ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters. Change 4: Tax calculation: order in which tax reductions are allowed: sections 27 and 28
This change introduces the rule that where no priority is specified, tax reductions are allowed in the order that provides the greatest reduction in income tax liability for the year. In addition, the priority between two specific tax reductions is clarified.
In calculating liability to income tax, section 835(4) of ICTA provides that, subject to any express provisions, deductions from income are made in the order that produces the greatest reduction in tax. There is no corresponding provision regarding the order in which reductions that are given in terms of tax are allowed.
In many cases the order in which two or more tax reductions are made does not affect the liability, but in calculating the amount of some tax reductions it is necessary to establish which other reductions have already been taken into account. The new rule in sections 27(2) and 28(2) mirrors the rule on deductions in providing that, subject to any express provisions, tax reductions are made in the order that produces the lowest income tax liability for the year.
Some of the rules on particular tax reductions do provide an order of priority in relation to some other tax reductions. For example, from sections 256(3), 347B(5B) and 353(1H) of ICTA it can be seen that a reduction under section 353 is allowed before a reduction under section 347B and that reliefs under Chapter 1 of Part 7 of ICTA (personal reliefs) come after the other two.
There are in fact two distinct personal reliefs that operate as tax reductions and in practice it will always be beneficial for relief under section 273 of ICTA to be deducted before married couple’s allowance because the latter is transferable. Accordingly, in setting out in section 27(5) those provisions that provide for a particular order, the reliefs under Chapter 1 of Part 7 have been separated with married couple’s allowance to be given last.