Annex 1: Minor Changes in the Law Change 59: Loan relationships: funding bonds: charge to tax as interest: sections 299 and 413
This change replaces a theoretical but unlikely charge to tax under Schedule D Case VI with a charge under the loan relationships legislation where funding bonds are issued and it is impractical to retain any bonds on account of income tax.
This change reproduces Change 82 in ITTOIA and so brings the income tax and corporation tax codes back into line.
Section 582(1) of ICTA generally treats the issue of funding bonds as a payment of interest and they are taxed accordingly. But there is one situation where funding bonds are charged to tax under Schedule D Case VI, rather than as interest. Section 582(2)(b) and (2A) of ICTA provides that where it is “impracticable” to retain bonds the recipient is instead chargeable to tax under Schedule D Case VI.
It would, however, be extremely unusual for a Case VI charge to arise on a company. Under section 930(1), 933 and 934 of ITA a company or authority is not obliged to deduct tax where the company beneficially entitled to the income is resident in the United Kingdom or, if not resident, the payment is within the charge to corporation tax under section 11 of ICTA. The only likely instance of a Case VI charge arising on a company liable to corporation tax (and hence the loan relationships regime) under section 582 is where tax is deductible on interest because it is paid other than by a company or authority. The only obvious example is a payment of a United Kingdom public revenue dividend under section 892 of ITA and public revenue dividends are unlikely to give rise to funding bonds.
Section 582(3A) of ICTA provides that the provisions of section 582 override the provisions of Chapter 2 of Part 4 of FA 1996 and thus the rules in section 582 apply where that treatment differs from treatment under the loan relationships regime.
As section 582(1) of ICTA treats funding bonds as a payment of interest for all purposes of the Corporation Taxes Acts, applying a different charge under Schedule D Case VI in just one situation has no particular logic and adds an unnecessary complication. As explained above, a Case VI charge is extremely unlikely to arise in the first place. So the separate Case VI charge is not reproduced. Section 413(2) ensures that all issues of funding bonds are charged to tax as interest, irrespective of the circumstances in which they are issued.
Loss relief against this income for losses previously arising under Schedule D Case VI has not been preserved given the unlikelihood of a Case VI charge. The exemption from tax for income charged under Schedule D Case III and which is applied for charitable purposes (section 505(1)(c)(ii) of ICTA) applies as a result of this change.
A tax disadvantage would arise if the taxpaying company had what would have been in the source legislation a Schedule D Case VI loss to bring forward or carry sideways and which could not be otherwise relieved. But since the likelihood of the Case VI charge arising under section 582 is so remote this can be virtually discounted.
A tax advantage could arise in the case of a charity where income, previously charged under Schedule D Case VI in the source legislation and therefore excluded from exemption, is not under the rewritten provision so excluded. But the likelihood of this occurring is equally remote. A tax advantage might also arise in that non-trading deficits on a loan relationship are available for set off against income within the rewritten provision and which was previously charged under Case VI income and against which such deficits could not be set.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with current practice.