Commentary on Sections Structure of Chapters Overview
2605.The Chapter rewrites the part of section 18(3) Schedule D Case III (a) of ICTA which deals with annual payments and the parts of Schedule D Cases IV and V which deal with foreign annual payments.
2606.Under section 18(3) of ICTA there are no individual charges on income from different types of source within the Schedule D Case IV or V charge. The system of identifying and classifying income by Schedule and Case is replaced by individual charges on types of income, which previously would have fallen under a general Schedular/Case charge. In the context of income which would have previously been charged under Case IV or V, as appropriate, the charge is being fully integrated with the equivalent income arising from a UK source.
2607.This Chapter sets out the charge to income tax on any annual payments that are not charged to tax by any other provision of this Act or any other legislation. Annuity payments made under purchased life annuities and distributions from unauthorised unit trusts (which in the source legislation are treated as annual payments) are generally regarded as investment income. So the charge to tax for this income is in Part 4 of this Act. Royalties which are annual payments are generally regarded as income from intellectual property and are therefore taxed alongside other intellectual property income under Chapter 2 of Part 5 of this Act. Annual payments derived from telecommunication rights are also taxed under a separate Chapter, Chapter 4 of Part 5 of this Act. So, as the annual payments charge in Chapter 7 of Part 5 of this Act takes effect only if an amount is not otherwise charged to income tax, there is no overlap between the charge under this Chapter and the ex-Case III charges elsewhere in this Act.
2608.The charge to tax is in the penultimate Chapter of Part 5 of this Act to emphasise that it is a residual charge.
2609.The exemptions from the charge to income tax on annual payments are in Part 6 of this Act.
2610.The phrase “annual payment” is retained but not defined. The phrase is not defined in the source legislation. Instead it derives its meaning from an extensive body of case law. That case law illustrates that the phrase has a meaning for tax purposes far different from its natural one. Replacing that phrase risks breaking the link to case law without making the law any clearer or easier to understand. Because of the volume and complexity of the case law, defining “annual payment” comprehensively in this Act is impracticable and also risks changing the law.
2611.But it is possible to derive from the case law the main characteristics of an annual payment.
2612.For example, Jenkins L.J., in Commissioners of Inland Revenue v Whitworth Park Coal Company (1959), 38 TC 531 HL (at pages 548 to 550) regarded the following propositions as established:
(i)To come within the Rule as an “other annual payment” the payment in question must be ejusdem generis with the specific instances given in the shape of interest of money and annuities (Hill v Gregory 6 TC 39; Earl Howe v Commissioners of Inland Revenue 7 TC 289)…;(ii)The payment in question must fall to be made under some binding legal obligation as distinct from a being a mere voluntary payment (Smith v Smith 1923)…;(iii)The fact that the obligation to pay is imposed by an Order of the Court and does not arise by virtue of a contract does not exclude the payment from Rule 1(a) of Case III (Smith v Smith 1923; CIR v Corporation of London (as Conservators of Epping Forest) 34 TC 293) …;(iv)The payment in question must possess the essential quality of recurrence implied by the description “annual” (Smith v Smith 1923) …;(v)The payment in question must be in the nature of a “pure income” profit in the hands of the recipient (Earl Howe v CIR 7 TC 289).”
2613.The value of the first proposition is not without doubt. Not only has Parliament changed the genus from that considered in Hill v Gregory and Earl Howe, but the Court of Appeal in R - v - Special Commissioners of Income Tax ex parte Shaftesbury Homes and Arethusa Training Ship (1922), 8 TC 367 CA, in construing “any yearly interest or other annual payment” held that the expression “other annual payment” could not be construed eiusdem generis with the expression “any yearly interest”.