Overview
2863.This Chapter provides the rules about deduction of tax at source in relation to distributions treated as made from unauthorised unit trusts (UUTs) to their unit holders. It is based on sections 348, 349(1) and (1A) and 469 of ICTA.
2864.A unit trust is “unauthorised” if it does not have authorisation under FISMA to seek investment directly from members of the public. Nor is such a trust regulated under FISMA. “Unauthorised unit trust” is defined in section 989.
2865.The rules for UUTs differ from the rules relating to annual payments (with which they are related in the source legislation) in that the amount shown by the trust’s accounts as income for a distribution period is treated as having been paid to unit holders on the date prescribed by Chapter 10 of Part 4 of ITTOIA, regardless of whether it has been so paid in whole or in part. Any actual payments to unit holders are ignored.
2866.Chapter 10 of Part 4 of ITTOIA does not deal with these amounts treated as paid to unit holders by charging them as a type of annual payment. Instead, that Act imposes a separate charge to income tax on the unit holder. In accordance with that approach, Chapter 9 of Part 9 of this Act gives relief to the trustees of the UUT for such amounts.
2867.This Chapter deals with the payments treated as having been made as regards the deduction at source rules. In particular, such amounts are treated as having been paid under deduction of a sum representing income tax at the basic rate for the applicable tax year; there is no actual duty to deduct as in other Chapters of this Part.
2868.This Chapter also requires the tax to be collected under Self Assessment. Since the trustees of the UUT will have obtained relief by deduction from their taxable income for the amount of any grossed-up amounts treated as paid to unit holders, this tax will normally be most of the tax that they have to pay.
2869.Additionally, if the deemed payments in a tax year cannot be fully relieved because their taxable income is insufficient, there is provision for the trustees to take account of any excess of modified net income (defined in section 1025) in earlier tax years over the payments they are treated as having made in those years.
Section 941: Deemed payments to unit holders and deemed deductions of income tax
2870.This section sets out the framework of the deduction at source regime for UUTs. It is based on sections 348(1A), 349(1A) and 469 of ICTA.
2871.If the unit holder is subject to income tax, the section:
treats as a payment by the UUT trustees to the unit holder any grossed-up amount (for which see section 548 of ITTOIA) which is charged to tax on the unit holder under Chapter 10 of Part 4 of ITTOIA (subsection (2)); and
treats the trustees as having deducted, at the basic rate for the tax year, a sum representing income tax (subsection (3)).
2872.If the unit holder is subject to corporation tax, the section treats the trustees as having deducted, at the basic rate for the year, a sum representing income tax from the deemed annual payment to the unit holder (see section 469(4A) to (4D) of ICTA, inserted by Schedule 1 to this Act) (subsections (4) and (5)).
Section 942: Income tax to be collected from trustees
2873.This section sets out the method of collection, and the amount of income tax to be collected. It is based on sections 348(1), 349(1), and 469(5A) and (5B) of ICTA.
2874.Subsection (2) requires the tax to be collected through the self-assessment tax return of the trustees of the UUT. The source legislation refers (section 469(5A)(a) of ICTA) to a charge under section 350 of ICTA. But in practice the tax is collected through the trustees’ self-assessment return, and the law is now brought into line with that practice, in keeping with the approach in relation to charges on income generally. See Change 81 in Annex 1.
2875.So, where the source legislation provides for the amount to be charged under section 350 of ICTA, this and the following sections are drafted in terms of an amount of income tax to be collected.
2876.The default rule is that the amount to be collected under Self Assessment is the amount treated as deducted under section 941, which refers to the formula given in section 548(2) of ITTOIA.
2877.Subsections (4) and (5) deal with the adjustment for the “income pool”. This applies when, in a tax year, the gross amounts of the payments treated as made exceed the trustees’ modified net income (so that, under the source legislation, not all the tax treated as deducted could be retained by way of relief under section 348 of ICTA).
2878.In that case, the income pool as at the start of the tax year (for the computation of which see section 943) is deducted from the total of the amounts treated for the tax year as having been paid to unit holders, but not so as to reduce it below the amount of the trustees’ modified net income. The resulting amount is then multiplied by the basic rate of income tax for the year, and that constitutes the amount of income tax payable by the trustees.
Section 943: Calculation of trustees’ income pool
2879.This section prescribes the method of calculating the “income pool”, which is to be applied in any tax year in which the grossed-up amounts treated as paid to unit holders by the trustees exceed their modified net income. It is based on section 469(5C) of ICTA.
2880.An income pool consists of a running total of the amount by which, taking one tax year with another, the trustees’ modified net income has exceeded the grossed-up amounts treated as paid by them. In each tax year when this has occurred, the amount of any such excess is to be calculated. And if in any tax year the amounts treated as paid exceed the modified net income, any such excess must be deducted from the income pool.
2881.So the income pool as at the start of any tax year (“the current tax year”) is calculated according to whether in the previous tax year the trustees’ modified net income exceeded the amounts treated as paid (Case 1), was less than them (Case 2) or equalled them (Case 3).
2882.The amount so calculated is available to set against any excess of payments treated as made over modified net income in the current tax year.
2883.Subsections (2) and (3) deal with cases where the UUT trustees have been non-UK resident. For any year of non-residence there may be modified net income, but there is no adjustment to the income pool.
2884.Subsection (3) also provides that the income pool is nil as at the start of the tax year in which a UUT is established.
