revenue are of the opinion that a PAYE deduction is impracticable, and direct that this section is to apply, the trustees have to account for the PAYE as if the participant were a former employee of the trustees. The practical effect of this is that the trustees have to deduct income tax at the basic rate.

2081.This section is the second of three that derive from paragraph 95 of Schedule 8 to FA 2000. This section derives from sub-paragraphs (7) and (8) of paragraph 95.

Section 512: Disposal of beneficial interest by participant

2082.This section provides for sections 510 and 511 to apply in a modified form where a participant disposes of his beneficial interest in any of his plan shares.

2083.This section is the last of three that derive from paragraph 95 of Schedule 8 to FA 2000. This section derives from sub-paragraph (9) of paragraph 95.

Section 513: Capital receipts: payments by trustees to employer company

2084.This section and section 514 apply where the trustees receive money which gives rise to a capital receipt that counts as employment income in the hands of the participant (see section 501). This section then applies to deal with the “basic” case that arises in these circumstances. The trustees are to pay over an amount equal to the amount of employment income to the employer company (an expression defined in subsection (5)), and the employer company is then to account for the PAYE and to pay the balance to the employee.

2085.This section is the first of two that rewrite paragraph 96 of Schedule 8 to FA 2000. This section derives from sub-paragraphs (1) and (2) of paragraph 96. Subsection (5) takes account of the amendment made to paragraph 96(2) of Schedule 8 to FA 2000 by section 39(4) of FA 2002.

Section 514: Capital receipts: PAYE deductions to be made by trustees

2086.Section 513 and this section apply where the trustees receive money which gives rise to a capital receipt that counts as employment income in the hands of the participant (see section 501). This section applies in circumstances where either there is no employer company or the Inland Revenue are of the opinion that a PAYE deduction is impracticable, and direct that this section is to apply. In these circumstances, and when making the capital payment to the participant, the trustees are to make a PAYE deduction as if the participant were a former employee of the trustees. The practical effect of this is that the trustees have to deduct income tax at the basic rate.

2087.This section is the second of two that rewrite paragraph 96 of Schedule 8 to FA 2000. This section derives from sub-paragraphs (3) and (4) of paragraph 96.

Section 515: Tax advantages and charges under other Acts

2088.This is a new section, explaining where the remaining provisions in the SIPs code are to be found. The majority are to be found in ICTA (subsection (1)); but others are to be found in TCGA 1992 (subsection (2)(a)), or in FA 2001 (subsection (2)(b)).

Chapter 7: Approved SAYE option schemes
Overview

2089.This Chapter tells an employee receiving or exercising a share option whether or not the option is within the Save-as-You-Earn (“SAYE”) rules and what the tax consequences are. A SAYE option scheme is defined in section 516. This label has not been used in the statute up to now. The name in the source legislation is “savings-related share option scheme” and these schemes are commonly referred to as SAYE share option schemes or simply SAYE schemes in practice.

2090.The label SAYE denotes a SAYE option scheme in these notes.

2091.Unlike in sections 185 and 187 of and Schedule 9 to ICTA, in this Act SAYE has been separated from the CSOP schemes in an attempt to make these rules easier to read and understand.

2092.The rules for APS schemes (profit sharing schemes approved under Schedule 9 to ICTA) are not rewritten in this Act. These rules will therefore still be found in sections 186 and 187 of and Schedules 9 and 10 to ICTA. There is reference to this in section 418(2) and in Part 8 of Schedule 7 to this Act.

2093.The redrafting of the SAYE and CSOP schemes has been influenced by the way the newer schemes, Enterprise Management Incentives (“EMI”) and Share Incentive Plans (“SIP”), were drafted in FA 2000. This is a matter of style and also part of an attempt to achieve consistency across the share schemes where possible. Codes have been introduced for each scheme or plan as explained in the notes on the introduction to this Part.

2094.Each section of this Chapter and each paragraph of Schedule 3 has a heading to help explain its contents and there are several examples of both sections and paragraphs containing introductory material.

2095.The requirements for the initial and continuing approval of the scheme are now contained in paragraphs 40 to 44 of Schedule 3. There are transitional provisions in Schedule 7 to ensure that a scheme approved under Schedule 9 to ICTA is treated as a SAYE option scheme approved under this Act.

Section 516: Approved SAYE option schemes

2096.This section sets out what is contained in this Chapter and in Schedule 3. It sets the scene: SAYE is a scheme which requires prior approval by the Inland Revenue and which enables the option-holder to benefit from income tax relief.

2097.There are references in the SAYE code in several places to the Inland Revenue, where in ICTA these refer to the Board. This reflects practice and is in line with the approach in FA 2000 to the EMI and SIP codes. The Inland Revenue is defined in section 720 as “any officer of the Board of Inland Revenue”. See Change 158 in Annex 1.

2098.In subsection (3)(c) there is a cross-reference to Part 2 of Schedule 7D to TCGA 1992 which covers the capital gains tax angle (see Schedule 6 to this Act).

2099.Share options are described as being granted rather than obtained in most contexts and especially where the timing of the grant is significant. This ties in with the terminology in EMI and perhaps gives a clearer indication of the exact date of the occasion.

2100.The definitions derive from section 187 of ICTA. There are minor definitions and a new index of defined expressions, at the end of Schedule 3 to this Act. This is based on the approach in the tax-relieved share schemes, introduced by FA 2000. The definition of “share option” matches the one used for EMI in FA 2000 (and in the EMI code). In section 516 there is also a fuller definition of the SAYE option scheme itself than in ICTA.

Section 517: Share options to which this Chapter applies

2101.This is an introductory section, which derives from section 185(1) of ICTA. This Chapter applies to an individual who obtains an option in accordance with the provisions of an approved scheme by reason of his or her employment. This phrase in section 185(1) matches the expression in the benefits code. The rules in paragraph 10 of Schedule 3 to this Act govern the particular employment.

2102.The reference to a commencement date in section 185(1) of ICTA is spent and is not rewritten.

Section 518: No charge in respect of receipt of option

2103.This derives from section 185(2) of ICTA. Here, as elsewhere, the phrase “no liability to income tax arises” expresses this type of exemption.

Section 519: No charge in respect of exercise of option

2104.This and the following section derive from section 185(3) and (4) of ICTA and explain the conditions for relief from income tax on the exercise of an option and on post-acquisition benefits.

2105.The relief and the exceptions are set out in a more straightforward way and in a positive framework. No liability to income tax arises in the circumstances set out in this section (subject to the two conditions in subsections (2) and (3)) on the exercise of an option in accordance with the approved provisions of the scheme. Under condition A, the option is exercised after three years from the date on which it is granted. This period between grant and exercise is the norm for a SAYE scheme.

2106.There are a number of circumstances however for an early (pre-three year) exercise which are catered for in SAYE schemes. Rules about these appear in Schedule 3 to this Act. Following on from section 185(4) of ICTA, this section identifies those circumstances for which tax relief is provided. But under condition B the position is expressed positively, although the formulation makes reference to the circumstances where tax relief is not available on the early exercise of an option.

2107.There is a clarification of the time limit in section 185(4) of ICTA, which refers to the exercise of an option within three years of its being obtained in subsections (2) and (3)(a). This section confirms that the period is inclusive of the date of the grant. So, if granted an option on 1 January 2002, an employee can be confident that it can be exercised on the same date three years later and the exercise will qualify for income tax relief. See Change 129 in Annex 1.

2108.There are similar clarifications in the CSOP code and there are references to time limits elsewhere in the notes on the approved schemes. These are instances where, to a greater or lesser extent, doubt may exist as to whether or not the “trigger date”, from which a period is measured, is to be included in the period. As the law ignores fractions of a day when computing periods of this nature, the start date for the various periods has been identified.

2109.The Inland Revenue practice under which the charge on the exercise, assignment and release of unapproved share options is lifted after the death of an option holder has now been given statutory effect in section 477(4). There is a cross-reference to this section in subsection (4). Also, to make it clear that the operation of section 477 acts in conjunction with the approved share scheme rules, which concern the time when a share option lapses after death, there is also a signpost to paragraph 32 of Schedule 3 to this Act in subsection (5)(a).

2110.In subsection (5)(b) there is a direct signpost to paragraph 42(3) of Schedule 3 to this Act, under which, for SAYE, the option holder is protected against the possibility of approval being withdrawn from an approved scheme.

Section 520: No charge in respect of post-acquisition benefits

2111.This section mirrors the previous section and gives relief in the same circumstances from income tax on specified charges on an increase in the value of shares acquired by way of a tax-relieved exercise.

2112.There is a signpost in subsection (3) to paragraph 42(3) of Schedule 3 to this Act under which, for SAYE, the option holder is protected against the possibility of approval being withdrawn from an approved scheme.

Chapter 8: Approved CSOP schemes
Overview

2113.This Chapter tells an employee receiving or exercising a share option whether or not the option is within a CSOP scheme and what the tax consequences are. A CSOP scheme is defined in section 521. The acronym CSOP stands for a company share option plan. This label has not been used in the statute up to now but it is commonly used in practice.

2114.The label CSOP denotes a CSOP scheme in these notes.

2115.Unlike in sections 185 and 187 of and Schedule 9 to ICTA, in this Act CSOP has been separated from the SAYE schemes in an attempt to make these rules easier to read and understand.

2116.The rules for APS scheme (profit sharing schemes approved under Schedule 9 to ICTA) are not being rewritten in this Act. These rules will therefore still be found in sections 186 and 187 of and Schedules 9 and 10 to ICTA. There is reference to this in section 418(2) and in Part 8 of Schedule 7 to this Act.

2117.The redrafting of the CSOP and SAYE schemes has been influenced by the way the newer schemes, Enterprise Management Incentives (“EMI”) and Share Incentive Plans (“SIP”), were written in FA 2000. This is a matter of style and also part of an attempt to achieve consistency across the share schemes where possible. Codes have been introduced for each scheme or plan as explained in the notes to the introduction to this Part.

2118.Each section of this Chapter and each paragraph of Schedule 4 has a heading to help explain its contents and there are several examples of both sections and paragraphs containing introductory material.

2119.The requirements for the initial and continuing approval of the scheme are now contained in paragraphs 28 to 32 of Schedule 4. There are transitional provisions in Schedule 7 to ensure that a scheme approved under Schedule 9 to ICTA is treated as a CSOP scheme approved under this Act.

Section 521: Approved CSOP Schemes

2120.This section sets out what is contained in this Chapter and in Schedule 4 to this Act. It sets the scene: CSOP is a scheme which requires prior approval by the Inland Revenue and which enables the option-holder to benefit from income tax relief. There is also provision here for amounts to count as employment income in certain circumstances.

2121.There are references in the CSOP code in several places to the Inland Revenue, where the relevant provisions in ICTA referred to the Board. This reflects practice and is in line with the approach in FA 2000 to EMI and SIP codes. The Inland Revenue is defined in section 720 as “any officer of the Board of Inland Revenue”. See Change 158 in Annex 1.

2122.In subsection (3)(c) there is a cross-reference to Part 3 of Schedule 7D to TCGA 1992 which covers the capital gains tax angle (see Schedule 6 to this Act).

2123.Share options are described as being granted rather than obtained in most contexts and especially where the timing of the grant is significant. This ties in with the terminology in EMI and perhaps gives a clearer indication of the exact date of the occasion.

2124.The definitions derive from section 187 of ICTA. There are minor definitions and a new index of defined expressions, at the end of Schedule 4 to this Act. This is based on the approach in the tax-relieved share schemes, introduced by FA 2000. The definition of “share option” matches the one used for EMI in FA 2000 (and in the EMI code). There is for the first time a definition of the CSOP scheme in section 521.

Section 522: Share options to which this Chapter applies

2125.This is an introductory section, which derives from section 185(1) of ICTA. This Chapter applies to an individual who obtains an option in accordance with the provisions of an approved scheme by reason of his or her employment. This phrase in section 185(1) matches the expression in the benefits code. The rules in paragraph 8 of Schedule 4 to this Act govern the particular employment.

2126.The reference to a commencement date in section 185(1) of ICTA is spent and is not being rewritten. This is also the case with section 185(9) of ICTA, which is specific to CSOP.

Section 523: No charge in respect of receipt of option

2127.Subsection (1) derives from section 185(2) of ICTA. Here as elsewhere the phrase “no liability to income tax arises” expresses this type of exemption.

2128.Subsection (2) also derives from section 185(2) of ICTA.

Section 524: No charge in respect of exercise of option

2129.This and the following section bring together section 185(3) and (5) of ICTA and incorporate paragraph 27(3) of Schedule 9 to ICTA, which was formerly referred to in section 185(3).

2130.These two sections explain the conditions for relief from income tax on the exercise of an option and on post-acquisition benefits. As with the SAYE provisions, this section makes the circumstances of relief and the exceptions more straightforward, expressing them in a positive form.

2131.No liability to income tax arises in the circumstances set out in the condition in subsection (2). The option has to be exercised between three years and ten years after receipt and three years after a previous exempt exercise, as defined in subsection (3).

2132.There are therefore three dates crucial to this relief. The three year period in subsection (2)(a)(i) begins with the day on which the option is granted. There is a minor change in relation to the exercise on the tenth anniversary of the grant in subsection (2)(a)(ii). See Change 129 in Annex 1.

2133.In subsection (2)(b) the rule makes it clear that the period is inclusive of the exercise of the current option. (In section 185(5)(b) of ICTA the period looks back to the date of an earlier exercise.) The effect is that if there is an exempt exercise of an option on 1 January 2002, an employee can be confident that a further exercise on the same date three years later will qualify for income tax relief.

2134.There are similar clarifications in the SAYE code and there are references to time limits elsewhere in the explanatory notes on the approved schemes. These are instances where it might be open to doubt whether or not the trigger date, from which a period is measured, is to be included in the period. As the law ignores fractions of a day when computing periods of this nature, this section identifies the start date for the various periods.

2135.The Inland Revenue practice under which the charge on the exercise, assignment and release of unapproved share options after the death of an option holder is lifted has now been given statutory effect in section 477(4). There is a new cross-reference to this section in subsection (4). Also, to make it clear that the operation of section 477 acts in conjunction with the approved share scheme rules, which concern the time when a share option lapses after death, there is a signpost to paragraph 25 of Schedule 4 in subsection (5).

Section 525: No charge in respect of post-acquisition benefits

2136.This section mirrors the previous section and also derives from section 185(3) and (5) of ICTA. It gives relief in the same circumstances from income tax on specified charges (post-acquisition charges under section 449 and section 453) on an increase in the value of shares acquired by way of a tax-relieved exercise. The exercise has to meet the condition set out in section 524. See Note 50 in Annex 2.

