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Characteristics of an annual payment

»Ê¹ÚÌåÓýapp phrase ‘annual paymentâ€� 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.
• »Ê¹ÚÌåÓýapp 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. »Ê¹ÚÌåÓýappse 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 profitâ€� if - like interest - it comes to the recipient without he or she having to do anything in return. It is ‘pure profitâ€� 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 (see Statement of Practice 4/1997), and HMRC staff should consult BAI (Financial Products Team) in cases of doubt.