The rewrite of the remaining Income Tax comes into force on 6 April 2005

In 2003, all of the primary legislation for income tax on earnings (formerly known as Schedule E) was rewritten into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), as part of the government's program to rewrite UK legislation into easier to understand English.

When that had been completed, the next area to be rewritten was the remaining income tax legislation relating to trading, property and investment income, which are the remaining income tax Schedules A, D and F. (Schedules B and C were abolished in 1988 and 1996 respectively.) The full Bill was published in Parliament on 1 December 2004. It should complete its Parliamentary stages and receive Royal Assent by March 2005. It is due to become law from 6 April 2005.

The former Schedule E is now income tax on employment income. The changes to terminology for Schedules A, D and F are:

• Schedule A is now income tax on property
  
  
• Schedule D is now income tax on trade profits (or, in fuller terms, profits of a trade, profession or vocation)
  
  
• Schedule F is now income tax on investment income.
  
  

As with ITEPA, the new Act does not change tax policy. There are, however, a large number of minor changes and clarifications of the law and these are detailed in the supporting documentation.

In general terms, the Bill has no direct impact on the operation of payroll and the taxation of benefits in kind. Some of the clauses in the new Bill which are of some relevance are:

• 4 - the charge in ITEPA on employment income has priority over the charge on profits of a trade
  
  
• 36 - no deduction is allowed in calculating the profits of a trade for an employee's remuneration unless it is paid to the employee within 9 months of the period of account. Remuneration is treated as being paid under the provisions of ITEPA.
  
  
• 45-47 - set out the circumstances in which a deduction for business expenses and gifts are permitted in calculating the profits of a trade. In general, if a deduction is permitted, no deduction is permitted against earnings for income tax purposes (ITEPA ss.356-358).
  
  
• 53 - defines the NICs that may be deducted in calculating the profits of a trade, namely secondary Class 1 NICs, Class 1A NICs and Class 1B NICs
  
  
• 69 - a deduction in calculating the profits of a trade is allowed for a payment for restrictive undertakings that is treated as earnings of an employee for income tax purposes (ITEPA ss.225,226)
  
  
• 72 - a deduction in calculating the profits of a trade is allowed where an employer pays the agent's charges for distributing monies donated by employees under a payroll giving scheme (ITEPA ss.713,714)
  
  
• 73 - a deduction in calculating the profits of a trade is allowed for counselling and outplacement expenses (in the context of termination of employment), but only if the conditions defined in ITEPA s.310 are met
  
  
• 74 - at present a deduction in calculating the profits of a trade for the costs of retraining courses (in the context of termination of employment) is only permitted if the employee is exempt from a tax charge because the prescribed conditions are met. That link is now removed, so a deduction against the profits of a trade no longer depends on whether or not the conditions for tax exemption are met in the case of the employee's liabilities to income tax.
  
  
• 163 - when an intermediary (within the IR35 rules) makes a deemed employment payment, the deduction in calculating the profits of a trade is limited to the amount of the payment. The deduction is given for the period in which the payment is treated as being made.

(Source: www.inlandrevenue.gov.uk/rewrite/index.htm )
...back to 3 December 2004

Income Tax (Trading and Other Income) Bill

The final draft of this Bill, the latest from the Tax Law Rewrite Project, has been published for a final round of consultation. It covers income tax on trading income, property income, savings and investment income and foreign income. The consultation period ends on 31 May 2004.

The first major rewrite of the Income Tax legislation was the Income Tax (Earnings and Pensions) Act 2003, which took effect on 6 April 2003. The PAYE Regulations have also been rewritten and come into force on 6 April 2004.
(Source: www.inlandrevenue.gov.uk/ria/ittoib-draft-ria.pdf )
...back to 5 March 2004

Rewritten PAYE Regulations

We reported last October that the PAYE Regulations had been rewritten and that the new version will take effect from 6 April 2004. The Inland Revenue has issued a brief summary of the key changes that will affect employers.

