EIM46075 | Section 554Z11C: Chapter 2 liability equal to or greater than earlier charges – overlap with 2 or more items and relevant Chapter 2 overlap charges

ITEPA 2003 – section 554Z11C(7) - (10)

It is possible for a relevant step to be taken which consists of separate amounts of income which have previously been subject to different charges to tax. The double taxation amendments to Part 7A contained in FA 2017 provide for relief to be given on a just and reasonable basis where overlaps exist between income which has been subject to more than one charge to tax.

Where a liability under Part 7A includes income which overlaps with all the liabilities previously charged, the provisions of section 554Z11C(7) – (10) allow payment of the Part 7A liability to be apportioned across all the previous charges. These provisions can only be used where the Part 7A liability which consists of overlapping elements of the previous charge is being settled.

This will apply in different circumstances to those covered by section 554Z11C(1) – (6). It will be appropriate to use the earlier parts of the section where, for example, a large amount was charged on contribution and lesser charges arise either on earmarking or where a payment of a sum of money was made.

Some of the concepts used in section 554Z11C(1) - (6) still apply.

There still needs to be a sum of money or an asset which is the subject of a relevant step. This is still referred to as sum or asset P. The tax due on the relevant step is still referred to as the Chapter 2 tax liability.

There is a different approach to the earlier charges on sum or asset Q. Where more than one earlier charge to tax exists, it is necessary to be able to identify the extent to which the income overlaps across the charges.

Section 554Z11C(7)(a) states that there must be overlap between sum or asset P which is the subject of the relevant step and each of 2 or more items which gave rise to a charge to tax on the employee before the relevant step is taken.

It achieves this by importing the conditions of section 554Z11B(2)(b) which states that an overlap has to exist with sum or asset Q. Since an overlap has to separately exist with each of the items previously charged to tax, each item will effectively have its own sum Q which will be a constituent part of the total amount charged to tax on sum P.

Each of the items previously charged to tax will overlap independently with the Chapter 2 tax liability on sum or asset P. The Chapter 2 tax liability now consists of different overlaps with each of the previous charges. The overlap within the Chapter 2 tax liability with each of these separate charges is called a relevant Chapter 2 overlap charge. The Chapter 2 liability has to therefore consist of 2 or more relevant Chapter 2 overlap charges.