Annex 1: Minor changes in the law made by the Act: Change 83: Discounts: charge to tax as interest: section 381
This change provides for discounts taxed in the source legislation under section 18(1)(b) of ICTA and Schedule D Case III (b) to be taxed as interest.
Discounts have been part of the charge to tax under Schedule D Case III since at least 1805. Several tax cases have considered aspects of their tax treatment including the difficulties in determining the nature of a “discount” as compared with “interest”. It has emerged from this case law that while the line between the terms can be difficult to identify, they are distinguishable in nature.
Discounts are nevertheless taxed in much the same way as interest. They are charged to tax on the person receiving or entitled to the discount: see section 59(1) of ICTA. Similarly, income tax is computed on the full amount of the income arising within the year of assessment without any deduction: see section 64 of ICTA.
Chapter 2 of Part 4 of this Act includes a specific charge to tax for interest which is extended to include other types of income which, in the source legislation, are treated as interest.
Section 381 provides that discounts, other than discounts in deeply discounted securities within Chapter 8 of Part 4 of this Act, are taxed under Chapter 2 of Part 4 of this Act as interest, so removing the necessity to distinguish between them for the purposes of the charge to income tax. It follows that the separate charge for these discounts is not rewritten in this Act.
This change has no implications for the amount of tax paid, who pays it or when.