Section 526: Charge where option granted at a discount

2137.This section derives from section 185(6) and (8) of ICTA. Section 185(7) of ICTA which covers the capital gains tax consequences (relief against a double charge) is now in Part 3 of Schedule 7D to TCGA 1992 (see Schedule 7 to this Act).

2138.The section imposes a charge in the rare case that the total of any consideration given for the grant of the option and the amount payable on exercising the option is less than the market value of the shares at the time the option is granted. The option has to be granted at a price which is not manifestly less than the market value at that date (which is the rule in paragraph 22 of Schedule 4, formerly paragraph 29 of Schedule 9 to ICTA). Therefore this charge can only occur where there has been an agreement to fix the value earlier than the date of the grant or a mistake is made on the valuation.

2139.The language of subsections (2) and (4) reflects the new approach to expressing “charge”.

2140.In response to a suggestion made in the consultation process leading up to this Act, “the price” in subsection (1)(b) has been changed to “the amount payable” since price implies an amount payable per share. A further clarification has also been introduced. This is the reference to “the maximum number of shares” that can be acquired under the option, which specifies the number of shares in the frame in order to make the comparison required.

2141.The reference to the discount being earned income has been dropped, as this has no continuing effect.

2142.Under subsection (4), “knock-on” relief is given against further income tax charges on the same shares. This is a signpost only now; the way the relief is given is included in sections 194, 479 and 480.

Chapter 9: Enterprise management incentives
Overview

2143.This Chapter contains the information that an employee needs in order to be able to establish the tax consequences of receiving or exercising a share option that is within the enterprise management incentives (“EMI”) rules.

2144.A code has been introduced for EMI options as for SAYE, CSOP and SIPs as explained in the notes on the introduction to this Part.

2145.Those parts of the EMI code that determine which options are within the scope of the scheme are separated out and appear in Schedule 5. Schedule 5 refers to “share options”, where appropriate, so as to align this phraseology with SAYE and CSOP. There is a definition of “share option” in section 527.

2146.The requirements for a qualifying option, deriving from Schedule 14 to FA 2000, are now contained in Schedule 5 to this Act. There are transitional provisions in Schedule 7 to ensure that where a share option was a qualifying option under Schedule 14 to FA 2000, it is treated as a qualifying option for the purposes of the EMI code.

Section 527: Enterprise management incentives: qualifying options

2147.This section sets out what is contained in this Chapter and in Schedule 5. As well as being a new scene-setting section, it includes material drawn from paragraph 1(1) of Schedule 14 to FA 2000 about what is a qualifying option.

2148.In subsection (3)(c) there is a cross-reference to Part 4 of Schedule 7D to TCGA 1992 which covers the capital gains tax angle, (see Schedule 7 to this Act).

Section 528: No charge on receipt of qualifying option

2149.This section prevents tax being chargeable on receipt of a qualifying option. It derives from paragraphs 42(1) and 43 of Schedule 14 to FA 2000.

Section 529: Scope of tax advantages: option must be exercised within 10 years

2150.This section explains that the tax advantages described in the following sections only apply if the option is exercised within ten years of it being granted. If the option being exercised is a replacement for a previous option, it must be exercised within ten years from when the original option was granted in order to qualify for the tax advantages. This derives from paragraph 42 of Schedule 14 to FA 2000.

2151.The words “the date of the” have been added before “grant” in subsection (2)(b) to clarify the effect of the rule in paragraph 42 which provides for a ten year period exclusive of the date of the grant.

Section 530: No charge on exercise of option to acquire shares at market value

2152.This section, which derives from paragraph 44 of Schedule 14 to FA 2000, deals with the situation where an employee is granted an option with an exercise price not less than the market value of the shares at the time the original option is granted. In this situation, there is no charge on the exercise of the option (or a replacement option) under section 476. This provision is subject to section 532 which outlines what happens if a disqualifying event takes place.

Section 531: Limitation of charge on exercise of option to acquire shares below market value

2153.This section sets out how to calculate the amount chargeable under section 476 when a qualifying option (or replacement option) is exercised to acquire shares for less than their market value when the option was originally granted. It derives from paragraph 45 of Schedule 14 to FA 2000.

2154.This provision is subject to section 532 which outlines what happens if a disqualifying event takes place.

2155.There are formulae to aid understanding of the text in this and in the succeeding section, which provide the basis for the calculation of the charges.

2156.There is no successor to paragraph 46 of Schedule 14 to FA 2000 (exercise of option to acquire shares at nil cost). This is redundant in that it is a variation of the situation in this section. Small changes have been made to sections 531 and 532 to ensure that the whole picture is preserved. In subsection (1) of section 531 there is a new “(or at nil cost)” and in both subsection (2) of this section and subsection (4) of section 532, a reference to “if any” in the definition of “ACS”.

2157.There is a further point affecting both this and the next section. The source legislation includes a provision that stating that if the section 476 gain was nil there is no liability to income tax. Sections 531 and 532 now use a formulaic approach and a more general solution has been found to deal with negative results. Section 420 provides for the position where a formula in Part 7 would produce a negative result. The result is to be taken to be nil.

Section 532: Modified tax consequences following disqualifying events

2158.This section sets out what happens where there has been a disqualifying event and the option had not been exercised within 40 days of that event. The 40-day period of grace is in recognition of the fact that the option-holder may have no control over a disqualifying event.

2159.This provision derives from paragraph 53 of Schedule 14 to FA 2000. The section now has a more comprehensive heading and is in a more prominent position before the sections describing the various types of disqualifying event. This draws out the impact of such an event on income tax relief.

2160.The broad effect of an amendment in paragraph 11 of Schedule 14 to FA 2001 was that this set of rules wholly replaces those included in paragraphs 44 and 45 of Schedule 14 to FA 2000 (rewritten in sections 530 and 531), if a disqualifying event occurs. There is a slight change in the wording to reflect this, referring to the option being “within”, for example, section 530, rather than section 530 applying.

2161.The effect of the provision is to separate out and relieve the gain in the value of the share option accruing over the period up to the disqualifying event, leaving any gain accruing between the disqualifying event and the date of exercise fully chargeable. There is of course the usual deduction for anything paid for the grant of the option.

2162.As noted in relation to the preceding section there is no successor to paragraph 46 of Schedule 14 to FA 2000. Another small change has been made to this section to ensure that the whole picture is preserved. In subsection (4) there is an added reference to “if any” in the definition of “ACS”.

2163.The provision in sub-paragraph (2D) of paragraph 53 of Schedule 14 to FA 2000, has not been reproduced. This was a provision that stated that if the section 476 gain was nil there is no liability to income tax. This and the preceding section now use a formulaic approach and a more general solution has been found to deal with negative results. Section 420 provides for the position where a formula in Part 7 would produce a negative result. The result is to be taken to be nil.

2164.Subsection (6) contains a clearer exposition of the rule in paragraph 53(3) of Schedule 14 to FA 2000 from which it derives. This ensures that the operation of this section does not result in a higher taxable amount than would be charged under section 476, if the EMI provisions did not apply. In this situation no part of either this section or of sections 530 and 531 apply (and so the amount is counted as income under section 476).

Section 533: Disqualifying events

2165.This is a new provision, which provides the reader with a list of the possible disqualifying events and notes where they are described in full.

Section 534: Disqualifying events relating to relevant company

2166.This section sets out those events that can happen to the company whose shares are the subject of a qualifying option that would lead to that share option ceasing to qualify under EMI. These are “disqualifying events”. It derives from paragraph 47(1) and (2) and paragraph 48 of Schedule 14 to FA 2000.

2167.The word “being” has been changed to “becoming” in subsection (1)(b) to better match the wording and meaning of subsection (1)(a).

2168.The definition of “control” is covered by section 840 of ICTA, see Note 51 in Annex 2.

2169.In subsection (4), which derives from paragraph 47(2) of Schedule 14 to FA 2000, the reference to the “original” option has been dropped from the phrase “when the option was granted”. There is no scope in paragraph 47(2)(b)(ii) of Schedule 14 to FA 2000 to refer to any option other than the qualifying option, mentioned in paragraph 47(2)(a) (in subsections (3) and (4)(a) of this section). This could be either an original or a replacement option. Also the words “of a group” no longer follow “parent company” in subsection (4)(b).

2170.To clarify the position if there has been a replacement option, there is a cross-reference to paragraph 41(5) (b) of Schedule 5.

2171.The words “from the grant” in the source legislation have been changed to “the period of two years after the date” of the grant in subsection (5) to clarify the rule. This new wording provides for a period exclusive of the date of the grant.

Section 535: Disqualifying events relating to employee

2172.This section sets out the disqualifying events that can occur in relation to an employee. These result in the share option held by that employee ceasing to qualify under EMI. It derives from paragraphs 47(1) (part), (3), and 52(1), (2) and (6) of Schedule 14 to FA 2000 and relates to provisions in Schedule 5 to this Act. It picks up on some new expressions introduced in paragraph 26 of that Schedule to set out more clearly the requirement on working time.

2173.First there is the employment requirement in subsection (1)(a). Next, under subsection (1)(b), there is a disqualifying event if, on the facts of the arrangement between employer and employee (usually the contract), the employee ceases to meet the requirement as to commitment of working time, contained in paragraph 26 of Schedule 5 to this Act.

2174.Finally, and the different nature of this test is emphasised by the words “in addition” in subsections (2) to (5), there is what is known as the “working time rule”. This takes into account the time actually spent by the employee on work in the relevant employment.

2175.The provisions in paragraphs 47 and 52 of Schedule 14 to FA 2000 are cumbersome to operate, do not work satisfactorily in all circumstances and could impact harshly on employees working flexi-time. Under subsections (2) to (5) there is a much simpler “working time rule”. See Change 130(A) in Annex 1.

2176.There is another minor change to the law in subsection (3). This corrects an omission in the source legislation, by providing a cross-reference to paragraph 26(3) of Schedule 5 to this Act. See Change 130(B) in Annex 1.

Section 536: Other disqualifying events

2177.This section lists the other events that can result in a share option ceasing to qualify under EMI. It derives from paragraphs 47(1) and 51 of Schedule 14 to FA 2000.

Section 537: Alterations of share capital for purposes of section 536

2178.Among the disqualifying events in section 536 are certain kinds of alteration of the company’s share capital. Section 537 sets out what kind of alteration comes into play for the purposes of section 536(1)(b) and (c). It derives from paragraphs 47(1) and 49 of Schedule 14 to FA 2000.

2179.There is a change in the wording in subsection (4) compared to the final paragraph of paragraph 49(1). “References to restrictions ... or to rights …  include”, followed by an interpretation, is replaced by “any reference to a restriction … or a right … is a reference to such a restriction … or right”, followed by the same interpretation. This rephrasing makes better sense of the final words in the sentence, “or in any other way”.

Section 538: Share conversions excluded for purposes of section 536

2180.Among the disqualifying events in section 536 is a conversion of the shares, to which the option relates, into a different class. Section 538 prevents a share conversion being a disqualifying event if it meets certain conditions as set out in subsections (2) and (3). This section derives from paragraph 50 of Schedule 14 to FA 2000.

Section 539: CSOP and other options relevant for purposes of section 536

2181.Among the disqualifying events in section 536 is the grant of a CSOP option if, after this grant, the total value of the shares for which the employee holds unexercised employee options under EMI or CSOP exceeds £100,000. This section explains the meaning of CSOP options and employee options for those purposes. It derives from paragraph 51(1) to (4) of Schedule 14 to FA 2000.

2182.There is a new definition of a group of companies, in contexts where there is no reference to the parent company, in paragraph 58 of Schedule 5 to this Act.

Section 540: No charge on acquisition of shares as taxable benefit

2183.This section prevents there being a charge to tax under Chapter 8 of Part 3 in respect of shares acquired by the exercise of a qualifying option, if the employee is resident and ordinarily resident in the United Kingdom. This derives from paragraph 54 (1) of Schedule 14 to FA 2000.

2184.The wording of the source legislation suggests that the residence tests apply at the time the option is exercised. In practice the Inland Revenue applies the test at the time of the grant of the option. In this section it has been made clear that the tests can be applied at the time of the grant or at the time of the exercise of a qualifying option. See Change 131 in Annex 1.

2185.The content of paragraph 54(2) of Schedule 14 to FA 2000 is in section 541, rather than in this section, since it relates to a charge under Chapter 9 of Part 3 which is not affected by the EMI provisions.

Section 541: Effects on other income tax charges

2186.The fact that a share option may be a qualifying share option under EMI does not prevent the ordinary operation of certain other income tax provisions. This section sets out what those provisions are. This includes a reference to the possibility of a charge under section 453 in subsection (1)(c). This last subsection derives from section 79 of FA 1988 and, though not immediately relevant since an EMI option cannot be granted over shares in a subsidiary, can apply to shares acquired on exercise of the option if there is a subsequent take-over.

2187.The section also describes what relief may be available as a deductible amount from a charge to tax under sections 427 or 438 in respect of shares acquired under the option.

2188.This section derives from paragraphs 54 (2) and 55 of Schedule 14 to FA 2000.

Chapter 10: Priority share allocations
Overview

2189.This Chapter derives from section 68 of FA 1988 which applies to offers made on or after 23 September 1987. That section exempts the benefit derived by directors and employees from a priority allocation of shares.

2190.Section 68 of FA 1988 starts by granting a complete exemption from the charge as emoluments in respect of any benefit derived from an entitlement to a priority allocation of shares. Then, in some circumstances, the legislation brings back into charge any discount enjoyed by employees. It does so by excluding the relevant amount from the initial exemption. The rules for calculating this amount are different from the normal rules for calculating emoluments.

2191.When section 68 of FA 1988 was enacted, it only dealt with relatively straightforward offers where there was a single public offer under which both members of the public and directors and other employees applied for shares including any priority shares.

2192.Successive amendments catered for more complex share offers. These included offers where, because of legal and other technical issues, the priority shares for directors and employees were subject to a separate employee offer. Each new tranche of legislation was “bolted on” to what had gone before. This was done by imposing the fiction that the separate public and employee offers were in fact a single offer – “the offer”.

2193.This led to some rather dense and convoluted legislation – particularly in the rules for the limits on the number of priority shares and the “similar terms” condition. In order to try to make the provisions easier to understand, that fiction has been abandoned and the Act instead uses the following structure: sections 542 and 543 deal with single share offers; sections 544 and 545 deal with share offers with separate public and employee offers; and sections 546 to 548 deal with supplementary material that is common to both.

2194.It should be noted that section 68(4) of FA 1988 (dealing with the capital gains aspects) does not appear in this Chapter. Instead, paragraph 212 of Schedule 6 to this Act inserts a new section 149C in TCGA 1992. In addition, section 68(6) of FA 1988, the original commencement provision, is omitted on the grounds that it is spent.

