Overview
2564.This Chapter requires the deduction of sums representing income tax from certain payments of interest made by deposit-takers and from certain payments of interest and dividends made by building societies. It is based on sections 477A and 480A to 482 of ICTA.
2565.Banks are the most obvious example of deposit-takers, but the definition of deposit-taker also includes other persons, for example individuals who have permission to accept deposits under Part 4 of FISMA.
2566.Many of the detailed provisions are in regulations, and this will remain the case.
2567.The main source rules for deposit-takers are in primary legislation, but all of the source rules for building societies are in regulations. For historical reasons, the two sets of rules adopt different approaches to identifying the payments subject to deduction of tax.
2568.A common basis for the split between primary and secondary legislation has resulted from the enactment in this Act of certain provisions of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231) (the building society regulations). See Change 126 in Annex 1, which affects sections 852, 853, 871 and 872 in this Chapter and some sections in Chapter 15 of this Part.
2569.And, building on this, a common basis for identifying payments subject to deduction of tax has resulted from aligning the gross payment category rules for building societies with deposit-takers. See Change 127 in Annex 1, which affects sections 851, 856, 858, 859 and 872.
2570.Those regulations not being rewritten will continue in force, as explained in Change 126 in Annex 1. HMRC specialists are working on rationalising the remaining regulations.
Section 850: Overview of Chapter
2571.This section provides an overview of the Chapter. It is new.
2572.The section provides signposts to the sections dealing with the main features of the Chapter, including key definitions and rules about when investments are (or are not) relevant investments.
2573.It also makes it clear that:
references to “interest” include a reference to “dividends” paid by building societies; and
crediting interest counts as paying it for all purposes of the Chapter.
2574.Sections 858 to 870 (investments which are not relevant investments) are placed in order of their relative significance.
Section 851: Duty to deduct sums representing income tax
2575.This section sets out the general duty to deduct a sum representing the savings rate of income tax from interest payments made by deposit-takers and building societies on relevant investments. It is based on sections 4 and 480A of ICTA and regulation 3 of the building society regulations.
2576.In accordance with section 850(6), “interest” includes dividend payments made by building societies.
2577.The definition of “relevant investment” for building societies has been aligned to the deposit-taker regime. See Change 127 in Annex 1 and the overview commentary for this Chapter.
Section 852: Power to make regulations disapplying section 851
2578.This section allows the Commissioners for Her Majesty’s Revenue and Customs to make regulations so that section 851 will not apply in relation to an interest payment where certain prescribed conditions have been met. It is based on sections 477A(1) and (2) and 480B(1) to (3) of ICTA.
2579.As part of the process of enacting some of the building society regulations, the wide powers provided in section 477A(1) of ICTA have been replaced with specific regulation making powers. See Change 126 in Annex 1 and the overview commentary for this Chapter.
2580.Regulations have been made under sections 477A(1) and 480B of ICTA which allow UK resident individuals to certify that they are not liable to income tax so that they may be paid gross.
2581.The regulations concerned are the Income Tax (Deposit-takers) (Interest Payments) Regulations 1990 (SI 1990/2232), and the building society regulations. The relevant parts of these regulations will continue to have effect under the general continuity of law provisions included in this Act.
Section 853: Meaning of “deposit-taker”
2582.This section defines “deposit-taker”. It is based on section 481(2) of ICTA.
2583.Article 39 of the FISMA (Consequential Amendments) (Taxes) Order 2001 (SI 2001/3629) (FISMA(CA)(T)O), amends the definition of deposit-taker in section 481(2) of ICTA. This amendment has been reflected in the rewritten legislation and consequently article 39 is revoked (see Schedule 3 to this Act).
2584.The persons prescribed as deposit-takers by orders made under the power in section 481(2)(f) of ICTA, namely firms with European Economic Area (EEA) passport rights and certain dealers in financial instruments, have also been included here. The two orders concerned (the Income Tax (Prescribed Deposit-takers) Order 1992 (SI 1992/3234) and the Income Tax (Prescribed Deposit-takers) Order 2002 (SI 2002/1968)) will be revoked (see Schedule 3 to this Act). See Change 126 in Annex 1.
Section 854: Power to prescribe persons as deposit-takers
2585.This section provides that the Treasury may make orders prescribing persons or a member of a class of persons receiving deposits in the course of business or activities to be treated as a deposit-taker. It is based on sections 481(2)(f) and 482(10) of ICTA.
