Apart from the welcome corporate tax exemption for dividends from non-UK companies, it was unknown what this Budget would hold for the tax adviser (and their client). The focus on the problems of the wider economy could have distracted HM Treasury, and indeed tax got a relatively light mention in the speech, other than changes imposing a significant additional tax burden on higher earners, and a brief reference to closing loopholes. However, HM Revenue & Customs seem to have relished the extra time gained by holding the Budget a month late by producing a bumper crop of 93 press releases, plus the promise of imminent consultations on banks’ conduct in relation to their tax affairs, transactions in securities, purpose tests, overhedging and underhedging and measures to bring innovative businesses to the UK, amongst others. A surprising number of the measures are to address issues resulting from the financial crisis.
Compliance, particularly in the banking sector, was a major target, with a code of conduct for banks and a related consultation document expected shortly, a new requirement for senior accounting personnel to certify that their tax accounting systems are fit for purpose, and a threat to “name and shame” if all else fails.
On the more positive side, a boost for the low carbon sector, the foreign profits exemption and 40 per cent first year allowance for a one-year period are welcomed, but the benefits are offset by the introduction of an interest cap and the fact that lease financiers will not be able to make use of the 40 per cent rate.
Those engaged in the investment management business will welcome changes such as the increased ISA limit, the clarification of the tax regime for various investment vehicles and the introduction of an effective tax regime for sukuk issues.
But the main topic of conversation within the City, at least, will no doubt be the changes for high earners, with a triple whammy of no personal allowance, reduced relief for pension contributions and a 50 per cent tax rate. This briefing sets out the changes of most relevance to our clients. Many measures have immediate (and some retrospective) effect. Others will only apply from the date of Royal Assent to the Finance Bill (expected mid to late July) and some will only take effect in 2010.
Key developments for headlight sectors
- increased income taxes for high earners compared with low capital gains tax rates will put renewed pressure on incentivising employees in a tax effective way.
- foreign dividends exempt from tax from 1 July 2009.
- Debt cap proposals to be introduced from 1 January 2010.
- added compliance burden for senior accounting officials in relation to tax accounting systems.
- restrictions on tax relief for pension contributions paid by high income individuals will impact companies operating pension schemes.
- a financial institution’s tax affairs will be much more closely monitored, with a code of conduct and consultative document promised for banks, and rules requiring a senior accounting officer to certify the adequacy of their tax accounting systems.
- more notices are to be issued by HM Revenue & Customs (HMRC) seeking details from financial institutions of potentially non-disclosed bank accounts held by UK taxpayers.
- a comprehensive regime for Sukuk issues relating to land to be introduced.
- ISA limit increasing to £10,200.
Energy and infrastructure
- the new first-year capital allowance at 40 per cent for new expenditure on plant and machinery will benefit this capital intensive sector.
- a package of “green” measures incentivises the low carbon economy.
- enhanced ROCs available for offshore windfarms with financial close before 2011.
- incentives for the oil and gas sector will encourage development of marginal fields and the re-use of redundant North Sea assets and infrastructure.
- the definition of goodwill in the intangible asset tax regime is clarified.
- a consultation is to be held on how to make the UK an attractive location for establishing technically innovative businesses.
- EIS and VCT rules relaxed.
- a first-year capital allowance for a 12-month period at 40 per cent for new expenditure on plant and machinery will benefit this capital intensive sector, but lessors are not eligible.
- a £2000 incentive is to be given to scrap old cars in exchange for new.
- fuel tax increases provide one of the biggest fundraisers for the Government.
- cross-border VAT is to be simplified.
Financial Institutions and other corporates
Financial crisis measures
Loan Relationships - connected companies
The Government have confirmed that two welcome changes to the loan relationship rules (on trade debt and late paid interest) will go ahead.
When a trade debt owing from one party to a non-related party is released, the normal tax treatment is that the lender obtains tax relief and the borrower is taxed on the amount released. This has not been the position for parties who are, in tax terms, connected (where for instance, they are under common control). There was a possible mismatch, in that it would be possible in some circumstances for the lender not to obtain tax relief for the amount released but for a tax charge to arise on the borrower. This position is now to be amended, so that neither tax relief nor a tax charge arises on the release.
The other change relates to the provisions governing interest relief for interest paid to a related party which is not in the same UK corporate group as the payer. Historically, the position has been that relief for that interest (even if accruing in the accounts) will be deferred for the borrower, if the interest is not paid within 12 months after the end of the relevant accounting period. It is arguable as to whether these restrictions were in compliance with the Government’s obligations under the Treaty of Rome but, in any event, they are to be amended so that they will only apply if the lender in question is resident in a so-called “non-qualifying territory”. These will be territories with whom the United Kingdom does not have a suitable double taxation agreement. As a result, interest relief on loans made by lenders in all the member states of the European Union will not be deferred and the impact of these rules will largely be confined to loans made by lenders based in tax havens. Because companies may have arranged their tax affairs on the basis that the “as paid” rule will apply, companies will be able to elect this treatment to continue to apply for the first accounting period that begins on or after 1 April 2009.
Agreements to forgo tax reliefs
Legislation will be introduced in the Finance Bill 2009 to implement agreements made by the Government with companies to forgo tax reliefs if they enter into arrangements under the Asset Protection Scheme which has been created to help some of the clearing banks and other financial institutions.
Under these arrangements, some of the groups have been asked to forgo tax losses or other reliefs. On a technical basis, such agreements could be over-ruled by the relevant provisions in the tax legislation, which for instance provide that, automatically, losses are carried forward from one period to the other. The rules will now be changed so that this does not happen and the agreements can therefore be effective.
Trading loss carry-back
A temporary measure was announced in the Pre-Budget Report 2008 to allow businesses to carry trading losses back against profits of the three preceding years and obtain a repayment of tax. This is to be introduced and extended in the Finance Bill 2009.
Under current rules, businesses can offset unlimited trading losses against profits in the immediately preceding year, but cannot generally carry trading losses back against profits of earlier years, except:
- start-up unincorporated businesses in the early years of operation can carry trading losses back for three years.
- any business ceasing to trade can also carry trading losses back for three years.
The proposal announced in the Pre-Budget Report 2008 was for the trading loss carry-back to be extended from the current one year entitlement to a period of three years, with losses being carried back against later years first. However, while the amount of the carry-back to the previous year remains unlimited, the amount that could have been carried back against the profits of the earlier two years was to be limited to £50,000 in total.
It was announced today that the ability for businesses to carry trading losses back will be extended.
Originally the measure was to have effect for company accounting periods ending in the period 24 November 2008 to 23 November 2009 and, for unincorporated businesses, the measure was to have effect in relation to trading losses for tax year 2008/09. Now it should be possible for businesses to apply the rules for two periods: for company accounting periods ending in the period 24 November 2008 to 23 November 2010 and, for unincorporated businesses, tax years 2008/09 and 2009/10. There will be two separate caps of £50,000: one for accounting periods ending in the twelve months to 23 November 2009 (or, for unincorporated business, tax year 2008/09) and a separate £50,000 cap on the carry-back of losses incurred in the accounting periods ending in the twelve months to 23 November 2010 (or, for unincorporated businesses, tax year 2009/10).
Hedging proceeds from future share issues
There has been an increasing number of large companies raising money through issuing shares - for example on a rights issue - and such companies would ordinarily not expect the proceeds raised from such share issues to be subject to corporation tax: such proceeds amount to an increase in share capital, rather than income, profits or gains.
In a Written Ministerial statement announced by the Financial Secretary to the Treasury on 10 March 2009, it was recognised that there are circumstances under which it is possible that hedging the proceeds from a rights issue of shares could give rise to a tax charge where the shares issued were denominated in a currency other than the functional currency of the issuing company. New rules were announced to ensure that such amounts could be excluded from being brought into account for corporation tax purposes, and these rules were confirmed today.
The concern arises where a company announces a rights issue of shares denominated in a currency other than its functional currency and enters into a currency derivative contract that seeks to hedge the risk to the value of the future share issue proceeds from currency fluctuations. It is proposed that existing regulations will be amended to ensure that any exchange, gain or loss on the currency derivative contract will be excluded from being brought into account for tax purposes unless, in the case of a gain, any part of that gain is subsequently distributed to shareholders. These rules will apply to all currency derivative contracts entered into on or after 1 January 2009 which have the intention of hedging the exchange risk for a future share issue.
Group Relief: Preference Shares
The rules providing for preference shareholders not to be treated as shareholders in a corporate group for tax purposes are to be relaxed for all accounting periods beginning on or after 1 January 2008.
