Inland Revenue 40
17 March 1998
DOUBLE TAXATION RELIEF: ANTI-AVOIDANCE
The Chancellor has today announced action to prevent banks and
financial traders obtaining excessive double taxation relief
against United Kingdom tax for foreign tax payments.
The proposals extend the existing rules governing relief for
foreign tax in respect of interest income to cover certain
dividend income and, in specific circumstances, such income
and related expenditure of their associates. The changes will
also reflect developments in the way money is raised by
financial traders and their associates to fund their
activities.
The measures will apply immediately to payments in respect of
arrangements entered into on or after Budget day but will only
apply to payments in respect of pre-Budget day arrangements
from 1 January 1999.
DETAILS
1. The present rules expressly prevent banks and other
financial traders from getting excessive relief for foreign
tax in respect of interest received from abroad, but attempts
have been made to avoid these rules by arranging: for the
return from lending money to overseas borrowers to be in the
form of dividends and in circumstances which give rise to an
entitlement to claim relief for "underlying tax" (i.e., the
overseas tax paid by the payer of the dividend or one of its
subsidiaries); or for the income to be received, or the
related costs to be borne, by an associate.
2. To counter this, the scope of the current law will be
extended to include, in addition to interest, such dividends
received in the course of a trade. It will also apply to the
foreign interest and dividend income of associates of
financial traders where arrangements have been made to avoid
the restriction that would have applied had the income been
received by the trader and to any related costs borne by an
associate, whether the income is received by the trader or by
the associate. The amendments will take account of new ways in
which financial traders and their associates fund their
activities. To assist them and their advisers in establishing
whether and how the new measures will affect them, a draft of
the Finance Bill clauses has also been issued. [A copy is
annexed to this press release.]
3. In a separate Budget day announcement the Government has
indicated its intention to review the double taxation relief
system for companies with a view to possible changes in a
subsequent Finance Act. Although that review may in due
course lead to more extensive changes to the rules for
obtaining relief for foreign tax, the Chancellor considers it
right to act now to counter these particular avoidance
schemes.
NOTES FOR EDITORS
1. Double taxation arises when income is taxed both by the
taxpayer's country of residence and the country in which the
income arises. The United Kingdom approach to relieving double
taxation is to tax the foreign income of a United Kingdom
resident but to deduct the foreign tax paid on the item of
income from the corresponding United Kingdom tax. This is
known as double taxation relief (DTR) and the aim is to give
relief only against the actual United Kingdom tax payable on
the income.
2. A bank or similar financial institution is taxed in the
United Kingdom by reference to the net profit it makes on its
trading activities. In particular, it may set off interest
payable on funds acquired to make an advance against the
income from that advance. So, if foreign tax is paid on the
gross interest received, that may well exceed the United
Kingdom tax payable on the net profit made by the bank from a
loan. Special rules put it beyond doubt that relief for
foreign tax paid on interest does not extend beyond the United
Kingdom tax payable on the bank's net profit from the overseas
transaction to reduce the tax payable on its other profits,
including profits earned in the United Kingdom.
3. These rules are at section 798 Income and Corporation
Taxes Act 1988. They expressly limit the DTR available to a
bank or other financial institution to the United Kingdom tax
attributable to the net profit from any overseas loan which
forms part of its trading activities, but do not explicitly
restrict the DTR available in respect of income other than
interest. This has led to some financial institutions seeking
to get round the rules, for example, by making what are, in
economic substance, loans in a form which does not give rise
to interest - such as redeemable preference shares - and
arranging matters so that, in addition to the DTR in respect
of foreign tax payable directly on the dividends, a claim may
be made for relief of "underlying tax". Given the relatively
low rate of United Kingdom corporation tax, in some
circumstances, the combination of these two types of relief
might result in no United Kingdom tax being payable on
overseas dividends received by United Kingdom banks. Since the
effect of the ordinary DTR rules in these types of situation
has been disputed, section 798 will be amended to provide a
clear set of rules for a wider range of income of these
financial institutions.