Section 542: Exemption: offer made to public and employees

2195.This section is concerned with offers which are open to both the public and employees. Subsection (1) derives from section 68(1) of FA 1988 and introduces the basic conditions for the exemption. The exemption itself is found in subsection (2) and is from liability to income tax as earnings. It follows that the exemption does not apply to a benefit received in connection with a change or termination within Chapter 3 of Part 6 of this Act which derives from section 148 of ICTA.

2196.Subsections (3) to (6) derive from sections 68(2), (2A) and (2B) of FA 1988 and give the detailed conditions which must be satisfied in order for the exemption to apply. In contrast to the source legislation, dealing with the conditions one by one should be clearer.

2197.Subsection (7) introduces section 543 which excludes certain discounts from the exemption in this section.

Section 543: Discount not covered by exemption in section 542

2198.This section derives from section 68(1A) of FA 1988 and excludes from the exemption in section 542 the benefit of certain discounts enjoyed by a director or employee in acquiring the priority shares. The discount therefore remains taxable as earnings. In calculating the taxable discount the amount of any registrant discount (see section 547) is disregarded.

Section 544: Exemption: different offers made to public and employees

2199.This section is concerned with cases where there are separate offers to the public and employees. Subsection (1) derives mainly from section 68(1ZA) of FA 1988 and introduces the basic conditions for the exemption. The exemption itself is found in subsection (2) and is from liability to income tax as earnings. It follows that the exemption does not apply to a benefit received in connection with a change or termination within Chapter 3 of Part 6 of this Act which derives from section 148 of ICTA.

2200.Subsections (3) to (6) derive from sections 68(1ZB), (2), (2A), (2B) and (2C) of FA 1988 and give the detailed conditions which must be satisfied for the exemption to apply. Subsection (3) requires the case of each company whose shares are subject to the employee offer to be considered. In the FA 1988 provisions, the fiction that the public offer and the employee offer are a single offer means that, reading subsections 68(2)(a) and 68(2C) together, a company whose shares are only subject to the public offer also has to be considered. In such a case, the limit on the number of shares allocated to employees, imposed by section 68(2)(a), will never be exceeded. These companies are not therefore mentioned. See Note 52 in Annex 2.

2201.Subsection (7) introduces section 545 which excludes certain discounts from the exemption in this section.

Section 545: Discount not covered by exemption in section 544

2202.This section derives from section 68(1) of FA 1988 and excludes from the exemption in section 544 the benefit of any discount (disregarding the registrant discount) enjoyed by a director or employee in acquiring the priority shares. The discount therefore remains taxable as earnings.

2203.Subsections (3) to (6) derive from the rather complex provisions in section 68(5B) and (5C) of FA 1988 which determine the “appropriate notional price” of the shares in the offer. Generally this is the notional price, but in some circumstances it is a proportion of the notional price. A formula has been introduced to make the basis of the calculation clearer.

Section 546: Meaning of being entitled “on similar terms”

2204.This section derives from sections 68(3) and (3A) of FA 1988 and explains the condition that entitlement to a priority allocation of shares must be on “similar terms”.

2205.Subsections (3) to (6) only apply where the allocation of shares in a company for directors and employees of the company is different from the allocations for directors and employees of other companies.

Section 547: Meaning and amount or value of “registrant discount”

2206.This section derives from section 68(5A) of FA 1988 which defines “registrant discount”. Section 68(5A)(b) requires at least 40% of shares which are allocated to members of the public other than employees and directors to be allocated to individuals entitled to the discount. It is not made explicit what this phrase means. Subsection (4) has been drafted to make clear that the intention is to exclude employees and directors who are entitled to a priority allocation. This change in approach is explained in detail in Note 53 in Annex 2.

2207.In this section the label “subscribing employee” has been used to describe those directors and employees who subscribe for shares under the offers and who comply with the same registration requirements as members of the public.

Section 548: Minor definitions

2208.This section contains the definitions used in this Chapter and mainly derives from section 68(5) of FA 1988. That legislation does not define “director” (except to include prospective and former directors) or “shares”. The definitions introduced here are discussed in Change 132 in Annex 1.

Chapter 11: Supplementary Provisions about employee benefit trusts
Background

2209.Chapters 6, 7, 8 and 9 of this Part set out the provisions for the four types of share scheme: share incentive plans (“SIPs”), Save As You Earn option schemes (“SAYE”), company share ownership plans (“CSOPs”) and enterprise management incentives (“EMIs”).

2210.Each of those schemes includes a number of requirements that the employee must meet. One of the conditions common to each of the schemes is that the employee must not have a “material interest” in the company whose shares are subject to the scheme. A “material interest” means entitlement to more than a certain percentage of the relevant company’s share capital.

2211.In determining whether or not the “material interest” test is satisfied, the entitlement of the individual to any of the company’s shares includes any such entitlement held by any “associates” of the individual.

2212.One kind of associate could be a trustee of a settlement of which the individual is a beneficiary. And one kind of trust that may well exist in the context of a company that is running share incentive schemes is an employee benefit trust. An employee wishing to participate in the share scheme may therefore need to know whether or not to count the trustees of the employee benefit trust as “associates” for the purposes of the “material interest” test.

2213.Each of the four types of share scheme mentioned in paragraph 2209 includes provisions directed to the issue whether the trustees of an employee benefit trust should be counted as associates. The provisions are to the same effect, and state, in each case, that the general rule is that the trustees are not counted as associates if neither the individual in question (with or without associates) nor any associate of the individual (with or without associates) controls more than a stated percentage of the ordinary share capital of the company.

Overview

2214.This Chapter contains provisions relating to employee benefit trusts. It deals with two issues.

2215.The first issue dealt with is the obvious question “What is an employee benefit trust?”. In the source legislation an employee benefit trust is stated, in the case of each of the four schemes, to have the same meaning as in paragraph 7 of Schedule 8 to ICTA. That Schedule is not being re-enacted, as it relates to profit-related pay schemes which will be effectively spent by the time that this Act takes effect. It will therefore no longer be possible to refer to the meaning of “employee benefit trust” as used in the legislation relating to profit related pay schemes. That definition, instead, is set out in this Chapter. The definition, in sections 550 and 551, derives from paragraph 7 of Schedule 8 to ICTA.

2216.The second issue dealt with relates to the general rule mentioned in paragraph 2213: for there are cases where the general rule is supplemented by further rules. In these cases, which depend upon the employee or an associate receiving a payment from the employee benefit trust, the employee (or the associate) is treated as owning the “appropriate percentage” of the ordinary share capital of the company, in addition to any percentage of that share capital actually owned. These provisions, in sections 552 to 554, derive from paragraph 7(9) to (12) of Schedule 8 to ICTA.

Section 549: Application of this Chapter

2217.This section sets out the ambit of this Chapter. Subsections (1) to (3) are drafting additions, while subsection (4) derives from material in paragraph 7(3) and (12) of Schedule 8 to ICTA.

2218.In subsection (4)(b), the words “the company which are subject to” have been added near the end of this provision. Although these words do not form part of paragraph 7(12), it is thought that they should have been included, and that the legislation is easier to understand if they are included. See Note 54 in Annex 2.

2219.Subsection (5) provides that, in this Chapter, the term “employee” includes the holder of an office. This general proposition holds good for the employment income Parts (see section 5), but was disapplied for the purposes of Part 7 in section 421. However, the provisions of this Chapter are governed by the definition of the term “employment” in section 169(1) of ICTA, which includes an office, so the general proposition that an “employee” includes an office-holder has been reinstated.

Section 550: Meaning of “employee benefit trust”

2220.This section sets out the basic ingredients of an employee benefit trust, as follows:

2221.This section derives from paragraph 7(5) of Schedule 8 to ICTA.

2222.Subsection (4) provides more information about the exceptions to the “no disposals since 13 March 1989” rule. Disposals that do not prevent the trust from being an employee benefit trust are either those made in the ordinary course of the management of the trust or “qualifying disposals”, as defined in section 551.

Section 551: “Qualifying disposals” for purposes of section 550

2223.This section sets out that a “qualifying disposal” can be of any of the ordinary share capital of the company, or money paid outright, provided one of three conditions is met. This section derives from paragraph 7(6) and (7) of Schedule 8 to ICTA.

2224.The conditions mentioned are set out in subsections (2), (4) and (5).

2225.Subsection (3) is new. Although subsection (2) refers to “employees of the company”, it is Inland Revenue practice to extend the benefit of this provision to employees of a subsidiary company (a subsidiary company being taken to mean a company under another company’s control, with the word “control” taking the meaning in section 840 of ICTA). Subsection (3) reflects that Inland Revenue practice. See Change 133 in Annex 1.

Section 552: Attribution of interest in company to beneficiary or associate

2226.This section sets out that in certain circumstances the individual (or an associate of the individual) is treated as owning the “appropriate percentage” of the company’s ordinary share capital. It derives from paragraph 7(9) of Schedule 8 to ICTA.

2227.The relevant circumstances are that the individual in question (or an associate) has received a payment from the employee benefit trust since 13 March 1989 and the property subject to the trust included any ordinary share capital of the company at any time during the three years preceding that payment.

2228.The “appropriate percentage” of the company’s ordinary share capital that the individual (or associate) is treated as owning in those circumstances is specified in section 553.

Section 553: Meaning of “appropriate percentage” for purposes of section 552

2229.This section sets out how the “appropriate percentage” is to be calculated. It derives from paragraph 7(10) of Schedule 8 to ICTA.

2230.There are a number of factors to be taken into account in working out the “appropriate percentage” of the company’s ordinary share capital for the purposes of section 552. The main calculation consists of a straightforward fraction using “P” and “D” to signify the numbers to be fed into that fraction. The expressions “P” and “D”, however, take rather more explaining.

2231.“P” is either the total of any payments received by the individual or associates from the trust during the 12 months up to and including the day the relevant payment is made (subsection (2)) or, if smaller, the distributions made by the company to the trustees of the employee benefit trust during the period of three years up to and including the day the relevant payment is made (subsection (3)).

2232.“D” is the aggregate distributions made during the three years preceding the relevant payment, divided by the number of years in which such distributions were actually made (subsection (4)).

2233.It is difficult to express the ideas in this calculation in simpler terms than those used in paragraph 7(10) of Schedule 8 to ICTA; but the section includes a mini method statement for the calculation of “D”.

Section 554: Attribution of further interest in company

2234.This section sets out in that in certain circumstances the individual (or an associate of the individual) is treated as owning, not only the “appropriate percentage” of the company’s ordinary share capital determined under section 552 but an additional percentage as well. It derives from paragraph 7(11) of Schedule 8 to ICTA.

2235.The “appropriate percentage” may be increased if the individual (or associate) receives payments from other trusts that own shares in the company. This section sets out in what circumstances the appropriate percentage may be so increased, and how to work out the total percentage of the company’s share capital that the individual (or associate) is treated as owning.

2236.Subsection (3) sets out material that has no precise counterpart in ICTA; but its inclusion in this Act should make the legislation clearer.

Part 8: Former employees: deductions for liabilities
Overview

2237.This Part contains provisions that give relief for payments made against liabilities arising from a former office or employment. To qualify for relief those payments must be made in the run-off period defined in the provisions. This Part derives from the provisions in section 92 of FA 1995 but subsections (6) to (8) are dealt as consequential amendments in paragraphs 217 and 219(2) of Schedule 6 to this Act. Subsection (10) is dealt with in sections 409 and 410 of this Act.

2238.In most instances there will not be any income from the relevant employment against which to set the payment incurred because that employment must have ceased. Relief for the payment is therefore given against total income. That contrasts with the corresponding provisions for similar payments incurred in an ongoing office or employment, found in sections 346 to 350 in Chapter 2 of Part 5 of this Act, which derive from section 201AA of ICTA. Under those provisions the payment can only be set against earnings from the employment that gives rise to the liabilities that led to the payment being incurred.

2239.Section 92 of FA 1995 operated by importing concepts from section 201AA of ICTA. This Part does not follow that approach and instead is as self-contained as possible.

Section 555: Former employee entitled to deduction from total income

2240.This section sets out the circumstances under which entitlement to a deduction arises. It derives from parts of section 92(1) and (5) of FA 1995.

Section 556: Deductible payments made outside the time limits allowed

2241.This section gives the start and finish dates of the run-off period referred to in the overview above. It derives from section 92(2)(a) of FA 1995.

2242.Subsection (1) is more precise than the source legislation about when the payment must be made. See Change 134 in Annex 1.

Section 557: Deductible payments wholly or partly borne by the former employer etc.

2243.This section gives a method for determining the amount of any deduction due to a former employee in one of two circumstances where that employee has not paid or borne the whole of the cost of the payment personally. It derives from parts of section 92(4) and (5) of FA 1995.

2244.The first circumstance is that the former employer (as defined in section 563) of this Act has borne some or all of the cost involved. The second circumstance is that the cost has been met from the proceeds of a contract of insurance against the risk(s) that gave rise to the need to make the payment. A deduction for the payment involved is available only to the extent that the former employee has been treated as having received a relevant retirement benefit or post-employment earnings.

Section 558: Meaning of “deductible payment”

2245.This section derives from section 201AA(1), (7), (8) and (9) of ICTA and from section 92(2)(b) of FA 1995. It describes the different sorts of payments that can qualify as a deduction under this Part.

Section 559: Liabilities related to the former employment

2246.This section describes the types of liability that can give rise to payments that are eligible for relief. It derives from section 201AA(2) of ICTA and from section 92(2)(b) of FA 1995.

Section 560: Meaning of “qualifying insurance contract”

2247.This section describes the conditions that have to be met if an insurance contract is to fall within the scope of this Part. It derives from section 201AA(3)(a) to (d) and (4) of ICTA and from section 92(2)(b) of FA 1995.

2248.Subsections (2) to (5) state the conditions that have to be met for an insurance contract to come within section 558(1).

Section 561: Connected contracts

2249.This section describes what determines whether insurance contracts are connected with one another. It derives from section 201AA (5) and (6) of ICTA and from section 92(2)(b) of FA 1995.

2250.Subsections (1) to (3) define when insurance contracts are connected.

2251.Subsections (4) to (7) provide for that connection to be ignored in certain specified circumstances.

Section 562: Meaning of “former employee” and “employment”

2252.This section defines what is meant by a “former employee”, giving some non-exhaustive examples of the sort of posts covered. It is based on and developed from the definition of “employment” in section 4 of this Act. It is sufficiently wide in scope to include what are commonly described as “shadow directors”, as defined in the full out words of section 67(1) of this Act. See Note 1 in Annex 2.