2586.The following Statutory Instruments made under section 481(2)(f) of ICTA are spent or obsolete and are revoked (see Schedule 3 to this Act):
the Income Tax (Prescribed Deposit-takers) (No 1) Order 1984 (SI 1984/1801), which included the British Railways Board in the definition of deposit-taker; and
the Income Tax (Composite Rate) (Prescribed Deposit-takers) Order 1985 (SI 1985/1696), which listed various local authorities as being included in the definition of deposit-taker. The bodies referred to in this Order (and which are still in existence) are covered in the definition of “local authority” in section 999. As local authorities are already included in section 853(4), this Order is obsolete.
Section 855: Meaning of “investment” and “deposit”
2587.This section defines “investment” and “deposit” in preparation for the sections setting out which investments are, or are not, relevant investments. It is based on section 480A(1) and 481(3) of ICTA and regulations 2 and 3 of the building society regulations.
2588.This section also makes clear that, whether or not a deposit bears interest, it will still be treated as a deposit (although deduction of tax will be necessary only where interest is paid). As part of the alignment of the two regimes, the definition of deposit now also applies in relation to building societies.
2589.Under paragraph 6 of Schedule 2 to FA 2005, alternative finance arrangements are treated as if they were deposits for the purposes of the deposit-taker regime. A similar result is achieved for building societies through the operation of paragraph 5 of Schedule 2 to FA 2005.
2590.The alignment of the two regimes (so that the building society gross payment category rules are similar to deposit-takers, see Change 127 in Annex 1 and the overview commentary for this Chapter), has prompted amendments of Schedule 2 to FA 2005 (see Schedule 1 to this Act).
Section 856: Investments which are relevant investments
2591.This section sets out the main rules about which investments are relevant investments. It is based on section 481(4) of ICTA and parts of regulations 3 and 4 of the building society regulations. See Change 127 in Annex 1, and the overview commentary on this Chapter, for the effects of the alignment of the regimes.
2592.Subsection (1) sets out the four categories of investments which are relevant investments for the purposes of this Chapter. Subsection (2) makes clear that subsection (1) is subject to the general rules in sections 858 to 870 about when an investment will not be treated as a relevant investment.
2593.Subsections (3) to (6) set out the detail of the conditions governing the four categories of relevant deposits.
2594.With the exception of the personal representative category, each category is separate and does not overlap. Consequently, an investment will only be a relevant investment where all the persons entitled to the interest payment are either:
individuals (subsection (3)),
a Scottish partnership where all the partners are individuals (subsection (4)), or
trustees of a discretionary or accumulation settlement (subsection (6)).
2595.Where a personal representative (subsection (5)) is entitled to any interest on the investment, the whole investment will be a relevant investment. So, where a personal representative is entitled to part of the interest on a joint account, all interest will be subject to deduction, unless a declaration has been made in accordance with the regulations made under section 852 in respect of the part of the investment which does not vest in the personal representative.
2596.Section 481(4)(c) of ICTA refers to a person receiving interest “as a personal representative [and] in his capacity as such.” As there is no distinction between a person receiving interest as a personal representative, and doing so in his capacity as such, the section simply refers to receiving interest “in that capacity”. This is in line with the approach used in relation to trustees.
2597.As a result of aligning the gross payment category rules for building societies with the deposit-taker rules and defining relevant investment by reference to the beneficial owner of the payment, many of the gross payment categories in regulation 4 of the building society regulations do not need to be rewritten. This is because certain of those payments do not fall within any category of relevant investment in the first place. See Changes 127 and 128 in Annex 1.
Section 857: Investments to be treated as being or as not being relevant investments
2598.This section sets out the rules governing when deposit-takers and building societies should treat investments as relevant (depending on the information they hold). It is based on section 482 of ICTA and regulation 11(4) of the building society regulations.
2599.Subsection (1) states that deposit-takers and building societies must treat an investment as a relevant investment unless they are satisfied that it is not a relevant investment.
2600.As part of the alignment of the two regimes, building societies will no longer need to obtain declarations from persons previously falling under the gross payment categories mentioned in regulation 4(1)(d) to (g), (k) and (r) of the building society regulations in order that payment can be made gross. See Change 129 in Annex 1.
Section 858: Declarations of non-UK residence: individuals
2601.This section applies to investments satisfying the individual interest condition set out in section 856(3). It is based on sections 481(5) and 482(2), (2A) and (6) of ICTA and regulations 2, 4(1)(a) and (b) and 11 of the building society regulations.
2602.The section confirms that a declaration of non-UK residence in a prescribed or authorised format containing certain information is required if the investment is not to be treated as a relevant investment (subsection (2)). See Change 130 in Annex 1.
