ANNEX 1:: MINOR CHANGES IN THE LAW Change 1: Double taxation relief: capital gains tax relief under double taxation arrangements: section 3
This change clarifies the extension of section 788(8) of ICTA (double taxation relief: provision as to income which is not subject to double taxation) to capital gains tax by section 277(1) of TCGA.
Section 788(8) of ICTA ensures that DTAs can be given statutory effect even if they contain “provision as to income or chargeable gains which is or are not subject to double taxation”. These words, however, are in a subsection that, taken by itself, operates only in relation to income tax, corporation tax and similar taxes in territories outside the United Kingdom. Two issues arise in rewriting those words as extended in relation to capital gains tax by section 277(1) of TCGA.
The first issue is whether to give effect to the substitution provided for by section 277(1) of TCGA and as a result to refer not to income or chargeable gains but to capital gains. In this regard, it is considered that capital gains include:
	chargeable gains; and
	gains (referred to in this note as “non-chargeable gains”) that would be chargeable gains but for some provision of TCGA, or of another UK enactment, that provides that the gains are not chargeable gains.
The second issue is whether the purpose stated in section 277(1) of TCGA – namely, the purpose of giving relief from double taxation in relation to capital gains tax and tax on chargeable gains charged under the law of any territory outside the United Kingdom – means that section 277(1) does not extend to capital gains the power to include provision as to items which are not subject to double taxation. This interpretation would be on the basis that making provision about items not subject to double taxation could not be said to be giving relief from double taxation.
The cited words from section 788(8) of ICTA, as extended by section 277(1) of TCGA, are rewritten, in section 3(2), so as to refer to:
“(a)provision as to income that is not subject to double taxation, or(b)provision as to chargeable gains that are not subject to double taxation.”
Viewed in the light of the first issue discussed in this note, referring to chargeable gains rather than capital gains means that, if any DTAs made provision as to non-chargeable gains that are not subject to double taxation, such provision would not have statutory effect. In principle, this is a change in the law. But it has no effect in practice, since no existing arrangements rely on section 788(8) of ICTA as extended by section 277(1) of TCGA in order to make provision as to non-chargeable gains that are not subject to double taxation.
Viewed in the light of the second issue discussed in this note, extending the reference to chargeable gains so that it applies in the context of capital gains tax, and similar taxes in territories outside the United Kingdom, would give statutory effect to provision in DTAs that (a), in the context of capital gains tax and such similar taxes, is provision as to chargeable gains that are not subject to double taxation and (b) is currently inoperative. In principle, this is a change in the law. But it has no effect in practice, since no existing arrangements make such provision.
As regards possible future DTAs, changing the scope of the power given by section 788(8) of ICTA, as extended by section 277(1) of TCGA, could be adverse or favourable to taxpayers, depending on the precise details of the provision which might be made by the future arrangements.
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 generally accepted practice.