Section 563: Other interpretation

2253.This section contains definitions of some terms used throughout this Part. It derives from section 92(4) (part) and (9) of FA 1995.

2254.In particular this section has an extended definition of “former employer”. See Note 1 in Annex 2.

Section 564: Application of this Part to office-holders

2255.The provisions in this Part are written in terms of the “former employee”. This section extends the provisions so that they apply equally to former office-holders. It echoes the provisions in section 5 of this Act. The section derives from part of section 92(4) and (9) of FA 1995. See Note 1 in Annex 2.

Part 9: Pension Income
Overview

2256.This Part identifies the income that is taxed as pension income.

2257.The Part charges income described as a pension in the source legislation. It also charges other income that is in the nature of pension income but is not described as a pension in the source legislation.

2258.Different Chapters in the Part identify the various forms that pension income can take and set out the rules governing each form. For each category of income the Chapters specify the person liable to tax and the basis of the charge.

2259.There is no statutory definition of “pension” for tax purposes, although voluntary pensions are specifically included. So “pension” has its ordinary meaning. That is a very wide meaning. The definition of “pension” fills almost three columns of the Oxford English Dictionary.

2260.The Part sets out the exemptions that apply to income that would otherwise be chargeable. It also sets out the deductions that are allowed in calculating taxable pension income; payroll giving donations and the 10% deduction for certain overseas government pensions. The 10% deduction for foreign pensions is dealt with by cross-reference to section 65(2) of ICTA.

Chapter 1: Introduction
Overview

2261.This Chapter sets out the structure of the pension income Part.

Section 565: Structure of Part 9

2262.This is the only section in the Chapter. It is new.

2263.Chapter 2 imposes the charge and explains how exemptions and deductions are dealt with.

2264.Chapters 3 to 15 identify:

2265.Chapters 16 to 18 identify a number of exemptions. All the exemptions apply for all income tax purposes and not just for the purposes of this Part.

Chapter 2: Tax on pension income
Overview

2266.This Chapter imposes the charge on “net taxable pension income” and explains how to calculate “net taxable pension income”. There are four steps in the process:

2267.These steps are carried out for each source of pension income separately; see paragraph 2275.

2268.The Chapter also includes a signpost to the various provisions that identify the person liable for any tax charged.

Section 566: Nature of charge to tax on pension income and relevant definitions

2269.This section identifies the different forms of pension income that are chargeable. It is new.

2270.“Pension income” is identified in subsection (2). Pension income includes not only pensions and annuities but other types of income that are in the nature of a pension. The types of pension income are listed in subsection (4). The length of the list reflects the variety of forms that pension income takes and the different ways in which those forms are treated for tax purposes.

2271.Subsection (1) provides that the charge on “pension income” does not apply to any exempt income. “Exempt income” is defined in subsection (3) to mean any income that is exempted from income tax by one of the sections in Chapters 16 to 18 of the pension income Part. This means that “exempt income” is included in the definition of “pension income” but is not taxed as pension income. This point is reinforced in section 567(4). See paragraph 2277.

2272.For example, section 641 (wounds and disability pensions) gives an exemption to various types of war pension. Those pensions fall within the ordinary meaning of United Kingdom pension in section 569 so they are included in “pension income” but because of the exemption they are not charged to tax.

Section 567: Amount charged to tax

2273.This section imposes the charge to tax and explains how the charge is calculated. It is new.

2274.Subsection (1) imposes the charge.

2275.Subsection (2) provides that the charge is imposed on “net taxable pension income”. Each pension, annuity or other item of pension income is treated separately in the calculation of net taxable pension income. So, if a taxpayer receives two occupational pensions, net taxable pension income is calculated for the income from each pension.

2276.Subsection (4)(a) explains that the amount of “taxable pension income” is given in the relevant section in Chapters 3 to 15. Each of those Chapters has a section entitled “taxable pension income”. Those sections give the rules for calculating the amount of the “taxable pension income” for the income dealt with in the Chapter.

2277.Subsection (4)(b) makes it clear that “taxable pension income” does not include any exempt income. The definition of “exempt income” is in section 566(3).

Section 568: Person liable for tax

2278.This section is a signpost to the sections in Chapters 3 to 15 that identify the person liable to pay the tax charged. It is new.

Chapter 3: United Kingdom pensions: general rules
Overview

2279.This Chapter applies to United Kingdom pensions.

Section 569: United Kingdom pensions

2280.This section identifies pensions paid by or on behalf of a person who is in the United Kingdom as pension income. It derives from paragraph 3 of Schedule E (section 19(1) of ICTA) but it also covers payments taxed by paragraph 2 of Schedule E and section 133 of ICTA.

2281.Subsection (1) applies to any pension paid by or on behalf of a person who is in the United Kingdom. It derives from paragraph 3 of Schedule E (section 19(1) of ICTA). The territorial scope in this section is mirrored by section 573 (in Chapter 4), which taxes foreign pensions. That section applies to a pension paid by or on behalf of a person who is outside the United Kingdom. Together these two provisions ensure that all pensions paid by or to persons in the United Kingdom will be taxed.

2282.Subsection (2) limits the scope of the section. It applies only to pensions not identified by one of the specific provisions of the pension income Part. This gives the section the character of a sweep-up provision. Normally a sweep-up provision would come after the specific provisions. But that would not be the right approach here.

2283.One of the objectives of the pension income Part is to remove the overlap that exists in ICTA. Paragraph 3 of Schedule E (section 19(1) of ICTA) imposes a general charge on United Kingdom pensions. But there are also two provisions that impose a specific and overlapping charge on a United Kingdom pension. Section 597 of ICTA imposes a specific charge on pensions paid by approved retirement benefits schemes and paragraph 2 of Schedule E (section 19(1) of ICTA) imposes a specific charge on pensions paid by the Crown.

2284.To remove any overlap the pension income Part needs to identify discrete forms of pension income. The general provision in section 569 is subject to the sections that identify specific forms of pension income. This results in the sweep-up nature of section 569. But despite its sweep-up nature section 569 will apply to many taxpayers. For example, nearly all public sector pensions will be within this section. If the position of the section in the Part is to reflect its importance it needs to come before the sections that apply to specific types of pension income. Also, making the section the first of the provisions that identify pension income gives a natural opening to the pension income Part. It is immediately obvious that all United Kingdom pensions are to be taxed.

2285.Subsection (3) is a signpost to Chapter 4, which gives the general rules for foreign pensions. It is not possible for a pension to be a United Kingdom pension as defined in section 569(1) and a foreign pension as defined in section 573. This is because the qualifying conditions are mutually exclusive.

2286.The pension income Part does not rewrite paragraph 2 of Schedule E (section 19(1) of ICTA). That provision applies to annuities, pensions and stipends payable by the Crown or out of the public revenue. All these forms of income will be taxed in the general charge on United Kingdom pensions in section 569.

2287.“Annuity” in paragraph 2 of Schedule E (section 19(1) of ICTA) is used in the sense of a regular income payment rather than a purchased annuity. Given the wide meaning of “pension” an annuity payable by the Crown is a pension. So it is not necessary for this Act to rewrite a specific charge on annuities payable by the Crown.

2288.The charge on annuities in paragraph 2 of Schedule E (section 19(1) of ICTA) does not apply to any annuity taxed by paragraph (c) of Schedule D Case III (section 18(3) of ICTA). As the pension income Part has not rewritten the charge on annuities in paragraph 2 of Schedule E the reference to paragraph (c) of Case III is redundant. So it is not necessary for this Act to rewrite the reference to paragraph (c) of Schedule D Case III (section 18(3) of ICTA).

2289.Paragraph 2 of Schedule E (section 19(1) of ICTA) imposes a specific charge on a pension payable by the Crown or out of the public revenue. The pension income Part does not retain this specific charge. Either the payment is a pension or it is not. The fact that the payment is made by the Crown cannot make it a pension. A pension paid by or on behalf of a person in the United Kingdom will be taxed by section 569. It is not necessary for this Act to rewrite the specific charge on a pension payable by the Crown or out of the public revenue.

2290.Paragraph 2 of Schedule E (section 19(1) of ICTA) imposes a specific charge on a stipend payable by the Crown or out of the public revenue. A stipend paid by the Crown does not need particular identification. If a payment described as a stipend represents earnings as defined in section 62 it will be taxed as employment income. If the payment described as a stipend is not earnings it will fall within the ordinary meaning of “pension”. So it is not necessary for this Act to rewrite the specific charge on a stipend payable by the Crown or out of the public revenue.

Section 570: “Pension”: interpretation

2291.This section ensures the charge applies to voluntary pensions. It derives from section 133(2) of ICTA.

2292.The scope of section 133(2) of ICTA has been considered in two tax cases. In Johnson v Holleran [1988] 61 TC 433 and Johnson v Farquhar [1991] 64 TC 395 it was held that section 133(2) of ICTA applies for all the purposes of Schedule E and not merely for the purposes of section 133(1).

2293.The effect of the section is that any pension paid by or on behalf of a person in the United Kingdom will be taxed even if there is no contractual right to receive the pension.

Section 571: Taxable pension income

2294.This section sets out the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2295.The section derives from section 41 of FA 1989. That section provides that income taxed by paragraphs 2 and 3 of Schedule E (section 19(1) of ICTA) and section 133 of ICTA is charged on the amount accruing in the tax year. This means that the charge is calculated on the amount accruing from day to day without regard to when the income is actually paid.

Section 572: Person liable for tax

2296.This section identifies the person chargeable. It is new.

2297.The pension income Part includes income that ICTA taxes under Schedule E and income that ICTA taxes under Schedule D. For income taxed under Schedule D section 59(1) of ICTA identifies the person chargeable as the person “receiving or entitled” to the income.

2298.There is no equivalent of section 59(1) of ICTA for pensions that ICTA taxes under Schedule E. It would be inconsistent to identify a person chargeable for some but not all pension income. The pension income Part avoids this inconsistency. It makes the person liable for tax on pension income the person receiving or entitled to the income in all cases where ICTA did not specify the person chargeable. See Change 135 in Annex 1.

Chapter 4: Foreign Pensions: general rules
Overview

2299.This Chapter applies to pensions paid by or on behalf of a person who is outside the United Kingdom.

Section 573: Foreign pensions

2300.This section identifies pensions paid by or on behalf of a person who is outside the United Kingdom as pension income. Taken together with section 569 this section ensures that all pensions paid by or to persons in the United Kingdom are taxed. It derives from sections 18(3) and 58(1) of ICTA, both of which create a charge under Schedule D Case V.

2301.Subsection (1) identifies the income that is within the section. It includes the restriction that the section applies only if the pension is paid to a person resident in the United Kingdom. As is the case for United Kingdom pensions there is no definition of “pension”. The word has its ordinary meaning.

2302.Subsection (2) limits the scope of the section. The section applies only to pensions not identified in one of the specific provisions of the pension income Part. This is a similar structure to section 569 which covers pensions paid by or on behalf of a person who is in the United Kingdom. There are two reasons why the general charge on foreign pensions is subordinate to the specific charging provisions of the pension income Part.

2303.First, as for United Kingdom pensions, each section should identify a discrete source of pension income. To achieve this it is necessary to remove the overlap of the charging provisions in ICTA.

2304.Second, there are two sorts of pension paid by or on behalf of a person who is outside the United Kingdom that ICTA taxes under Schedule E rather than Schedule D Case V. The pension income Part has to deal specifically with those pensions in order to maintain the effect of ICTA. The two sorts affected are those taxed by section 580 (approved retirement benefits schemes) and section 615 (certain overseas government pensions).

2305.It is possible for an approved retirement benefits scheme to be operated by or on behalf of a person outside the United Kingdom. A pension or annuity paid by such a scheme is taxed by section 580. The payer is obliged to operate PAYE. The 10% deduction in section 65(2) of ICTA is not available for these pensions.

2306.Section 615 applies to a pension paid in the United Kingdom by or on behalf of certain overseas governments for service to those governments. In practice these pensions are paid by the Crown Agents. The Crown Agents operate PAYE when paying the pensions.

2307.Subsection (3) is a signpost to Chapter 3, which gives the general rules for United Kingdom pensions. It is not possible for a pension to be a foreign pension as defined in section 573(1) and a United Kingdom pension as defined in section 569(1). This is because the qualifying conditions are mutually exclusive.

Section 574: “Pension”: interpretation

2308.This section ensures the charge applies to voluntary pensions. It derives from section 58(2) of ICTA.

2309.Subsection (1) identifies voluntary pensions using the same language that section 570 uses to identify United Kingdom voluntary pensions. But the rules for foreign voluntary pensions are slightly different from the rules for United Kingdom voluntary pensions. For a foreign voluntary pension there is no equivalent of section 133(2) of ICTA (see paragraph 2291). A foreign pension paid on a voluntary basis will be taxable only if it meets the conditions in section 58(2) of ICTA.

2310.Subsections (2) and (3) set out the conditions in section 58(2) of ICTA. The effect of the Interpretation Act 1978 is that the reference to “widow” in section 58(2)(b) of ICTA includes “widower”. Subsection (2)(b) makes this effect explicit.

2311.Subsection (4) gives the meaning of “office”. It applies section 5 in Part 2 (Employment Income: charge to tax).

Section 575: Taxable pension income

2312.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567. The section invokes sections 65, 68, 584 and 585 of ICTA. It is new.

2313.In ICTA the basis of assessment for a foreign pension is given by the rules of Schedule D Case V. The pension income Part does not repeat those rules but cross-refers the reader to them. The rules are in section 65 of ICTA and include the remittance basis. Section 65 is modified by the rules for Irish income in section 68 of ICTA. Sections 584 and 585 of ICTA are also relevant. Section 584 gives relief for income taxed on an arising basis if that income cannot be remitted to the United Kingdom. Section 585 gives relief for income taxed on a remittance basis if the remittances are delayed. There is a specific reference to retrospective payments of pension income in section 585(2) of ICTA.

Section 576: Person liable for tax

2314.This section identifies the person chargeable. It derives from section 59(1) of ICTA.

Chapter 5: United Kingdom social security pensions
Overview

2315.This Chapter identifies certain social security benefits as pension income. These are pensions that are paid in the form of social security benefits.

Section 577: United Kingdom social security pensions

2316.This section identifies the six United Kingdom social security benefits taxed as pension income.

2317.ICTA does not impose a specific charge on these social security benefits. They are taxed either by section 617 of ICTA as social security benefits or by paragraph 2 of Schedule E (section 19(1) of ICTA) as a pension.

2318.The charge on industrial death benefit and graduated retirement benefit derives from paragraph 2 of Schedule E (section 19(1) of ICTA). The charge on the other benefits derives from section 617(1) of ICTA.

