Income Tax (Trading and Other Income) Act 2005

Part 8 Foreign income: special rules

Chapter 1 Introduction

829 Overview of Part 8

This Part provides for—

(a) an alternative basis for calculating the amount charged for certain relevant foreign income (see Chapter 2),

(b) certain deductions in calculating relevant foreign income where that basis does not apply (see Chapter 3), and

(c) relief where a person is prevented from transferring income to the United Kingdom (see Chapter 4).

830 Meaning of “relevant foreign income”

(1) In this Act “relevant foreign income” means income which arises from a source outside the United Kingdom and is chargeable under any of the provisions specified in subsection (2).

(2) The provisions are—

(a) Chapter 2 of Part 2 (trade profits),

(b) Chapter 17 of Part 2 (adjustment income),

(c) Chapter 3 of Part 3 (profits of property business),

(d) Chapter 11 of Part 3 (overseas property income),

(e) Chapter 2 of Part 4 (interest),

(f) Chapter 4 of Part 4 (dividends from non-UK resident companies),

(g) Chapter 7 of Part 4 (purchased life annuity payments),

(h) Chapter 8 of Part 4 (profits from deeply discounted securities),

(i) Chapter 13 of Part 4 (sales of foreign dividend coupons),

(j) section 579 (royalties and other income from intellectual property),

(k) Chapter 3 of Part 5 (films and sound recordings: non-trading businesses),

(l) Chapter 4 of Part 5 (certain telecommunication rights: non-trading income),

(m) section 649 (estate income),

(n) Chapter 7 of Part 5 (annual payments not otherwise charged), and

(o) Chapter 8 of Part 5 (income not otherwise charged).

(3) But “relevant foreign income” does not include income chargeable as a result of section 844 (unremittable income: income charged on withdrawal of relief after source ceases).

(4) For the treatment of other income as relevant foreign income, see—

(a) section 857(3) (a partner’s share of a firm’s trading income),

(b) paragraph 6(3) of Schedule 3 to the Commonwealth Development Corporation Act 1999 (c. 20) (distributions by the Commonwealth Development Corporation),

(c) section 575(3) of ITEPA 2003 (taxable pension income: foreign pensions),

(d) section 613(4) of that Act (taxable pension income: foreign annuities),

(e) section 631(3) of that Act (pre-1973 pensions paid under the Overseas Pensions Act 1973 (c. 21)),

(f) section 635(4) of that Act (taxable pension income: foreign voluntary annual payments), and

(g) section 679(2) of that Act (taxable social security income: foreign benefits).

Chapter 2 Relevant foreign income charged on remittance basis

Remittance basis

831 Claims for relevant foreign income to be charged on the remittance basis

(1) A person may make a claim for a tax year for the person’s relevant foreign income to be charged for that year in accordance with section 832.

(2) The claim must state that condition A or B is met.

(3) Condition A is that the person is not domiciled in the United Kingdom.

(4) Condition B is that the person is not ordinarily UK resident.

(5) This section does not apply to relevant foreign income arising in the Republic of Ireland.

832 Relevant foreign income charged on the remittance basis

(1) If a person makes a claim under section 831(1) for a tax year in respect of relevant foreign income, income tax is charged on the full amount of the sums received in the United Kingdom in the tax year in respect of the income.

(2) For the purposes of subsection (1), it does not matter whether the income arises in the year for which the claim is made or arose in an earlier year in which the person was UK resident.

(3) The only case in which deductions are allowed is where the income is from a trade, profession or vocation carried on outside the United Kingdom.

(4) In that case the same deductions are allowed as are allowed under the Income Tax Acts where the trade, profession or vocation is carried on in the United Kingdom.

(5) This section is subject to section 835 (relief for delayed remittances).

833 Income treated as remitted: repayment of UK-linked debts

(1) For the purposes of section 832, if a person who is ordinarily resident, but is not domiciled, in the United Kingdom uses relevant foreign income outside the United Kingdom to satisfy a UK-linked debt, the person is treated as receiving the income in the United Kingdom at the time when it is so used.

(2) Subsection (1) is subject to subsection (5).

(3) In subsection (1) “UK-linked debt”, in relation to a person, means—

(a) a debt for money lent to the person in the United Kingdom, or for interest on money so lent,

(b) a debt for money lent to the person outside the United Kingdom and received in the United Kingdom, or

(c) a debt incurred for satisfying—

(i) a debt falling within paragraph (a) or (b), or

(ii) another debt falling within this paragraph.

(4) In the case of a debt (within subsection (3)(b) or (c)) for money lent to the person outside the United Kingdom, it does not matter whether the money lent is received in the United Kingdom before or after the income is used to satisfy the debt.

(5) But in the case of such a debt if the money lent is not received in the United Kingdom until after the income is so used, the person is treated as receiving the income in the United Kingdom when the money lent is received there (instead of at the time provided in subsection (1)).

(6) For the purposes of this section, if any of the money lent is used to satisfy a debt, the debt for the money so used is treated as incurred for satisfying that other debt.

(7) In subsections (3) to (5) any reference to money lent being received in the United Kingdom includes a reference to its being brought there.

