Annex 1: Minor changes in the law made by the Act: Change 141: Foreign income: special rules: unremittable income: withdrawal of relief: ECGD payments received: section 843
This involves the withdrawal of relief in respect of unremittable income on the making of an Export Credit Guarantee Scheme payment in respect of the income.
Section 584 of ICTA provides a relief from income tax where a person’s income arising outside the United Kingdom is charged on the basis of the income arising in the tax year, but cannot be transferred to the United Kingdom because of circumstances outside the person’s control (“unremittable income”). Section 584(2) of ICTA provides that if such a person makes a claim in respect of overseas income which:
	is unremittable; and
	he or she will continue to be prevented from transferring to the United Kingdom, notwithstanding any reasonable endeavours on his or her part,
the amount of the income is to be left out of account in charging income from that source.
However, under section 584(2A) of ICTA if on any date “paragraph (a) or (b) of subsection (2) above ceases to apply” the income is treated as arising on the date of the change and is charged to tax for the tax year in which that date falls.
Section 584(5) of ICTA modifies the operation of the relief where a payment is made under the Export Credit Guarantee Scheme in respect of the unremittable income. Section 584(5) of ICTA provides that “…to the extent of the payment, the income shall be treated as income to which paragraphs (a) and (b) of subsection (2) above do not apply (and accordingly cannot cease to apply)”. This makes it clear that no claim can be made, but not whether relief already given may be withdrawn or, if it may, whether the charge to withdraw the relief is to be made for the tax year in which the income first arose, or the year in which the ECGD payment is made.
This lack of clarity appears to be an unintentional result of amendments made by paragraph 33 of Schedule 20 to FA 1996, which substituted the present subsections (2) and (2A) of section 584 of ICTA for the original subsection (2) and amended subsection (5) in consequence. Those amendments, which were part of the changes made to facilitate Self Assessment for income tax, built on the changes already made by F(No 2)A 1987 for the introduction of “Pay and File” for corporation tax. Before the FA 1996 changes section 584(2) of ICTA was much longer and provided not only that account would not be taken of the income to the extent that the claimant showed “to the satisfaction of the Board that conditions [corresponding to those in paragraphs (a) and (b) in the present subsection (2)]” were satisfied with respect to it, but also that “on the Board ceasing to be satisfied that those conditions are satisfied” such assessments etc were to be made as were necessary to take account of the income and of any tax payable in the overseas territory in respect of it “according to their value at the date when in the opinion of the Board those conditions cease to be satisfied with respect to it”.
The original section 584(5) of ICTA provided that to the extent of the Export Credit Guarantee Scheme payment the income should be treated as income “with respect to which the conditions mentioned in subsection (2) above are not satisfied (and accordingly cannot cease to be satisfied)”. So it plainly had the effect that not only could no claim be made, but the Board would be bound to be satisfied that the income had ceased to be unremittable – or perhaps had never been unremittable – and so it could be assessed. It was never very clear what date was to be used for the value of the income and the foreign tax. But presumably the only date that could be used was the date when the Board had to cease to be satisfied, that is the date of the payment.
There is no good reason for the treatment of income which is no longer unremittable to vary according to whether circumstances have changed or an ECGD payment has been made. So this apparent change in the effect of section 584(5) of ICTA appears to have been completely unintentional. In practice, the income is taxed in the tax year in which the ECGD payment is made. Therefore section 843(4) and (5), which rewrite section 584(5) of ICTA, provide for the income to be taxed in that tax year, and accordingly for the income and any tax payable in respect of it in the place where it arises to be taken into account for income tax purposes at that date.
This change is adverse to some taxpayers in principle. But it is in line with the original legislation before amendment and with the intention of the amended legislation. And it is expected to have no practical effect as it is in line with current practice.