2319.Subsection (2) describes each of the benefits by reference to the relevant provisions of the National Insurance Act 1965, the Social Security Contributions and Benefits Act 1992 and their Northern Ireland equivalents.

2320.The subsection includes all three categories of state retirement pension. Category A pensions are paid in respect of a person’s own contributions. Category B pensions are paid in respect the person’s spouse’s contributions. Category D pensions are payable to persons over 80 years of age who do not qualify for a Category A or B pension.

Section 578: Taxable pension income

2321.This section sets out the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2322.The section derives from section 41 of FA 1989. That section provides that income taxed by paragraph 3 of Schedule E (section 19(1) of ICTA) and section 617(1) of ICTA is charged on the amount accruing in the tax year. This means that the charge is calculated on the amount accruing from day to day without regard to when the income is actually paid.

Section 579: Person liable for tax

2323.This section identifies the person chargeable. It is new.

2324.In ICTA this income is taxed under Schedule E. It does not identify the person chargeable. This section identifies the person liable for tax on the benefits within Chapter 5 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Chapter 6: Approved retirement benefits schemes
Overview

2325.This Chapter identifies the payments made by approved retirement benefits schemes that are charged to tax as pension income.

Section 580: Pensions and annuities

2326.This section applies to pensions and annuities paid by an approved retirement benefits scheme.

2327.It derives from section 597 of ICTA.

2328.Paragraph (a) applies to pensions and annuities paid on retirement. It derives from section 597(1) of ICTA. The word “pension” in section 597(1) is subject to the interpretation rule in section 612(1) of ICTA that pension includes annuity. It also covers income drawdowns.

2329.Paragraph (b) derives from section 597(3) of ICTA, which deals with bought-out annuities. This paragraph applies to a number of annuities that are purchased through the operation of an approved retirement benefits scheme. For example, deferred annuities that satisfy the approval requirements in section 591(2)(g) of ICTA or annuities written on the winding-up of a scheme or to discharge a pension sharing order.

2330.It does not cover the case where a member of the scheme transfers the value of the benefits to an approved personal pension scheme and takes an annuity or income withdrawals from that scheme. Such an annuity or income withdrawal would be taxed by Chapter 8 of the pension income Part (Approved personal pension schemes).

2331.This section does not rewrite section 597(2) of ICTA. That provision is a transitional measure introduced when the basis of assessment switched from Schedule D Case III to Schedule E. It allows the Board to authorise the pension payer to continue to treat the annuity as if it were taxed under Schedule D Case III. This is to give the payer time to set up a PAYE scheme. This power is no longer needed.

2332.The section applies to all approved schemes as defined in section 586 including United Kingdom approved schemes operated by or on behalf of a foreign employer. There is no territorial restriction in section 597 of ICTA. So there is no territorial restriction on the operation of the section.

Section 581: Taxable pension income

2333.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2334.The section derives from section 41 of FA 1989. That section provides that income taxed by section 597 of ICTA is charged on the amount accruing in the tax year. This means that the charge is calculated on the amount accruing from day to day without regard to when the income is actually paid.

Section 582: Person liable for tax

2335.This section identifies the person chargeable. It is new.

2336.In ICTA this income is taxed under Schedule E. It does not identify the person chargeable. The section identifies the person liable for tax on pensions and annuities within section 580 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Section 583: Unauthorised payments

2337.This section applies to unauthorised payments made by approved retirement benefits schemes. It derives from sections 599A(9) and 600 of ICTA.

2338.Subsection (2) prevents the section applying if the payment has been taxed by section 623 as a return of surplus funds from an additional voluntary contributions scheme. It derives from section 599A(9) of ICTA.

2339.Subsection (3)(a) identifies the type of scheme to which the section applies. It derives from section 600(1) of ICTA. The scheme must be approved when the unauthorised payment is made. The section applies to schemes approved under Chapter 1 of Part 14 of ICTA or its predecessor Chapter 2 of Part 2 of FA 1970.

2340.The pension income Part does not repeat the reference to schemes approved under Chapter 2 of Part 9 of ICTA 1970. These are former approved superannuation schemes that lost their approval in 1980. It is not necessary for this Act to rewrite the reference to these schemes.

2341.Paragraph (c) of section 600(1) of ICTA refers to schemes approved under section 208 of ICTA 1970. These are also former approved superannuation schemes that lost their approval in 1980. But they may still enjoy the advantages that come from approval if they satisfy the conditions in section 608 of ICTA. Section 608 has been rewritten in Chapter 7 of this Part (Former approved superannuation schemes). The charge on unauthorised payments made by those schemes is dealt with in that Chapter rather than here.

2342.Subsection (3)(b) gives the condition that the payment is not authorised by the scheme rules or made as a consequence of paragraph 33 of Schedule 6 to FA 1989. Paragraph 33 of Schedule 6 to FA 1989 applies to the return of employee additional voluntary contributions. It deems the rules of an additional voluntary contributions scheme to include a requirement to repay surplus funds whether or not such a payment is authorised by the scheme rules. The charge on the return of these funds is dealt with in Chapter 13 of this Part (Return of surplus additional voluntary contributions).

2343.Subsection (4) prevents the section applying to a pension or annuity. This avoids any overlaps with section 580.

2344.Subsection (6) prevents a double charge if the unauthorised payment is either a repayment of the employee’s contributions or a commutation of the pension. If these payments exceed the benefits authorised by the scheme rules this Chapter will tax them as unauthorised payments. Subsection (6) is needed to prevent the payments being taxed again by sections 598 or 599 of ICTA. Those provisions impose specific charges on the repayment of the employee’s contributions or the commutation of the pension. The regulations referred to in subsection (6) apply to superannuation funds approved before 6 April 1980. These regulations are not yet obsolete.

2345.Subsection (7) clarifies the meaning of “payment”. It derives from section 600(4) of ICTA.

Section 584: Taxable pension income

2346.This section sets out the basis of assessment for unauthorised payments. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2347.The section derives from sections 600(2) and (4) of ICTA.

Section 585: Person liable for tax

2348.This section identifies the person chargeable. It derives from section 600(2) of ICTA.

2349.The person liable for tax is the employee or the ex-spouse, no matter who received the payment.

Section 586: Meaning of “retirement benefits scheme” etc.

2350.This section invokes various definitions in ICTA.

2351.It derives from the interpretations in Chapter 1 of Part 14 of ICTA.

2352.Subsection (1) defines “retirement benefits scheme” and “approved”.

2353.“Retirement benefits scheme” is defined in section 611 of ICTA as follows:

In this Chapter “retirement benefits scheme” means, subject to the provisions of this section, a scheme for the provision of benefits consisting of or including relevant benefits, but does not include -

(a)

any national scheme providing such benefits; or

(b)

any scheme providing such benefits which is an approved personal pension scheme under Chapter IV of this Part.

2354.The definition of “approved” includes a reference to Chapter 2 of Part 2 of FA 1970. This is the legislation that introduced the new code for approved retirement benefits schemes. That code is now in Chapter 1 of Part 14 of ICTA.

2355.Subsection (2) deals with third party arrangements. It derives from section 612(2) of ICTA. It makes it clear that a pension or annuity paid through a third party is covered by section 580.

2356.Subsection (3) clarifies the meaning of “employer”. It derives from section 612(2A) of ICTA.

Section 587: Application to marine pilots’ benefit fund

2357.This section ensures that the provisions of Chapter 6 apply to a marine pilots’ benefit fund. It derives from section 607 of ICTA.

2358.The purpose of the legislation is to allow self-employed marine pilots to belong to an occupational pension scheme. Such membership would normally be available only to employees.

2359.One effect of the applying the provisions of Chapter 6 to a marine pilots’ benefit fund is that the Schedule D Case VI charge on unauthorised payments has been rewritten as a pension income charge. See Change 136 in Annex 1.

Section 588: Meaning of “employee” and “ex-spouse”

2360.This section clarifies the meaning of “employee” and defines the meaning of “ex-spouse”.

2361.Subsection (1) derives from the definition of “employee” in section 612(1) of ICTA and the definition of “ex-spouse” in section 659D of ICTA.

2362.Subsection (2) derives from the definition of “director” in section 612(1) of ICTA.

Section 589: Regulations

2363.This section allows the Board of Inland Revenue to make regulations for the administration of the charges identified in this Chapter. It derives from section 612(3) of ICTA.

Chapter 7: Former approved superannuation funds
Overview

2364.This Chapter identifies the payments made by former approved superannuation funds that are charged to tax as pension income.

Section 590: Annuities

2365.This section applies to annuities paid by former approved superannuation funds. It derives from section 608(4) of ICTA.

2366.“Former approved superannuation fund” means an occupational pension scheme that was approved under section 208 of ICTA 1970. These schemes lost their approval in 1980 when the code for retirement benefit schemes in Chapter 1 of Part 14 of ICTA took full effect. But section 608 of ICTA allows a scheme approved under section 208 of ICTA 1970 to remain exempt from income tax on its fund income provided two conditions are met. First, no further contributions are made into the scheme. Second, no changes are made to the scheme rules.

2367.The section uses the same language as section 580 to identify the arrangements under which the annuities are paid.

Section 591: Taxable pension income

2368.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2369.The section derives from section 608(4) of ICTA.

2370.ICTA charges section 608(4) annuities under Schedule E. But they are not included in the list, in section 41 of FA 1989, of income that is taxed on the amount accruing in the tax year. The basis of assessment indicated in section 608(4) of ICTA is the annuity paid in the tax year. This section makes that basis of charge clear.

Section 592: Person liable for tax

2371.This section identifies the person chargeable. It is new.

2372.ICTA taxes this income under Schedule E. It does not identify the person chargeable. This section identifies the person liable for tax on annuities within section 590 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Section 593: Unauthorised payments: application of section 583

2373.This section applies to unauthorised payments from former approved superannuation funds. It derives from sections 599A(9) and 600 of ICTA.

2374.Section 600(1) of ICTA imposes a charge on:

this Chapter; … or

(c)

section 208 … of the 1970 Act.

2375.Schemes can no longer be approved under section 208 of ICTA 1970. The present tense, “is approved”, was introduced into the opening paragraph of section 600 of ICTA by Schedule 6 of FA 1989. It is used because subsection (1)(a) of section 600 applies to retirement benefits schemes approved under Chapter 1 of Part 14 of ICTA (dealt with by section 583 in Chapter 6 of this Part). But the charge on unauthorised payments still applies to schemes approved under section 208 ICTA 1970. That charge is rewritten in this section so that this Chapter deals with all the charges on former approved superannuation funds.

2376.The rules in section 600 of ICTA that apply to former approved superannuation funds are the same as those that apply to approved retirement benefits schemes. Rather than repeating those rules this section applies sections 583, 584, 585 and 588.

2377.Subsection (1) identifies the payments to which section 593 is applied. The payment must not be authorised by the rules of the fund or be made as a consequence of paragraph 33 of Schedule 6 to FA 1989. The effect of paragraph 33 of Schedule 6 to FA 1989 is discussed in paragraph 2342.

2378.Subsection (2) prevents section 593 applying if the payment has been taxed by section 623 as a return of surplus funds from an additional voluntary contributions scheme. It derives from section 599A(9) of ICTA.

2379.Subsection (3) clarifies the meaning of payment. It derives from section 600(4) of ICTA.

Section 594: Meaning of “former approved superannuation fund”

2380.This section identifies the superannuation funds that are covered by this Chapter. It derives from section 608(1) of ICTA.

Chapter 8: Approved personal pension schemes
Overview

2381.This Chapter identifies the payments made by approved personal pension schemes or arrangements that are taxed as pension income.

Section 595: Annuities

2382.This section identifies annuities from approved personal pension schemes as pension income. It derives from section 648A of ICTA.

2383.The effect of section 648A(1)(b) of ICTA is preserved by a consequential amendment to section 18(1)(b) of ICTA. This amendment ensures that an annuity taxed in the pension income Part is not also taxed under Schedule D.

2384.Section 648A(2) of ICTA has not been rewritten as it is no longer needed. That provision is a transitional measure introduced when the basis of assessment switched from Schedule D Case III to Schedule E. It allows the Board to authorise the pension payer to continue to treat the annuity as if it were taxed Schedule D Case III. This is to give the payer time to set up a PAYE scheme. This power is no longer needed.

Section 596: Taxable pension income

2385.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2386.The section is new. Tax is charged on the amount of the annuity received in the tax year. See Change 137 in Annex 1.

Section 597: Person liable for tax

2387.This section identifies the person chargeable. It is new.

2388.ICTA taxes this income under Schedule E. It does not identify the person chargeable. This section identifies the person liable for tax on annuities within section 595 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Section 598: Income withdrawals

2389.This section identifies income withdrawals from approved personal pension arrangements as pension income. It derives from section 643(5) of ICTA.

Section 599: Taxable pension income

2390.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2391.The section derives from section 643(5) of ICTA. It makes it clear that tax is charged on the total of the income withdrawals made in the tax year.

Section 600: Person liable for tax

2392.This section identifies the person chargeable. It is new.

2393.ICTA taxes this income under Schedule E. It does not identify the person chargeable. This section identifies the person liable for tax on income withdrawals within section 598 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Section 601: Unauthorised personal pension payments

2394.This section identifies unauthorised payments from personal pension schemes or arrangements as pension income. It derives from section 647 of ICTA.

2395.Subsection (2) defines “personal pension payment”. It derives from section 647(1) of ICTA.

2396.Subsection (4) deals with the case in which the payment is made at a time when the scheme and the individual’s arrangements are approved. It derives from section 647(2)(a) of ICTA. A payment that is not authorised by the scheme rules is taxable.

2397.Subsection (5) deals with the case in which the payment is made at a time when the scheme is not approved. It derives from section 647(2)(b) of ICTA. A payment is taxable if it would not have been authorised by the rules of the scheme when the scheme was last approved.

2398.Subsection (6) deals with the case in which the payment is made at a time when the arrangements are not approved. It derives from section 647(2)(b) of ICTA. A payment is taxable if it would not have been authorised by the arrangements when the arrangements were last approved.

2399.Subsection (7) provides that “payment” includes non-cash payment. It derives from section 647(4) of ICTA.

Section 602: Taxable pension income

2400.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2401.The section derives from section 647(3) of ICTA.

Section 603: Person liable for tax

2402.This section identifies the person chargeable. It derives from section 647(3) of ICTA.

Section 604: Meaning of “personal pension scheme” and related expressions

2403.This section cross-refers to various definitions and interpretations.

2404.It derives from section 630(1) of ICTA.