Where companies form a corporate group, they are able to surrender tax losses from one group member to another and transfer assets on a tax neutral basis. In broad terms, a group for these purposes requires the company in question to be at least 75 per cent owned by its parent or under common control of a 75 per cent parent. In determining whether this 75 per cent test is met, the starting point is to look at the identity of the shareholders. For these purposes, a holder of a fixed-rate preference share has not been treated as a shareholder. As a result, it has been possible for groups to issue fixed-rate preference shares to outsiders without the issuer being degrouped from the rest of the group. If they were degrouped, a tax charge could arise and losses could no longer be surrendered. The definition of fixed-rate preference share has been very restrictive; it has not, for instance allowed shares to be issued with a LIBOR based coupon or where the rate of interest is linked to RPI. In relation to all accounting periods that commence on or after 1 January 2008, this will no longer be the case. The definition of “fixed-rate preference shares” will be replaced by a new defined term (relevant preference shares). These will allow companies to issue preference shares with a variable published market interest rate or a rate linked to RPI. It is arguable that the current definition of “fixed-rate preference share” does not include non cumulative fixed-rate preference shares, where payment of the dividend is not due if the relevant institution is unable to pay it because of financial difficulties or where dividend payments are restricted by regulatory capital issues. Preference shares with these features will now be included and their holders will not be treated as shareholders for group relief purposes.
These changes are welcome, although the final details are awaited as, in principle, it will allow groups to issue a wider range of preference shares, without risking the relevant issuer being degrouped for tax purposes. If there are companies who wish to preserve their existing treatment (because for instance the preference shares are held by other group companies and if they were not treated as equity, the companies would not be grouped), it will be possible to elect to continue the existing treatment, provided the shares were issued before 18 December 2008. This was the date on which the intention to make these changes was originally announced.
Carry forward of non-sterling losses
If a company makes losses, it can carry those losses back to set against the profits of a previous accounting period; any remaining losses will be carried forward, potentially to set against future profits of the same trade.
Where the company draws up its accounts in a currency other than sterling, difficulties can arise because the company’s profits have to be converted into sterling according to the rate of exchange in the period when the profits were earned. The losses however have to be converted into sterling according to the rate of exchange in the period when the losses were incurred.
As the rate of exchange prevailing in the accounting period when the losses are incurred is unlikely to be the same as that prevailing when the profits are earned, the amount of profits which can be sheltered by the losses will depend, to an extent, on movements in sterling exchange rates.
The Government has confirmed that it will introduce legislation to require losses to be converted into sterling at the same rate as is used to convert into sterling the profits which the losses are set against. These changes will also ensure that when a company changes its functional currency, any losses carried forward (or back) across that change will be carried forward (or back) at the spot exchange rate for the two currencies for the date of the change.
These changes will apply to accounting periods commencing on or after 29 December 2007, unless the company elects to defer the commencement date to the first accounting period beginning after the Finance Act 2009 receives Royal Assent.
Stock lending and repos - Relief for insolvency
The tax treatment of stock loans and repo arrangements attempts to follow the economic substance of such transactions, rather than their legal form. Neither stamp duty, stamp duty reserve tax (SDRT) nor capital gains tax are levied on the transfers of the shares, provided equivalent shares are returned to the originator. If, however, equivalent shares are not returned, SDRT becomes payable, and the lender/vendor is treated as having sold the shares for their market value (potentially triggering a charge to taxation on the deemed chargeable gain).
The Government has confirmed that it will introduce reliefs from these charges, where the failure to return equivalent shares is due to the insolvency of one of the parties to the stock loan/repo arrangement. These reliefs will:
- relieve the borrower under a stock loan, or purchaser under a repo, from the SDRT charge which would otherwise arise on the termination of the stock loan/repo
- relieve the lender under a stock loan, or seller under a repo, from any stamp duty or SDRT which would otherwise be payable on the purchase of replacement securities
- relieve the borrower under a stock loan or seller under a repo from any stamp duty or SDRT that would otherwise be payable on the purchase of any securities to replace any securities transferred to the lender/seller as collateral
- relieve the lender under a stock loan from any taxation on the chargeable gain which it is deemed to make on the termination of the stock loan.
The relief from taxation of the deemed chargeable gain will only apply to lenders under stock loans, and then only if they use the collateral provided by the borrower to acquire replacement securities in the market. In the Pre-Budget Report the Government had indicated that it would consider a similar relief for sellers under repos, but has decided not to proceed with such a relief.
These reliefs will apply for insolvencies occurring on or after 1 September 2008.
inancial Services compensation payments
Payments representing interest paid by the Financial Services Compensation Scheme (FSCS) will be taxed as if they were interest.
Payments made to savers by the FSCS include an element in respect of interest that would have been paid by the defaulting financial institution. In legal and therefore tax terms, such a payment is unlikely strictly to be interest; this is because the definition of interest comes from case law and requires there to be an underlying debt (as interest is defined as payment by time for the use of money). This could lead individuals to argue that the interest element in the compensation payment is not taxable, or if taxable, is only taxed at the rate applicable to capital gains, which at 18 per cent is lower than the income tax rate. The relevant statutory provisions will be amended to provide expressly that payments made by the FSCS that represent accrued interest will be taxable as if they are income receipts.
This change will not be required to be made to the relevant rules for companies; this is because the compensation payments will be within the loan relationship rules and therefore already taxable.
The measure applies to payments made by FSCS after 6 October 2008.
Payments from the Financial Assistance Scheme
Payments from the Financial Assistance Scheme (FAS) will be treated in the same way as payments that would have been made by the pension scheme whose default the FAS is covering.
The FAS was introduced to help members in defined benefit pension schemes which were wound up between 1 January 1997 and 5 April 2005; since then, it has been replaced by the Pension Protection Fund. It tops up the payments made by a pension scheme which has a shortfall. Because the payment is made by the FAS and not by a registered pension scheme, in theory, the tax treatment could be less favourable. This position is to be changed, so that payments made by the FAS will be treated in the same way as if they had been made by a registered pension scheme.
Taxation of foreign profits
The package of measures arising from the 21 June 2007 discussion document “Taxation of the foreign profits of companies” is, as announced in the Pre-Budget Report 2008, to be introduced in the Finance Bill 2009.
This highly significant, and much debated, package of measures consists of five principal elements:
- the introduction of a new tax regime which largely exempts both UK and non-UK source dividends from corporation tax
- some consequential changes to the controlled foreign company (CFC) rules
- a restriction on the amount of interest and other finance expenses that will be deductible for UK corporation tax purposes (the debt cap)
- an extension to the loan relationship and derivative contract “unallowable purpose” rules
- the replacement of the current HM Treasury consent rules with a post-transaction reporting obligation for prescribed movements of capital above £100 million.
Scope and commencement
The original proposal to extend the scope of the existing anti-avoidance provisions to apply whenever loan relationships or derivative contracts form part of arrangements that have a tax avoidance purpose will not form part of the Finance Bill 2009, although this will be kept under review.
The operative date for the remaining four items will be as follows:
- dividend exemption - to apply to dividends and other distributions received on or after 1 July 2009
- CFC reform - to apply for accounting periods starting on or after 1 July 2009 (but with provisions for periods that straddle that date)
- debt cap - to apply to interest and finance expenses payable in accounting periods beginning on or after 1 January 2010
- repeal of HM Treasury consent and introduction of new reporting regime - to apply to transactions undertaken on or after 1 July 2009.
Further information announced on 22 April 2009
As anticipated, the new legislation will treat non-UK and UK distributions in the same way. Distributions will generally be exempt if they fall into an exempt class and anti-avoidance provisions do not apply; while HM Revenue & Customs (HMRC) consider that the vast majority of distributions will be exempt from corporation tax, it will be necessary for a taxpayer to prove that this is the case. Representations had been made that the starting point should be that a dividend would be exempt, unless the contrary was the case. It will be interesting to see to what extent HMRC have taken account of other comments made.
It had been anticipated that the dividend exemption would only apply to dividends received by large- and medium-size groups. The announcement on 22 April 2009 suggests that this will be extended to small groups, provided the dividends in question arise from holdings of 10 per cent or more.
Two consequential changes will - as expected - be made to the CFC rules: the “acceptable distribution policy” exemption which prevents a CFC apportionment if the CFC distributes virtually all of its income back to the UK within a specified time-frame is to be repealed (as such distributions will generally no longer be taxable); and the “exempt activities” exemption for superior and non-local holding companies will also be repealed, subject to a 24-month transitional period. However, the exemption for local holding companies will remain.
Significant changes to the proposed debt cap were announced by HMRC on 7 April 2009 and, other than the announcement of the proposed commencement date, no further announcements were made in respect of this.
Briefly, the debt cap requires a comparison between two different measures of finance expenses - the ‘tested amount’ and the ‘available amount’ - and, to the extent that the tested amount exceeds the available amount, a deduction for the excess interest and finance expense will be disallowed for corporation tax purposes. It is then possible, in certain circumstances, to disregard certain finance income received by UK companies. The announcement on 7 April 2009 proposed significant changes to how the tested amount and available amount should be calculated. The tested amount is now the total of each UK company’s net finance expenses (including intra-group and external finance expenses), whereas originally the tested amount was only the intra-group finance expenses of UK companies with no deduction for finance income.