2603.The section also makes clear that payments will be made gross only where all the individuals are non-UK resident. See Change 127 in Annex 1.
Section 859: Declarations of non-UK residence: Scottish partnerships
2604.This section applies to investments satisfying the Scottish partnership condition set out in section 856(4). It is based on sections 481(5) and 482(2), (2A) and (6) of ICTA and regulations 2(1), 4(1)(a) and (b) and 11 of the building society regulations.
2605.This section confirms that a declaration of non-UK residence in a prescribed or authorised format containing certain information is required if the investment is not to be treated as a relevant investment (see subsection (2)). See Change 130 in Annex 1.
2606.The section also ensures that a deposit will not be a relevant investment unless all the partners of the Scottish partnership are not ordinarily resident in the United Kingdom. See subsection (3) and Changes 127 and 131 in Annex 1.
Section 860: Declarations of non-UK residence: personal representatives
2607.This section applies to investments satisfying the personal representative condition set out in section 856(5). It is based on sections 481(5) and 482(2) and (6) of ICTA and regulations 2(1), 4(1)(c) and 11 of the building society regulations.
2608.The section confirms that a declaration of non-UK residence in a prescribed or authorised format containing certain information is required if the investment is not to be treated as a relevant investment (see subsection (2)). See Change 130 in Annex 1.
Section 861: Declarations of non-UK residence: settlements
2609.This section applies to investments satisfying the settlement condition set out in section 856(6). It is based on sections 481(5) and 482(2) and (6) of ICTA and regulations 2(1), 4(1)(bb) and 11 of the building society regulations.
2610.The section confirms that a declaration of non-UK residence in a prescribed or authorised format containing certain information is required if the investment is not to be treated as a relevant investment (see subsection (2)). See Change 130 in Annex 1.
2611.See Change 131 in Annex 1 and the commentary on section 859 for information on changes made in respect of Scottish partnerships in subsections (2) to (4).
Section 862: Inspection of declarations
2612.This section gives an officer of Revenue and Customs power to inspect any declarations which have been made to the deposit-taker or building society. It is based on section 482(3) and (4) of ICTA and regulation 11(5) and (6) of the building society regulations.
2613.Regulation 8 of the Income Tax (Deposit-takers) (Non-residents) Regulations 1992 (SI 1992/14) and regulation 11(7) of the building society regulations provide a two year time limit for the retention of declarations.
2614.For deposit-takers, this section is a minor change in law, as the source legislation in section 482(3) of ICTA does not give flexibility in the selection of declarations to be inspected: it is all or none. See Change 132 in Annex 1.
Section 863: General client account deposits
2615.This section provides that general client account deposits will not be treated as relevant investments and defines the circumstances in which an investment will be treated as a “general client account deposit”. It is based on section 481(5) and 482(6) of ICTA and regulations 2(1) and 4(1) of the building society regulations.
Section 864: Qualifying uncertificated eligible debt security units
2616.This section provides that an investment will not be treated as a relevant investment if a “qualifying uncertificated eligible debt security unit” has been issued in respect of the investment. It is based on section 481(5)(a) of ICTA and regulation 4(1)(j) of the building society regulations.
2617.References to deposit rights in sections 349(4), 477A and 481(5A) of ICTA and regulation 4(1)(j) of the building society regulations have not been rewritten as they are obsolete. See Change 133 in Annex 1.
Section 865: Qualifying certificates of deposit
2618.This section provides that an investment will not be treated as a relevant investment if a “qualifying certificate of deposit” has been issued in respect of the investment. It is based on section 481(5)(a) of ICTA and regulation 4(1)(j) of the building society regulations.
Section 866: Qualifying time deposits
2619.This section provides that an investment will not be treated as a relevant investment if the deposit is a “qualifying time deposit”. It is based on sections 481(5)(a) and 482(6) of ICTA and regulation 4(1)(j) of the building society regulations.
Section 867: Lloyd’s premium trust funds
2620.This section provides that if an investment forms part of a Lloyd’s premium trust fund it will not be treated as a relevant investment. It is based on section 481(5) of ICTA, sections 183(2) and 184(1) of FA 1993 and regulations 2(1) and 4(1) of the building society regulations.
2621.Subsection (1) refers to a “premium trust fund” rather than a “premiums trust fund”, as per the source legislation (section 481(5)(f) of ICTA and regulation 4(1)(o) of the building society regulations). This new defined term follows the amendment made to section 184 of FA 1993 by articles 75 and 79 of FISMA(CA)(T)O, effective from 1 December 2001.
