ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.
Change 138: Charges on income: year in which payments taken into account: rates for deduction of tax: sections 900, 901, 902 and 903
This change requires a sum representing income tax to be deducted from certain annual payments and patent royalties at the basic rate (or, in some cases, the savings rate) in force in the tax year they are made. It also ensures the payments will always be taken into account in the payer’s tax calculation for the tax year in which they are made.
Section 4 of ICTA requires any deduction made to be at the basic or savings rate in force for the relevant tax year. That year is defined in section 4(2) of ICTA and depends on whether the payment is paid wholly out of income brought into charge to income tax. If it is, the relevant year is the tax year in which the payment is due to be paid. If not, the relevant year is the tax year in which the payment is made.
In either case, the relevant year is also the year against the income of which the payment is treated as a charge by virtue of the rule in section 835(6)(b) of ICTA which links into section 4 of ICTA.
These rules give rise to two awkward points.
The first is that the payer may not know the level of his income for the tax year at the time of payment and so there may be uncertainty about whether it will be treated as being paid wholly out of income brought into charge to income tax. Not knowing which tax year is relevant at the time of payment means that the payer may not know the rate for deduction at that time. (This uncertainty is also referred to in connection with Change 81).
The second concerns the case where the payer has insufficient income in the year the payment was due but has ample income in the following year and (whether or not for that reason) makes the payment in that following year. Here, a sum representing income tax will be deductible at the rate for the year in which the payment was due. And section 835(6)(b) provides that the payment is treated as a charge against the payer’s income of that year. That is potentially disadvantageous to a payer who has insufficient income in that year to cover the charge.
Under this change, the provisions of section 4 of ICTA are not rewritten so far as they address these issues, but instead the rule is that deduction is made at the applicable rate in force for the year of payment. And the sections providing for the collection of the tax (in later Chapters of Part 15) and for relief for the payments themselves in calculating net income (Chapter 4 of Part 8) follow suit. The self-assessment return and guidance material already effectively adopt this approach, by simply asking for details of payments without considering whether a payment is late.
Moving to a deduction at the rate in force for the year of payment may benefit the taxpayer in the second case cited above. But the taxpayer is not disadvantaged in the reverse scenario, where a payment is made late and the payer had ample income in the year the payment was due, but has less total income than the amount of the payment in the year of payment. That is because the payer’s income would not have been enough to cover the charge (before the change) and (after the change) it is only possible for some of the payment to be deducted in calculating net income.
Nothing in this new rule affects the year in which a payment subject to deduction of tax at source is assessable on the recipient. That is fixed by provisions such as sections 580(1) and 684(1) of ITTOIA.