The available amount will now take into account the worldwide (UK and non-UK) consolidated finance expense of the worldwide group and not include finance income, whereas originally it was proposed that this would just be the non-UK consolidated finance expenses of the group and would take into account worldwide external finance income.
These proposed changes to how the debt cap is calculated - together with the other measures, referred to below - should have the effect of reducing the compliance cost of the debt cap for many groups.
Other changes announced on 7 April 2009 include:
- changes to the definition of finance costs and expenses
- the wider use of local generally accepted accounting principles for applying the debt cap
- an exclusion for short-term and de minimis finance costs
- an exemption from the debt cap rules for financial services groups
- a single “gateway test” based on a comparison of debt (as opposed to finance expense) intended to avoid an application of the detailed rules
- rules to prevent non-trading loan relationship deficits being stranded in circumstances where they would have been sheltered by loan relationship income but for an application for the disallowance/disregard mechanism of the debt cap
- a proposed targeted anti-avoidance rule to target arrangements intended to decrease the tested amount, increase the available amount or increase or decrease the debt taken into account in applying the gateway test.
The requirement to obtain approval from HM Treasury before undertaking certain transactions involving the issue of shares by or transfer of subsidiary companies resident outside the UK will be removed and replaced with a post-transaction reporting requirement that applies to transactions to the value of £100 million or more, subject to a number of exclusions.
This change was expected, but it should be noted that the announcement states that companies must make a report within six months of the transaction, rather than quarterly as previously announced.
Foreign dividends received in an accounting period straddling 1 April 2008
UK companies which receive foreign dividends are currently subject to tax on those dividends. The recipient is, in certain circumstances, entitled to a credit against this tax for certain foreign taxes paid by the company which paid the dividend. The amount of the credit is limited by reference to a formula (the mixer cap), which includes the rate of corporation tax in force when the dividend is paid - for dividends received after 1 April 2008, this is 28 per cent.
The reduction in the rate of corporation tax - from 30 per cent to 28 per cent, from 1 April 2008 - results in dividends received in an accounting period which straddles 1 April 2008 being taxed at a blended rate, of between 28 per cent and 30 per cent, not the 28 per cent rule in force when the dividend is actually paid. The Government proposes to respond to this “mismatch” by amending the mixer cap formula to refer to the blended rate of corporation tax actually payable on dividends paid after 1 April 2008, rather than the (lower) rate of 28 per cent.
The Finance Bill 2009 will contain provisions which seek to tax profits which are economically equivalent to interest (so-called disguised interest) as if they were interest. The new rules will only apply where the profits are payable under an arrangement which has as its main purpose (or one of its main purposes) to secure that the profits are not taxed as income.
For some years HMRC have struggled to counteract transactions which sought to obtain a tax advantage by creating a return on an investment which was economically equivalent to interest but where the return was received in a non-taxable form. Targeted anti-avoidance provisions introduced in Finance Act 2005 were amended in each successive Finance Act without eliminating all the planning opportunities in this area. In 2007 HMRC began a consultation process on whether a principles-based drafting approach would operate more successfully. Leading members of the judiciary had supported this approach arguing that complex highly prescriptive legislation often produced arbitrary results because the judges could not identify any clear principle to guide them to the intention of the legislation. The legislation to be introduced is the result of that consultation.
The new principle is that, where an arrangement produces a return economically equivalent to interest the return will be taxed as if it were a profit from a loan relationship. A return will be economically equivalent to interest if it is payable by reference to the time value of money, is calculated at a rate which is reasonably comparable to a commercial rate of interest and if there is no practical likelihood that the return will not be paid.
In addition to there having to be motive to avoid a tax on income, there is an exception from the rules where the profits arise solely from a result of an increase in the value of shares in a connected company. This will include certain joint venture companies and will include most controlled foreign companies.
Non-participating or fixed-rate redeemable preference shares accounted for as a financial liability will not be caught by the disguised interest provisions. Instead separate provisions will, in certain circumstances, tax the shareholder as if it had made a loan.
Arrangements caught by these provisions will be unattractive because disguised interest, unlike real interest, will not generally be deductible for tax purposes.
The new rules will apply to arrangements entered into on or after 22 April 2009. There is an exception to this transitional rule for profits which are already caught by existing anti-avoidance rules. These profits will be caught by the disguised interest rules regardless of when the arrangements were entered into.
Transfers of income streams
The Finance Bill 2009 will introduce legislation which taxes a seller who disposes of a right to receive income without also selling the underlying asset to the same person. The seller will be taxed on the amount paid for the transfer in the same way as the income would have been taxed.
The reason for this change is to combat transactions whereby an income stream is sold to a company which would not be taxed on the income (for example, if the buyer were non-UK tax resident). The seller would neither be taxed on the income stream nor, typically, on the sale proceeds. The sale proceeds would escape tax because they would be capital in nature and the seller would be able to utilise the base cost in the underlying asset against receipt of the sale proceeds. There are a number of existing provisions in the tax rules which deal with this area and many of these will be repealed by the Finance Act 2009.
To the extent that the buyer of an income stream is UK tax resident, it will not be taxed on the income. Instead, it will be taxed as if it had made a loan to the seller equal to the price it paid for the income stream. The rules will apply to all forms of transfer including gifts. Where there is no consideration or the consideration is substantially less than market value the change will be computed by reference to the market value of the income stream at the time of transfer. The income is treated as arising when the consideration is recognised in the seller’s profit and loss account.
The draft rules contain various exemptions where a taxpayer will be deemed to transfer the underlying asset along with the right to receive an income stream. For example, where a lease of land which is the subject of an existing lease is granted, this will not fall within the new legislation.
The changes will apply to all disposals of income which take place on or after 22 April 2009.
Personal tax accountability of senior accounting officers of large companies
Senior accounting officers of large companies liable to UK taxes and duties are to become liable to personal penalties if they fail to ensure and certify that the accounting systems in operation within their company are adequate for the purposes of accurate tax reporting. The company may also become liable to a penalty where there is the careless or deliberate failure to comply with these new obligations.
Specifically, the new duties will be:
- every large company liable to UK tax and duties must notify HMRC of the identity of its senior accounting officer
- that officer must take reasonable steps to establish and monitor accounting systems within the company to ensure that they are adequate for the purposes of accurate tax reporting
- that officer must certify annually that the accounting systems are adequate, or alternatively specify the nature of any inadequacy, and confirm that the company auditors have been notified.
There is already a statutory requirement for companies to make accurate returns in relation to tax but this provision is to introduce a new obligation, on both the company and on the senior accounting officer personally, to ensure that the internal accounting systems are adequate to ensure this can be done. This measure continues the gradual creep of the potential personal liability of individuals within corporates.
These obligations will apply to returns for accounting periods beginning on or after the date of Royal Assent. There will be consultation and there may be transitional provisions put in place.
Sale of Lessor Companies
Schedule 10 Finance Act 2006 (Schedule 10) applies where a business of leasing plant or machinery is carried on by a company alone or in partnership. On a change in the ownership of the lessor company or a change in the profit-sharing arrangements of a partnership carrying on a leasing business, a tax charge arises immediately before the change in ownership. This is calculated by reference to the difference between the tax written down value of the company’s plant and machinery assets and their book value. This charge would not be capable of being sheltered by the buyer group’s losses, although the buyer is entitled to a matching expense in the following accounting period. In this way, the charge is designed to affect the selling group, whilst the expense is designed to benefit the buying group. The expense will only benefit the buying group where it is profitable (as was intended in order to ensure that a sale to a loss making group would not be attractive). However, the downturn in the economy has resulted in buying groups being unable to utilise the relief within the permitted period, which has impeded commercially rather than tax motivated transactions. In response to this and other concerns, HMRC published a discussion document in July 2008 inviting comments on proposals for changes to Schedule 10. These proposals have culminated in draft legislation published on 22 April 2009.
The changes introduced in the draft legislation include the following:
- where the Schedule 10 expense results in a loss in the lessor company, the period over which that loss can be surrendered to other companies in the buyer’s group will be extended. In addition, provision will be made for an increase in the amount of the loss in order to preserve its value where it remains unutilised over the same period
- where companies carrying on a leasing business in partnership increase their interest in the business they should now benefit from the full amount of relief due
- a charge will not be calculated when a partnership is dissolved or ceases to carry on a leasing business
- a charge will not be calculated where there is an intra-group transfer involving a lessor company owned by a consortium.
The changes will have effect for transactions taking place on or after 22 April 2009 or, in relation to losses, it will have effect where those losses are incurred in accounting periods ending on or after 22 April 2009. The extension of the period for group relief of losses resulting from a Schedule 10 expense will be welcomed by groups of companies that are temporarily loss-making in the current economic downturn as otherwise the expense could result in a carried forward loss that was not available for group relief.
