Explanatory Notes

Commentary on Sections

Part 8: Foreign income: special rules

Chapter 1: Introduction

Overview

3074.This Chapter sets out the content of Part 8 and provides a definition of “relevant foreign income” for this Act.

Section 829: Overview of Part 8

3075.This section is new.

Section 830: Meaning of “relevant foreign income”

3076.This section is based on section 18 of ICTA. The main provisions in this Act which apply to relevant foreign income (apart from numerous charges to tax and “income charged” sections) are:

• section 771: exemption for relevant foreign income of consular officials and employees;

• Chapter 2 of this Part: relevant foreign income charged on remittance basis; and

• Chapter 3 of this Part: relevant foreign income charged on arising basis: deductions and reliefs.

3077.To be “relevant foreign income”, income must arise from a source outside the United Kingdom, and be chargeable under one of the provisions listed in subsection (2). (See also the definition of “income” in section 878(1), by virtue of which “income” includes amounts treated as income. A number of the provisions listed in subsection (2) include such income; for example, see Chapter 8 of Part 4 of this Act.)

3078.The definition is based on words in section 18(3) of ICTA:

• “tax in respect of income arising from securities out of the United Kingdom” (Schedule D Case IV); and

• “tax in respect of income arising from possessions out of the United Kingdom” (Schedule D Case V).

3079.Section 18(1) and (3) of ICTA require that, for an amount to fall within the charge under those Cases, as opposed to another charging provision, it has to be (a) income, (b) which arises from, (c) securities or possessions, (d) out of the United Kingdom and (e) is not charged in priority under another Schedule of ICTA or under ITEPA.

3080.Case law establishes that “securities” are a sub-set of “possessions”. The definition of “relevant foreign income” does not maintain any distinction between income which, in the source legislation, is within Schedule D Case IV and income which is within Schedule D Case V.

3081.The definition uses “source” rather than “possessions” (the expression in Schedule D Case V). “Possessions”, in the context of Schedule D Cases IV and V, appeared in the first income tax Act of 1799 when the word carried associations with, in particular, colonial property that it no longer has. The definition employs the more widely used term “source”.

3082.The meaning of “possessions” in Schedule D Case V has been interpreted by case law. It covers any and every source of income arising outside the United Kingdom. Income charged to tax under Schedule D Cases IV and V by virtue only of section 18(3) of ICTA (that is, excluding amounts treated as income by another provision in the source legislation and charged under Schedule D Case IV or V) has an identifiable source.

3083.In Colquhoun v Brooks (1889), 2 TC 490 HL (where the subject was how to tax a partner’s share of a foreign trade), Lord Macnaghten dealt with the meaning of “possessions” in terms of a source of income (page 508):

“Turning now to the “fifth case,” I ask why are not the Respondent's profits and gains from his Melbourne business within the “fifth case”? What is the meaning of the term “possessions” in that case? The word “possessions” is not a technical word. It seems to me that it is the widest and most comprehensive word that could be used. Why, for instance, should not possessions in Ireland mean everything, every source of income that the person chargeable has in Ireland, whatever it may be? Why should not “profits from possessions out of Great Britain,” which is to be found in Schedule G., No. XI., and recalls the expression “income out of Great Britain” in the Act of 1799, mean profits from every source of income abroad? I use the expression “source of income” because it is as a source of income that the Act contemplates and deals with property and everything else that a person chargeable under the Act may have, and the Act itself, in section 52, uses the expressions “sources chargeable under the Act” and “all the sources contained in the said several schedules” as describing everything in respect of which the tax is imposed.”

3084.There were at that time no income tax charges on amounts treated as income. But the scope of Schedule D Cases IV and V has since been extended by provisions which charge to income tax, within one or other of the Cases, a profit or gain which would not otherwise be income arising from a security or from possessions within section 18(3) of ICTA. That is, on first principles it would be a capital profit or receipt. Such chargeable amounts could not therefore be said to derive from a “source” in the traditional sense. In Walker v Centaur Clothes Group Ltd (2000), 72 TC 379 HL(17), Lord Hoffmann commented (page 416):

“Income tax is traditionally a source-based annual tax, liability depending upon the existence of a source of income falling under one of the Schedules during the year of assessment (see Brown (Surveyor of Taxes) v National Provident Institution [1921] 2 AC 222, 8 TC 57).

If the income tax had retained that ancient simplicity, it would be true to say that income could not be within the charge to tax unless there was a source within the charge and a person could not be within the charge unless he had a source of income within the charge. But that would be because of the nature of the income tax and not anything in the language of the definition.

It is, however, no longer true to say that liability to income tax depends upon the existence during the year of assessment of a source within the charge. There are cases (such as post-cessation receipts) when liability depends upon the existence of income defined by reference to a source which does not exist within the year of assessment. Or liability may depend upon an event, such as a balancing charge on the sale of an asset which has attracted a capital allowance, or the receipt of a capital sum from a particular kind of transaction, which is deemed to be taxable income received in that year of assessment or sometimes spread over several years of assessment.”

3085.Although the definition uses “income which arises from a source” in respect of all income within the definition, specific rules have been added, in view of Lord Hoffmann’s remarks, in sections 428(3) (deeply discounted securities) and 658(2) (beneficiaries’ income from estates in administration), to attribute a foreign source to the income in question to ensure that there is no doubt that the definition applies to these provisions.

3086.Subsection (2) lists by Chapter or section the provisions in this Act that charge income and other amounts which the source legislation charges under Schedule D Cases IV or V. Where a Chapter contains more than one charge and only one of those charges applies to relevant foreign income, the section applying that charge has been specified – for example, see section 579 (charge to tax on royalties and other income from intellectual property). Chapter 2 of Part 4 of this Act has been included in full because, if any interest from a registered industrial and provident society is foreign interest, although it is not charged under Cases IV and V in the source legislation, it is treated by the Act as relevant foreign income. See Change 131 in Annex 1.

3087.Subsection (3) eliminates income that would otherwise be within the definition of “relevant foreign income” because it is charged under one or other of the provisions listed in subsection (2) in accordance with section 844. In the source legislation, such income is charged under Schedule D Case VI. This subsection is based on section 584(4) of ICTA.