(8) Section 834 sets out circumstances in which a person is treated as using income to satisfy a debt for the purposes of this section.

(9) In this section and that section “satisfy”, in relation to a debt, means satisfy wholly or in part.

834 Arrangements treated as repayment of UK-linked debts

(1) A person to whom money has been lent (“the borrower”) is treated for the purposes of section 833 as using relevant foreign income to satisfy a debt if conditions A and B are met.

(2) Condition A is that the borrower uses the income in such a way that the lender holds money or property representing the income on behalf or on account of the borrower in such circumstances that it is available to the lender to satisfy the debt (by set-off or otherwise).

(3) Condition B is that under an arrangement between the borrower and the lender—

(a) the amount for the time being owed by the borrower to the lender, or

(b) the time at which the debt is to be satisfied,

depends in any respect, directly or indirectly, on the amount or value the lender holds on behalf or on account of the borrower as mentioned in subsection (2).

(4) In this section “lender”, in relation to money lent, includes any person for the time being entitled to repayment.

Relief for delayed remittances

835 Relief for delayed remittances

(1) If section 832 (relevant foreign income charged on the remittance basis) applies to income for a tax year, the person liable for the tax may make a claim for relief under this section in respect of any of the income which meets conditions A and B (“delayed income”).

(2) Condition A is that the income arose before the tax year for which relief is claimed.

(3) Condition B is that the income could not have been transferred by the person to the United Kingdom before the tax year because of—

(a) the laws of the territory where the income arose,

(b) executive action of its government, or

(c) the impossibility of obtaining there currency that could be transferred to the United Kingdom.

(4) If a person claims relief for a tax year in respect of delayed income, that income is to be deducted from the income charged to tax for that year in accordance with section 832.

(5) The delayed income is to be treated as if it were income received in the United Kingdom in the tax year in which it arose.

836 Relief for delayed remittances: backdated pensions

(1) This section applies if—

(a) section 832 applies to a pension or annuity, or an increase in a pension or annuity, that is treated as relevant foreign income as a result of section 575(3), 613(4) or 635(4) of ITEPA 2003,

(b) the pension, annuity or increase was granted retrospectively, and

(c) an amount of pension, annuity or increase is paid in respect of a tax year (“the earlier year”) before the tax year in which it was granted.

(2) For the purposes of section 835 that amount of pension, annuity or increase is treated as income arising in the earlier year from a source that the person liable for the tax possessed in the earlier year.

(3) The condition in section 835(3) only applies to the pension, annuity or increase in the period after it becomes payable.

837 Claims for relief on delayed remittances

(1) A claim under section 835 must be made on or before the fifth anniversary of the normal self-assessment filing date for the tax year for which the relief is claimed.

(2) All adjustments (by way of repayment of tax, assessment or otherwise) are to be made which are necessary to give effect to section 835.

(3) Those adjustments may be made at any time, despite anything to the contrary in the Income Tax Acts.

(4) A person’s personal representatives may make any claim under section 835 which the person might have made.

(5) If a person dies—

(a) any tax paid by the person and repayable because of a claim under section 835 is to be repaid to the personal representatives, and

(b) the person’s personal representatives are liable for any additional tax which arises because of a claim under that section.

(6) If subsection (5)(b) applies, the additional tax—

(a) is to be assessed on the personal representatives, and

(b) is a debt due from and payable out of the estate.

Chapter 3 Relevant foreign income charged on arising basis: deductions and reliefs

838 Expenses attributable to collection or payment of relevant foreign income

(1) In calculating the amount of relevant foreign income to be charged to income tax for a tax year, a deduction is allowed for expenses incurred outside the United Kingdom that are attributable to the collection or payment of the income.

(2) Subsection (1) does not apply to income charged for the tax year in accordance with section 832 (relevant foreign income charged on the remittance basis).

839 Annual payments payable out of relevant foreign income

(1) In calculating the amount of relevant foreign income to be charged to income tax for a tax year, a deduction is to be allowed for an annual payment other than interest if it meets conditions A to C.

(2) Condition A is that the payment is payable out of the relevant foreign income.

(3) Condition B is that, had the payment arisen in the United Kingdom, it would have been chargeable to income tax under one of the following provisions or to corporation tax under Case III of Schedule D—

• Chapter 10 of Part 4 (distributions from unauthorised unit trusts),

• section 579 (charge to tax on royalties and other income from intellectual property),

• Chapter 4 of Part 5 (certain telecommunication rights: non-trading income), or

• Chapter 7 of Part 5 (annual payments not otherwise charged).

(4) Condition C is that the payment is made to a non-UK resident.

(5) Subsection (1) does not apply if—

(a) the relevant foreign income is received in the United Kingdom, or

(b) it is charged for the tax year in accordance with section 832 (relevant foreign income charged on remittance basis).

(6) In the case of relevant foreign income chargeable under Chapter 2 or 17 of Part 2 (trading income) that arises in the Republic of Ireland, this section applies with the omission of condition B and subsection (5)(a).

