ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL General position in the source legislation
The main source legislation involved is in sections 3, 347A, 348, 349(1) to (1B), 350(1) and 387 of ICTA and section 51 of ITTOIA.
Sections 348 and 349(1) to (1B) of ICTA run in parallel and, supported by section 3 of ICTA, are concerned only with certain annual payments and certain patent royalties. The scope of these sections is much reduced from what it once was, now that they no longer apply to interest and given the interplay of these provisions with section 347A of ICTA.
Section 348 of ICTA applies when the payment is payable wholly out of profits or gains brought into charge to income tax and section 349 of ICTA applies when it is not so payable. Broadly, section 348 applies where the payer is subject to income tax and has sufficient income to cover the charge on income, and section 349 applies where the payer is subject to corporation tax or is exempt or, while subject to income tax, has insufficient income to cover the charge on income.
The concept of alienation of income, which lies in the background to sections 3 and 348 of ICTA, is that an amount of income equal to the amount of the charge on income is regarded as no longer being the income of the payer, but as the income of the payee instead. The tax that the payer deducts (it will always be in the payer’s interest to deduct and retain the tax even though it is optional) enables the payee to be regarded as receiving the payment under deduction of tax (see sections 602 and 618 of ITTOIA).
All of the payer’s income is subject to tax, without the annuity or other annual payment being deducted (see section 348(1)(a) of ICTA) and without the charge on income consuming any part of the payer’s basic rate band (as it is always to be charged at the basic rate: see section 3 of ICTA), to ensure the tax concerned is collected from the payer.
Section 348 of ICTA can only work where the payer has sufficient income. Where this is not the case, section 349 of ICTA applies. Here, deduction of income tax is mandatory and the tax is collected by assessment under section 350(1) of ICTA. There is no relief under the deduction at source regime for payments assessed under section 350 (but the payment may qualify for other relief, eg as a deduction in calculating trading profits).
At the boundary between these two regimes lie cases where the payer has only sufficient income to cover part of the charge on income. In these cases the whole payment falls within section 349(1) of ICTA (and so deduction of tax is mandatory), but it is only the tax on the excess that needs to be collected by assessment under section 350(1) of ICTA (see the reference there to “on the payment, or on so much thereof as is not made out of profits or gains brought into charge to income tax”).
There are then a variety of provisions designed to maximise the extent to which payments can be handled within the scheme of section 348 of ICTA, including those reducing the extent of personal reliefs (see section 276 of ICTA), tax reducer reliefs (see eg section 256(3)(c)(ii) of ICTA), and the availability of terminal loss relief (see the first part of section 388(5) of ICTA). It is only where such measures prove insufficient that the regime of section 349(1) of ICTA comes into play.
Complex features of the present position include:
	the conceptual background of the payer’s income being alienated to the payee (an approach which dates from the time when different sources of income were assessed separately without regard to total income);
	the idea of payments being (or not being) made out of profits or gains brought into charge to income tax, the boundary between sections 348 and 349(1) of ICTA, and the need for a payer to know which regime will apply; and
	the resulting multiplicity of provisions across the income tax code which require understanding of charges on income, despite the fact that the range of payments still treated in this way is now very narrow.