2405.The definition of “approved” in section 630(1) of ICTA is:

(a)

in relation to a scheme (other than an approved retirement benefits scheme), means approved by the Board under this Chapter; and

(b)

in relation to arrangements, means -

(i)

made in accordance with a scheme which is for the time being, and was when the arrangements were made, an approved scheme; or

(ii)

made in accordance with a scheme which is for the time being an approved converted scheme but which was, when the arrangements were made, an approved retirement benefits scheme

but does not refer to cases in which approval has been withdrawn.

2406.The definition of “income withdrawal” in section 630(1) of ICTA is:

2407.The definition of “personal pension arrangements” in section 630(1) of ICTA is:

2408.The definition of “personal pension scheme” in section 630(1) of ICTA is:

Chapter 9: Retirement annuity contracts
Overview

2409.This Chapter identifies annuities paid under a retirement annuity contract as pension income.

Section 605: Annuities

2410.This section applies to annuities paid under a retirement annuity contract. It derives in part from section 18(1)(a)(i) of ICTA and in part is new.

2411.“Retirement annuity contract” is a widely understood term although it is not defined in ICTA. It means a contract that satisfies the conditions for relief set out in Chapter 3 of Part 14 of ICTA. It has not been possible to enter into such a new contract since 1988. But premiums and annuities will be paid under existing contracts for many years to come.

2412.In ICTA there is no specific charge on annuities paid under retirement annuity contracts. The annuities are taxed by the ordinary rules of Schedule D Case III. The pension income Part creates a specific charge on annuities paid under retirement annuity contracts in the pension income Part for two reasons.

2413.First, retirement annuity contracts remain an important source of retirement income for the self-employed.

2414.Second, the specific charge will help to establish a clear boundary between those annuities that qualify for the relief given by section 656 of ICTA and those that do not. This point is particularly relevant for the purchased life annuities dealt with in Chapter 10. It is discussed in paragraphs 2425 and 2426 of the explanatory notes on that Chapter.

Section 606: Meaning of “retirement annuity contract”

2415.This section defines “retirement annuity contract”. It derives from sections 620, 621 and 622(3) of ICTA.

2416.The term “retirement annuity contract” is not defined in ICTA or the Finance Acts. This section introduces a definition based on the conditions under which the premiums qualify for tax relief.

2417.Paragraph (a) applies to annuity contracts and trust schemes. It derives from sections 620 and 621 of ICTA. Section 620 applies to annuity contracts that have as their main object the payment of a retirement annuity to an individual. It also applies to trust schemes established to pay retirement annuities to an individual in an occupational group. Section 621 covers contracts to pay annuities to the spouse or dependant of the individual.

2418.Paragraph (b) applies to substituted contracts. It derives from section 622(3) of ICTA. Section 622 is concerned with the option to apply the accrued benefits arising from a maturing contract in taking out another contract. It is no longer possible to exercise this option to create a new retirement annuity contract. But annuities are still paid under substituted contracts. So a reference to substituted contracts is needed in the definition of “retirement annuity contract”.

Section 607: Taxable pension income

2419.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2420.It derives from section 64 of ICTA.

Section 608: Person liable for tax

2421.This section identifies the person chargeable. It derives from section 59(1) of ICTA.

Chapter 10: Other employment-related annuities
Overview

2422.This Chapter identifies various purchased life annuities as pension income. It applies to purchased life annuities in the nature of pension income that are not identified in other Chapters of the pension income Part.

2423.In ICTA there is no specific charge on the annuities included in this Chapter. They are taxed as annual payments under the ordinary rules of Schedule D Case III. There are two reasons for creating a specific charge on these annuities in the pension income Part.

2424.First, the pension income Part should include all the income in the nature of pension income.

2425.Second, it is the clearest way of dealing with sections 656 and 657 of ICTA.

2426.A purchased annuity includes a payment of income and an element that in economic terms is the return of capital. Section 656 of ICTA exempts the capital element of an annuity payment from income tax. But this relief is not given to the annuities listed in section 657(2) of ICTA. Those annuities are:

2427.This Chapter taxes the annuities described in the second bullet in paragraph 2426. Other Chapters of the pension income Part tax the annuities described in the first bullet. This will allow section 657 of ICTA to be rewritten so it applies only to the annuities in the third bullet.

Section 609: Annuities for the benefit of dependants

2428.This section applies to annuities if their purchase qualified for relief under section 273 of ICTA. It derives in part from section 18(1)(a)(i) of ICTA and in part is new.

2429.Subsection (1) is new. It identifies the annuities as pension income.

2430.Subsection (2) derives from section 18(1)(a)(i) of ICTA. It limits the scope of the section if the annuity is a foreign annuity. Foreign annuities are taxable only if paid to persons resident in the United Kingdom.

Section 610: Annuities under sponsored superannuation schemes

2431.This section applies to an annuity purchased under a sponsored superannuation scheme. It derives in part from section 18(1)(a)(i) of ICTA and in part is new.

2432.Subsection (1) is new. It identifies the annuities to be taxed as pension income. To do this the section has to describe the process under which the annuities are paid. It does this using the same language that section 580 uses to identify annuities paid by approved retirement benefits schemes.

2433.Subsection (2) derives from section 18(1)(a)(i) of ICTA. It limits the scope of the section if the annuity is a foreign annuity. Foreign annuities are taxable only if they are paid to persons resident in the United Kingdom.

2434.Subsection (3) ensures there is no overlap with other sections in the pension income Part. The definition of “sponsored superannuation scheme” in section 624(1) of ICTA predates the introduction of approved retirement benefits schemes in Chapter 1 of Part 14 of ICTA. An approved retirement benefits scheme is likely to be within the definition of “sponsored superannuation scheme”. In ICTA an annuity paid by an approved retirement benefits scheme is taxed under Schedule E. The annuities identified in this section are taxed under Schedule D. A Schedule E charge takes priority over a Schedule D charge. This subsection preserves that order of priority.

2435.Subsection (4) defines “sponsored superannuation scheme”. It cross-refers to section 624(1) of ICTA. The definition of “sponsored superannuation scheme” in section 624(1) of ICTA is as follows:

‘a sponsored superannuation scheme’ means a scheme or arrangement -

(a)

relating to service in particular offices or employments, and

(b)

having for its object or one of its objects to make provision in respect of persons serving in those offices or employments against future retirement or partial retirement, against future termination of service through death or disability, or against similar matters,

being a scheme or arrangement under which any part of the cost of the provision so made is or has been borne otherwise than by those persons by reason of their service (whether it is the cost or part of the cost of the benefits provided, or of paying premiums or other sums in order to provide those benefits, or of administering or instituting the scheme or arrangement).

Section 611: Annuities in recognition of another’s services

2436.This section applies to an annuity purchased by any person in recognition of another’s services. It derives in part from section 18(1)(a)(i) of ICTA and in part is new.

2437.Subsection (1) is new. It identifies the annuities to be taxed as pension income.

2438.Subsection (2) derives from section 18(1)(a)(i) of ICTA. It limits the scope of the section if the annuity is a foreign annuity. Foreign annuities are taxable only if they are paid to persons resident in the United Kingdom.

2439.Subsection (3) ensures there is no overlap with other sections in the pension income Part. An annuity paid by an approved retirement benefits scheme may be purchased in recognition of another’s services. In ICTA an annuity paid by an approved retirement benefits scheme is taxed under Schedule E. The annuities identified in this section are taxed under Schedule D. A Schedule E charge takes priority over a Schedule D charge. This subsection preserves that order of priority.

2440.Subsection (4) gives the meaning of “office”. It applies section 5 in Part 2 (Employment Income: charge to tax).

Section 612: Taxable pension income: UK annuities

2441.This section deals with the basis of assessment if the annuity arises from a source in the United Kingdom. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2442.The section derives from section 64 of ICTA.

Section 613: Taxable pension income: foreign annuities

2443.This section deals with the basis of assessment if the annuity arises from a source outside the United Kingdom. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2444.The section invokes sections 65, 68, 584 and 585 of ICTA. It is new.

2445.In ICTA the basis of assessment for a foreign pension is given by the rules of Schedule D Case V. The pension income Part does not repeat those rules but cross-refers the reader to them.

2446.Subsection (4) makes it clear that the 10% deduction in section 65(2) of ICTA and the relief in section 585(2) of ICTA apply to these annuities. See Change 138 in Annex 1.

Section 614: Person liable for tax

2447.This section identifies the person chargeable for all the annuities in this Chapter. It derives from section 59(1) of ICTA.

Chapter 11: Certain overseas government pensions paid in the UK
Overview

2448.This Chapter identifies certain pensions paid in respect of government service overseas as pension income.

Section 615: Certain overseas government pensions paid in the United Kingdom

2449.This section derives from paragraph 4 of Schedule E (section 19(1) and section 133(2) of ICTA).

2450.Paragraph 4 of Schedule E imposes a charge on certain pensions paid by or on behalf of overseas governments to United Kingdom residents. It refers to a “pension or annuity”. As in paragraph 2 of Schedule E “annuity” is used here in the sense of a regular income payment rather than a purchased annuity. The word “pension” has a wide meaning. An annuity taxed by paragraph 4 of Schedule E is within that meaning. It is not necessary for this Act to rewrite the reference to annuities.

2451.Subsection (2) identifies the categories of person to whom the pension must be paid. The effect of the Interpretation Act 1978 is that “widow” includes “widower”. The subsection incorporates this effect. The pension must be payable in respect of overseas government service.

2452.Subsection (4) identifies the countries covered by the section. It does this by reference to other legislation. In December 2002 the countries covered were:

(a)

A country which forms part of Her Majesty’s dominions. These are:

Anguilla, Bermuda, British Antarctic Territory, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Gibraltar, Montserrat, Pitcairn, Henderson, Ducie and Oeno Islands, St Helena, St Helena Dependencies (Ascension Island, Tristan da Cunha), South Georgia and South Sandwich Islands, Turks and Caicos Islands.

(b)

Any other country mentioned in Schedule 3 of British Nationality Act 1981. These are:

Antigua and Barbuda, Australia, The Bahamas, Bangladesh, Barbados, Belize, Botswana, Brunei, Canada, Republic of Cyprus, Dominica, Fiji, The Gambia, Ghana, Grenada, Guyana, India, Jamaica, Kenya, Kiribati, Lesotho, Malawi, Malaysia, Maldives, Malta, Mauritius, Namibia, Nauru, New Zealand, Nigeria, Pakistan, Papua New Guinea, Saint Christopher and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Seychelles, Sierra Leone, Singapore, Solomon Islands, South Africa, Sri Lanka, Swaziland, Tanzania, Tonga, Trinidad and Tobago, Tuvalu, Uganda, Vanuatu, Western Samoa, Zambia, Zimbabwe.

(c)

Any territory under Her Majesty’s protection. There are no such countries at present.

2453.The section does not identify the individual countries. This is because it would then be necessary to amend primary tax legislation to take account of any changes. A recent example is Hong Kong’s change of status. The section follows the pragmatic approach of ICTA.

2454.Subsection (5) prevents the section applying to payments made by the United Kingdom government. The phrase “public revenue of the United Kingdom” is retained because it has a settled technical meaning. It means a payment out of the United Kingdom Consolidated Fund. The reference to Northern Ireland is needed because there is also a Northern Ireland Consolidated Fund.

2455.Subsection (6) defines “overseas government service”. It derives from the definition of “relevant service” in paragraph 4 of Schedule E (section 19(1) of ICTA).

2456.Subsection (7) derives from section 133(2) of ICTA. That section extends the charge on pensions taxed under Schedule E to voluntary pensions. Section 133(2) applies to these overseas government pensions if any are paid on a voluntary basis.

Section 616: Taxable pension income

2457.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2458.It derives from section 41 of FA 1989. Section 41 charges pensions on the amount accruing in the tax year. This means that the charge is calculated on the amount accruing from day to day without regard to when the income is actually paid.

Section 617 Deduction allowed from taxable pension income

2459.This section allows a deduction of 10% from the amount chargeable. It derives from section 196 of ICTA. The deduction feeds into the calculation of net taxable pension income in section 567(3).

Section 618: Person liable for tax

2460.This section identifies the person chargeable. It is new.

2461.In ICTA this income is taxed under Schedule E. ICTA does not identify the person chargeable. This section identifies the person liable for tax on pensions within section 615 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Chapter 12: House of Commons Members’ Fund
Overview

2462.This Chapter identifies periodical payments granted out of the House of Commons Members’ Fund as pension income.

Section 619: The House of Commons Members’ Fund

2463.This section derives from section 613(3) of ICTA.

2464.The section will apply to a very small number of taxpayers, possibly no more than 100. The House of Commons Members’ Fund was established in 1939. It was superseded by the Parliamentary Contributory Pension Fund in 1964. The 1939 fund continues to make grants to former Members and their dependants. These grants are described as “periodical payments”.

2465.Paragraph (a) applies to grants made to former Members and their dependants who qualify for grants under the House of Commons Members’ Fund Act 1939.

2466.Paragraphs (b) and (c) apply to grants made to former Members and their dependants who receive grants under section 4 of the House of Commons Members Fund Act 1948 because they do not qualify under the 1939 Act. These payments are made from sums appropriated from the fund and the income earned on those appropriated amounts.

2467.Section 613(1) and (2) of ICTA deal with Members’ contributions to the fund. Because Members no longer pay these contributions it is not necessary for this Act to rewrite section 613(1) and (2).

Section 621: Taxable pension income

2468.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2469.The section derives from section 613(3) of ICTA and makes it clear that tax is charged on the full amount paid in the tax year.

Section 622: Person liable for tax

2470.This section identifies the person chargeable. It is new.

2471.In ICTA this income is taxed under Schedule E. ICTA does not identify the person chargeable. This section identifies the person liable for tax on payments within section 619 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Chapter 13: Return of surplus employee additional voluntary contributions
Overview

2472.Members of retirement benefits schemes can boost the pensions they will receive by making additional voluntary contributions (AVCs). They may make AVCs to their employer’s scheme or to a separate “free-standing” AVCs scheme. If these schemes are “approved” by the Inland Revenue the member is entitled to tax relief on the payments and the investment income of the scheme is exempt. If a scheme does particularly well it is possible for the total benefits available to a member to exceed the maximum benefits permitted under the approval rules. The scheme administrator then has to return surplus AVCs to the member. In paying back the surplus the administrator has to deduct a special tax charge (see section 599A(2) of ICTA) designed to recover the tax relief in respect of both the AVCs and the investment income.

2473.This Chapter is concerned with the treatment of the scheme member. If the scheme administrator has to return surplus AVCs the member is treated by section 595A(5) as having received the payment net of basic rate tax. This Chapter rewrites this charge as pension income. See Change 139 in Annex 1.

Section 623: Return of surplus employee additional voluntary contributions

2474.This section identifies a return of surplus funds to a member of an exempt approved retirement benefits scheme or a relevant statutory scheme as pension income. It derives from sections 599A(1), (5), (9) and (10) of ICTA.

