Deductions at source - CIOT - The Chartered Institute of Taxation

Deduction of Income Tax at SourceResponse by The Chartered Institute of Taxation toTax Law Rewrite Paper CC (05)281. Introduction1.1 We are grateful for the opportunity to comment on the draft clauses for therewrite of the legislation concerning the deduction of income tax at source.1.2 We would be happy to discuss any part of our comments in further detail shouldthis be helpful to members of the project.2. General comments2.1 Once again, we found the draft provisions in the main clearly drafted.2.2 We are concerned about the number of labels the names of which start with thewords “relevant” and “qualifying”. We recognise that these are often the labelscurrently used in the current legislation. However, wherever possible, we wouldurge the Project to find more meaningful alternatives. Where “qualifying” is tobe used, we would prefer its use to be restricted to cases where the thing soqualifying is entitled to some beneficial treatment (eg some allowance orexemption or other relief).2.3 Similarly, we note that the word “annual” has been retained, although it is neverthat clear what constitutes an annual payment. However, we recognise that itwould probably be beyond the scope of the Project to address this point.Nevertheless, we wonder whether the possible rationalisation of the meaning of“annual” in such circumstances could be addressed by those in what wasRevenue Policy in due course.2.4 We wonder whether a cross reference could be added to the variousexceptions from the duty to deduct tax, including those that are not beingrewritten here (eg where a double taxation agreement removes the requirementto deduct tax).12 UPPER BELGRAVE STREETLONDON SW1X 8BBREGISTERED AS A CHARITY NO 1037771Tel: +44 (0)20 7235 9381Fax: +44 (0)20 7235 2562E-mail: post@ciot.org.ukwww.tax.org.ukUK REPRESENTATIVE BODY ON THECONFEDERATION FISCALE EUROPEENNE

Tax Law Rewrite Deduction at Source CIOT comments 14 November 20053. Specific comments – Clause 23.1 We wonder if the phrase “collected through the individual’s self assessmentreturn” is quite right. It conjures up the image of cash passing through themass of paper that constitutes a physical return. Perhaps it would be sufficientto refer to collection through the self assessment system (as suitably defined).3.2 We note that there are differences between the rules for individuals and otherpersons. However, the wording of clauses 2 and 3 is otherwise identical(except for the reference to clause 4). For this reason we do not think thatanything is gained by repeating the rules for relief in successive clauses. (Therewould therefore need to be a corresponding amendment to clause 4(1).)4 Clause 34.1 Q1: We agree with the proposal to align the approach to patent royalties withthat for annual payments.5 Clause 75.1 Q2: We agree with the proposed terminology “sums representing income tax”.6 Part 2, Chapter 26.1 We did not consider this Chapter in detail, as the clauses were recentlyconsidered in our document dated 25 April 2005, and it appears that the latestdraft incorporates the amendments discussed in the subsequent responsedocument.7 Part 2, Chapter 37.1 The layout of this Chapter is not easy to follow on an initial reading. First, oneis introduced to the concept of relevant payments and those payments to whichthe Chapter does not apply. Then one encounters the duty to deduct taxfollowed by the exceptions from that duty.7.2 For most readers of the legislation, it does not matter whether tax is notdeductible for (1) because the payment is not relevant or (2) because there isanother exemption.7.3 It would be clearer if (where possible) the exceptions from the duty to deductcould be placed together with the provisions which exclude certain paymentsfrom the duty to deduct.8 Clause 368.1 Whilst the term “discount” does not appear in the singular form in ITTOIA, wethink that the clause “is not discounts” in subsection (2)(b) reads ratherunnaturally. We note that paragraph 46 of the draft Explanatory Notes refers to“a discount”.8.2 The origin of the parenthetical words in subsection (3) is unclear.8.3 We are not convinced about the merits of retaining the expression “place ofabode” – except to say that its retention ensures that there can be noP/bc/subsfinal/tlr 2 14.11.05

