CIOT Finance Bill 2003 representations
1. Foreign income ‚ what is the position of someone who is resident but not domiciled and not ordinarily resident?
2. IR35 ‚ are IR35 deemed payments income for tax credit purposes?
3. Termination payments ‚ is it correct that taxable payments in lieu of notice (PILONs) count as tax credit income although the period for which they are paid does not count as a period of work?
4. Strikers ‚ likewise, is it correct that strike pay counts as tax credit income, although the period on strike does not count as a period of work, apart from the first 10 days?
5. Mileage allowances ‚ relief under s231 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) appears to have been missed from the amending regulations.
The Revenue have now provided answers to each of the first four questions, namely:
1. All income, worldwide, needs to be included in a tax credit claim. Any remittance basis, which might apply for tax purposes, is ignored.
[The main disregards for foreign income for tax credit purposes are:
a) unremittable income (see Reg 3(3) SI 2002/2006); and
b) 10% relief for foreign pensions (see Reg 12(3)(b) SI 2002/2006, as amended by Reg 10 SI 2003/732.)]
The Revenue have also said that they will consider our suggestion to include mileage allowance relief when they consider the next set of amendments to the Definition and Calculation of Income Regulations.
More detail on the four questions we posed and the Revenue‚ s answers is given below.
Foreign income CIOT said: Amending regulation 5(3)(b) of SI 2003/732 creates an apparent hole in the tax credit income treatment of those who are not resident, ordinarily resident and domiciled in the UK. It appears that an individual who is resident but not ordinarily resident and not domiciled in the UK (for income tax purposes) could still claim the remittance basis for non-employment income. By contrast, for employment income it seems that the last but one paragraph of Regulation 4(1) of SI 2002/2006 would still require the remittance basis to be ignored. Would you please confirm that this interpretation is correct?
IR replied: Regulation 3 (4) of the Definition & Calculation of Income Regulations, as amended, explicitly overrides the remittance basis of taxation for two groups of tax credit claimants, those who for tax purposes are resident and domiciled but not ordinarily resident in the UK and those who are resident and ordinarily resident but not domiciled in the UK. You have suggested that a third group, those who are resident but not ordinarily resident and not domiciled in the UK, may still benefit from the remittance basis of taxation in respect of non-employment income when claiming tax credits. There are two points to bear in mind.
Firstly, it is unlikely that someone who is not ordinarily resident for tax purposes and not domiciled in the UK would be able to meet the ordinary residence test for tax credit purposes, as contained in the Tax Credits (Residence) Regulations 2003.
Secondly, even if such a person were to meet the ordinary residence test for tax credits and make a claim, non-employment (or non-trading) income from outside the UK would fall within the scope of regulation 12 of the Definition & Calculation of Income Regulations. This defines foreign income for tax credit purposes as ‚ income arising, in the [tax] year in question, from possessions or securities out of the United Kingdom‚ . So all tax credit claimants who have income from investments or property overseas or who are entitled to foreign pensions or social security benefits have to include them in their claim as the income arises, not when it is received in the UK.
Nevertheless, to put the matter beyond doubt, we shall in due course amend regulation 3 (4) further so that it clearly applies to individuals who, for tax purposes, are resident but not ordinarily resident and not domiciled in the UK.
Finally in this area, we can confirm that the penultimate paragraph of regulation 4 (1) overrides the remittance basis in respect of employment income.
CIOT comment: The amendment referred to by the Revenue will probably be necessary anyway to deal with the position of those in receipt of foreign trading income, not covered by regulation 12.
The Tax Credits (Residence) Regulations do give tax credits to certain categories of persons not ordinarily resident in the UK.
IR35 CIOT said: It seems to us that, by virtue of the ITEPA 2003 changes introduced by SI 2003/732 and SI 2003/701, deemed payments under the ‚ IR35‚ legislation would now count as employment income. This is not unfair in the sense that the deemed payment is an amount considered to be earnings (which could have been paid out as salary); the problem is practical in that typically people find it hard to know what the deemed payment is until well after the tax year end.
Could you confirm that our interpretation is correct and explain how people are going to know what amounts to return when they make their tax credits claim?
Our argument for thinking that deemed payments are now included is that the ITEPA changes to the income regulations involve using s62 of ITEPA as the starting point (see Reg 4(a) of SI 2003/732) and it seems to us that this would include s50 of ITEPA. We also note that the amendments to the Working Tax Credit (Entitlement and Maximum Rate) Regulations, in deleting references to Schedule E and emoluments, substitute "where the earnings under the contract are chargeable to income tax as employment income under Parts 2 to 7 of ITEPA", which of course includes Chapter 8 of Part 2, the IR35 rewrite (see Reg 3(3) of SI 2003/701). This begs the question of who is the ‚ employer‚ in IR35 situations, who might be required to pay any working tax credit (other than childcare). Will you issue guidance on this also please?
We note that the TC600 and notes make no reference to IR 35.
IR replied: You have suggested that we have extended our definition of employment income for tax credit purposes to include deemed payments under the 1R35 rules. You suggest this for two reasons. Firstly, because in regulations 2 (2) and 4 (1) (a) of the Definition & Calculation of Income Regulations, as amended, we refer to the tax definition of ‚ earnings‚ in section 62 of ITEPA. Secondly, because the previous reference to Schedule E in regulation 2 (Interpretation) of the Working Tax Credit Regulations has been replaced by one to earnings taxable as employment earnings under Parts 2 to 7 of ITEPA, which would include the rewritten 1R35 rules in Chapter 8 of Part 2 of that Act. You are concerned about the administrative implications, namely how would claimants know what amounts to report in their tax credit claim and who would be the employer responsible for paying Working Tax Credit in 1R35 situations?