Taxpayers will also be relieved that the Government has so far refrained from taking the more radical actions included in the July 2008 discussion document, such as ring fencing the leasing trade going forward. HMRC note that it is not clear that such radical action is necessary in the current economic climate, particularly when the tax effect of a charge is likely to be mitigated by loss relief. However, the Government proposes to keep this option under review.
Comments on the draft legislation have been invited and should be provided as soon as possible.
Anti-avoidance: double taxation relief
The Government has announced three measures to counter perceived abuse of the UK’s double taxation relief rules, two of which are specifically targeted at banks. The third measure is of more general application. All three measures will have effect from 22 April 2009.
The UK’s double taxation relief rules entitle UK residents to claim credit against the UK taxation payable on their foreign income for certain foreign taxes paid in respect of that foreign income (eg, withholding taxes). These rules will become of less importance when the exemption from corporation tax on foreign dividends comes into force, but will continue to apply to other foreign income (ie, branch profits).
Avoidance by banks
The first scheme to be countered involves the use of manufactured overseas dividends (MODs). These are payments made to a person under arrangements for the transfer of overseas securities, which represent overseas dividends paid on those securities. The recipient of the MOD is entitled to credit for the foreign tax to which the recipient of the actual overseas dividend would have been entitled. The Government is concerned that some banks have been structuring repos between two members of their group, on terms that entitle the recipient to a MOD. The recipient is entitled to tax relief for the foreign tax without having suffered any deduction for that foreign tax, and the Government plans to counter such arrangements by denying relief for foreign tax where the economic cost of the foreign tax is not borne by the company.
The second group of schemes to be countered attempt to circumvent the limit which the Finance Act 2005 introduced on the tax relief which can be claimed for foreign tax attributable to dividends/interest received as part of a UK company’s trade. This limit is based on the corporation tax payable by the company in respect of those dividends and income, but reduced by a reasonable apportionment of the company’s trading deductions and expenses. The Government is concerned that banks are attempting to circumvent this limit, using two techniques. First, diverting the foreign income to an investment company to which, it is argued, the limit does not apply. Secondly, by acquiring the income-producing asset using funds which do not have a funding cost. This technique prevents the company from having to allocate any funding costs to the income. HMRC does not accept that the first technique is effective but the Government plans to legislate to put the issue “beyond doubt”. The Government’s response to the second technique is to legislate to require banks to allocate part of their funding costs to the foreign income in question regardless of whether their records show that specific funds have been used to make the loan or carry out the transaction.
Denial of relief for taxes repaid to other members of the taxpayer’s group
The third measure is of general application and concerns refunds, by a non-UK tax authority, of non-UK taxes for which a UK company has claimed foreign tax credits. The Government will legislate to deny such tax credits where a refund of the tax is made to any member of the taxpayer’s group, and to require the taxpayer to refund any relief given if the tax is only refunded after the credit is given in the UK. Foreign exchange losses - anti-avoidance
Measures are to be introduced to combat “one-way exchange effect” and currency contract tax avoidance schemes.
In 2006, anti-avoidance provisions were introduced to combat certain “one-way exchange effect” schemes. In such a scheme, a company may enter into a transaction whereby an exchange gain arising on a non-sterling loan, or currency contract, is “matched” for tax purposes against an investment in a foreign currency denominated asset (and therefore such gain is not brought into account for tax purposes at the end of the accounting period) whereas if an exchange loss were to arise, it is not matched, and tax relief is obtained. The 2006 anti-avoidance provisions targeted particular schemes. However, due to disclosures under the Disclosure Regime, HMRC have become aware of certain “work arounds” to the 2006 anti-avoidance provisions. Therefore, with effect from 22 April 2009, the 2006 legislation will be replaced with a targeted anti-avoidance rule, which prevents matching where both profits and losses would not be matched.
The second scheme involves a company manufacturing a loss in respect of a forward premium on a forward currency contract, which is dependent only on interest rates, where the counterparty is not taxed on the corresponding profit (presumably because of the application of the matching rules). The anti-avoidance provision will ensure, again with effect from 22 April 2009, that any element of an exchange gain or loss on a currency contract that arises as the result of using forward, rather than spot, interest rates, will not fall within the matching rules.
Draft legislation is not currently available.
Treatment of manufactured interest on “repo” transactions
In response to the High Court decision in DCC Holdings v HMRC  STC 77, the Financial Secretary to the Treasury announced, on 27 January 2009, that legislation would be introduced in the Finance Act 2009 to ensure that both deemed and “real” payments of manufactured interest, in excess of the amounts recognised in the accounts, are not deductible for tax purposes.
In DCC Holdings, the taxpayer had acquired gilts from an offshore bank, and resold them, under the terms of a repo, ten days later. The High Court held that the deemed manufactured interest, which the taxpayer was treated as paying for tax purposes (which reflected an interest coupon for six months’ interest on the gilts) was deductible for the taxpayer. This was the case despite the fact that the transaction was accounted for, on a substance over form basis, as a loan, and for accounting purposes, therefore, the taxpayer did not recognise a debit for the manufactured interest. The taxpayer therefore potentially realised a significant tax loss which bore no relation to its accounting treatment. The legislation on which the scheme in DCC Holdings is based was rewritten in 2007. With effect from 27 January 2009, the legislation will be amended to ensure that deemed manufactured interest is not deductible if not reflected in the accounts.
HMRC have become concerned that the High Court judgment in DCC Holdings could be said to imply that a taxpayer is entitled to a deduction for actual payments of manufactured interest (rather than “deemed” payments, which were the subject of the DCC Holdings case). HMRC consider that, as the tax treatment of actual payments of manufactured interest had never been queried prior to the High Court decision in DCC Holdings, that the legislation preventing the deductibility of actual payments of manufactured interest will have effect for all open periods of account (and may therefore be said to have retrospective effect).
Financial arrangements avoidance
The Finance Bill 2009 will contain legislation which seeks to tackle two tax avoidance schemes which have been disclosed to HMRC.
The first scheme sought to generate tax losses for a group. One company in a group (the borrower) would issue a bond to a second group company (the lender). The bond would be convertible into the shares of the borrower. The scheme worked by ensuring that the borrower’s debits (tax deductions) would be greater than the amount of the lender’s credits (taxable income). The new legislation will increase the level of the lender’s taxable income so that it is equal to the borrower’s deductions. The changes will only apply where convertible debt is issued by one company to another connected company and the debtor would receive a greater level of deductions than the lender’s taxable income.
The second scheme worked by a company “de-recognising” a derivative contract which is carried at fair value in its accounts. This transaction sought to ensuring that the profits arising on the derivative contract post-“de-recognition” are not taxed because, following de-recognition, profits were no longer reflected in the company’s accounts. The Finance Bill 2009 will ensure that where a derivative contract is “de-recognised” in a company’s accounts, the company will still be taxable on the profits and losses arising from that contract.
The new rules will apply to debits and credits arising on or after 22 April 2009.
Reallocation of chargeable gains
The Finance Bill 2009 will introduce changes - effective from Royal Assent - that are intended to make it easier for groups to manage the company in which chargeable gains or allowable losses are treated as arising.
Section 171A TCGA 1992 is designed to help groups of companies manage this process. For example, without it, it would be necessary for a company that has existing capital losses to be the company that realises a chargeable gain in order to utilise such losses. In circumstances where the asset that would give rise to a gain on disposal is held by a different company within the group, it would be possible to make an intra-group transfer of that asset to the company with the pre-existing losses (such intra-group transfer being on a tax neutral basis), with the effect that such company can offset pre-existing losses against a subsequent gain that arises when the asset actually leaves the group. Section 171A TCGA 1992 currently removes the need for there to be an actual prior intra-group transfer of assets by allowing the relevant companies to elect to deem such intra-group transfer to have occurred immediately before the disposal outside the group.
The proposal is that, instead of deeming a transfer of an asset from one group company to another before disposal, section 171A TCGA 1992 should instead allow a joint election to be made to transfer any gain or loss from the company making the disposal to one or more specified companies within the group when they jointly elect. Chargeable gains or allowable losses can sometimes occur without there being a disposal outside the group, for example where an asset has become of negligible value or where the asset is sold to a related party (such as a non-UK associate) at a profit; if sold to a related party at a loss, there would be restrictions on the use of that loss. The advantage of the proposed change to section 171A TCGA 1992 is that it should be possible to elect for such gains or losses to arise in different group companies in these circumstances, whereas this would not have been possible under the existing legislation as there would have been no disposal to a third party.
Life insurance companies
The tax treatment of life insurance companies has been changed significantly over the last few years; five further changes are to be made.
Amounts added to the long term insurance fund (LTIF)
In changes that will have effect for accounting periods ending on or after 22 April 2009, HMRC are to introduce legislation in the Finance Bill 2009 to clarify the tax treatment of additions to LTIFs to, in part, prevent life insurance companies using additions to facilitate the creation of a trading loss which does not reflect a commercial loss.
A trading loss will not be available to reduce a life insurance company’s other taxable profits, or to surrender as group relief, where it arises in the same period as, or following, an addition to a non-profit fund, and there is either a book value election or arrangements whose purpose is to reduce the admissible value of the assets.
Restriction on deduction for amounts allocated to policyholders
Currently a trading deduction is allowed for all amounts allocated to policyholders without restriction. Finance Bill 2009 will provide, for accounting periods ending on or after 22 April 2009, for a trading deduction to be restricted in respect of amounts allocated to policyholders where those amounts are capital in nature or made to facilitate an attribution of inherited estate and the amounts allocated are not funded out of the fund’s taxable income.
Contingent loans transitional provisions
The rules for the taxation of contingent loans - for example loans to LTIFs on terms that provide for repayment to be contingent on the emergence of surplus at some point in the future - that were contained in section 83ZA Finance Act 1989 were repealed for periods of account beginning on or after 14 January 2008 and replaced by the legislation for financing-arrangement-funded transfers to shareholders. The transitional rules that provide relief for the repayments of contingent loans that had been taxed under section 83ZA Finance Act 1989 are to be amended to ensure that every repayment of such loan is treated in the same way as it would have been had section 83ZA Finance Act 1989 not been repealed.
Foreign business assets and the “floor”
For accounting periods beginning on or after 1 January 2007, the tax rules for non-BLAGAB business - pension business, overseas life insurance business, life reinsurance business, ISA business and child trust fund business - were consolidated into one category - gross roll-up business. Amendments will be made to ensure that, for computational purposes, the mean value of foreign business assets is included in the calculation of the “floor” for gross roll-up business investments return.
A change to the value shifting rules in section 30 TCGA 1992 will be introduced in the Finance Bill 2009 to apply to disposals taking place on or after 22 April 2009. This change is to address a concern that a prior transfer of a long-term insurance business between companies in the same group could mean that the value shifting rules in section 30 TCGA 1992 apply to increase the disposal value for subsequent disposals of assets outside the group, with the effect that a chargeable gain is increased or allowable loss reduced. The proposed amendments are intended to ensure that section 30 TCGA 1992 does not apply when there has been a shift in value arising from an intra-group transfer of life insurance business that is not part of tax avoidance arrangements.
Transfers of business between mutual societies
The Finance Bill 2009 will permit HMRC from 22 April 2009, to make regulations in relation to the taxation consequences of transfers of a business between mutual societies, namely building societies, industrial and provident societies and friendly societies.
Under current law, a wide range of provisions deal with different types of mutual societies. These provisions provide for different tax consequences to arise where transfers are made to a company as opposed to transfers between mutual societies, and for different tax consequences where the same type of transfer takes place between different types of mutual society.
Consolidation may be envisaged in this area and the stated intention behind introducing such powers is to remove potential distortions in the tax treatment so that such distortions do not act as a barrier to commercial decisions. It is also stated that HMRC would like to provide certainty where current laws are unclear and to counter potential future avoidance activity.
Classification of intangible fixed assets regime - goodwill
The intangible fixed assets regime applies to intangible assets created, or acquired from an unconnected party, after 1 April 2002. Goodwill which has not been subject to a third party transfer will be treated as falling within the regime where the business which generated it commenced after 1 April 2002, and outside the regime (and therefore within the capital gains regime) where the business commenced before 1 April 2002.
The Finance Bill 2009 will include legislation which confirms the following points in respect of the treatment of goodwill and other internally generated assets:
- that intangible assets include internally generated assets
- all goodwill is treated as created in the course of carrying on the business in question
- where the business was carried on at any time before 1 April 2002, the goodwill is treated as created before 1 April 2002, regardless of when the goodwill was actually created
- otherwise, goodwill is treated as created after 1 April 2009.
The draft legislation has not yet been published but these measures are clearly designed to eliminate any ambiguity there may otherwise be in the drafting.
Corporation tax rates
The main rate of corporation tax which applies currently will remain unchanged for April 2010 onwards at 28 per cent for companies with profits (other than ring fence profits) of more than £1.5 million and at 30 per cent for companies with ring fence profits.
Small companies’ rate
As announced in the Pre-Budget Report 2008, the planned increase in the small companies’ rate of corporation tax has been deferred for one year. As a result, the small companies’ rate of corporation tax for all profits, apart from ring fence profits, will remain at 21 per cent and the small companies’ rate for ring fence profits will remain at 19 per cent.
Business and HM Revenue & Customs (HMRC) powers
Capital allowances and leasing
New first-year allowance
The Government has introduced a temporary first-year capital allowance of 40 per cent. This will apply to new capital expenditure incurred in the tax year 2009-2010 which would normally be allocated to the main capital allowances pool. It will not apply to assets which are being leased by their owner.
The 40 per cent rate of allowances will be available for most expenditure incurred on plant and machinery. Notable exceptions (where allowances will continue to be available at the current 20 per cent or 10 per cent rate) include expenditure on long-life assets, integral fixtures and assets which are being leased. In spite of the leasing exception, it appears (although this would need to be confirmed once draft legislation becomes available) that where a lessee is entitled to capital allowances under a long funding lease, the 40 per cent first-year allowance may be available.
It is not clear from the Budget documentation whether expenditure which currently qualifies for capital allowances at 20 per cent, but is not included in the main capital allowances pool (such as expenditure in a single ship pool) will qualify for the new rate. Our expectation is that it will, but this will need to be confirmed once draft legislation is produced.
The temporary first-year allowance will be available to individuals, partnerships and companies. In the tax years falling after the current year, allowances will be available at the usual 20 per cent rate.
In November 2008 the Government published draft legislation (which came into force in November 2008) to combat perceived anti-avoidance schemes. These schemes involved uplifting a taxpayer’s qualifying expenditure on an asset by means of a sale and leaseback or lease and leaseback transaction. The aim of these transactions was to entitle the taxpayer to a greater amount of capital allowances.
The rules were aimed at the following two schemes:
- Company A would enter into a long funding finance lease of an asset with company B. Before the lease was granted, company B would sell the right to receive almost all of the rents from company A. Company B would lease the asset back to company A under a long funding finance lease.
The rationale for the scheme was that company A would bring into account a disposal value equal to the net investment in the lease. Since the rents had been sold off, the net investment would be very small. On the grant of the leaseback, company A would be deemed to have incurred qualifying expenditure equal to the market value of the equipment. This is much higher than the net investment. Since company B would not claim capital allowances, it would not be required to bring any disposal value into account.
- Company A would sell an asset to a finance provider (such as a bank) for less than market value. Company A would lease the asset back from the finance provider under a long funding operating lease.
The idea behind this transaction is that company A would bring in a disposal value equal to the sale proceeds and then incur qualifying expenditure equal to the market value of the asset. The finance provider would not bring any amounts into account for capital allowances purposes.
The November 2008 legislation combated these schemes by:
- changing the disposal value brought into account by a lessor on the grant of a long funding finance lease. Instead of bringing the net investment into account, a lessor must bring into account the higher of the market value of the asset or (broadly) the lease payments less finance charges
- restricting the level of qualifying expenditure available on the grant of a long funding leaseback so that the qualifying expenditure under a sale and long funding leaseback does not exceed the disposal value brought into account by the seller (or a person connected with the seller).
On 22 April 2009, the Government announced that the November 2008 legislation would be changed as follows:
- the definitions of sale and leaseback will be amended to ensure that they cover a sale and leaseback to a person connected with the seller where that person continues to use the asset after the date of sale
- to the extent that premiums payable for the grant of a lease are not brought into account for capital allowances purposes, they will be taxed as income
- when a lessor grants a long funding finance lease, it is deemed to dispose of the asset and immediately reacquire it for an amount equal to the net investment in the lease. The rules will be changed so that the lessor will be deemed to dispose of and reacquire the asset for the higher of the market value of the asset or (broadly) the lease payments less finance charges.
These changes take effect from 22 April 2009.
UK dividend exemption for Lloyd’s corporates
The Finance Bill 2009 will provide that corporate members of the Lloyd’s insurance market will no longer pay corporation tax on dividends and other distributions received (normally as part of their investment income) from UK companies on or after 1 July 2009. In addition, they will also be able to benefit from the proposed introduction of the exemption from tax for dividends received from non-UK companies. This proposal will bring them into line with general insurance companies, and will remove an anomaly highlighted during the discussions on the taxation of foreign profits.
UK and UK Continental Shelf Oil and Gas Tax
Change of Use
As oil fields reach the end of their useful lives, costs of decommissioning make the potential for the reuse of expensive assets more attractive. After a period of consultation with the industry, a regime to facilitate change of use of such assets will be introduced.