Tax Law Rewrite Deduction at Source CIOT comments 14 November 2005unintended change in the law. In particular, we can find no authority whichsuggests that companies can be said to have an “abode”. Additionally, thereare a number of authorities which state that an individual’s usual place of abodecan be that individual’s place of business rather than the individual’s residence.To avoid such doubts and to rid the legislation of such archaic language, wewould recommend that the terminology be updated in the forthcoming FinanceBill as a pre-rewrite change.9 Clause 379.1 The heading of this and the next clause could be clearer if they explicitlyreferred to the fact that these clauses provide exceptions from the Chapter.9.2 The same point applies to clauses 40 to 46, although these at least are coveredby an italic cross-heading which serves a similar purpose.10 Clause 3910.1 We note that the statute must clearly extend who is treated as the payer of theinterest (and therefore extend the scope of the duty to deduct tax). However,the expression “by or through whom” could be misleading, in that it is followedby a requirement to deduct tax by the person “on making the payment”. Thiscondition suggests that it is only the person who makes the payment who isobliged to deduct the tax. If so, then the words “or through whom” could bedeleted. It is clear that this would not be appropriate, but it would be clearer ifone could readily determine the full breadth of the duty to deduct tax.11 Clause 4011.1 Subsection (1) is not as clear as it might be. In particular, the words “is made”appear to be better placed at the end of the sentence (or a different form ofwords is used, eg, “if there is a relevant payment of interest to which thisChapter applies”).11.2 We welcome the clearer approach adopted by subsections (4) and (5)compared with that in section 349(3AB). However, we wonder if subsection (5)could be simplified further by:• omitting the words “to deduct a sum representing income tax under section39” and “to a payment of interest on an advance from that organisation”; and• replacing the final words by “even if the condition in subsection (2) is notmet”.12 Clause 4112.1 It would be of immense benefit to readers of this clause to have a signpost tothe provisions that do require banks to deduct tax.13 Clause 4613.1 We wonder whether it would be appropriate to include section 486(9) within theorigins for subsection (1) as well as subsection (3).13.2 We note that subsection (2) might contravene EC law.P/bc/subsfinal/tlr 3 14.11.05

Tax Law Rewrite Deduction at Source CIOT comments 14 November 200513.3 We repeat our previous comments concerning the phrase “place of abode”.14 Clause 4714.1 Q3: We welcome the clarification, but think it would be better placed closer tothe definition of “relevant payment of yearly interest” rather than left as anorphan provision.15 Clause 4815.1 Q4: We see no need for the inclusion of clause 48(3)(b).15.2 Q5: If the Building Societies do not need to rely upon this explicit exemption forqualifying deposit rights, then it would be better to remove such references.16 Clause 4916.1 Q6: We welcome this clarification, but think that the Explanatory Notes wouldbenefit by the addition of a paragraph explaining why this is not a change(referring perhaps to the current practice and any comments of the BSA).16.2 We note that the origins of this clause are not shown at all.17 Clause 5317.1 This clause is a vast improvement on ICTA section 50(3).17.2 Q7: We welcome the label “gross-paying government securities”. Whilst ithardly trips off the tongue, it does have the advantage of “doing what it says inthe tin”.17.3 Q8: We agree that the parenthetical words in ICTA section 50(A1) add nothingand can be safely removed.18 Clause 5418.1 We welcome the omission of the words currently in ICTA section 51(2) “for thepurposes of making issues from the Consolidated Fund of Northern Ireland”.18.2 The modifications made by subsection (4) would be more logically placed insection 55 (where one has to ensure that there is no modification of themeaning of “The Treasury” as used by clause 54).18.3 Additionally, the words “those section” in paragraph (b) require an additional “s”.19 Clause 5519.1 We note that the current legislation refers to an “application”. Whilst we do notobject to this term, we wonder whether it is more akin to an “election” insofar asthe Registrar has no discretion to refuse any application validly made.However, we note that to change the wording might lead to difficulties with theTMA provisions concerning the making (and revoking) of elections.P/bc/subsfinal/tlr 4 14.11.05

Tax Law Rewrite Deduction at Source CIOT comments 14 November 200520 Clause 5720.1 The references in subsections (1), (2)(c) and (4) to Her Majesty use lower-caseaitches.21 Clause 5921.1 We share the concern raised at the Consultative Committee meeting inSeptember 2005 that the phrase “arises in the UK” is meaningless (or, at best,unclear) in the context of a payment. We note that terminology is used,however, in section 347A(2A)(a) (as inserted by ITTOIA). Nevertheless, theExplanatory Notes explain more clearly what is meant by the clause – that thepayment has a UK source.21.2 It would be useful if the Explanatory Notes made an explicit reference to theprovisions in Chapter 10 dealing with unauthorised unit trusts.22 Clause 6022.1 Q9: We welcome the simplification proposed by the transfer of the collectionmechanism to Self Assessment.23 Clause 6123.1 We feel that it would be just as easy (and clearer for readers) if the closingwords of subsection (2) repeated the wording of clause 60(1)(c) rather thanmerely referred to it.23.2 We would also prefer all the conditions within that subsection to be included inone list. Currently, the subsection reads: If X then Y only if Z. It would beclearer if it were of the form, Not Y if (X and Not Z).23.3 We would prefer subsection (4) to be split across two subsections.24 Clause 6224.1 Whilst we are not keen on the use of assumptions, etc, we wonder whether thewords “were it not for the person whose income it is” would be better replacedby the less opaque “if it were received by an individual”.25 Clause 6325.1 The provisions referred to in the origins shown under subsection (4) do notappear to include any reference to corporation tax.25.2 We also note that the conditions in subsections (2) to (4) are not labelled assuch. We wonder whether this is an oversight or whether there are differenttypes of conditions – those that are labelled A, B, C etc and those that are not.26 Clause 6426.1 The origins to subsection (1) refer to ICTA, s349(7) and the provision in FA2004, which inserted s349(7). Section 349(7) was, however, substituted byITTOIA.P/bc/subsfinal/tlr 5 14.11.05

