Annex 1: Minor changes in the law made by the Act: Change 137: Foreign income: special rules: deductions: omission of requirement for income not to be received in the United Kingdom: section 838
This change involves rewriting the part of section 65(1) of ICTA that permits deductions for expenses incurred outside the United Kingdom to be allowed in calculating the amount of foreign income chargeable to tax with the omission of the condition that the income in question must not be received in the United Kingdom.
Under section 65(1)(a) of ICTA certain deductions may be made from income within Schedule D Case IV and V that is taxed on the arising basis (with the exception of income arising from a trade carried on wholly abroad). The deductions are only permitted to be made where the income concerned is not received in the United Kingdom. (See the words preceding paragraph (a) of section 65(1) of ICTA.)
It is thought that this rather curious condition was included as an attempt to put taxpayers who found themselves within the arising basis rather than the remittance basis (following the restrictions placed on the remittance basis in FA 1914) on a similar footing to those who could still take advantage of the remittance basis. In fact, no deductions are available to those taxed on the remittance basis (except in the case of trading income). Moreover, in practice, for taxpayers within the arising basis, the Inland Revenue make no distinction between income received and not received in the United Kingdom: deductions available under section 65(1)(a) of ICTA are given whether or not the income in question is received in the United Kingdom. (See Change 138 for further details about the nature of these deductions.)
In rewriting the circumstances in which these deductions are allowed, this restriction has been omitted. (It is necessary, however, and has been retained for the deduction allowed for annuities under section 65(1)(b) of ICTA which is rewritten in section 839: see subsection (5)(a) of that section.)
This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.