840 Relief for backdated pensions charged on the arising basis

(1) This section applies if—

(a) as a result of section 575(3), 613(4) or 635(4) of ITEPA 2003 a pension or annuity or an increase in a pension or annuity is treated as relevant foreign income,

(b) the pension, annuity or increase is paid in respect of a tax year (“the earlier year”) before the tax year in which the pension, annuity or increase arose, and

(c) the income is not charged in accordance with section 832 (relevant foreign income charged on the remittance basis).

(2) If the person liable for the income tax makes a claim for relief under this section for the tax year in which the pension, annuity or increase paid in respect of the earlier year arises, that pension, annuity or increase is treated as income arising in the earlier year from a source that the person possessed in the earlier year.

(3) But subsection (2) does not affect the calculation of the full amount of the income so arising under section 575(2), 613(3) or 635(3) of ITEPA 2003 (under which the full amount of that income is to be calculated on the basis that the pension or annuity is 90% of its actual amount).

(4) Section 837 (claims for relief on delayed remittances) applies to claims under this section as it applies to claims under section 835.

Chapter 4 Unremittable income

841 Unremittable income: introduction

(1) This Chapter applies if—

(a) a person is liable for income tax on income arising in a territory outside the United Kingdom, and

(b) the income is unremittable.

(2) For the purposes of this Chapter, income is unremittable if conditions A and B are met.

(3) Condition A is that the income cannot be transferred to the United Kingdom by the person who is liable for income tax in respect of the income because of—

(a) the laws of the territory where the income arises,

(b) executive action of its government, or

(c) the impossibility of obtaining there currency that could be transferred to the United Kingdom.

(4) Condition B is that the person who is liable for income tax in respect of the income has not realised it outside that territory for an amount in sterling or in another currency which the person is not prevented from transferring to the United Kingdom.

(5) This Chapter does not apply to profits which a person is treated as receiving under section 714(2) of ICTA (accrued income profits), but see section 723 of that Act (which makes similar provision).

842 Claim for relief for unremittable income

(1) If a person liable for income tax on unremittable income makes a claim for relief under this section in respect of that income, it is not taken into account for income tax purposes.

(2) Subsection (1) is subject to section 843.

(3) No claim under this section may be made in respect of any income so far as an ECGD payment has been made in relation to it.

(4) In subsection (3) “ECGD payment” means a payment made by the Export Credit Guarantee Department under an agreement entered into as a result of arrangements made under—

(a) section 2 of the Export and Investment Guarantees Act 1991 (c. 67) (insurance in connection with overseas investment), or

(b) section 11 of the Export Guarantees and Overseas Investment Act 1978 (c. 18).

(5) A claim under this section must be made on or before the first anniversary of the normal self-assessment filing date for the tax year for which the income would be charged to tax if no claim were made.

843 Withdrawal of relief

(1) This section applies if—

(a) a claim under section 842 has been made in relation to any income, and

(b) either—

(i) the income ceases to be unremittable, or

(ii) an ECGD payment is made in relation to it.

(2) In this section “ECGD payment” has the meaning given by section 842(4).

(3) If income ceases to be unremittable, the income is treated as arising on the date on which it ceases to be unremittable.

(4) If an ECGD payment is made in relation to income, the income is treated, to the extent of the payment, as arising on the date on which the ECGD payment is made.

(5) The income treated as arising under subsection (3) or (4), and any tax payable in respect of it under the law of the territory where it arises, are taken into account for income tax purposes at their value at the date on which the income is treated as arising.

(6) Subsections (3) to (5) do not apply so far as the income has already been treated as arising as a result of this section.

(7) If a person who would have become liable for income tax as a result of this section has died—

(a) the personal representatives are liable for the tax instead, and

(b) the tax is a debt due from and payable out of the estate.

844 Income charged on withdrawal of relief after source ceases

(1) This section applies if—

(a) income is treated as arising as a result of section 843, and

(b) at the time it is so treated the person who would have become liable for income tax as a result of that section—

(i) has permanently ceased to carry on the trade, profession, vocation or property business from which the income arises, or

(ii) in the case of income from another source, has ceased to possess that source.

(2) In the case of income from a trade, profession or vocation—

(a) the income is treated as a post-cessation receipt for the purposes of Chapter 18 of Part 2 (trading income: post-cessation receipts), but

(b) in the application of that Chapter to that income, section 243 (extent of charge to tax) is omitted.

(3) In the case of income from a property business—

(a) the income is treated as a post-cessation receipt from a UK property business for the purposes of Chapter 10 of Part 3 (property income: post-cessation receipts), but

(b) in the application of that Chapter to that income, section 350 (extent of charge to tax) is omitted.

(4) In the case of income from another source, the income is taxed as if the person continued to possess that source.

845 Valuing unremittable income

(1) If no claim is made under section 842 in relation to unremittable income arising in a territory outside the United Kingdom, the amount of the income to be taken into account for income tax purposes is determined as follows.

(2) If the currency in which the income is denominated has a generally recognised market value in the United Kingdom, the amount is determined by reference to that value.

(3) In any other case, the amount is determined according to the official rate of exchange of the territory where the income arises.