2475.Subsection (4) requires the payment to be to or for the benefit of an employee. The meaning of “employee” is extended by section 612(1) of ICTA to include future and former employees. This is made clear in section 628(1).

2476.Section 599A(1) of ICTA applies to payments made to or for the benefit of employees or their personal representatives. But section 599A(5) of ICTA applies only to payments made to or for the benefit of employees. For this reason the section makes no mention of personal representatives.

2477.Subsection (5) prevents the payments also being taxed as a repayment of the employee’s contributions or as a commutation of the pension. It derives from section 599A(9) of ICTA. The section uses the same language as section 583(6). The regulations referred to in subsection (3)(b) apply to superannuation funds approved before 6 April 1980. These regulations are not yet obsolete.

2478.Section 599A(9) of ICTA gives this section priority over any charge under section 600 of ICTA. That rule has been included in the rewrite of section 600 as section 583(2).

Section 624: Taxable pension income

2479.This section sets out the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2480.It derives from section 599A(5). Tax is charged on the grossed up amount of the payments made in the tax year.

Section 625: Person liable for tax

2481.This section identifies the person chargeable. It derives from section 599A(5) and (8) of ICTA.

Section 627: Meaning of “grossing up”

2482.This section explains what is meant by “grossing up”. It is new. Although the concept of grossing up is familiar it is not explained in ICTA.

Section 628: Interpretation

2483.This section cross-refers to various definitions in ICTA. It derives from the interpretations given in Chapter 1 of Part 14 of ICTA.

2484.Subsection (1) clarifies the meaning of “employee”. It gives the meaning of “exempt approved scheme” and “relevant statutory scheme” by cross-reference.

2485.“Exempt approved scheme” is defined in section 592(1) of ICTA as follows:

This section has effect as respects -

(a)

any approved scheme which is shown to the satisfaction of the Board to be established under irrevocable trusts; or

(b)

any other approved scheme as respects which the Board, having regard to any special circumstances, direct that this section shall apply;

and any scheme which is for the time being within paragraph (a) or (b) above is in this Chapter referred to as an ‘exempt approved scheme’.

2486.“Relevant statutory scheme” is defined in section 611A(1) of ICTA as follows:

In this Chapter any reference to a relevant statutory scheme is to -

(a)

a statutory scheme established before 14th March 1989, or

(b)

a statutory scheme established on or after that date and entered in the register maintained by the Board for the purposes of this section, or

(c)

a parliamentary pension scheme.

2487.Subsection (2) derives from the definition of “director” in section 612(1) of ICTA.

2488.Subsection (3) derives from section 599A(10) of ICTA and the definition of employee in section 612(1) of ICTA.

2489.Subsection (4) applies the definition of “office” in section 5(3) in Part 2 (Employment Income: charge to tax).

Chapter 14: Pre-1973 pensions paid under the Overseas Pensions Act 1973
Overview

2490.This Chapter identifies certain pensions paid since 6 April 1973 under the Overseas Pensions Act 1973 as pension income.

Section 629: Pre-1973 pensions paid under the Overseas Pensions Act 1973

2491.This section derives from section 616(3) of ICTA.

2492.Section 616(3) of ICTA was introduced to deal with a consequence of the Overseas Pensions Act 1973. Under the Overseas Pensions Act 1973 the United Kingdom government took responsibility for paying certain pensions previously paid by Commonwealth governments. This converted the pensions from foreign pensions taxed under Schedule D Case V to United Kingdom pensions taxed under Schedule E. This might have been to the taxpayer’s disadvantage because the income could no longer be taxed on the remittance basis.

2493.The effect of section 616(3) of ICTA is to treat the pensions as if they are still paid by the overseas government. To qualify the pension must have been paid since 6 April 1973 to the original pensioner, or to the original pensioner’s widow or widower.

2494.Subsection (1)(b) introduces the term “pre-1973 pension”. That term is defined in section 630.

2495.Subsection (2) prevents the section applying to any part of the pension that is paid under the Pensions (Increase) Act 1971. These increases to the pension have always been paid by the United Kingdom government and have always been taxed as United Kingdom pensions.

Section 630: Interpretation

2496.This section defines various terms used in the Chapter. It derives from section 616(3) and (4) of ICTA.

2497.Subsection (1) defines “original pensioner”. It derives from section 616(4) of ICTA. The pensioner must be the person whose service earned the pension and he or she must have retired before 6 April 1973.

2498.Subsection (2) defines “pre-1973 pension”. The pension must have been paid since 6 April 1973 to the original pensioner or to the pensioner’s widow or widower. The recipient must be resident in the United Kingdom.

Section 631: Taxable pension income

2499.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2500.It derives from section 616(3) of ICTA and invokes sections 65 and 68 of ICTA.

2501.Section 616(3) of ICTA treats the pension as if the original overseas government or body paid it. This section adopts a different approach. The practical effect of section 616(3) is to tax the pension as a foreign pension. The section legislates the practical effect.

2502.In ICTA the basis of assessment for a foreign pension is given by the rules of Schedule D Case V. The pension income Part does not repeat those rules but cross-refers the reader to them. There is no cross-reference to sections 584 and 585 of ICTA. These sections will not apply if the United Kingdom government pays the pensions.

Section 632: Person liable for tax

2503.This section identifies the person chargeable. It derives from section 59(1) of ICTA.

Chapter 15: Voluntary annual payments
Overview

2504.This Chapter identifies voluntary annual payments as pension income.

Section 633: Voluntary annual payments

2505.This section derives from sections 58(2) and 133(1) of ICTA.

2506.Section 58 of ICTA imposes a charge on voluntary pensions and voluntary annual payments paid by or on behalf of a person outside the United Kingdom. Section 133 of ICTA imposes a charge on voluntary pensions and voluntary annual payments paid by or on behalf of a person in the United Kingdom. The charges on voluntary pensions have been rewritten in Chapters 3 and 4. These are the Chapters that deal with United Kingdom and foreign pensions generally. As voluntary annual payments are not pensions it is not appropriate to include them in Chapters that deal with pensions. So the charges on voluntary annual payments have been rewritten in a separate Chapter.

2507.The conditions for the section to apply are very similar to those that apply to foreign voluntary pensions. Those conditions have been rewritten in section 574 and are repeated in this section. The only difference is in subsection (4), which deals specifically with foreign voluntary annual payments. Subsection (4) restricts the charge to payments made to persons resident in the United Kingdom. This restriction is not needed in section 574 because the same effect is achieved by section 573.

Section 634: Taxable pension income: UK voluntary annual payments

2508.This section is concerned with the basis of assessment if the annual payment is paid by or on behalf of a person who is in the United Kingdom. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2509.The section derives from section 41 of FA 1989. That section provides that income taxed by section 133 of ICTA is charged on the amount accruing in the tax year. This means that the charge is calculated on the amount accruing from day to day without regard to when the income is actually paid.

Section 635: Taxable pension income: foreign voluntary annual payments

2510.This section deals with the basis of assessment if the annual payment is paid by or on behalf of a person who is outside the United Kingdom. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2511.It invokes sections 65, 68, 584 and 585 of ICTA. It is new.

2512.In ICTA the basis of assessment for a foreign pension is given by the rules of Schedule D Case V. The pension income Part does not repeat those rules but cross-refers the reader to them.

Section 636: Person liable for tax

2513.This section identifies the person chargeable for both United Kingdom and foreign source payments.

2514.For a payment made by or on behalf of a person who is in the United Kingdom the section is new. ICTA taxes this income under Schedule E. It does not identify the person chargeable. The section identifies the person liable for tax on annual payments within section 633 as the person receiving or entitled to the income. See Change 135 in Annex 1.

2515.For a payment made by or on behalf of a person who is outside the United Kingdom the section is derived from section 59(1) of ICTA.

Chapter 16: Exemption for certain lump sums
Overview

2516.This Chapter is concerned with lump sums paid under tax-advantaged pension schemes.

Section 637: Exemption for lump sums provided under certain pension schemes etc.

2517.This section exempts lump sums paid under tax-advantaged pension schemes from income tax. It derives from section 189 of ICTA.

2518.A lump sum is not a pension. The exemption is included in the pension income Part because the payment of lump sums is a feature of many pension schemes.

2519.Subsection (1) provides the exemption. Section 620(3) of ICTA allows the Board of Inland Revenue to approve a retirement annuity contract that pays a lump sum in specified circumstances. These lump sums have always been considered to be tax-free. The section makes this clear by including these payments in the exemption. See Change 140 in Annex 1.

2520.Subsection (2) limits the scope of the exemption. The exemption applies only if:

2521.This limitation is intended to prevent “golden handshakes” being paid as exempt lump sums.

2522.Subsection (4) limits the exemption given to lump sum payments made under retirement annuity contracts to payments that satisfy the conditions for approval in section 620(3) of ICTA.

2523.Subsection (5) defines and clarifies various terms used in the section. In part it is new and in part it derives from Part XIV of ICTA.

2524.“Approved personal pension arrangements” derives from section 630(1) of ICTA.

2525.“Personal pension arrangements” is defined in section 630(1) of ICTA as follows:

2526.“Approved” in relation to personal pension arrangements is defined in section 630(1) of ICTA as follows:

(i)

[arrangements] made in accordance with a scheme which is for the time being, and was when the arrangements were made, an approved scheme; or

(ii)

made in accordance with a scheme which is for the time being an approved converted scheme but which was, when the arrangements were made, an approved retirement benefits scheme;

but does not refer to cases in which approval has been withdrawn.

2527.The definition of “office” applies section 5 in Part 2 (Employment income: charge to tax).

2528.Subsection (6) defines “tax-exempt pension scheme”. A scheme described in section 221(1) and (2) of ICTA 1970 is a former approved superannuation scheme. These schemes lost their approval in April 1980. But it is still possible for such a scheme to pay a lump sum and so the reference to these schemes is not obsolete.

2529.Subsection (7) defines “relevant statutory scheme”, “retirement benefits scheme” and, in relation to retirement benefits schemes, “approved”.

2530.Section 611A(1) of ICTA gives the meaning of “relevant statutory scheme” as follows:

(a)

a statutory scheme established before 14th March 1989, or

(b)

a statutory scheme established on or after that date and entered in the register maintained by the Board for the purposes of this section, or

(c)

a parliamentary pension scheme.

2531.Section 611(1) of ICTA gives the meaning of “retirement benefits scheme” as follows:

‘retirement benefits scheme’ means, subject to the provisions of this section, a scheme for the provision of benefits consisting of or including relevant benefits, but does not include -

(a)

any national scheme providing such benefits; or

(b)

any scheme providing such benefits which is an approved personal pension scheme under Chapter IV of this Part.

Chapter 17: Exemptions: any taxpayer
Overview

2532.This Chapter exempts various pensions from any charge to income tax. The exemption applies whether or not the taxpayer is resident in the United Kingdom.

2533.Four of the provisions rewritten in this Chapter, sections 315, 318, 330 and 617 of ICTA, provide that the “income shall not be treated as income for any income tax purpose”. Either they use that phrase or a very similar form of words. Section 317 of ICTA, rewritten as section 638, provides that the income “shall be disregarded for all the purposes of the Income Tax Acts”.

2534.In order to make the exemptions simple and consistent the phrase “no liability to income tax arises” is used throughout this Act to express exemption from tax. See Note 28 in Annex 2.

Section 638: Awards for bravery

2535.This section exempts pensions and annuities paid to holders of various awards for bravery. It derives from section 317 of ICTA.

Section 639: Pensions in respect of death due to military or war service

2536.This section exempts pensions and allowances paid on death due to service in the armed forces, wartime service in the merchant navy or war injuries. It derives from section 318 of ICTA.

2537.Paragraph (a) applies to pensions and allowances paid in respect of both civilians and members of the armed forces. It derives from section 318(2)(a) of ICTA. Section 318(2) identifies the exempted pensions in general terms. This avoids the need to identify the specific schemes under which the pensions are paid. The section follows the pragmatic approach of section 318(2). This is because the pensions are paid under a range of schemes. It avoids the need to amend primary tax legislation every time a new scheme is introduced.

2538.Paragraph (b) applies to pensions and allowances paid in respect of members of the armed forces who died in peacetime service before the 1939–1945 war. It derives from section 318(2)(b) of ICTA.

2539.Paragraph (c) applies to pensions and allowances paid by countries outside the United Kingdom. It derives from section 318(2)(c) of ICTA.

Section 640: Exemption under section 639 where income withheld

2540.This section extends the exemption identified in section 639 if the pension or allowance is reduced because another pension or allowance is also payable. It derives from section 318(3) of ICTA.

Section 641: Wounds and disability pensions

2541.This section applies to wounds and disability pensions paid to members of the armed forces and civilians. It exempts the pensions from any charge to income tax. It derives from section 315 of ICTA.

2542.Paragraphs (a) to (d) of subsection (1) identify pensions paid to members of the armed forces. They are derived from section 315(2)(a) to (d) of ICTA. Section 315(2)(a) to (d) identifies the pensions in general terms. This avoids the need to identify each of the various schemes under which the pensions are paid. The section follows the pragmatic approach of section 315(2).

2543.The section uses the term “the armed forces of the Crown” rather than “the naval, military or air forces of the Crown”. The two terms have the same meaning. They cover all United Kingdom service personnel, including members of the regular forces, the reserve forces and the women’s services. The term has also been used in the rewrite of sections 197 and 316 of ICTA (sections 296 and 297).

2544.Paragraphs (e) and (f) of subsection (1) apply to pensions paid to civilians and members of the merchant navy who have been disabled as a result of war service. They are derived from section 315(2)(e) of ICTA. This Act does not rewrite the reference to the Injuries in War (Compensation) Act 1915 as there are no surviving beneficiaries of these schemes.

2545.Paragraph (g) of subsection (1) also applies to pensions paid to civilians and members of the merchant navy. This is new. It gives statutory effect to the practice of extending the exemption to pensions granted by schemes established under sections 3 to 5 of the Pensions (Navy, Army, Air Force and Mercantile Marine) Act 1939. See Change 141 in Annex 1.

2546.Subsection (2) prevents the exemption applying to any amount not attributable to disablement or disability. It derives from section 315(3) of ICTA.

Section 642: Compensation for National-Socialist persecution

2547.This section exempts annuities and pensions paid by the German and Austrian Governments to victims of National-Socialist persecution. It derives from section 330 of ICTA.

2548.Paragraph 46 of Schedule 6 to this Act repeals the reference to section 330 of ICTA in section 65(2) of ICTA. The exemption means the reference is unnecessary.

