INTM550560 - Hybrids: definition of key terms: ordinary income

Ordinary income

Ordinary income is defined at s259BC as income that is brought into account when calculating taxable profits on which a relevant tax is charged. Entities such as charities may not have ordinary income where the income received falls wholly within relevant exemptions. This is because that income is not brought into account in calculating profits on which a relevant tax is charged.

However, Finance Act 2021 introduced rules into Part 6A TIOPA 2010 for Qualifying Institutional Investors (QII), which are listed in Paragraph 30A of Schedule TAC to TCGA 1992, see CG53012.

From the date of Royal Assent of the Finance Act 2021, income is to be treated as ordinary income if it would have been brought into account for the purposes of calculating taxable profits had the person not been a QII.

A relevant tax is any tax within s259B(1) – see INTM550520 - other than CFC charges (259BC(9)).

Income is not brought into account as ordinary income for the purposes of Part 6A

  • if it is charged to the relevant tax at a nil rate, or
  • if it is excluded, reduced or offset by any exemption, exclusion, relief or credit
    • that applies specifically to all or part of the amount of income (as opposed to ordinary income generally), or
    • that arises as a result of, or otherwise in connection with, a payment or quasi-payment that gives rise to the amount of income

Withholding taxes are excluded from scope.

A receipt may remain within the definition of ordinary income even where it has been characterised differently under the payee regime. For example, a finance return may be characterised as proceeds from a share sale by a share trader, but still be included within trading profits as income. In those circumstances the receipt is taxed at the same rate as a finance return would have been and so is ordinary income. See the example at INTM551380.

A full or partial refund of the relevant tax charged on profits will not prevent an amount from being treated as ordinary income if those refunds result from a ‘qualifying loss relief’.

A qualifying loss relief is a loss that might be used to reduce the amount on which a person is liable to income tax or corporation tax on income in the UK, or a corresponding non-UK loss. This will include, for example, refunds arising from relief for or equivalent to

  • UK group relief,
  • UK loss carry back
  • UK generic allowable expenditure incurred in earning the profits that exceeds the income received

A full or partial refund of the relevant tax as a consequence of anything that is not a qualifying loss relief will result in the amounts being excluded from ordinary income. This may occur where it is a feature of the relevant jurisdiction’s tax regime that the tax on income can be refunded, whether to the company or another person, without the application of a qualifying loss relief, but perhaps because it is income of a specified character.

Controlled foreign company’s regimes

S259BD extends the definition of ordinary income to include certain income subject to a charge under a controlled foreign company (CFC) regime.

See INTM550570 for a more detailed explanation.