Tax Law Rewrite Deduction at Source CIOT comments 14 November 200526.2 Furthermore, subsection (1) appears to suggest that the exemption conferredby Chapter 10 of Part 6 of ITTOIA does not cover the requirement to deduct taxunder what is currently ICTA s349. This is on the basis that the clause statesthat the payment is not to be ignored for the purposes of the duty to deduct.However, Chapter 10 provides that exempt income is to be ignored for allother income tax purposes except where there is an implied or expressprovision to the contrary. In our view, there is no such implied or expressprovision to the contrary. Instead, what FA 2004 s101 provides is that therecan be a temporary exemption when the income is thought to be exempt.However, under the FA 2004 régime (as extended by ITTOIA), exempt incomeis exempt from deduction. Therefore, truly exempt income can be ignored forthe purposes of the duty under clause 63.27 Clause 6727.1 We repeat our previous comments concerning the phrase “place of abode”.28 Clause 6828.1 We repeat our previous comments concerning the scope of FA 2004 s101.29 Clause 6929.1 Subsections (3) to (5) (and, in particular, the last two) should be hived off to aseparate clause as they go far beyond situations involving agents.30 Clause 7030.1 We wonder whether the omission of the reference to ITTOIA s599 would beworthy of a mention in the Explanatory Notes. Or should that section in fact bereferred to in subsection (4)?31 Clause 7131.1 After dealing with Chapter 6 and the preceding clauses of Chapter 7, all ofwhich deal with intellectual property rights, clause 71 stands out like a sorethumb in that it deals with non-commercial payments by companies. This ismade worse when one realises that the next clause (clause 72) is the beginningof Chapter 8, which also deals with royalty payments.31.2 Under the current layout of chapters this is perhaps inevitable (although thesituation could be slightly ameliorated by moving this clause to the top of theChapter so that it does not get lost after all the IP provisions).31.3 An alternative approach would be to hive off clause 71 into a Chapter of its own(a single-clause Chapter would not be new), leaving the rest of Chapter 7 andfor Chapter 8 to deal with the sundry IP provisions.32 Clause 7332.1 Q10: We agree it is appropriate to refer to an officer of R&C in this situation.P/bc/subsfinal/tlr 6 14.11.05

Tax Law Rewrite Deduction at Source CIOT comments 14 November 200533 Clause 7433.1 We note that the inclusive definition of “royalty” has seen an “or” change to an“and”. However, we agree that this makes no material difference to themeaning of the law – but makes the definition clearer.34 Clause 7934.1 Initially, we were tempted to agree with the Project in its decision to includeclause 79 in Bill 4. This was the case even though it makes modifications toother provisions.34.2 However, on reflection, this drafting technique is not strictly necessary.Consequently, the legislation would be clearer if:• a new para 3(5) (say) were added to FA 1998 Schedule 18;• a new paragraph 20A were inserted after para 20 (with para 20 suitablymodified) to deal with these penalties; and• clause 79 merely provided a helpful cross-reference to Schedule 18 asappropriate.35 Clause 8135.1 In subsection (1), we wonder if “none … apply” should be “none … applies”.35.2 As subsection (3) qualifies subsection (1) and subsection (4) qualifiessubsection (2), we wonder if (2) and (3) could be swapped around.35.3 Subsection (5), like existing section 349A(5), does not explain explicitly whathappens if the principal is another company. In other words, does theexemption apply if a company makes a qualifying payment on behalf of anothercompany? The Explanatory Notes suggest that there is no exemption in suchcases, but this is not obvious from the clause. We would recommend that thisbe made more explicit. We suggest that subsection (5) be varied to:Subsection (1) does not apply to any payment made by a companyacting as a trustee or agent for another person.35.4 Would it be possible to add “qualifying partnerships” to the list of payers insubsection (1)(a) and replace subsection (6) by a definition of qualifyingpartnership? Clauses 81(5), 82(5) and 88 would need to be amendedaccordingly.36 Clause 8336.1 No doubt, this clause (when compared with clause 84) risks a future challengeunder European law. A similar comment applies in respect of clause 87(4) and(5).P/bc/subsfinal/tlr 7 14.11.05

