The Tax Credits (Definition and Calculation of Income) Regulations 2002

Made: 30th July 2002

Coming into force in accordance with regulation 1

Whereas a draft of this instrument, which contains the first regulations made under section 7(8) and (9) of the Tax Credits Act 2002, has been laid before, and approved by resolution of, each House of Parliament:

Now, therefore, the Treasury, in exercise of the powers conferred upon them by sections 7(8) and (9), 65(1), (7) and (9) and 67 of the Tax Credits Act 2002, hereby make the following Regulations:

PART 1 — General Provisions

Citation, commencement and effect

1

These Regulations may be cited as the Tax Credits (Definition and Calculation of Income) Regulations 2002 and shall come into force—

• (a) for the purpose of enabling claims to be made, on 1st August 2002;

• (b) for the purpose of enabling awards to be made, on 1st January 2003; and

• (c) for all other purposes, on 6th April 2003;

and shall have effect for the tax year beginning on 6th April 2003 and subsequent tax years.

Interpretation

2

• (1) In these Regulations, unless the context otherwise requires—

• “the Act” means the Tax Credits Act 2002;

• “the Contributions and Benefits Act” means the Social Security Contributions and Benefits Act 1992[^f00003]; and

• “the Employment Act” means the Employment and Training Act 1973[^f00004].

• (2) In these Regulations except where the context otherwise requires—

• “the 1992 Fund” means moneys made available from time to time by the Secretary of State for Social Security for the benefit of persons eligible for payment in accordance with the provisions of a scheme established by him on 24th April 1992 as respects England and Wales and Northern Ireland and on 10th April 1992 as respects Scotland;

• “the Board” means the Commissioners of Inland Revenue;

• “child” has the meaning given in the Child Tax Credit Regulations 2002[^f00005];

• “claim” means a claim for child tax credit or working tax credit and “joint claim” and “single claim” shall be construed in accordance with section 4(6) of the Act and “claimant” shall be construed accordingly;

• “the Eileen Trust” means the charitable trust of that name established on 29th March 1993 out of funds provided by the Secretary of State for Social Security for the benefit of persons eligible in accordance with its provisions;

• “emoluments” shall be construed in accordance with section 131 of the Taxes Act;

• “employment zone” means an area within Great Britain designated by the Employment Zones Regulations 2000[^f00006] for the purposes of section 60 of the Welfare Reform and Pensions Act 1999[^f00007];

• “employment zone programme” means a programme which is— established for one or more employment zones, and designed to assist claimants for a jobseeker’s allowance to obtain sustainable employment;

• “family” means— in the case of a joint claim, the married or unmarried couple by whom the claim is made and any child or qualifying young person for whom at least one of them is responsible, in accordance with regulation 3 of the Child Tax Credit Regulations 2002[^f00008]; and in the case of a single claim, the claimant and any child or qualifying young person for whom he is responsible in accordance with regulation 3 of the Child Tax Credit Regulations 2002;

• “the Independent Living Fund” means the charitable trust of that name established out of funds provided by the Secretary of State for Social Services for the purpose of providing financial assistance to those persons incapacitated by or otherwise suffering from very severe disablement who are in need of such assistance to enable them to live independently;

• “the Independent Living Funds” means the Independent Living Fund, the Independent Living (Extension) Fund and the Independent Living (1993) Fund;

• “the Independent Living (Extension) Fund” means the trust of that name established on 25th February 1993 by the Secretary of State for Social Security and Robin Glover Wendt and John Fletcher Shepherd;

• “the Independent Living (1993) Fund” means the trust of that name established on 25th February 1993 by the Secretary of State for Social Security and Robin Glover Wendt and John Fletcher Shepherd;

• “the Macfarlane (Special Payments) Trust” means the trust of that name established on 29th January 1990 partly out of funds provided by the Secretary of State for Health for the benefit of certain persons suffering from haemophilia;

• “the Macfarlane (Special Payments) (No. 2) Trust” means the trust of that name established on 3rd May 1991 partly out of funds provided by the Secretary of State for Health for the benefit of certain persons suffering from haemophilia and other beneficiaries;

• “the Macfarlane Trust” means the charitable trust established partly out of funds provided by the Secretary of State for Health to the Haemophilia Society for the relief of poverty or distress among those suffering from haemophilia;

• “the Macfarlane Trusts” means the Macfarlane Trust, the Macfarlane (Special Payments) Trust and the Macfarlane (Special Payments) (No. 2) Trust;

• “pensionable age” has the meaning given by the rules in paragraph 1 of Schedule 4 to the Pensions Act 1995[^f00009];

• “pension fund holder”, in relation to a personal pension scheme or a retirement annuity contract, means the trustees, managers or scheme administrators of the scheme or contract;

• “personal pension scheme”— has the meaning given by section 1 of the Pensions Schemes Act 1993[^f00010] or section 1 of the Pension Schemes (Northern Ireland) Act 1993[^f00011]; and includes a scheme approved by the Board under Chapter 4 of Part 14 of the Income and Corporation Taxes Act 1988[^f00012];

