Overview
1266.This Chapter provides for relief for certain annual payments and patent royalty payments by deduction in calculating net income. These rules are coupled with those providing for deduction of tax at source from the payments: see Chapter 6 of Part 15 and the related commentary.
1267.The scheme of the source legislation relating to charges on income (which owes its origins to the historic concept of alienation of income) is replaced with a deduction in calculating net income. See Change 81 in Annex 1.
1268.This Chapter distinguishes between individuals and other persons. One reason for this is that section 347A of ICTA provides that, with certain exceptions, an annual payment made by an individual (or personal representatives) is not to be a charge on the income of the person liable to make it. And there is a similar rule concerning the recipient in section 727 of ITTOIA. But those rules do not apply to payments by other persons. See the commentary on sections 900, 901, and 903.
1269.In addition, the rules about when payments are regarded as being, or not being, made out of profits or gains brought into charge to income tax distinguish between the position of individuals and other persons in the light of the case law.
Section 447: Overview of Chapter
1270.This section provides an overview of the Chapter. It is new.
Section 448: Relief for individuals
1271.This section provides for relief by deduction from income if an individual pays an annual payment for commercial purposes (see section 900) or pays a patent royalty (see section 903). It is based on section 348 of ICTA.
1272.The income tax in respect of the payment is collected as part of the individual’s self-assessment by way of Chapter 17 of Part 15. See Change 81 in Annex 1 and the overview commentary on this Chapter.
1273.The term “gross amount of the payment” is defined in section 452.
1274.In the source legislation a number of types of income are treated as not brought into charge to income tax and so are not available to cover charges on income. To preserve the effect of the source legislation, it is necessary to prevent the deduction being given against such “non-qualifying income”. Subsection (3) introduces these by referring to subsection (4) and to section 451.
1275.Subsection (4) gives a signpost to section 1025 which, together with section 1026, provides that such income cannot form part of “modified net income”. So it cannot give occasion for relief. See the commentary on section 1025.
Section 449: Relief for other persons
1276.This section provides for relief by deduction from income in the case of persons other than individuals. It is based on section 348 of ICTA.
1277.Subsection (1)(c) works together with the repeal of section 51 of ITTOIA to align the approach to patent royalties with that for annual payments. See Change 81 in Annex 1.
1278.Subsection (5) mirrors the rule about “modified net income” in the previous section.
Section 450: Other persons: payments ineligible for relief
1279.This section rewrites the rule in the source legislation about when payments are regarded as being, or not being, made out of profits or gains brought into charge to income tax. It is new.
1280.In the case of an individual one need go no further than ask whether the individual has income, as noted in Change 82 in Annex 1. But the position is more complex in the case of persons other than individuals.
1281.Subsection (2) provides that if a payment can lawfully only be made out of capital, or out of exempt income, relief will not be given: see Change 82 in Annex 1 in connection with Sugden v Leeds Corporation (1913), 6 TC 211 HL.
1282.Subsection (3) provides that, if a person other than an individual makes a payment within this Chapter that is charged to capital, it is to that extent denied relief. This principle appears in Chancery Lane Safe Deposit and Offices Co Ltd v CIR (1965), 43 TC 83 HL and related cases: see Change 82 in Annex 1.
1283.Subsection (4) provides for cases where the taxpayer has treated a payment as having been made out of exempt income, and this has had an effect on the actual or contingent rights or obligations of any person. Relief in such cases is denied on the authority of CIR v Ayr Town Council (1938), 22 TC 381 CS: see Change 82 in Annex 1 concerning that and related cases.
1284.Subsection (5) deals with subsidy cases, where payment is made but the payer is reimbursed for the gross amount in a form that is not taxable in the payer’s hands. To permit such cases would in effect give double relief: see Change 82 in Annex 1 as regards Corporation of Birmingham v CIR (1930), 15 TC 172 HL and related cases.
Section 451: Special rule for persons affected by section 733 of ICTA
1285.This section is based on section 733(2) of ICTA.
1286.Sections 731 to 735 of ICTA are anti-avoidance provisions. They are concerned with cases where:
a person (“the first buyer”) buys securities and subsequently sells them to someone else; and
the first buyer becomes entitled to receive any interest payable on them.
1287.Section 733(2) addresses the case where:
interest (the “affected income”) is payable to the first buyer;
that interest, or some part of it, would be exempt, but is not so, because section 733(1) cancels the exemption; and
the first buyer makes an annual payment in the same tax year as that in which the interest arises.
1288.The source legislation provides that an annual payment is to be treated as paid out of profits or gains not brought into charge. It follows that, even though the exemption is cancelled by section 733(1), leaving interest in charge to income tax, the annual payment must not be treated as paid out of that interest.
1289.This is rewritten so that relief is only given if, and to the extent that, the person has “non-affected income” equal to the annual payment. Non-affected income is defined as modified net income less affected income. On modified net income, see the commentary on sections 448 and 1025.
1290.Because this is a rule relating to a very specific type of income, it is necessary to apply it before applying the provisions referred to in subsection (4).
Section 452: The gross amount of a payment
1291.This section provides, for the purposes of this Chapter, that the gross amount of a payment is the amount of the payment before deduction of income tax. It is new.
