Commentary on Sections Example 3 Ne = £5,000; Da = 183; De = 183; Smg = 0 Section 664: Short-term incapacity benefit not payable at the higher rate
2632.This section limits the charge to tax on short-term incapacity benefit. It relies on definitions in the social security legislation. It derives from section 139(1)(a) of FA 1994.
2633.The charge on incapacity benefit in section 139 of FA 1994 excludes “benefit payable for an initial period of incapacity”. That period is defined as a period for which short-term benefit is payable other than at the “higher rate”.
2634.Subsection (1) restricts the charge to tax on short-term incapacity benefit so that it is taxable only if it is payable at the “higher rate”.
2635.Subsection (2) cross-refers to the definition of “higher rate” in the social security legislation. The phrase is construed in accordance with section 30B(5) of the Social Security Contributions and Benefits Act 1992. That section refers to the rates of benefit set out in Schedule 4 to the Act. The benefit is payable at the “higher rate” after the first 196 days of a period of incapacity for work.
2636.As noted in paragraph 2608, incapacity benefit is charged to tax by section 139 of FA 1994. So it is logical for the benefit to be excluded from the charge in section 617 of ICTA. A free-standing charge was set up by section 139 of FA 1994 in case section 617(1) was not effective in taxing a new benefit – an explicit charge was thought to be safer.
2637.When incapacity benefit replaced sickness benefit and invalidity benefit in 1995, the references to the older benefits were not removed from section 617(1) of ICTA (some publishers have updated the text to help the reader). Instead, section 13(2) of the Social Security (Incapacity for Work) Act 1994 treats the references to sickness benefit and invalidity benefit in section 617(1)(a) as references to incapacity benefit. So incapacity benefit appears to be excluded from the charge in section 617 by subsection (1)(a).
2638.A consequence of exclusion from the section 617(1) charge would be that the benefit is not regarded as income for income tax purposes because of section 617(2)(c). This was overlooked when section 139 of FA 1994 set up the free-standing charge. So the benefit is apparently disregarded by section 617 of ICTA but clearly taxed by section 139 of FA 1994.
2639.This Act clarifies the law, to bring it into line with the clear, undisputed, policy objective (to tax incapacity benefit) and generally accepted practice. See Change 143 in Annex 1.