We do not agree with your reading of the Definition & Calculation of Income Regulations on this point. The tax credits definition of employment income is based primarily on ‚ earnings‚ as defined in section 62 of ITEPA (previously ‚ emoluments‚ within section 131 of the Taxes Act 1988) as well as specified benefits in kind (for example, cars, car fuel, vouchers and credit tokens) and other payments (such as sums for restrictive undertakings). The fact that we have explicitly listed certain benefits in kind and other payments as employment income in regulation 4 (1) (b) onwards means that when regulation 4 (1) (a) refers to ‚ earnings‚ , it means strictly earnings within section 62 of ITEPA, not ‚ deemed employment payments‚ within section 50 of the Act. Although section 50 of ITEPA says that deemed employment payments are ‚ to be treated as earnings from employment‚ for tax purposes, if by way of comparison we look at section 120 dealing with car benefit, it uses the same phrase about treating that benefit ‚ as earnings from employment‚ for tax. If we had intended to extend the tax credits definition of employment income to deemed employment payments, we would have had to say so explicitly, as we did for cars and some other benefits and payments.
Having said that, we will consider whether the new definition of ‚ employed‚ in regulation 3 (3) of the Working Tax Credit amending regulations needs to be expanded to make clear that it does not apply to a deemed employment in Chapter 8 of Part 2 of ITEPA.
Termination payments CIOT said: We note that all taxable termination payments now count as tax credit income (before it was only those paid under the Employment Rights Act) - see Reg 6(f) of SI 2003/732. This also is not in the TC600 or notes.
We also see that amendments to the WTC entitlement regulations deem periods when claimants are in receipt of payments in lieu of notice (PILONs) as periods when they are not "working" ie the income counts but the period for which it is paid does not (see new Reg 7C inserted by Reg 7 of SI 2003/701).
Was this change intended?
IR replied: As you point out, regulation 6 (2) (f) of the amendments to the Definition & Calculation of Income Regulations extends the definition of employment income for tax credit purposes to all termination payments taxable under Chapter 3 of Part 6 of ITEPA (previously section 148 of, and Schedule 11 to, the Taxes Act). On the other hand, the new Working Tax Credit regulation 7C provides that if a person stops work and receives pay in lieu of notice, that person is not regarded as being in qualifying remunerative work for the purposes of the Working Tax Credit. You are concerned that although the income is taken into account, we will not count the period when work has stopped when assessing eligibility for the Working Tax Credit.
The change to the Working Tax Credit Regulations was made because, for tax purposes, the fact that payment is made in lieu of notice is seen as proof that the employment has terminated. The individual will therefore be able to go and work elsewhere (although he may be expressly forbidden to work for a competitor of his former employer for a certain time). Ministers felt that it would be too generous to supplement that person‚ s income with Working Tax Credit at that point, especially when he or she is free to get other work and may even qualify for Working Tax Credit in his or her new job.
In addition, the Definition & Calculation of Income Regulations apply to both the Child Tax Credit (which does not contain a work condition) as well as the Working Tax Credit. In extending our definition of employment income to all payments within Chapter 3 of Part 6 of ITEPA, we are simply following the income tax treatment, which charges such payments as employment income which is not earnings or share-related. In any case, claimants in receipt of such payments will only need to report them for tax credit purposes to the extent that they are taxable (ie to the extent that they exceed, in aggregate, the ¬£30,000 limit in section 403 of ITEPA). The guidance notes will be amended in due course.
Strikers CIOT said: Likewise we note that strike pay counts as income but now, apart from the first 10 days on strike, the period of striking does not count as a period of working (see new Reg 7A inserted by Reg 7 of SI 2003/701). This is another mismatch. You want to count the income but not the time for which it is paid. Again was this intended?
IR replied: As with termination payments, you point out that income in the form of strike pay is counted but, by virtue of the new Working Tax Credit regulation 7A, not the strike period when considering eligibility for the Working Tax Credit, if the individual is on strike for longer than ten consecutive days.
Although strike pay is not taxable as earnings, it has been counted as income for tax credit purposes since the original regulations came into force last summer. This puts it on the same basis for tax credit purposes as Income Support paid to a member of a couple involved in a trade dispute which, of course, is taxable by virtue of section 665 of ITEPA (previously section 151 of the Taxes Act) and which is also taken into account as income for tax credit purposes in line with the proviso in item 13 of Table 3 in regulation 7 (3), as amended, of the Definition & Calculation of Income Regulations.
It is also worth bearing in mind that the vast majority of strikes last no more than five days. According to figures from the Office for National Statistics, in 2000 (the latest year for which full statistics are available), nearly nine out of ten strikes lasted five days or less and 95 per cent lasted for no more than ten days. This issue is therefore unlikely to affect many tax credit claimants. In settling on ten days in the new Working Tax Credit regulation 7A, Ministers decided to strike a balance between the practicalities of disrupting entitlement to Working Tax Credit for short periods, including payment via employer arrangements, and the principle of not paying Working Tax Credit to people who were not actually working while on strike.
Technical Department 020 7235 9381