• “qualifying young person” has the meaning given in the Child Tax Credit Regulations 2002;

• “retirement annuity contract” means a contract or trust scheme approved by the Board under or by virtue of any provision of Chapter 3 of Part 14 of the Taxes Act;

• “retirement benefits scheme” has the meaning given in section 611 of the Taxes Act[^f00013];

• “Schedule D” means the Schedule set out in section 18 of the Taxes Act[^f00014];

• “Schedule E” means the Schedule set out in section 19 of the Taxes Act[^f00015];

• “the Service Pensions Order” means the Naval, Military and Air Forces, etc. (Disablement and Death) Service Pensions Order 1983[^f00016];

• “tax year” means a period beginning with the 6th April in one year and ending with 5th April in the next;

• “the Taxes Act” means the Income and Corporation Taxes Act 1988;[^f00017]

• “voluntary organisation” means a body, other than a public or local authority, the activities of which are carried on otherwise than for profit;

• “war pension” has the meaning given in section 25(4) of the Social Security Act 1989[^f00018].

• (3) For the purposes of these Regulations, whether a person is responsible for a child or a qualifying young person is determined in accordance with regulation 3 of the Child Tax Credit Regulations 2002.

• (4) In these Regulations—

• (a) a reference to a claimant’s partner is a reference to a claimant’s spouse or a person with whom the claimant lives as a spouse; and

• (b) a reference to a claimant’s former partner is a reference to a claimant’s former spouse or a person with whom the claimant has lived as a spouse; and

• (c) a reference in these Regulations to an Extra Statutory Concession is a reference to that Concession as published by the Inland Revenue on 1st July 2002[^f00019].

PART 2 — Income for the purposes of tax credits

CHAPTER 1 — General

Calculation of income of claimant

3

• (1) The manner in which income of a claimant or, in the case of a joint claim, the aggregate income of the claimants, is to be calculated for a tax year for the purposes of Part 1 of the Act is as follows.

• Step OneCalculate and then add together—the pension income (as defined in regulation 5(1)),the investment income (as defined in regulation 10),the property income (as defined in regulation 11),the foreign income (as defined in regulation 12) andthe notional income (as defined in regulation 13)of the claimant, or, in the case of a joint claim, of the claimants.If the result of this step is £300 or less, it is treated as nil.If the result of this step is more than £300, only the excess is taken into account in the following steps.

• Step TwoCalculate and then add together—the employment income (as defined in regulation 4),the social security income (as defined in regulation 7),the student income (as defined in regulation 8) andthe miscellaneous income (as defined in regulation 18)of the claimant, or in the case of a joint claim, of the claimants.

• Step ThreeAdd together the results of Steps One and Two.

• Step FourCalculate the trading income (as defined in regulation 6) of the claimant, or in the case of a joint claim, of the claimants.Add the result of this step to that produced by Step Three ... in the year.If there has been a trading loss in the year, subtract the amount of that loss from the result of Step Three.A loss shall not be available for tax credits purposes, unless the trade was being carried on upon a commercial basis and with a view to the realisation of profits in the trade or, where the carrying on of the trade formed part of a larger undertaking, in the undertaking as a whole.Any trading loss in the year not set off as a result of the calculations in Steps One to Four above due to an insufficiency of income may be carried forward and set off against trading income (if any) of the same trade, profession or vocation in subsequent years (taking earlier years first) for the purposes of calculation of income under this regulation.

• (2) Subject to the qualifications in the following paragraphs of this regulation, and the provisions of Part 3, the result of Step Four in paragraph (1) is the income of the claimant, or, in the case of a joint claim, of the claimants, for the purposes of the Act.

• (3) Income which—

• (a) arises in a territory outside the United Kingdom and

• (b) is, for the time being, unremittable for the purposes of Chapter 4 of Part 8 ofITTOIA,

is disregarded in calculating the income of the claimant or, in the case of a joint claim, of the claimants.

• (4) Paragraph (5) applies in the case of a claimant who is , for income tax purposes—

• (a) resident and domiciled ... in the United Kingdom, ...

• (b) resident ... but not domiciled in the United Kingdom. ...

• (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (5) In the case of a person to whom this paragraph applies—

• (a) any income arising outside the United Kingdom is to be taken into account, subject to any specific provision of these Regulations, regardless of the domicile or residence of the claimant; and

• (b) references to a sum being taken into account are to be construed as including a sum which would be taxable if he were resident... and domiciled in the United Kingdom.

• (5A) Any income is to be taken into account, subject to any specific provision of these Regulations, notwithstanding the provision of any Order in Council under section 788 of the Taxes Act (double taxation agreements).

• (6) In the case of a claimant who would be chargeable to income tax but for some special exemption or immunity from income tax, income shall be calculated on the basis of the amounts which would be so chargeable but for that exemption or immunity.

• (6A) Income paid to a claimant in a currency other than sterling shall be converted into sterling at the average of the exchange rates applicable for the conversion of that currency into sterling in the period of 12 months ending on 31st March in the tax year in which the income arises.