In relation to decommissioning costs, a regime is already in place, but there are restrictions if the asset continues to be used outside the oil and gas regime. Also, PRT reliefs previously claimed may be clawed back if an asset is reused for a non-oil and gas purpose and/or PRT could be charged in respect of the profits from the new activity.
Assets whose use is changed will, from 22 April 2009 (for corporation tax) and 30 June 2009 (for PRT) be treated in broadly the same way as decommissioned assets.
Decommissioning costs of change of use assets will qualify for relief against ring fence profits and for PRT relief in the same way as decommissioned assets. No PRT claw back will apply where the asset is wholly put to a qualifying change of use purpose, and income from the new activity will not be within the scope of PRT.
In a welcome development HMRC has confirmed that cushion gas is an asset in respect of which plant and machinery allowances can be claimed thereby encouraging the use of former gas wells as storage facilities. Finally, PRT decommissioning relief will in future still be available even if the claimant has ceased to be a licence holder on expiry of the relevant licence; however, income from the relevant asset will be chargeable to PRT.
For disposals made on or after 22 April 2009, no chargeable gain will arise on the exchange of UK/UKCS licences post development, to the extent that the value of the licence matches the one it is swapped for. Also, from that date, instead of the deferral regime which currently applies, no gain will arise where the proceeds of a ring fence asset are reinvested in another chargeable ring fence asset.
PRT is to be simplified by adopting a simpler methodology to deal with commingled fields, partially repealing the provisional expenditure allowance, and repealing some redundant legislation. Ring fence corporation tax will be simplified by using the normal corporation tax definition of a consortium, rather than the more complex modified definition used at present.
Field allowance for challenging new developments
For certain categories of field given development consent on or after 22 April 2009, a new field allowance is to be introduced which, over time, will be offset against the supplemental charge otherwise payable. The categories of field are small fields (below 3.5 million tonnes), ultra heavy oil fields and ultra high temperature/pressure oil fields.
Prevention of acceleration of decommissioning relief
Legislation effective from 22 April 2009 will prevent UK and UKCS companies accelerating relief for decommissioning expenses. Relief will only be available for the cost of qualifying work carried out in the relevant period.
Registration and deregistration thresholds
The taxable turnover threshold, at and above which a person must compulsorily register for VAT will be increased from £67,000 to £68,000 and the threshold for determining whether a person may apply for deregistration will be increased from £65,000 to £66,000. The registration and deregistration threshold for relevant acquisitions from other EU Member States will also be increased from £67,000 to £68,000. All of these changes will take effect on 1 May 2009.
Temporary reduction on standard rate and related anti-avoidance
The Finance Bill 2009 will provide for the standard rate of VAT to revert to 17.5 per cent on 1 January 2010. It will also amend the powers of the Treasury to vary the rate by clarifying that a variation order can be made for a period of less than 12 months and that any order may be revoked.
Anti-forestalling legislation will be introduced to counter schemes that purport to apply the reduced rate of VAT to goods or services supplied on or after the date that the standard rate returns to 17.5 per cent. This could be, for example, where a supplier issues an invoice or receives payment before the rate rise where goods or services are not due to be delivered or performed until on or after the rate reverts to 17.5 per cent. From 25 November 2008, anti-avoidance measures will provide for a supplementary 2.5 per cent charge to VAT to be paid in certain circumstances where VAT of 15 per cent has been declared on a supply of goods or services or grant of the right to receive goods or services where the customer cannot recover all the VAT on the supply. The circumstances are that either the supplier and customer are connected parties, the supplier funds the purchase or grant of right or a VAT invoice is issued where payment is not due for at least six months. From 31 March 2009, a supplementary charge will also apply where a prepayment of more than £100,000 is made before the rate rise in respect of goods or services (or in relation to the grant of the right to receive goods or services) to be provided on or after the rate rise. This will not apply if the prepayment is in accordance with normal commercial practice in relation to supplies when no VAT rate increase is expected.
Changes to VAT System for Cross-Border Trading
A package of changes to the VAT system for cross-border trading will come into effect from 1 January 2010 (as a result of changes to the relevant European law). The changes are intended to simplify and modernise the VAT system and to counter fraud, but are likely to involve at the very least an increased compliance burden for businesses.
The package includes:
- new place of supply rules for services
- new time of supply rules for services
- the introduction of European Sales List (ESL) reporting for supplies of cross-border services
- changes to ESL reporting for goods
- a new electronic refund procedure for VAT incurred in other EU Member States.
Place of Supply Rules for Services
The place of supply rules determine the country where a supply of services is made, where any VAT is payable and whether it should be accounted for by the supplier or the customer. The general rule is currently that VAT is due where the supplier’s business is established and no distinction is made between business and non-business customers.
Under new rules to be introduced from 1 January 2010, a distinction will be made between business and non-business customers. For non-business customers, the general rule will remain unchanged so that VAT will be due where the supplier is established. However, for supplies to business customers, the rule will change so that VAT will generally be due in the country in which the customer’s business is established. This contrasts with the current position, where only specified services are subject to the reverse charge provisions.
The changes will reduce the need to seek reclaims of overseas VAT from overseas tax authorities, which can be time consuming and delay recovery. To that extent they will facilitate acquiring cross-border services. It should also neutralise the impact of differential rates between Member States.
As is the case now, there will continue to be a number of exceptions to the general rules. In particular:
- supplies to both business and non-business customers of cultural, artistic, sporting, scientific, educational, entertainment and similar services, as well as valuation and work on goods, are currently taxed where the service is performed. This will continue to be the case for non-business customers. However, for supplies to business customers, from July 2010, valuation and work on goods will be taxed where the customer is established and from July 2011, most supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services will be taxed where the customer is established
- land related services are supplied where the land is situated. This will continue to be the case
- currently the place of supply of hire of means of transport is treated as the place where the supplier is established. From 1 January 2010, there will be a distinction between short-term hire (no more than 30 days, or 90 days for vessels) and long-term hire. For short-term hire, the place of supply will be where the vehicle is put at the disposal of the customer. For long-term hire, the place of supply will fall under the new general rule. However, from 1 January 2013, the place of supply of long-term hire to non-business customers will generally be where the customer is established
- currently there is no exception for restaurant and catering services. From 1 January 2010 these services will be treated as supplied where they are physically performed. For restaurant and catering services carried out on board ships, aircraft or trains as part of transport in the EC, the place of supply will be the place of departure
- currently the place of supply of intermediary services is the place where the service is being arranged. This will continue to be the case for non-business customers. However, from 1 January 2010, services provided by intermediaries to business customers will fall under the general rule
- currently, the place of supply of the transport of goods is where the transport takes place, except for intra-community transport which is supplied in the place of departure. This rule will remain the same for supplies to non-business customers. Supplies to business customers will fall under the new general rule from 1 January 2010
- the place of supply of certain intangible services, eg, legal advice, will continue to be treated as supplied where the customer belongs when provided to non-business customers outside the EC
- currently ancillary transport services are deemed to be supplied where they are physically carried out. This will continue to be the case for non-business customers, but from 1 January 2010, the supply of such services to business customers will fall under the general rule.
Time of Supply Rules
At present the time of supply for a cross-border supply of services is generally when the supply is paid for, unless the consideration is non-monetary, in which case the tax point will occur at the end of the VAT accounting period during which the service is performed.
From 1 January 2010, the rules will be governed by the time when a service is performed and a distinction will be made between single and continuous supplies. For single supplies, the tax point will occur when the service is completed (or when it is paid for if this is earlier). For continuous supplies, the tax point will be the end of each billing or payment period (or when it is paid for if this is earlier). Finally, for continuous supplies that are not subject to billing or payment periods, the tax point will be 31 December each year (or when a payment is made if that is earlier).
European Sales Lists
UK businesses that supply services where the customer’s place of establishment is treated as the place of supply will be required to complete an ESL for each calendar quarter. It will relate only to services on which the customer is required to account for a reverse charge in their country of establishment. The ESL should include the following:
- the VAT registration number of the businesses to which the services were supplied
- the total value (excluding VAT) of those supplies to each of those businesses.
Further secondary legislation will be introduced later in 2009 to enable HMRC to meet a new obligation to exchange information with other EU Member States more quickly to counter fraud. This will affect ESLs in relation to the supply of goods and will:
- reduce the time available to businesses to submit ESLs from the current six weeks to 14 days for paper and 21 days for electronic submissions
- reduce the length of time available for HMRC to collect, process and exchange ESL data with the tax administrations in other Member States to one month in total
- require monthly ESLs for goods where the value exceeds £70,000 in a quarter.
VAT Refund Procedure
A new electronic VAT refund procedure will be introduced across the EU from 1 January 2010 to replace the current paper-based system. From 1 January 2010, businesses established in the UK will submit claims for overseas VAT electronically on a standardised form to HMRC rather than direct to the Member State of Refund. The main changes from the paper-based system are as follows:
- businesses will be able to submit claims up to nine months from the end of the calendar year in which the VAT was incurred, rather than the current six months
- tax authorities will have four months, rather than six months, to make repayments, unless further information is requested in which case the deadline extends up to a maximum of eight months
- the Member State of Refund will pay interest in cases where the business meets all its obligations but deadlines are not met by the tax authorities
- all EU Member States will be required to afford a right of appeal against non-payment in accordance with the procedures of the Member State of Refund.
Publishing the names of deliberate tax defaulters
HMRC is to name and shame individuals and companies who are penalised for deliberate defaults in tax returns where that has led to a loss of tax of more than £25,000. Names and details will be published quarterly, within a year of the penalty becoming final, and will be removed one year later. The crucial test will be whether a default is “deliberate”, as opposed to where a taxpayer has failed to take reasonable care. The sensible view is that if a taxpayer has taken proper professional advice and taken a reasonable position, such a default would not normally be said to be deliberate even it is later agreed or determined by a court to be wrong. However, the concept of “deliberate error” is new in tax legislation and hence it is not clear how a court would interpret this.
Those who make a full unprompted disclosure and those who make a full prompted disclosure within the required time will be spared their blushes.
Reclaiming overpayments of income tax, capital gains tax and corporation tax
At the moment, the taxpayer has a statutory right to reclaim tax only in certain circumstances. This measure extends the statutory right to reclaim overpaid tax to cases not currently encompassed in statute - that is, where the payment was not made under an assessment or was not due to a mistake in the return.
Under the new procedure, it will be for claimants - rather than HMRC - to determine the amount to be repaid, subject to HMRC’s right to enquire into a claim within the normal window, and to recover any underpayments. The time limit for reclaims is to be harmonised to four years in all cases, and the right to appeal is to be extended to be brought in line with the same grounds as appeals against other matters.
On the face of it, these measures seem sensible. However, there may be a sting in the tail. The proposals state that they are to replace any non-statutory claims; this could be taken as meaning that it will not be possible to make a restitutionary claim for any tax paid under a mistake of law where there would normally be a six-year time limit. This has been the route used in the recent cases where UK legislation has been held not to be in conformity with EU law.
This measure will apply to claims made on or after 1 April 2010.
Review of HMRC powers, deterrents and safeguards: payments, repayments and debt
From Royal Assent, HMRC will gain the power to require companies and businesses to supply it with contact details for people who are in debt to HMRC and with whom it has lost contact. This is expected to involve HMRC being given the statutory power to require third parties to pass customer details on to HMRC. There will be an administrative burden placed on the third parties involved and it will be interesting to see the detail in the legislation to gauge how great this will be.
Individuals and companies are to be able to voluntarily spread their income tax or corporation tax payments over a period straddling the normal due dates through a management payment plan (MPP) without incurring interest and penalties. MPPs will not be available before April 2011.
Lastly, HMRC are to gain the power to collect small debts through the Pay As You Earn system, probably from April 2012.
Compliance: record keeping and time limits
In the 2008 Finance Act, with effect from 1 April 2009, the Government consolidated and in some places changed the rules governing the keeping of records, HMRC information powers and time limits for making assessments. These rules are now to be extended to include environmental taxes (aggregates levy, climate change levy and landfill tax), insurance premium tax, stamp duty land tax, stamp duty reserve tax, inheritance tax and petroleum revenue tax.
There are to be better aligned time limits for assessments and claims; these will be harmonised at four years for claims and mistakes, rising to 20 years for deliberate inaccuracies.
Changes to time limits for assessments and claims will be brought in by Treasury Order and are not expected to take full effect until 1 April 2011.
The extension of record-keeping requirements and new inspection and information powers for HMRC by Treasury Order are expected to have effect from 1 April 2010. These will be within the same framework as for other taxes and will include giving HMRC the power to:
- inspect statutory records
- require third parties to provide certain information
- visit business premises to inspect records, assets and premises
- impose penalties for refusing to allow an inspection and failing to comply with an information notice. A tax geared penalty will be able to be imposed by the new Upper Tribunal.
The taxpayer will have appeal rights against penalties and some safeguards against valuation inspections at private homes.
Review of HMRC powers, deterrents and safeguards: penalties for late filing of returns and late payment of tax
There are to be new penalty regimes for late filing and late payment in respect of the following taxes:
- income tax, corporation tax, value added tax, Pay As You Earn (PAYE), class 4 national insurance contributions and payments under the Construction industry Scheme (CIS)
- environmental taxes (aggregates levy, climate change levy and landfill tax)
- excise duties (alcohol, fuel, tobacco, oils) gambling and air passenger duty
- stamp duties (stamp duty land tax and stamp duty reserve tax)
- inheritance tax, insurance premium tax, pension schemes and petroleum revenue tax
The measure will repeal a large number of different penalty and surcharge provisions and replace them with more aligned penalty regimes, albeit modified for PAYE and CIS. Notably, it includes applying penalties for the first time to employers who are late in making monthly PAYE and NICs payments and companies late paying corporation tax.
The implementation of the new penalties is to be staged over a number of years starting with penalties for late payment of PAYE which will be brought in from April 2010.
Where the obligation to make a return is annual or occasional, the penalty for late filing is an immediate £100 followed three months later by daily penalties of £10 per day (annual obligations only) which become tax geared once the filing is over six months late.
In these cases, there are also tax geared penalties for the late payment of tax although there will be the suspension of late payment penalties where the taxpayer agrees a schedule of payments with HMRC. Penalties for the late filing of CIS returns are very similar, but the penalties for late payment of PAYE depend on the number of defaults in a 12 month period; the first default will not attract a penalty at all.
There will be the right of appeal against all penalties on the basis of “reasonable excuse”.
HMRC powers, deterrents and safeguards: interest harmonisation
The tax regimes administered by HMRC cover:
- income tax
- corporation tax
- class 4 National Insurance Contributions
- construction industry scheme sums
- environmental taxes (aggregates levy, climate change levy and landfill tax)
- excise duties (alcohol, fuel, tobacco, oils) gambling and air passenger duty
- stamp duty land tax and stamp duty reserve tax
- inheritance tax, insurance premium tax, pension schemes and petroleum revenue tax.
- Interest rates are to be harmonised for all the taxes and duties listed above, with the exception of corporation tax and petroleum revenue tax. The rate will be based on the Bank of England base rate and will be automatically updated 13 working days after any change.
There will be a single rate of simple interest paid by HMRC on overpayments across all taxes, duties and penalties listed above other than quarterly instalment payments for companies. A single rate of simple interest will similarly be charged on late payment of taxes, duties and penalties.
Interest on late payment by the taxpayer will be charged from the date tax was due until the date it is paid. HMRC will pay interest on repayments from the later of the date the tax was due and the date it was actually paid, until the date repayment is made.
Shortly after Royal Assent, for those taxes where HMRC currently charge and pay interest, rates will be aligned by Treasury Order. For other taxes, the harmonisation will be implemented over a number of years by Treasury Order. It is expected that legislation to apply this harmonised regime to corporation tax and petroleum revenue tax will be introduced in the Finance Bill 2010.
Legislation in Finance Bill 2009 will require HMRC to launch a Charter setting out standards of behaviour and values to which HMRC will aspire. It is expected to be in place by Autumn 2009 and by 31 December 2009 at the latest.
The Commissioners for HMRC will report annually on how well HMRC is doing in meeting the standards in the Charter.
Extension to Customs Powers
From Royal Assent to the Finance Bill 2009, Customs officers will be able to exercise powers to check whether a movement purported to be between Member States is in fact so, even if those officers have no reasonable grounds for believing that to be the case. They will also be able to make selective and proportionate checks to collect duties or enforce import prohibitions also without needing to demonstrate any reasonable belief that the checks are necessary in any particular case.
The proffered justification for this change is to enable a single primary border checkpoint for EU and non-EU travellers.
Investments, Islamic finance, funds and land
Alternative finance - tax measures to facilitate sukuk issuance secured on land
The Finance Act 2007 introduced legislation which provided for sukuk (Islamically compliant instruments which are equivalent to bonds) to be taxed for corporation tax on income purposes on the same basis as conventional bonds. However, sukuk are structured using real assets, commonly land, which gives rise to a number of additional tax concerns.
First, stamp duty land tax (SDLT). A sukuk issuance would typically involve the transfer of real estate to a sukuk issuance vehicle, together with a leaseback and an obligation to re-transfer the land back to the transferor at the end of the sukuk term. SDLT could be due in respect of the sale and re-transfer (the leaseback would be expected to be exempt under sale and leaseback relief). The Finance Act 2009 will contain provisions to exempt both the initial transfer of land and the re-transfer at the end of the sukuk term from SDLT.