Tax Law Rewrite Deduction at Source CIOT comments 14 November 200537 Clause 8537.1 We wonder if the various permutations of subsection (2) could be set out moreclearly, perhaps even splitting it back into the two paragraphs as under thecurrent legislation.38 Clause 8838.1 Despite the subsequent reference to “subsection (2)”, as a matter of draftingstyle, we would prefer the reference to subsection (1) to be in the form “section81(1)”. This is a more concise style of drafting and allows readers to see morereadily which section is being referred to.38.2 We repeat our comments relating to the possible inclusion of a term “qualifyingpartnership”.39 Chapter 1039.1 Q11: We understand the reasoning behind the deeming. However, we are notsure that it is necessary to adopt this approach. This is because it amounts tothe deemed deduction from a deemed payment, and the Rewrite Project hasalways striven to reduce the incidence of statutory deeming.39.2 As far as the unit holders are concerned, the tax treatment is akin to dividendsin that there is some income arising (albeit a deemed distribution in UUT cases)to which there is attached a credit. There seems to be no reason to deem anydeduction to have been made.39.3 As far as the trustees are concerned, the amount of the “deemed deduction” ismore significant as it impacts upon the tax payable by them. However, we aresure that the same result can be achieved more directly.39.4 Once one moves away from the deemed deduction approach, it might transpirethat the remaining provisions of Chapter 10 are better suited in another Part ofthe Bill altogether. This would give rise to a consequential amendment toclause 112(3), (4) and (6).40 Clause 9040.1 Q12: We do not object to the alignment of the law with the current practicewhich requires UUTs to account for the tax due under the SA provisions.41 Clause 9141.1 We are not sure that the steps in subsection (2) actually determine whetherthere is a useable excess from earlier years. Presumably, there is no suchexcess if the amount determined by the steps is nil or negative (as suggestedby paragraph 260 of the Explanatory Notes). However, this should be madeexplicit in the legislation.42 Part 2, Chapter 1142.1 We did not consider this Chapter in detail as the clauses were recentlyconsidered in our document dated 12 July 2005. We note, however, that theP/bc/subsfinal/tlr 8 14.11.05

Tax Law Rewrite Deduction at Source CIOT comments 14 November 2005latest draft Chapter incorporates the amendments discussed in the recentresponse document.43 Clause 11043.1 Q13: We welcome the decision to remove the section 350 “charge” to tax.44 Clause 11244.1 We have earlier suggested that subsections (3) and (4) might be removed if theapproach to UUTs is revised. However, for the purposes of the followingcomment, we assume that they are to be retained in this clause. The openingwords of both subsections (1) and (3) provide that the clause applies if certainconditions are fulfilled. Logically, if the conditions in subsection (3) are fulfilled,then the whole of the clause applies (including subsection (2)). Similarly,subsection (4) applies (from a logical perspective) if subsection (1) is satisfied.However, the apparent intention of the provisions is that:• subsection (2) applies if and only if the conditions of (1) are satisfied;and• subsection (4) applies if and only if the conditions of (3) are satisfied.44.2 We would prefer subsection (7) to be worded along the lines, “the definitions insection 89(7) apply to this section”.45 Clause 11345.1 We wonder whether subsection (2) could be omitted and replaced by theinsertion of “beneficial” before “recipient” in subsection (1).46 Clause 11646.1 Q14: We do not object to the proposal to extend the application of the definitionof “deposit”.47 Clause 11747.1 The relevance of the words “, or financial instruments,” is unclear in subsection(1)(c). We note that it replicates the existing provision in section 349(5).Grammatically, it appears to provide an alternative to the preceding words “afinancial instrument”. However, if that were the case, would that not be coveredby section 6(c) of the Interpretation Act 1978? If the matter is to be put beyonddoubt, we would suggest a separate subsection to that effect.48 Clause 11848.1 Q15: We are not convinced that this does not represent a change in the law.ITTOIA section 552 is based on ICTA section 56(5). That refers to “anobligation to pay a stated amount”. However, section 6(c) of the InterpretationAct seems to allow that to be read as “an obligation to pay stated amounts” andalso “obligations to pay stated amounts”. But, there again, it seems equallyvalid to interpret the rewritten provisions in similar ways so as to allow there tobe more than one repayment date.P/bc/subsfinal/tlr 9 14.11.05

Tax Law Rewrite Deduction at Source CIOT comments 14 November 200549 Clause 11949.1 Q16: We are not convinced that this does not represent a change in the law.ITTOIA, section 552 is based on ICTA, section 56(5). That refers to “anobligation to pay a stated amount”. However, section 6(c) of the InterpretationAct seems to allow that to be read as “an obligation to pay stated amounts” andalso “obligations to pay stated amounts”. But, there again, it seems equallyvalid to interpret the rewritten provisions in similar ways so as to allow there tobe more than one repayment date.49.2 Q17: If here is no practical need for the reference to units, then we have noobjection to their being omitted.50 Clause 12050.1 Q18: In the context of the current drafts, the single definition of “quotedEurobond” seems appropriate.The Chartered Institute of Taxation14 November 2005P/bc/subsfinal/tlr 10 14.11.05