ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL 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.
Change 3: Tax calculation: relief for deficiencies: amendment to section 539 of ITTOIA: section 26 and Schedule 1 (section 539 of ITTOIA)
This change amends the way in which relief under section 539 of ITTOIA is given and introduces a formal claims requirement.
Section 539(1) of ITTOIA provides for relief for a deficiency to be given as a deduction from total income. But the mechanics of the relief as set out in section 539(3) to (5) show that it is intended to work as a computational adjustment to the amount of income tax payable. Accordingly, the relief is included with those that operate as tax reductions in section 26 of the Act, and section 539 of ITTOIA is itself amended to make the position clear.
Amended section 539 of ITTOIA adopts a step approach to the calculation of the reduction. Since the greatest reduction in tax is achieved by charging dividend income at the dividend ordinary rate instead of at the dividend upper rate (a reduction from 32.5% to 10%), Step 1 allocates the deficiency as far as possible to dividend income chargeable at the upper rate. On the same basis Step 2 deals with savings income charged at the higher rate (a reduction from 40% to 20%) and Step 3 with other income (a reduction from 40% to 22%).
The treatment set out above does not apply to certain life annuity contracts made in the accounting period of an insurance company or friendly society beginning before 1 January 1992. In such a case the provisions of paragraph 109 of Schedule 2 to ITTOIA apply to treat the deficiency as an income deduction. That paragraph is itself consequentially amended by this Act to make the position clearer.
The opportunity has also been taken to introduce a claims requirement in line with other insurance related reliefs (see Change 83). In practice, box 12.9 of the Self Assessment return does require a claim to relief. The introduction of a formal claims requirement regularises this practice and provides a straightforward way of resolving disputes.