Section 643: Malawi, Trinidad and Tobago and Zambia government pensions

2549.This section exempts certain pensions paid since 6 April 1973 in respect of government service in Malawi, Trinidad and Tobago and Zambia. It derives from sections 616(1) and (2) of ICTA.

2550.Sections 616(1) and (2) of ICTA were introduced in 1973 to deal with a consequence of the Overseas Pensions Act 1973. Under the Overseas Pensions Act 1973 the United Kingdom government took over responsibility for paying certain pensions previously paid by Commonwealth governments. In 1973 the United Kingdom had double taxation agreements in force with three countries under which government service pensions paid by those countries were exempt from United Kingdom tax.

2551.The effect of the Overseas Pensions Act 1973 was to make these pensions United Kingdom pensions. The benefit of the exemptions given by the double taxation agreements would have been lost if they had not been preserved in some way. Section 616(1) and (2) of ICTA preserved the exemptions by treating the pensions as if they were still paid by the original government. The practical effect is that the pensions are exempt as long as the relevant provisions of the double taxation agreement are unchanged. The section legislates the practical effect.

2552.Subsection (5) prevents the exemption applying to any part of the pension that is paid under the Pension (Increase) Act 1971. These increases have always been paid by the United Kingdom government and have always been taxed under Schedule E as United Kingdom pensions.

Section 644: Pensions payable where employment ceased due to disablement

2553.This section exempts disablement pensions paid solely as a consequence of work-related illness or accident or war injuries. It gives statutory effect to ESC A62. See Change 142 in Annex 1.

2554.Subsection (1) applies the section to qualifying disablement pensions.

2555.Subsection (2) defines “disablement pension”. It is a pension paid to a person who has left an employment because of disablement. The section does not apply to pensions paid by tax-approved pension schemes. These are approved retirement benefits schemes and former approved superannuation funds.

2556.Subsection (4) gives the meaning of “office”. It applies section 5 in Part 2 (Employment income: charge to tax).

Section 645: Social security pensions: increases in respect of children

2557.This section applies to a social security benefit, taxed as pension income, if the benefit is increased because the recipient is responsible for a child. It derives from section 617(1)(b) of ICTA and ESC A24.

2558.Subsection (2) defines “social security pension”. Paragraph (a) derives from section 617(1)(b) of ICTA. Paragraph (b) derives from ESC A24.

Section 646: Former miners etc: coal and allowances in lieu of coal

2559.This section applies to free coal and payments in lieu of free coal given to retired miners and their widow or widower. It gives statutory effect to an extension to ESC A6 published in paragraph SE 66695 of the Inland Revenue’s Schedule E manual. See Change 69 in Annex 1.

2560.Subsection (2) limits the scope of the exemption to the provision of free coal, or the payment of cash in lieu, of an amount that represents a reasonable level of personal consumption. But subsection (3) assumes that this condition is met unless the Inland Revenue can show that it is not. The purpose of these two subsections is to reproduce the restriction that applies to all ESCs - a concession will not be given where an attempt is made to use it to avoid tax.

2561.Subsection (4) gives the definition of “former colliery worker”. The definition is the same as that in section 306.

Chapter 18: Exemptions: Non-UK resident taxpayers
Overview

2562.This Chapter exempts certain pensions paid to non-residents in respect of government service overseas.

Section 647: Introduction and meaning of “foreign residence condition” etc.

2563.This section describes the foreign residence condition that must be satisfied if the exemptions identified later in the Chapter are to apply. It also expands the meaning of pension. It derives from section 615 of ICTA.

2564.Subsections (2) and (3) deal with the foreign residence condition. The taxpayer must make a claim to the Board to be non-resident.

2565.Subsection (4) identifies various payments that are also treated as pension income for the purposes of this Chapter. It derives from the definition of pension in section 615(7) of ICTA.

Section 648: The Central African Pension Fund

2566.This section exempts pensions paid from the Central African Pension Fund. It derives from section 615(2)(f) of ICTA.

Section 649: Commonwealth government pensions

2567.This section exempts pensions paid by various Commonwealth governments from funds established in the United Kingdom. It derives from section 615(2)(b) of ICTA.

2568.Subsection (2) defines “Commonwealth government”. The exemption does not apply to all the countries that are current members of the Commonwealth. But the term is not inaccurate because the section applies only to countries that have a former colonial connection to the United Kingdom.

2569.Subsections (3), (4) and (5) set out a number of other definitions used to establish the meaning of “Commonwealth government”. The reference to “colony” in section 615(2)(b) of ICTA has been rewritten as “British overseas territory”. This incorporates the change introduced into Schedule 1 to the Interpretation Act 1978 by section 1(3) of the British Overseas Territories Act 2002. Any reference to “colony” is now interchangeable with “British overseas territory”.

Section 650: Oversea Superannuation Scheme

2570.This section exempts pensions paid under the Oversea Superannuation Scheme. It derives from section 615(2)(c) of ICTA, and corrects a small error in ICTA, which refers to this scheme as the “Overseas Superannuation Scheme”.

2571.Subsection (2) cross-refers to the legislation under which the pensions must be paid. The schemes are now operated under the Overseas Pensions Act 1973.

Section 651: Overseas Pensions Act 1973

2572.This section exempts pensions paid under section 1 of the Overseas Pension Act 1973. It derives from section 615(2)(d) of ICTA.

2573.Subsection (2) prevents the exemption applying to any part of the pension paid under the Pensions (Increase) Acts. It derives from section 615(4) of ICTA. These increases have always been paid by the United Kingdom government and have always been taxed under Schedule E as United Kingdom pensions.

Section 652: Overseas Service Act 1958

2574.This section exempts pensions paid under the Overseas Service Act 1958. It derives from sections 615(2)(e) of ICTA.

2575.Subsection (4) cross-refers to the legislation under which the pensions must be paid. These schemes are now to be operated under the Overseas Pensions Act 1973.

2576.Subsection (5) requires the pensions to be paid in accordance with schemes made under the Overseas Pensions Act 1973. These are schemes that the Secretary of State certifies as corresponding to the 1958 Act. This subsection derives from section 615(8)(c) of ICTA.

2577.Subsections (6) and (7) give the conditions that must be satisfied for a person to be treated as employed in the service of an overseas territory. They are derived from section 615(9) and (10) of ICTA.

Section 653: Overseas Service Pensions Fund

2578.This section exempts pensions paid out of the Overseas Service Pensions Fund. It derives from section 615(2)(g) of ICTA.

2579.Subsection (3) extends the meaning of “pension” to include any gratuity or other sum payable in respect of ill health. It derives from the definition of “pension” in section 615(7) of ICTA.

Section 654: The Pensions (India, Pakistan and Burma) Act 1955

2580.This section exempts pensions paid under the Pensions (India, Pakistan and Burma) Act 1955. It derives from section 615(2)(a) of ICTA.

2581.In subsection (2)(b)(ii) “correspond to the provision made under the 1955 Act” is a reference to the provision for pensions to be paid.

2582.Subsection (3) prevents the exemption applying to any part of the pension that is paid under the Pension (Increase) Act 1971. These increases have always been paid by the United Kingdom government and have always been taxed under Schedule E as United Kingdom pensions.

Part 10: Social security income
Overview

2583.This Part identifies the income that is taxed as social security income. It derives mainly from section 617 of ICTA. It also derives from other provisions of the Income Tax Acts that deal with the taxation of social security income.

2584.Section 617 of ICTA contains the main rules and charges United Kingdom social security benefits to tax under Schedule E. It sets out in narrative form the various social security benefits that are charged to tax. It also identifies the benefits that are not charged to tax. And it provides that some of those benefits are not to be treated as income for any income tax purpose.

2585.Subsections (3) and (4) of section 617 of ICTA deal with whether social security contributions may be deducted for tax purposes. The sections in this Part deal only with the charging of benefits. So the rules about deductions are not rewritten here.

2586.The aim of the social security income Part is to set out all the rules charging or exempting benefits payable under the social security Acts. The approach is to list the benefits in two tables. One table lists the taxable benefits and the other lists the non-taxable benefits.

2587.The Part also sets out the charging and exemption rules that apply to foreign benefits.

Chapter 1: Introduction
Overview

2588.This Chapter sets out the structure of the social security income Part.

Section 655: Structure of Part 10

2589.This is the only section in the Chapter. It is new.

2590.Subsection (1) lists the other Chapters in the Part. It identifies the different Chapters that deal with United Kingdom and foreign social security benefits. In each case, different Chapters deal with the benefits that are charged to tax and those that are exempt.

2591.Subsection (2) is a signpost to three rules that apply to government payments but which are not dealt with in this Part. The rules are not rewritten in this Part because they may apply more widely than to social security income alone. For instance, a Treasury order under section 151 of FA 1996 may require that a benefit is taxed as a business receipt.

Chapter 2: Tax on social security income
Overview

2592.This Chapter imposes the charge on “net taxable social security income” and explains how to calculate “net taxable social security income”. There are four steps in the process:

2593.These steps are carried out separately for each United Kingdom and foreign social security benefit.

2594.The Chapter includes a signpost to the provisions that identify the person liable to pay any tax charged on United Kingdom and foreign social security benefits.

Section 656: Nature of charge to tax on social security income

2595.This section explains that the charge on social security income does not extend to income that is exempt from tax. It is new.

2596.Exempt income is included in the definition of social security income but is not taxed. The definition of “exempt income” applies for the purposes of the social security income Part. In particular, the expression is used in section 681(1) (taxable and other foreign benefits: exemptions).

Section 657: Meaning of “social security income”, “taxable benefits” etc.

2597.This section introduces the terms which are used to identify the benefits that are taxable and to arrive at the amount of income that is charged to tax. It is new.

2598.Subsection (2) makes it clear that the expression “social security income” (used in section 656) includes both taxable benefits and those that are exempt.

2599.Subsection (4) ensures that the four statutory payments listed in section 660(2) are not included in social security income if they are charged to tax as employment income.

Section 658: Amount charged to tax

2600.This section imposes the charge to tax. It is new.

2601.The section explains how relief for payroll giving is allowed against social security income. The rules for the relief are in Part 12. Those rules depend on a definition of “taxable social security income” from which the payroll giving deduction (“PGD”) is subtracted to arrive at the “net taxable social security income”. That lower amount is the amount on which tax is charged.

2602.Each taxable benefit is treated separately in the calculation of net taxable social security income.

Section 659: Person liable for tax

2603.This section is a signpost to the sections later in the Part where the person liable for the tax is identified for United Kingdom and foreign benefits. It is new.

Chapter 3: Taxable UK social security benefits
Overview

2604.This Chapter sets out the rules for taxing United Kingdom social security benefits.

2605.The charge on United Kingdom social security benefits in ICTA is under Schedule E. The charge is under paragraph 5 of Schedule E (section 19(1) of ICTA):

…any other provision of the Tax Acts directing tax to be charged under this Schedule …

2606.Section 150(a) of ICTA charges allowances under Job Release schemes. The last Order under the Job Release Act 1977 extended the effect of the Act to 29 September 1988. So this Act does not rewrite paragraph (a) of the section (or section 191 of ICTA). The other paragraphs, which charge statutory adoption pay, statutory maternity pay, statutory paternity pay and statutory sick pay, are rewritten in this Act - see paragraph 2608.

2607.The Chapter sets out the income chargeable. It also identifies the basis of assessment and the person chargeable.

Section 660: Taxable benefits: UK benefits – Table A

2608.This section sets out the United Kingdom benefits that are taxable. It derives from section 617(1) of ICTA. That subsection deals with most United Kingdom benefits (some of which are taxed in Part 9 as pensions). The table in this section also lists other benefits that are not within section 617:

2609.Subsection (1) is the first of the tables (“Table A”). This table lists the taxable UK benefits. The second table (“Table B”) is in section 677 – see paragraph 2682.

2610.The table identifies each benefit by the section of the social security Act under which it is paid. The table also identifies the corresponding Northern Ireland provision if it has been enacted. The suspension of the Northern Ireland Assembly has prevented the enactment of some proposed Northern Ireland provisions. Those provisions are described rather than identified in the table.

2611.The table arranges the benefits in alphabetical order. This means that a particular benefit should be easy to find. And it should be easy to maintain the clarity of the table because it will be easy to insert any new benefit into the table in the right place.

2612.Incapacity benefit is included in the table of taxable benefits. See Change 143 in Annex 1.

2613.Subsection (2) is a special rule for statutory adoption pay, statutory maternity pay, statutory paternity pay and statutory sick pay. It derives from the opening words “if they would not otherwise be (chargeable)” in section 150 of ICTA.

2614.In most cases these payments are earnings from an employment and charged to tax under the employment income Parts of this Act. This subsection ensures that a charge under the employment income Parts takes precedence over a charge under the social security income Part.

2615.In other cases the payments are made by the government. Then there is no charge to tax on them as earnings and they are charged as social security income.

Section 661: Taxable social security income

2616.This section sets out the basis of assessment for some United Kingdom social security benefits. It derives from section 41(2) of FA 1989, which applies only to the benefits (and pensions) mentioned in section 41(1) of FA 1989.

2617.Incapacity benefit is explicitly brought within the rule in section 41 of FA 1989 by section 139(3) of FA 1994.

2618.Five benefits in Table A are not covered by the rule in section 41 of FA 1989. They are statutory adoption pay, statutory maternity pay, statutory paternity pay statutory sick pay (all charged to tax by section 150 of ICTA) and jobseeker’s allowance (charged to tax by section 151A of ICTA). There is no statutory basis of assessment for these benefits in ICTA.

2619.So the section applies only to the first four benefits listed in Table A.

Section 662: Person liable for tax

2620.This section identifies the person chargeable. It is new.

2621.The rule in this section applies only to United Kingdom social security income. But an identical rule applies to foreign social security income – see section 680.

2622.The social security income Part includes income that ICTA taxes under Schedule E and income that ICTA taxes under Schedule D. For income taxed under Schedule D section 59(1) of ICTA identifies the person chargeable as the person “receiving or entitled” to the income.

2623.There is no equivalent of section 59(1) of ICTA for social security benefits that ICTA taxes under Schedule E. It would be inconsistent to identify a person chargeable for some but not all social security income. The social security income Part avoids this inconsistency. It makes the person liable for tax on social security income the person receiving or entitled to the income in all cases where ICTA does not specify the person chargeable. See Change 135 in Annex 1.

Chapter 4 Taxable UK social security benefits: exemptions
Overview

2624.This Chapter sets out the partial exemptions that apply to the taxable benefits listed in Table A. It derives from sections 151, 151A and 617 of ICTA and section 139 of FA 1994.

2625.One exemption applies generally. That is the exemption for any part of a benefit that is in respect of a child. The other exemptions relate to part of the following benefits: