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These are payments made by a person or corporation from which tax has been deducted by the payer, who must account for it to the Inland Revenue. They are mostly interest payments and amounts paid by way of covenant. In the latter instance the deduction is deemed to have been made even though the taxpayer does not officially do so. The amount that he covenants to pay is treated as a ‘net’ payment and the payee, if not subject to tax for one reason or another, e.g. because of charity status, then obtains repayment of the tax notionally paid by the payer. In preparing a tax computation the annual payments are deducted from income and then later brought back into account and tax collected from them at the standard rate. For that reason, entering into covenants is not recommended for the low income earner if the tax applicable to his net income is nil – or less than the tax on the covenant – for he will be paying not only the covenant but also the tax that he has been deemed to have deducted from it. In order to minimize his liability it is important that the tax due on his income – after adding back the gross equivalent of the annual charges – is greater than the tax on the annual charge itself.
Reference: The Penguin Business Dictionary, 3rd edt.
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