Schedule 25
Finance Bill
10:00 am
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The second example in the Bill of the use of principles-based legislation, the schedule secures that receipts that derive from a transfer of a right to income are treated as income for the purposes of income tax and corporation tax. Like the measure on disguised interest, it is the result of consultation on principles-based legislation.
Case law shows that it is possible for companies and individuals to convert income into capital for tax purposes by selling the right to income streams. For individuals, such schemes are particularly attractive as a result of the capital gains tax increase to 18 per cent. Avoidance in this area has led to a wide range of piecemeal measures that treat sales of income as giving rise to amounts charged to tax as income. The schedule replaces the various targeted anti-avoidance rules with a comprehensive rule that ensures that a company or individual cannot avoid tax by selling income for a lump sum that is taxed more favourably than the income would have been—for example, a capital gain covered by losses.
As a result of the consultation, schedule 25, like the preceding schedule, contains specific exceptions—in this case, for transfers of income that are the consequences of the transfer of the asset from which the income arises, or where a transfer of income is the consequence of the grant or surrender of a lease over land. There are also exceptions for disposals of rights in respect of oil licences. The new legislation saves 15 pages of anti-avoidance legislation, using only eight pages, and is another example of the principles-based approach being made to work.
The Government amendments correct an error in the schedule, which replaces a number of enactments. Among the repealed provisions is a rule that currently taxes the sale of the right to annual payments as income—that is, recurring payments of an income nature that are paid under a legal obligation. That repealed provision contains a number of exceptions for sales of annual payments that are already subject to appropriate tax treatment. Owing to an oversight, the new transfers of income rules do not replicate those exclusions, but they should have done. Without the amendments, the new rules could impose an additional and inappropriate tax charge on transactions of that kind, so they simply restore the exclusions and make sure that they continue to apply under the new legislation.