4. Since section 798 only applies to interest received and
expenditure incurred in the course of a trade, it can also be
side-stepped by arranging for the interest to be received, or
the expenditure incurred, by an associated company in whose
hands it is regarded as income from, or an expense of, an
investment, rather than a trade. In either case, the bank
continues economically and commercially, to make the loan or,
as the case may be, incur the related costs but, by routing
one or the other through such an associate, it avoids the
current specific limitation to trading income.
5. Section 803 ICTA 1988, which prevents banks and financial
traders from avoiding these rules by arranging for the income
to be received by an associate resident outside the United
Kingdom, is being similarly amended.
6. The cost to companies of complying with the changes is
expected to be negligible for all save aggressive tax
avoiders.
7. The revenue yield arising from the measure is estimated
at 10 million pounds for 1999-2000 and 50 million pounds for
2000-2001.
INLAND REVENUE PRESS OFFICE
Double taxation relief
Restriction of relief on certain interest and dividends.
[j4571]
.-(1) For section 798 of the Taxes Act there shall be
substituted the following section-
"Restriction of relief on certain interest and dividends.
798.-(1) This section applies where-
(a) in any chargeable period the profits of a trade
carried on by a qualifying taxpayer include
an amount computed in accordance with
section 795 in respect of foreign interest
or foreign dividends;
(b) the taxpayer is entitled in accordance with this
Chapter to credit for foreign tax on the
foreign interest or foreign dividends; and
(c) in the case of foreign dividends, the foreign
tax mentioned in paragraph (b) above is or
includes underlying tax.
(2) The amount of the credit for foreign tax referred to
in subsection (1)(b) above which, in accordance with this
Chapter, is to be allowed against income tax or
corporation tax-
(a) shall be limited by treating the amount of the
foreign interest or foreign dividends (as
increased or reduced under section 798A) as
reduced (or further reduced) for the
purposes of this Chapter by an amount equal
to the taxpayer's financial expenditure in
relation to the interest or dividends (as
determined in accordance with section
798B); and
(b) so far as the credit relates to foreign tax on
interest or foreign tax on dividends which
is not underlying tax, shall not exceed 15
per cent of the interest or dividends,
computed without regard to paragraph (a)
above or to any increase or reduction under
section 798A.
(3) In this section and sections 798A and 798B-
"interest", in relation to a loan, includes any
introductory or other fee or charge which
is payable in accordance with the terms on
which the loan is made or is otherwise
payable in connection with the making of
the loan;
"foreign dividends" means dividends payable out of
or in respect of the stocks, funds, shares
or securities of a body of persons not
resident in the United Kingdom;
"foreign interest" means interest payable by a
person not resident in the United Kingdom
or by a government or public or local
authority in a country outside the United
Kingdom.
(4) In this section and section 798B "qualifying
taxpayer" means, subject to subsection (5) below, a
person carrying on a trade which includes the receipt of
interest or dividends and is not an insurance business.
(5) Where a company which is connected or associated with
a qualifying taxpayer is acting in accordance with a
scheme or arrangement the purpose, or one of the main
purposes, of which is to prevent or restrict the
application of this section to the taxpayer-
(a) the company shall be treated for the purposes of
this section as a qualifying taxpayer; and
(b) any foreign interest or foreign dividends
received in pursuance of the scheme or
arrangement shall be treated for those
purposes as profits of a trade carried on
by the company.
(6) For the purposes of this section and section 798B-
(a) section 839 applies; and
(b) subsection (10) of section 783 applies as it
applies for the purposes of that section."
(2) This section and sections {j4572} and {j4573} do not
have effect in relation to foreign interest or foreign
dividends paid before 1st January 1999 in pursuance of
arrangements which were entered into before, and are not
altered on or after, 17th March 1998.
