Annex 1: Minor changes in the law made by the Act: Change 82: Funding bonds: charge to tax as interest: section 380 and paragraph 168 of Schedule 1
This change replaces the charge to tax under Schedule D Case VI, which operates in particular circumstances where funding bonds are issued but it is impracticable to retain any bonds on account of income tax, with a charge on all funding bonds as interest and extends the exemption from income tax for charities to cover the income otherwise within the replaced charge.
Section 582(1) of ICTA provides that where funding bonds are issued to a creditor in respect of any liability to pay interest on certain debts, the issue of the bonds is treated as if it were the payment of an amount of that interest equal to the value of the bonds at the time of issue. Where a person would be required to deduct tax from the payment if it were an actual payment of interest, bonds to a value equal to the tax on the interest are to be retained and tendered in satisfaction of the tax (see section 582(2)(a) of ICTA).
So section 582(1) of ICTA generally treats the issue of funding bonds as a payment of interest and they are taxed accordingly. But there is one situation where funding bonds are charged to tax under Schedule D Case VI, rather than as interest. Section 582(2)(b) of ICTA provides that where it is “impracticable” to retain bonds the recipient is instead chargeable to tax under Schedule D Case VI. As section 582(1) of ICTA treats funding bonds as a payment of interest for all purposes of the Taxes Acts, applying a different charge under Schedule D Case VI in just one situation has no particular logic and adds an unnecessary complication. So the separate charge has not been reproduced. Section 380 ensures that all issues of funding bonds are charged to tax as interest, irrespective of the circumstances in which they are issued.
The substituted section 392 of ICTA in paragraph 168 of Schedule 1 to this Act preserves the possibility of loss relief being claimed as a deduction from this income. (It is not considered that a loss could arise in a transaction where a charge is imposed under section 582 of ICTA.)
Section 505(1)(c)(ii) of ICTA, which allows a charity exemption for income taxed under Schedule D Case III, has been amended so as to refer to all income within section 380 whether formerly Schedule D Case III or Case VI.
This change has no implications for the amount of tax paid, who pays it or when, except that the extension of the exemption for charities’ income is in taxpayers' favour in principle and may benefit some in practice, although the numbers affected and the amounts involved are likely to be small.