Professional Services Withholding Tax (PSWT) - Commencement & Cessations

Introduction

We have been asked to comment on the following points on allowing credit for PSWT.

Commencement situations

The effect of the decision in the Daly case is that credit for PSWT is now allowed on a current year basis. The administrative arrangements for crediting/repaying PSWT overpaid as a consequence of the decision in the Daly case, are contained in Statement of Practice IT/1/95.

The amount of PSWT credit allowed against income tax for a year of assessment is the PSWT referable to the basis period for that year of assessment. “Basis period for a year of assessment” is defined in Section 13 Finance Act 1987 [Par(a)] as being the period on the profits or gains of which income tax for that year of assessment falls to be computed for the purposes of Case I or II of Schedule D. The proviso to the definition provides that where two basis periods overlap, the period common to both is deemed to fall into the second basis period only [sub-par (i)].

In commencement situations, basis periods usually overlap. Where this happens, the period of overlap is deemed to fall into the second basis period only. PSWT deducted in this period is referable to the second basis period. Credit for this PSWT is allowed accordingly. Example I below illustrates how this operates.

Cessation situations

The proviso to the definition of “basis period for a year of assessment” provides that where there is an interval between the end of a basis period for one year of assessment and the commencement of the basis period for the next year of assessment, the interval is deemed to be part of the second basis period [sub-par (ii) of par (a)]. In cessation situations, there may be such an interval. Example II below illustrates how credit for PSWT is given in a cessation situation where there is an interval between basis periods.

Partnerships

Under Section 20 Finance Act 1987, credit for PSWT borne by a partnership is apportioned between the partners in proportion to the ratio by which they share the partnership profits to which the PSWT relates.

From time to time, partners, due to the particular circumstances of their partnership agreement, may wish to allocate the credit for PSWT between them other than in accordance with this basis.

Revenue is prepared to consider requests for the allocation of credit for PSWT between partners other than on the strict basis required by the legislation. Such requests should be made in exceptional circumstances only. For example, where one partner is entitled to a repayment of PSWT, while another partner owes a significant amount of tax, consideration will be given to a request to have credit for PSWT allocated in such a way as to reduce/eliminate both the repayment and the tax outstanding.

The partners in question will be required to sign an undertaking that they will not seek credit/repayment of the tax on any basis, other than that agreed. Any application for such treatment should be made to the partnerships local tax office.