(3) Subject to subsection (2) above, this section and
sections {j4572} and {j4573} have effect in relation to
foreign interest or foreign dividends paid on or after 17th
March 1998.
Adjustments of interest and dividends for spared tax etc.
[j4572]
. After section 798 of the Taxes Act 1988 there shall be
inserted the following section-
"Adjustments of interest and dividends for spared tax etc
798A.-(1) In a case where section 798 applies-
(a) subsection (2) below applies if the foreign tax
referred to in subsection (1)(b) of that
section is or includes an amount of spared
tax; and
(b) subsection (3) below applies if the foreign tax
so referred to is or includes an amount of
tax which is not spared tax.
(2) For the purposes of income tax or corporation tax,
the amount which apart from this subsection would be the
amount of the foreign interest or foreign dividends shall be
treated as increased by so much of the spared tax as
does not exceed-
(a) the amount of the spared tax for which, in
accordance with any arrangements applicable
to the case in question, credit falls to be
given as mentioned in section 798(1)(b); or
(b) if it is less, 15 per cent of the interest or
dividends, computed without regard to any
increase under this subsection.
(3) If the amount of tax which is not spared tax exceeds-
(a) the amount of the credit which, by virtue
of this Chapter (but disregarding subsection
(2) of section 798),is allowed for that tax
against income tax or corporation tax;
or
(b) if it is less in the case of tax on foreign
interest, 15 per cent of the interest,
computed without regard to any increase or
reduction under this section or that
subsection,
then, for the purposes of income tax or corporation tax,
the amount which, apart from this subsection, would be the
amount of the foreign interest or foreign dividends shall be
treated as reduced by a sum equal to the excess.
(4) Subsection (2) above has effect for the purposes of
corporation tax notwithstanding anything in section 80(5) of
the Finance Act 1996 (matters to be brought into
account in the case of loan relationships only under
Chapter II of Part IV of that Act).
(5) Nothing in subsection (2) above prejudices the
operation of section 795 in relation to foreign tax which is
not spared tax.
(6) In this section "spared tax" means foreign tax which
although not payable falls to be taken into account for
the purposes of credit by virtue of section 788(5)."
Meaning of "financial expenditure". [j4573]
. After section 798A of the Taxes Act 1988 there shall be
inserted the following section-
"Meaning of "financial expenditure".
798B.-(1) For the purposes of section 798 "financial
expenditure", in relation to a qualifying taxpayer and any
interest or dividends is, subject to the provisions of
this section, the aggregate of-
(a) so much of the financial expenses (consisting of
interest, discounts or similar sums or
qualifying losses) incurred by the taxpayer
or a person connected or associated with
him as-
(i) is properly attributable to the
earning of the interest or dividends;
and
(ii) falls to be taken into account in
computing the taxpayer's or
person's liability to income tax or
corporation tax; and
(b) so much of any other sum paid by the taxpayer or
a person connected or associated with him
which-
(i) falls to be taken into account as
mentioned in paragraph (a) above;
and
(ii) would not, apart from this
paragraph, be taken into account in
determining the amount of the
interest or dividends,
as it is reasonable to regard as
attributable to the earning of the interest
or dividends (whether or not it would fall,
in accordance with normal accountancy
practice, to be so treated).
(2) There shall be deducted from the aggregate given by
subsection (1) above so much of the qualifying gains and
profits accruing to the qualifying taxpayer or a person
connected or associated with him as-
(a) is properly attributable to the earning of the
interest or dividends; and
(b) falls to be taken into account in computing the
taxpayer's or person's liability to income
tax or corporation tax.
(3) In a case where the amount of a qualifying taxpayer's
financial expenditure in relation to the earning of the
interest or dividends is not readily ascertainable-
(a) that amount shall be taken, subject to
subsection (4) below, to be such sum as it
is just and reasonable to attribute to the
earning of the interest or dividends; and
(b) in the case of interest, regard shall be had in
particular to any market rates of interest
by reference to which the rate of the
interest is determined.
