Annual payments: meaning of annual payment
Characteristics of an annual payment
The phrase ‘annual payment’ is not defined in the legislation. Its meaning comes from an extensive body of case law. This has established that to be an annual payment, a sum must possess four characteristics.
- It must be payable under a legal obligation. For example, a university student might receive a regular termly contribution from his or her parents towards living expenses. This is not an annual payment, because there is no legal obligation to make the contribution.
- The obligation to make payments must extend for more than a year - the payments must be capable of recurring. But the obligation may be contingent. In the case of Cunard’s Trustees v CIR (27TC122), sums were to be paid from the capital of a will trust in any year in which trust income was insufficient to meet the beneficiary’s needs. These sums were held to be annual payments, despite the fact they were payable in some years but not in others. ITTOIA05/S683 (3) specifically provides that the frequency with which the payments are made does not matter.
- It must be income, not capital, in the hands of the recipient. A capital sum may be paid in instalments - these are not annual payments.
- It must represent pure income profit to the recipient. A sum is ‘pure income profit’ if - like interest - it comes to the recipient without he or she having to do anything in return. It is ‘pure profit’ because, under ITTOIA05/S684 (1), it is charged on the recipient without any deduction being permitted. SAIM8030 looks at this in more detail, and SAIM8050 gives examples.
Customer rewards and ‘cashback’
Inducements or rewards offered to customers by a trade, profession or vocation might constitute annual payments chargeable to tax under ITTOIA05/S683 if they possess the above four characteristics - see examples 2 and 3 at SAIM8050. It is a question of fact in each case whether a payment has these characteristics. ‘Cashbacks’ can present difficult issues, and HMRC staff should consult CTIAA (Financial Products Team) in cases of doubt.