2622.The new definition of “premium trust fund” used in the main Lloyd’s legislation (section 184 of FA 1993) is applied by subsection (2). This means that new rules relating to the Sourcebook made by the Financial Services Authority under FISMA will have effect for the purposes of defining a “premium trust fund” in respect of this Chapter.
Section 868: Investments held outside the United Kingdom
2623.This section sets out when an investment held outside the United Kingdom will not be treated as a relevant investment. It is based on sections 481(5)(h) and (j) and 482(7) of ICTA and regulation 4(1)(s) of the building society regulations.
2624.For the purposes of the section, subsection (4) sets out when an investment is to be treated as being held at a branch. As the source legislation does not define when an investment will be treated as being held at a branch for the purposes of building societies, subsection (4) has been extended to apply to building societies to clarify what is meant.
Section 869: Sale and repurchase of securities
2625.This section ensures that, in relation to building societies, certain investments arising in the context of sale and repurchase transactions are not treated as relevant investments. It is based on regulation 4(1)(t) and (u) of the building society regulations.
2626.The section does not apply in relation to deposit-takers. In the case of subsection (1) this is because loans do not fall within the definition of “deposit” (see section 855). So interest paid by deposit-takers on such loans is not subject to the duty to deduct under this Chapter.
2627.In the case of subsection (2) it is because the source legislation about deposit-takers does not exempt interest payments made in respect of cash payments made as security for the performance of the sale and repurchase agreements from the duty to deduct tax. Where interest is paid by deposit-takers on such deposits to individuals, Scottish partnerships, personal representatives or trustees of discretionary or accumulation settlement, it will be subject to the duty to deduct under this Chapter.
Section 870: Other investments
2628.This section collects together the remaining instances where an investment is not to be treated as a relevant investment.
2629.Subsection (1) sets out various investments with deposit-takers which are not relevant investments. It is based on section 481(5)(b), (c), and (d) of ICTA.
2630.Subsection (2) sets out various investments with building societies which are not relevant investments. It is based on section 477A(1A) and (10) of ICTA and regulations 3(2) and 4(1)(h) of the building society regulations.
2631.For the purposes of the section, bank is defined by reference to section 991 which is based on section 840A of ICTA. In the building society regulations, the reference to “bank” in regulation 4(1)(h) is not defined. In order to clarify the position for building society legislation, the definition of “bank” has been extended to apply to building societies.
Section 871: Power to make regulations to give effect to Chapter
2632.This section gives the Commissioners for Her Majesty’s Revenue and Customs power to make regulations in relation to providing information, inspection of records by officers of Revenue and Customs, and generally giving effect to the Chapter. It is based on sections 477A, 482(11), (11A) and (12) of ICTA.
2633.As a number of the building society regulations will be enacted, the wide powers provided in section 477A(1) of ICTA have been replaced (in part) with specific regulation making powers. See Change 126 in Annex 1.
2634.Subsection (2) has been aligned to the wording of similar provisions. In particular it now includes a reference to supplemental and transitional provision and savings.
Section 872: Power to make orders amending Chapter
2635.This section gives the Treasury power to provide that certain investments are or are not relevant investments. It is based on sections 477A(1), (1A) and (2) and 481(6) and 482(12) of ICTA.
2636.As a number of the building society regulations will be enacted, the wide powers provided in section 477A(1) of ICTA have been replaced (in part) with specific order making powers. The order making power in this section takes the place of the power in section 477A(1) of ICTA in relation to building societies. See Changes 126 and 127 in Annex 1.
2637.Subsection (2) allows the Treasury, in the case of deposit-takers, to specify which deposit-takers an order under this section will apply to.
2638.Subsection (4) gives the Treasury power to amend all sections of the Chapter except section 852 (power to disapply section 851).
Section 873: Discretionary or accumulation settlements
2639.This section makes provision about when a settlement is to be regarded as a discretionary or accumulation settlement, and when a person is to be regarded as a beneficiary of such a settlement, for the purposes of the Chapter. It is based on sections 481(4A) and 482(5A) of ICTA and regulation 2 of the building society regulations.
2640.Subsection (2) ensures that the section applies in the same way that section 481(4A) of ICTA did before 6 April 2006. See Change 85 in Annex 1.
2641.In regulation 2(1) of the building society regulations, part of the definition of discretionary and accumulation trust (which, following the enactment of paragraph 37 of Schedule 13 to FA 2006, is now a reference to “settlement”) refers to “income of the settlor applied in defraying expenses of the trustees”. These words have not been included as they are obsolete.