• (7) In calculating income under this Part there shall be deducted ...—

• (a) the amount of any banking charge or commission payable in converting to sterling a payment of income which is made in a currency other than sterling;

• (b) the grossed-up amount of any qualifying donation (within the meaning of Chapter 2 of Part 8 of ITA (gift aid)), made by the claimant or, in the case of a joint claim, by either or both of the claimants; ... and

• (c) the amount of any contribution made by the claimant, or in the case of a joint claim, by either or both of the claimants to a registered pension scheme together with the amount of any tax relief due on those contributions.

• (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (8) If—

• (a) a claimant has sustained a loss in relation to a UK property business or an overseas property business; and

• (b) the relief to which he is entitled in accordance with section 120 of ITA (deduction of property losses from general income) exceeds the amount of his property income or foreign income for tax credits purposes, for the year in question;

the amount of his total income for tax credit purposes, computed in accordance with the preceding provisions of this regulation, shall be reduced by the amount of the excess.

• In this paragraph “UKproperty business” and “overseas property business” have the same meanings as they have in Chapter 2 of Part 3 ofITTOIA.

Step One

Calculate and then add together—

• (a) the pension income (as defined in regulation 5(1)),

• (b) the investment income (as defined in regulation 10),

• (c) the property income (as defined in regulation 11),

• (d) the foreign income (as defined in regulation 12) and

• (e) the notional income (as defined in regulation 13)

of the claimant, or, in the case of a joint claim, of the claimants.

If the result of this step is £300 or less, it is treated as nil.

If the result of this step is more than £300, only the excess is taken into account in the following steps.

Step Two

Calculate and then add together—

• (a) the employment income (as defined in regulation 4),

• (b) the social security income (as defined in regulation 7),

• (c) the student income (as defined in regulation 8) and

• (d) the miscellaneous income (as defined in regulation 18)

of the claimant, or in the case of a joint claim, of the claimants.

Step Three

Add together the results of Steps One and Two.

Step Four

Calculate the trading income (as defined in regulation 6) of the claimant, or in the case of a joint claim, of the claimants.

CHAPTER 2 — Employment Income

Employment income

4

• (1) In these regulations “employment income” means—

• (a) any earnings from an office or employment received in the tax year;

• (b) so much of any payment made to a claimant in that year in respect of expenses as is chargeable to income tax by virtue of section 62 or section 72 of ITEPA;

• (c) the cash equivalent of any non-cash voucher received by the claimant in that year and chargeable to income tax under section 87 of ITEPA or, where there is an optional remuneration arrangement, the relevant amount,;

• (d) the cash equivalent of any credit-token received by the claimant in that year and chargeable to income tax under section 94 of ITEPA or, where such a credit-token is provided pursuant to an optional remuneration arrangement, the relevant amount;

• (e) the cash equivalent of any cash voucher received by the claimant in that year and chargeable to income tax under section 81 of ITEPA or, where there is an optional remuneration arrangement, the relevant amount,;

• (f) any amount chargeable to tax under Chapter 3 of Part 6 of ITEPA;

• (g) so much of a payment of statutory sick pay, received by the claimant during the year, as is subject to income tax by virtue of section 660 of ITEPA;

• (h) the amount (if any) by which a payment of statutory maternity pay, statutory paternity pay, statutory shared parental pay or statutory adoption pay , statutory parental bereavement pay or statutory adoption pay exceeds £100 per week;

• (i) any amount charged to income tax for that year under section 120 or section 149 of ITEPA;

• (ia) the relevant amount in cases where a car is made available to the claimant or a member of the claimant’s family pursuant to an optional remuneration arrangement where the car’s CO₂ emissions figure exceeds 75 grams per kilometre;

• (j) any sum to which section 225 of ITEPA applies;

• (k) any amount paid in that year by way of strike pay to the claimant as a member of a trade union.

• (l) any amount charged to income tax for that year under Part 7 of ITEPA.

• (m) any amount paid to a person serving a custodial sentence or remanded in custody awaiting trial or sentence, for work done while serving the sentence or remanded in custody.

For the purposes of this paragraph, references to the receipt of a payment of any description are references to its receipt by or on behalf of the claimant, or in the case of a joint claim of either of the claimants, in any part of the world.

This paragraph is subject to the following qualifications.

• (2) Employment income does not include pension income.

• (2A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (2B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (3) This paragraph applies if (apart from section 64 of ITEPA) the same benefit would give rise to two amounts (“A” and “B”)—

• (a) “A” being an amount of earnings from a claimant’s employment as defined in section 62 of ITEPA, and

• (b) “B” being an amount to be treated as earnings under any provision of Chapter 10 of Part 3 of ITEPA.

• In such a case, the amount to be taken into account in computing the claimant’s employment income is the greater of A and B, and the lesser amount shall be disregarded.

• (4) In calculating employment income, the payments and benefits listed in Table 1 shall be disregarded except where the payment or benefit is provided pursuant to optional remuneration arrangements and is neither a special case benefit nor an excluded benefit.