EIM46065 - Section 554Z11C: identifying overlapping sums or assets and applying relief: example 3 – two or more charges – earlier charge paid

ITEPA 2003 – sections 554Z11C(1) – (6)

Since the legislation does not allow earlier charge paid amounts to be set against other earlier charges, a different approach must be taken to obtain relief where more than 2 charges exist and an amount is paid towards an earlier charge.

Using the example from section 554Z11C – overlapping sums or assets – example 2 with a payment being made against an earlier charge will demonstrate how the difference in relief is obtained:

2008-2009 - earnings charge on £400,000 (sum Q2) contribution to EBT - resulting in 40% tax charge of £160,000
2016-2017 - relevant step on £200,000 (sum Q1 ÷ P2) earmarking charge - resulting in 45% tax charge of £90,000
2017-2018 - relevant step on £150,000 loan (sum P1) - resulting in Chapter 2 liability at 45% of £67,500

General principles

To obtain full relief, it is necessary to consider how the payment made by the taxpayer interacts with each of the other liabilities as separate calculations.

In the table of liabilities above, payment is being made against the 2016-2017 liability. It is necessary to consider the liability arising in 2017-2018 as including a Chapter 2 overlap charge against an earlier charge arising in 2016-2017. Any earlier charge paid amounts will be treated as payments on account of the Chapter 2 overlap charge. This will deal with any double taxation between the separate charges for these 2 years.

This leaves the 2008-2009 liability to be considered. Since a payment of an earlier charge can’t be used to relieve another earlier charge, to fully relieve the income across all the charges, it is then necessary to compare the 2016-2017 liability separately against the 2008-2009 liability.

The 2016-2017 liability becomes a separate Chapter 2 liability which includes a separately calculated Chapter 2 overlap charge against an earlier charge arising in 2008-2009. The value of the relevant step for the 2016-2017 liability becomes a newly calculated sum P. It is necessary to consider the overlap between this and the earlier liability in 2008-2009. This becomes a newly calculated sum Q. Any payments against the Chapter 2 overlap charge for 2016-2017 can be used as payments on account of the earlier charge for 2008-2009.

Detailed calculation – 2017-2018 against 2016-2017

The Chapter 2 liability is £67,500 in 2017-2018 and it wholly relates to income included in the 2016-2017 tax liability. The Chapter 2 overlap charge is therefore still £67,500.

It is again necessary to calculate how much of the income which gave rise to the 2017-2018 charge is included in the 2016-2017 charge.

The overlapping income is £150,000 (sum P1) out of total income charged of £200,000 (sum Q1). The overlap covers 75% of the income charged in 2016-2017. The charge for that year was £90,000. Since 75% of that charge relates to overlapping income, the amount of the earlier charge for 2016-2017 is £90,000 × 75% = £67,500.

Detailed calculation – 2016-2017 against 2008-2009

It is then necessary to consider what the Chapter 2 overlap and earlier charges are when comparing 2016-2017 to 2008-2009.

Previously the liability for 2016-2017 was the earlier year’s tax liability and contained the earlier charge. In relation to the 2008-2009 year, the charge for 2016-2017 becomes the Chapter 2 tax liability and contains the Chapter 2 overlap charge.

Sum P is no longer the £150,000 from 2017-2018 – it is now £200,000 from 2016-2017 (referred to now as P2). The overlapping amount between 2016-2017 and 2008-2009 is £200,000. This gave rise to the whole of the Chapter 2 tax liability of £90,000 so the Chapter 2 overlap charge is £90,000.

The overlapping amount of £200,000 is 50% of the amount which gave rise to the earlier tax liability of £160,000. The earlier charge for 2008-2009 is £160,000 × 50% = £80,000.

To summarise the position in relation to the overlapping charges:

2008-2009 – earlier charge 2 – £80,000
2016-2017 – Chapter 2 overlap charge in respect of 2008-2009 – £90,000
2016-2017 – earlier charge 1 – £67,500
2018-2019 – Chapter 2 overlap charge in respect of 2016-2017 – £67,500

In 2018-2019, a payment of £70,000 is made for the 2016-2017 liability. This needs to be considered as a paid amount against both the 2018-2019 charge and the 2008-2009 charge.

In relation to the 2018-2019 Chapter 2 overlap charge, this is an earlier charge paid amount. It can be used as a payment on account of the 2018-2019 Chapter 2 overlap charge of £67,500. Since the amount paid exceeds the Chapter 2 overlap charge by £2,500, that amount can be set against any late payment interest arising in respect of that Chapter 2 overlap charge. It will not clear the 2016-2017 liability in full but it does clear the earlier charge for this year.

In relation to the 2008-2009 earlier charge, this is a Chapter 2 paid amount. The payment can be used as a payment on account of the 2008-2009 earlier charge.

It will not clear the earlier liability in full. Since the earlier charge is £80,000, the payment of £70,000 will leave £10,000 of the earlier charge still able to be franked by any further payment towards any of the 2016-2017 liability.

Using the payments in this example, the 2018-2019 charge is fully covered. Any further payments would be made against the balances remaining on the other years. These would then be considered as Chapter 2 paid amounts or earlier charge paid amounts as appropriate and available to be used as payments on account of the earlier charges or Chapter 2 overlap charges as appropriate.