(4) The Board may by regulations supplement subsection(3)
above-
(a) by specifying matters to be taken into account
in determining such a just and reasonable
attribution as is referred to in paragraph
(a); and
(b) by making provision with respect to the
determination of market rates of interest
for the purposes of paragraph (b);
and any such regulations may make different
provision for different cases.
(5) In this section "qualifying losses" means-
(a) losses falling to be brought into account for
the purposes of Chapter II of Part II of
the Finance Act 1993 (exchange gains and
losses) in accordance with sections 125 to
127 of that Act; and
(b) losses falling to be brought into account for
the purposes of Chapter II of Part IV of
the Finance Act 1994 (interest rate and
currency contracts) in accordance with
sections 155 to 158 of that Act;
and "qualifying gains" and "qualifying profits" shall be
construed accordingly."
Underlying tax reflecting interest or dividends. [j4574]
.-(1) Section 803 of the Taxes Act 1988 (underlying tax
reflecting interest on loans) shall be amended as follows.
(2) In subsection (1)-
(a) in paragraph (b), after the words "a dividend"
there shall be inserted the words "("the
overseas dividend")";
(b) in paragraph (c), for the words "interest on a
loan made" there shall be substituted the words
"interest or dividends earned or received"; and
(c) for paragraph (d) there shall be substituted the
following paragraph-
"(d) if the company which received the interest or
dividends ("the company") had been resident
in the United Kingdom, section 798 would
apply in relation to that company."
(3) In subsection (3), for the words from "on so much" to
the end there shall be substituted the words "on so much of
the interest or dividends as exceeds the amount of the
company's relevant expenditure which is properly attributable
to the earning of the interest or dividends".
(4) In subsection (4)-
(a) in paragraph (a), for the words "section 798(2)"
there shall be substituted the words "section
798(3)";
(b) for paragraph (b) there shall be substituted the
following paragraph-
"(b) "the company's relevant expenditure" means the
amount which, if the company referred to in
subsection (1)(d) above were resident in the
United Kingdom and were a qualifying taxpayer
for the purposes of section 798, would be its
financial expenditure in relation to the
earning of the interest or dividends, as
determined in accordance with section 798B."
(5) In subsection (5)-
(a) for the words "the dividend", in both places
where they occur, there shall be substituted
the words "the overseas dividend"; and
(b) for the words "the interest" there shall be
substituted the words "the interest or
dividends".
(6) In subsection (6)-
(a) for the words "the dividend" there shall be
substituted the words "the overseas dividend";
and
(b) for the words "the permitted amount" there shall
be substituted the following paragraphs-
"(a) the amount of the spared tax which under any
arrangements is to be taken into account for
the purpose of allowing credit against
corporation tax in respect of the overseas
dividend; or
(b) if it is less, 15 per cent of the interest or
dividends;".
(7) For subsection (7) there shall be substituted the
following subsection-
"(7) In this section "spared tax" has the same meaning as
in section 798A."
(8) In subsection (8)-
(a) after the words "amount of tax which" there
shall be inserted the words "is referable to
interest and"; and
(b) for the words "the dividend" there shall be
substituted the words "the overseas dividend".
(9) In subsection (9)-
(a) for the words "the interest", in both places
where they occur, there shall be substituted
the words "the interest or dividends"; and
(b) for the words "the dividend" there shall be
substituted the words "the overseas dividend".
(10) For subsections (10) and (11) there shall be
substituted the following subsection-
"(10) In subsection (1) above "bank" means a company
carrying on, in the United Kingdom or elsewhere, any trade
which includes the receipt of interest or dividends, and
section 839 applies for the purposes of that subsection."
(11) This section does not apply where the overseas
dividend is paid before 1st January 1999 in pursuance of
arrangements which were entered into before, and are not
altered on or after, 17th March 1998.
