ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle and in practice) only administrative matters. Change 131: Deduction of tax: deposit-takers and building societies: declarations of non-UK residence: Scottish partnerships: sections 859 and 861
This change clarifies the operation of provisions about Scottish partnerships.
Under Scottish law, a Scottish partnership is a separate legal entity and thus capable of being the beneficial owner of a deposit. Section 481(4)(b) of ICTA states that where a deposit is owned by a Scottish partnership, and all the partners are individuals, it will be treated as a relevant investment.
But under section 481(5)(k)(i) of ICTA, the deposit will not be treated as a relevant investment where, “the person who is beneficially entitled to the interest is not … ordinarily resident in the United Kingdom”.
As the Scottish partnership is the person beneficially entitled to the deposit, this does not sit comfortably with the fact that it is the partners who each have a residence status, rather than the partnership itself. Further, existing practice (although declarations in favour of Scottish partnerships are rare) is to apply this provision by reference to whether all the partners are not ordinarily resident in the United Kingdom (rather than whether the Scottish partnership is not ordinarily resident).
Section 481(5)(k)(i) of ICTA and regulation 4(1)(a) of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 (SI 1990/2231) (the building society regulations) have therefore been rewritten in section 859 in such a way as to ensure that a deposit will not be a relevant investment where a declaration has been made by the Scottish partnership that all the partners of the Scottish partnership are not ordinarily resident in the United Kingdom.
In the same way, section 481(5)(k)(iii) of ICTA treats a deposit as not being a relevant investment where the trustees are not UK resident and believe that no beneficiary is an individual ordinarily resident in the UK or a UK resident company. On a strict reading of section 481(5)(k)(iii) this means that a declaration may be made where the trustees are non-UK residents and a Scottish partnership, consisting in whole or part of UK resident partners, is a beneficiary. In order to rewrite section 481(5)(k)(iii) of ICTA in a way that is consistent with the rewrite of section 481(5)(k)(i) of ICTA, it is necessary to refer to the partners of the Scottish partnership rather than the Scottish partnership in section 861.
This aspect of section 861 follows the approach currently taken by regulation 4(1)(bb) of the building society regulations which allows a payment to be made gross where the trustees are not UK resident and the beneficiaries are non-UK resident or, in the case of a Scottish partnership, the partners are non-UK resident individuals. But regulation 11(2AA)(b) of the building society regulations requires the building society to obtain a declaration stating that the trustee does not have reasonable grounds for believing that the beneficiaries are UK resident. In order to rewrite regulation 11(2AA)(b) in a way that is consistent with regulation 4(1)(bb)(ii), it is necessary for the rewritten legislation to refer to the partners of the Scottish partnership rather than the Scottish partnership.
Section 861, therefore, provides that, where the beneficiary is a Scottish partnership, the declaration must confirm that all the partners are not ordinarily UK resident.
Further, section 482(2)(a) of ICTA and regulation 11(2AB)(b) of the building society regulations require an undertaking to be included in the declaration that, if the beneficiary becomes resident, a notification will be sent to the deposit-taker or building society. In order to rewrite these provisions in a way that is consistent with the rewrite of section 481(5)(k)(i) and (iii) of ICTA and regulation 4(1)(a) and (bb) of the building society regulations, reference is made, in sections 859(3) and 861(3), to the partners of the Scottish partnership rather than the beneficiary.
Finally, for building societies, section 861(3)(b)(iii) departs from regulation 4(1)(bb)(ii) of the building society regulations, which in effect requires the declaration to state that no beneficiary of the trust is a Scottish partnership with a UK resident partner or a company partner (whether UK resident or non-UK resident). It appears more appropriate for regulation 4(1)(bb)(ii) of the building society regulations to be consistent with the general approach taken in regulation 4(1)(bb)(iii) dealing with trusts. Consequently, section 861(3)(b)(iii) only refers to UK resident company partners.