• Agencies must issue a P45 to an agency worker when either the worker goes "off the books" or the agency has not paid the worker for 3 months.
• On the death of an employee or pensioner,
  • employers and pension payers no longer have to provide information on the P45 about the personal representatives or about future payments to be made.
  • after completion of a P45, employers (other than pension payers) must deduct tax at the basic rate from payments, as they would if the employee were still alive but had left the employment.
  • pension payers continue to deduct tax as if the pensioner were still alive, except for payments made both after completion of P45 and in the tax year after the year of death when deduction at the basic rate applies.

• Employers must notify the Revenue when they become aware that a system for splitting tips (a tronc) is in existence.
• When relevant, for tax years 2004-05 onwards, all versions of form P60 must show 3 sets of pay and tax i.e.
  • from previous employments in the same tax year
  • from the current employment
  • totals for whole year.

(Source: www.inlandrevenue.gov.uk/employers/stoppress.htm )
...back to 9 January 2004

Rewritten PAYE Regulations

Readers interested in the source Regulations for PAYE may be interested in viewing the rewritten Income Tax (Pay As You Earn) Regulations 2003 that take effect from 6 April 2004.

The primary legislation covering income tax on employment income has already been rewritten and took effect from 6 April 2003 as the Income Tax (Earnings and Pensions) Act 2003.

Neither the new Act nor the latest Regulations make any significant changes to the legislation. However, there are drafting changes to accommodate areas that required clarification and some of the provisions have been adjusted to match current Inland Revenue practice. All of the relatively minor changes to the Regulations are explained in a supporting Commentary.
(Source: www.inlandrevenue.gov.uk/rewrite/paye_regs.htm )
...back to 31 October 2003

Rewriting tax law

The Tax Law Rewrite Project began in 1996 with the objective of rewriting all of the UK's primary tax legislation to make it clearer and easier to use, but without changing its general effect. The project's first Bill on Capital Allowances was enacted in 2001. The next, a consolidation of tax law on employment income, pensions and taxable social security benefits, has now been published in draft form, for a final round of consultation. The Income Tax (Earnings and Pensions) Bill has 712 clauses and 8 schedules and is expected to start its passage through Parliament at the end of 2002, for enactment in 2003. At the same time, the supporting Regulations are also being rewritten and should take effect from April 2004.

In preparing the new consolidation Act, the project team has identified several hundred instances where they believe it is appropriate to make minor changes in order to improve the existing legislation. Many of the existing extra-statutory concessions are being merged into the legislation itself. Many of the proposed changes will have no obvious effect on payroll practice, but two examples of minor changes that will be noticed and on which the Government is consulting are the following:

1. Current law on termination payments and benefits states:
   • "a payment or benefit is treated as received (a) in the case of a payment or cash benefit, when payment is made of or on account of the payment or benefit; (b) in the case of a non-cash benefit, when it is used or enjoyed".
     As this definition does not cover all possible situations, especially where benefits are "used or enjoyed" over a long period of time, the proposed new wording is that:
   • "a payment or benefit is treated as received (a) in the case of a payment or cash benefit, when payment is made of or on account of the payment or benefit; (b) in the case of a non-cash benefit that is calculated by reference to a period within the tax year, at the end of that period; (c) in the case of a non-cash benefit that is not so calculated, when it would have been treated as earnings if the worker had been an employee and the benefit had been provided by reason of the employment."

2. In calculating the cash equivalent value of benefits that were available for part of a year, current legislation generally defines the number of days in a year as 365, even in leap years. The new legislation will use "the number of days in the year in question". The calculation will normally marginally reduce the value of the benefit but, in the case of fuel benefit, the new calculation would marginally increase the employee's proportionate scale charge in a leap year.

Copies of the draft Bill and related documents are available at www.inlandrevenue.gov.uk/rewrite/index.htm , or from David Mutton, telephone 020 7438 7606. The deadline for comments is 27 September 2002.
Payroll Briefing 4 - 18 July 2002