(12) Subject to subsection (11) above, this section
applies where the overseas dividend is paid on or after 17th
March 1998.
i.1996 c. 8.
ii.1993 c. 34.
Inland Revenue 1
17 March 1998
______________________________________________________________
INCOME TAX RATES AND ALLOWANCES
The Chancellor announced today that all allowances and
thresholds will rise in line with inflation.
The 1998-99 package:
Cuts the number of people paying tax at the basic rate by
widening the 20 per cent band by 200 pounds to 4,300 pounds,
in line with inflation. 7.5 million people now pay tax only
at the lower rate.
- Increases the basic rate limit by 1,000 pounds.
- Increases personal allowances by 150 pounds to 4,195
pounds.
- Increases the married couple's allowance and related
allowances, the higher allowances available for people
aged 65 and over, the blind person's allowance and the
income limit for age-related allowances.
- Extends the additional personal allowance to women with
children and incapacitated husbands.
- Makes no change to the rates of income tax.
1999-2000:
The Chancellor announced that the rate of relief at which the
married couple's allowance and related allowances are given
will be restricted to 10 per cent from 6 April 1999, with a
corresponding increase, above indexation, in the age-related
married couple's allowances for people aged 65 and over.
The Chancellor also announced the introduction of a new
payable income tax credit for working families. The Working
Families Tax Credit will begin in October 1999.
The package means:
- All income taxpayers, around 26 million people, will pay
less income tax in 1998- 99. On average, taxpayers will
be around 62 pounds a year, 1 pound 19 pence per week,
better off in cash terms;
- A one-earner couple on average earnings will be around 51
pounds a year, 98 pence per week, better off in cash
terms.
DETAILS
1. The Chancellor's proposals will result in the following
rates and bands for the tax year 1998-1999 (1997-1998 levels
shown for comparison):
Rate of tax Taxable income* Taxable income*
(per cent) 1997-1998 1998-1999
(pounds) (pounds)
Lower (20) 0-4,100 0-4,300
Basic (23) 4,101-26,100 4,301-27,100
Higher (40) over 26,100 over 27,100
*Taxable income is defined as gross income for tax
purposes, less those allowances and reliefs
available at the taxpayer's marginal rate.
2. The proposed levels of allowances for 1998-1999 are as
follows (1997-1998 levels shown for comparison):
Allowance 1997-98 1998-99
(pounds) (pounds)
Personal allowance 4,045 4,195
Personal allowance 5,220 5,410
(age 65-74)
Personal allowance 5,400 5,600
(age 75 and over)
Married couple's allowance, 1,830* 1,900*
Married couple's allowance 3,185* 3,305*
(age 65-74)
Married couple's allowance 3,225* 3,345*
(age 75 and over)
Blind person's allowance 1,280 1,330
Income limit for 15,600 16,200
age-related allowances.
*Relief is restricted to 15 per cent in 1998-1999
for married couple's allowance and other related
allowances (widow's bereavement allowance,
additional personal allowance and maintenance
relief).
3. The Chancellor announced that relief for the married
couple's allowance and the allowances linked to it would be
restricted to 10 per cent in 1999-2000, with a corresponding
increase, above indexation, in the age-related married
couple's allowances for people aged 65 and over. The
restriction will also apply to the allowances and reliefs
which are set at the same level as the under-65s married
couple's allowance. These are the additional personal
allowance, the widow's bereavement allowance and relief for
maintenance payments to a divorced or separated spouse.
Relief for maintenance payments
4. People making maintenance payments currently qualify for
tax relief on the amounts they pay, up to a limit of 1,830
pounds. That limit will be increased, in line with the
married couple's allowance, to 1,900 pounds from 6 April 1998.
Similarly, relief on these payments, which is currently
restricted to 15 per cent, will be restricted to 10 per cent
from 6 April 1999.
5. People who entered into maintenance arrangements before
15 March 1988 may currently qualify for relief on payments up
to the total amount on which they received relief in 1988-89.
