1.Section 40 and Schedule 13 introduce legislation to prevent unauthorised unit trusts (UUTs) from being used to generate “repayment” of tax that the UK Exchequer has not received or to avoid certain restrictions on the use of credits for foreign tax.
2.Paragraph 1(2) amends section 941(6) of the Income Tax Act 2007 (ITA) to provide a definition of “deemed income” (see section 943A(3)(b)).
3.Paragraph 1(3) amends section 942 ITA by inserting a new subsection (6) to make clear that double tax relief does not apply to income tax collectable by reference to the amount of deemed payments.
4.Paragraph 1(4) inserts new sections 943A to 943D into ITA.
5.New section 943A(1) provides that the legislation will apply where the following conditions are met:
the trustees of a UUT are treated under section 941(2) of ITA as making a distribution (“deemed income”) in a tax year;
there is a reduction in the income pool in that tax year. This will happen by virtue of Step 1 in section 942(5) of ITA; and
the “double tax relief pool” at the start of the tax year is greater than zero (see new section 943C).
6.New sections 943A(2) and (3) provide that where these conditions are met, the “foreign element” of the deemed income is not treated as UK income, but as foreign income. Additionally, the foreign element of the deemed deduction - that is, the amount of tax that is treated as having been deducted from the distribution – is treated as overseas tax, instead of UK tax. The overseas income is treated as arising from a territory with which the UK has no double taxation agreement.
7.New section 943A(4) explains that there is a reduction in the income pool in a tax year when the amount of the pool at the start of the tax year is greater than at the start of the following tax year.
8.New section 943A(5) contains signposts to the sections that contain provisions about the “foreign element” of deemed deductions and deemed income, and the calculation of the double tax relief pool.
9.New section 943B defines what is meant by the foreign element of the deemed income or deemed deduction. It is that proportion of the deemed income or deemed deduction that corresponds to the ratio of A to B.
10.New section 943B(2) provides that “A” is the lesser of the reduction in the amount of the income pool mentioned in section 943A(1) multiplied by the basic rate of tax and the amount of the “double tax relief pool” at the start of the tax year. “B” is the total of the deemed deduction – the tax treated as deducted from the deemed income – referable to that tax year.
11.New section 943C explains how to calculate the foreign tax pool at the start of the tax year for the purposes of section 943A(1). It is the sum of A+B-C, where:
A is the amount of the double tax relief pool at the start of the previous tax year. This is taken to be nil if the UUT is established in the current tax year or if the current tax year is the first tax year in which the trustees have been UK resident;
B is the amount of double tax relief claimed by way of credit by the trustees in the previous tax year; and
C is the sum of the foreign elements of the deemed deductions made in the previous tax year.
12.This rule is subject to a transitional rule in paragraph 4 for determining the amount of the double tax relief pool as at the start of the tax year 2009-10.
13.New section 943D places a duty upon the trustees of the UUT to provide information to enable unit holders to calculate their tax liabilities or repayments based upon the treatment of some or all of the deemed deduction (treated as made from the deemed payment(s)) as foreign tax, and of some or all of the deemed payments as foreign income.
14.Paragraph 2 of the Schedule provides for consequential amendments to legislation.
15.Paragraph 3 provides for a commencement date of 21 October 2009 – the date the legislation was announced.
16.Paragraph 4 is a transitional rule used for calculating the amount of the double tax relief pool as at the start of the tax year 2009-10. Where amounts A and B are both greater than £20,000 the pool is the lower of amounts A and B; in all other cases it is nil. Paragraph 4 therefore applies a de minimis limit for the purposes of calculating the double tax relief pool at the start of the tax year 2009-10, and only for that year. Amounts A and B are:
Amount A is the sum of the amounts of double tax relief that has been claimed by way of credit in the tax years 2007-08 and 2008-09; and
Amount B is 20 per cent of the income pool at the start of 2009-2010.
17.The legislation responds to schemes notified to HM Revenue & Customs (HMRC) that seek to take advantage of the tax rules applicable to unauthorised unit trusts by using them to convert foreign income subject to withholding tax into receipts of UK income with an associated UK tax credit.
18.The aim of the schemes is to generate repayment of the tax credit or to avoid restrictions on the use of credits for foreign tax.
19.The legislation ensures that the income is treated as foreign income from which foreign tax has been deducted, to the extent that it is identified as deriving from a foreign source.
20.More information on the amendments can be found in the Technical Note published on the HMRC website on 21 October 2009 and the Written Ministerial Statement (“Anti-Avoidance”) made by the Financial Secretary to the Treasury on the same day.