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 134: Deduction of tax: interest paid by building societies: sections 874 and 875
This change removes a drafting defect in section 349(2) of ICTA, to make it clear that Chapter 3 of Part 15 of this Act (deduction from certain payments of yearly interest) does not apply to any interest paid by building societies. All duties to deduct sums representing income tax from payments made by building societies are dealt with in Chapters 2 and 4 of Part 15 of this Act (based on sections 349(3A) and (3B) and regulations made under 477A(1) of ICTA).
Subject to certain exceptions that are not relevant here, section 349(2) of ICTA imposes a duty to deduct sums representing income tax from yearly interest paid (whether by or through the payer):
“(a)otherwise than in a fiduciary or representative capacity, by a company (other than a building society) or local authority; or(b)by or on behalf of a partnership of which a company is a member; or(c)by any person to another person whose usual place of abode is outside the United Kingdom.”
Under the source legislation, payments by building societies of interest on shares in, deposits with or loans to them are dealt with by regulations under section 477A(1) of ICTA. The scope of this provision is wide. But yearly interest on freely transferable securities issued by building societies are excluded from those regulations by section 477A(1A) of ICTA, being dealt with separately in section 349(3A) and (3B) of ICTA.
A building society is a body corporate, within the definition of a company in section 832(1) of ICTA, so section 349(2)(b) of ICTA could be read as catching any payments of yearly interest by a partnership of which a building society is a member. Also, section 349(2)(c) of ICTA, with its reference to payments “by any person”, could be read as imposing a duty on a building society to deduct from payments of yearly interest it makes to persons abroad. But both these possibilities would duplicate duties imposed by regulations made under sections 349(3A) and 477A(1) of ICTA.
This was not always so. As originally enacted, section 476(5)(a) of ICTA excluded from sections 348 to 350 of ICTA any dividends or interest to which regulations applied, unless those regulations specifically provided for sections 348 to 350 to apply. (The current regulations make no such provision.) At that time building societies could not issue freely transferable securities.
On the abolition of the composite rate provisions by FA 1990, section 349(3) of ICTA, which provides for exceptions to the duty to deduct under section 349(2), was amended by inserting subsection (3)(e) to exclude from that duty:
“any dividend or interest paid or credited in a relevant year of assessment in respect of shares in, or deposits with or loans to, a building society.”
But in FA 1991 amendments were made to ICTA by locating the duty to deduct from dividends and interest on freely transferable securities in new sections 349(3A) and (3B). To pave the way for this, section 477A(1A) was inserted, ensuring that such dividends and interest were outside the scope of the regulations under section 477A. Further, the words inserted as section 349(3)(e) of ICTA by FA 1990 were repealed and the words “(other than a building society)” inserted into section 349(2)(a) of ICTA, but with no adjustment to section 349(2)(b) or (c). This inadvertently opened up the possibility that parts, but not all, of section 349(2) could apply to payments of interest by a building society.
This change restores the position of building society interest payments by excluding them from Chapter 3 of Part 15 of this Act (the rewritten equivalent of sections 349(2) and (3) of ICTA). So all payments of dividends and interest now fall under either Chapter 2 or Chapter 4 of Part 15 of this Act.