This relief is restricted (for 1998-99) to 15 per cent on the
first 1,900 pounds of the payments they make, but any payments
made over that figure up to the person's 1988-89 limit
qualify at their marginal rate. From 6 April 1999, relief in
line with the married couple's allowance will be restricted to
10 per cent, with the balance up to the person's 1988-89
limit continuing to qualify for relief at their marginal
rate.
6. The tax treatment of people receiving maintenance
payments is not affected by the restriction of relief to 10
per cent from 6 April 1999, regardless of when their
arrangements were made.
Extension of the additional personal allowance
7. The Chancellor announced that, with effect from 6 April
1997, the additional personal allowance will be extended to
women with children and incapacitated husbands living with
them. This allowance has previously only been available to
parents who were not living with a spouse, and fathers with
incapacitated wives.
Income tax on savings
8. There are no changes to the tax charge on income from
savings (for example, interest paid by bank and building
societies) which is now 20 per cent. Higher rate taxpayers
will continue to pay tax on such income at 40 per cent.
The rate applicable to trusts
9. The rate applicable to trusts, which applies to income of
discretionary and accumulation trusts, will remain at 34 per
cent.
Working Families Tax Credit
10. The Working Families Tax Credit will provide help to over
1 million families It is central to the programme of tax and
benefit reform announced in the Budget, which will be
supported by the minimum wage. The WFTC will make work pay for
families, tackling the main obstacles to work: the
unemployment trap, the poverty trap and lack of affordable
childcare. For further details please see HMT press notice.
Changes to PAYE codes
11. PAYE codes for the year 1998-1999 will change as a result
of the measures announced today. In general, people who only
receive the personal allowance will have their code adjusted
by their employer or pension provider in accordance with
general instructions issued by their tax office. These people
will not receive a notice of coding from the Inland Revenue
unless one is required for some other reason. People who
receive the married couple's allowance and related allowances
will be sent an adjusted notice of coding. Employers will
operate amended codes on the first pay-day after 17 May.
NOTES FOR EDITORS
Statutory Indexation
1. Income tax legislation requires the main allowances and
thresholds to be increased in line with the Retail Prices
Index, unless Parliament determines otherwise.
2. Changes in allowances have to be rounded up to the
nearest multiple of 10 pounds, and thresholds and bands to
the nearest multiple of 100 pounds.
3. The effects of the changes - on individual taxpayers at
various levels of income - are illustrated in tables which
accompany this press release on the Internet.
Revenue effects
4. The proposals will have no cost in 1998-99, a yield of
720 million pounds in 1999-2000 and a yield of 1,080 million
pounds in 2000-01, compared with indexation.
Effects on taxpayer numbers
5. The number of taxpayers at any given time depends partly
on the level of tax allowances and thresholds, and partly on
a number of underlying economic factors (for example, levels
of employment and wages). Provisional estimates are that
there will be 26.2 million income taxpayers in 1998-1999,
100,000 more than in 1997-1998. If the allowances and limits
had been frozen this year, the number of income taxpayers
would have increased to 26.6 million.
INCOME TAX RATES AND ALLOWANCES 1998-1999 ILLUSTRATIVE TABLES
The effects of the changes to the income tax rates and
allowances proposed in the Budget on individual taxpayers at
various levels of income are illustrated in the Excel Spreadsheet
tables which accompany this press release on the Internet.
The tables assume that the taxpayer has no tax reliefs other
than the appropriate personal and married couple's allowance
(and that where the individual has the married couple's
allowance, he or she is receiving the full amount of the
allowance, including the age-related allowance if they are 65
and over and their income is below the aged income limit).
The tax liability of people with the additional personal
allowance or the widow's bereavement allowance is the same as
for people aged under 65 with the married couple's allowance.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327
(Out of hours 0860 359544)
Non media enquiries to: 0171 438 6420/6425
(Office hours only)
iii.1994 c. 9.
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