January 2004 Technical Committee report to Council and Branches
First, share related income will be counted as tax credits income in 2003/04 even if it arose prior to 26 November 2003. The Revenue‚ s view is that it is a fundamental principle of the new tax credit system that entitlement is based on annual income. Basing entitlement on annual income means looking at income across the whole of the tax year. They explain that this is set out in section 7 of the Tax Credits Act 2002, in particular subsections (4) and (5) which define the terms "current/previous year" income respectively. Furthermore, regulation 3 (1) of the Tax Credits (Definition & Calculation of Income) Regulations prescribes the way in which income of a claimant (or, in a joint claim, the income of the claimants) is to be calculated "for a tax year" for the purposes of the Act. They consider that the amending regulations will apply when final entitlement in respect of 2003-04 tax credits comes to be computed and the request is made for 2003-04 income to finalise that first year's award and to enable a provisional award to be made for 2004-05. Consequently, the amending regulations, in so far as they relate to changes in the treatment of income for tax credit purposes, will affect income of the whole tax year 2003-04. Just as the reliefs contained in those amendments apply in respect of that full tax year, by the same token the extension of the definition of income to include taxable gains from employment-related securities options will also apply to the entire tax year.
The CIOT would be interested to hear from any members whose clients will be materially affected by what might be seen as a retrospective change in the law.
Secondly, on the matter of claimants bringing forward trading losses from years prior to 2001-02 in accordance with the original claim form guidance notes, the Revenue have confirmed that they have no objection to these claimants obtaining relief.
We also asked the Revenue to provide some clarification on the meaning of the new reg 4(5) which gives a new relief for property losses. Their reply is given below:
‚ You have asked for some clarification of amending regulation 4 (5) which inserts a new paragraph (8) into regulation 3 of the Definition & Calculation of Income Regulations. As you point out, the new regulation 3 (8) provides that a tax credit claimant who has made a loss in his property business and who has capital allowances due, or part of whose loss arises from agricultural land, and who is entitled to income tax relief by virtue of section 379A (2) and (3) ICTA against his general income of the tax year of the loss or the following tax year, may set that part of the loss against his total income for tax credit purposes for the relevant year.
"However, you suggest that the claimant may, for tax credit purposes, not get full relief for that part of his loss and you ask whether the relief in the new regulation 3 (8) will be available to the tax credit claimant's spouse or personal partner.
"On your first question, we do not agree with the suggestion that the tax credit claimant will not get full relief for the relevant part of his loss. The new regulation 3 (8) does not require the tax credit claimant to calculate another excess. Regulation 3 (8) simply provides that we are applying section 379A (2) and (3) in respect of losses from a UK or foreign property business as defined for tax credit purposes. It is necessary to refer to a UK or overseas property business (and income arising from such a business) as defined in the tax credit regulations because section 379A itself only refers to the income tax relief. Incidentally, we are not referring to all foreign income here since sub-paragraph (a) in the new regulation 3 (8) refers to an overseas property business, so the reference to "foreign income" in sub-paragraph (b) should be seen in that context.
"Turning to your second question, the short answer is "no". The new regulation 3 (8) refers to the claimant who has sustained the loss and the relief to which he is entitled in accordance with section 379A (2) and (3). In keeping with the income tax provision, the relief is only available to the person who has incurred the loss. As pointed out above, the section 379A (2) and (3) loss may be set against that person's general income of that tax year or (if that is insufficient to absorb it) the following year's general income. Our view here is that there are likely to be few tax credit claimants in this position, so it was not worth departing from the income tax rules.‚
Technical Department 3 February 2004
Technical Department 020 7235 9381