The certificates which are issued to sukuk holders give the sukuk holder an interest in the underlying assets of the issuer. The Finance Act 2008 included legislation which deemed sukuk certificate holders not to have an interest in the issuer’s assets for all tax purposes (and therefore, no SDLT should have arisen on issue or transfer of a sukuk certificate). HM Revenue & Customs (HMRC) intend to amend these rules to ensure that the issue and transfer of sukuk certificates will only be exempt from SDLT provided that an individual sukuk holder does not acquire control of the issuer’s assets by virtue of the holding of sukuk (although there will be a carve out from this restriction for underwriters, and the situation where the bondholder was unaware that he had control of the issuer’s assets).
The Finance Act 2009 will also contain two provisions which affect the tax treatment of the transferor of the land which is used to secure the sukuk issuance. The transfer of land to a sukuk issuance vehicle would constitute a disposal of that land by the transferor for the purposes of both corporation tax on chargeable gains and capital allowances. These rules will be amended so that:
- for corporation tax on chargeable gains, there will be no disposal of the land on transfer to the sukuk vehicle, nor on the re-transfer of the land at the end of the sukuk term. No chargeable gain should therefore arise for the transferor on transfer of the land to the sukuk vehicle.
- similarly, for capital allowance purposes, the transfer of the land will not constitute a disposal event, and therefore the transferor will not be required to recognise disposal value and will, instead, continue to claim allowances in respect of any expenditure qualifying for capital allowance purposes. It is expected that this treatment will apply for both plant and machinery and industrial buildings allowances.
These changes demonstrate the Government’s continued commitment to developing the Islamic Finance industry in the UK, and will be warmly welcomed by the industry. Once effective, there should be no UK tax obstacle to issuing real estate backed sukuk in the UK.
The changes will have effect from Royal Assent.
Legislation will be introduced in the Finance Bill 2009 to amend the offshore funds regime. The changes are being introduced following the publication by HM Treasury on 16 December 2008 of a paper entitled “Offshore funds: further steps”. This paper contained draft legislation providing a new definition of an offshore fund and draft regulations containing the detailed rules for the operation of the offshore funds tax regime.
The current offshore funds tax regime was introduced in 1984 with the aim of preventing UK investors from rolling up income offshore and being taxed when the investment is sold under the more advantageous capital gains tax regime. While the purpose of the regime will remain the same, the Government hopes to clarify, simplify and modernise the regime by introducing a new characteristics-based definition of “offshore fund” and by introducing regulations effecting the new “Reporting” and “Non-Reporting” funds regime.
Under the current legislation, the definition of an investment in an offshore fund is based upon the regulatory definition of a “collective investment scheme” as set out in the Financial Services and Markets Act 2000. The new definition will use a characteristics-based approach. There will also be specified exceptions to ensure that fixed share capital arrangements that do not share key characteristics of open-ended arrangements will remain outside the definition. The new definition is intended to be simpler and to provide more certainty to investors, but also to counter tax advantages being obtained where an offshore arrangement is technically outside the current definition of an offshore fund but the arrangements are economically the same.
The new regime will not come into force until 1 December 2009 and transitional rules are expected to provide grandfathering for investors in existing arrangements.
Chargeable gains and offshore funds
Legislation will be introduced in the Finance Bill 2009 to provide similar treatment to contract-based offshore funds as that given to investments in unit trusts. Under current legislation, for capital gains tax purposes, units in a unit trust are treated as if they were shares in a company. However, rights in funds in foreign jurisdictions which are not companies, unit trusts or partnerships (mostly those constituted by contractual arrangements) are often treated differently depending on the structure. Where such a fund comes within the new definition of an offshore fund (see above), an interest in such a fund will be treated as an asset for capital gains tax purposes. This will mean that interests in such funds are treated in the same way as shares in a company or units in a unit trust and investors will no longer be required to consider disposals of the underlying assets for calculating capital gains tax on chargeable gains.
Importantly these changes will not apply to investors subject to corporation tax, who must continue to treat their gains as transparent for tax purposes. Similar changes are expected to be introduced at a future date for corporation taxpayers, but have been delayed pending consultation with industry.
There will be no effect on interests in tax transparent foreign partnerships, which will be specifically excluded from the new offshore fund definition. Such partnerships will continue to be treated as transparent for both income and gains in the same way as for UK partnerships.
The new treatment will apply to investments in contract-based offshore funds on and after 1 December 2009. However, from 22 April 2009 investors subject to capital gains tax will be able to elect to apply the new rules retrospectively back to the tax year 2003-04. Investors should consider carefully whether or not to make an election as, once made, the election will be irrevocable and will apply for all relevant tax years after the date of the election. Investors making such an election will be treated as having invested in an offshore fund that is certified by HMRC as a qualifying fund.
Increased ISA Limits
From 6 October 2009 people aged 50 and over will benefit from an increase in the overall annual subscription limit for ISAs from £7,200 to £10,200, £5,100 of which may be saved in cash. It is not clear what is the position if the ISA has already been taken out for this year and for instance, whether additional funds can be injected later. From 6 April 2010 these new limits will apply to all ISA investors.
New tax rules for investment trust companies investing in interest bearing assets
From 1 September 2009, investment trust companies (ITCs) will be entitled to elect not to be subject to UK corporation tax on income received from interest bearing assets provided such income has been distributed to its shareholders.
ITCs are currently subject to UK corporation tax on their income (including interest income) but not on their gains. The announced changes will allow ITCs to elect to receive a tax deduction for any interest distributions they make. As a result, the ITC will not be subject to tax on the interest income provided it is distributed. In the shareholder’s hands the interest distribution will be treated as if it were yearly interest and the shareholder will be subject to UK income tax (at 20 per cent for basic rate taxpayers or 40 per cent or higher for higher rate taxpayers) or UK corporation tax on such receipts. The overall effect is intended to align the tax treatment for shareholders receiving such interest distributions with the tax treatment that would have applied had they received the interest payment direct.
Certainty on trading and investment for authorised investment funds and investors in equivalent offshore funds
Legislation will be introduced to provide certainty to authorised investment funds (AIFs) and investors in equivalent offshore funds that certain transactions will not be treated as trading transactions.
Currently, AIFs are subject to UK corporation tax at a lower special rate of 20 per cent on their income arising from trading transactions but not on their gains. UK resident investors in equivalent offshore funds which are “reporting funds” under the proposed new offshore funds regime will be subject to UK income tax on the offshore funds’ “reportable income” which includes profits from trading transactions. Such UK resident investors will not be subject to UK tax on capital gains realised by the offshore fund.
The legislation, which will have effect for AIFs on and after 1 September 2009 and for offshore funds from 1 December 2009, will introduce a “white list” listing those transactions which will not be treated as trading transactions. The effect of this will be that AIFs and investors in equivalent offshore funds will not be subject to UK tax where the AIF, or the equivalent offshore fund, undertakes such transactions.
Two safeguards will be introduced to prevent abuse of the legislation. First, the AIF, or equivalent offshore fund, must meet a genuine diversity of ownership condition. Second, financial traders who hold interests in AIFs, or equivalent offshore funds will be required to include realised and unrealised profits and losses on those interests in their trading results for tax purposes. This is to prevent financial traders sheltering profits by routing them through AIFs or offshore funds.
The Government considered a reform of stamp duty reserve tax (SDRT) on surrenders or transfers of interests in AIFs. However, the Government has now announced that, after consultation with the industry, no reform will take place. As a result, a SDRT charge at the rate of 0.5 per cent will continue to apply on the value of surrenders of units to managers or trustees with a potential reduction dependent upon the number of units issued and surrendered within a two-week period of the surrender or upon the value of the exempt and non-exempt assets held by the AIF.
Tax elected funds
From 1 September 2009, authorised investment funds (AIFs), which are authorised unit trusts and open-ended investment companies, will be able to elect to be treated as a tax elected fund and, as a result, move the tax point from the AIF to the investor.
Currently, AIFs are subject to corporation tax at a lower special rate of 20 per cent on their taxable income but are not subject to tax on their gains. Individual investors in AIFs are subject to tax at the dividend rates (no further tax for basic rate taxpayers and at 25 per cent for higher rate taxpayers) on distributions from AIFs. Investors within the charge to UK corporation tax must divide their distribution into unfranked income which is subject to UK corporation tax, and franked income which is treated as a dividend and is, therefore, under current UK legislation generally not subject to UK corporation tax.
A discussion paper was published in July 2008 setting out a proposal that AIFs meeting certain conditions could elect to be tax elected funds. It has now been announced in the Budget 2009 that secondary legislation, which is yet to be drafted, will be introduced to provide for this new regime.
The effect of these changes will be that UK dividends received by tax elected funds will remain non taxable and will be distributed as a dividend to investors. Such dividends will be subject to tax as dividends in the normal way in the hands of the investors. All other income of the fund should be distributed as a non-dividend (interest) distribution. The fund will receive a tax deduction equal to the amount of non-dividend (interest) distributions made. Such distributions will be subject to tax as interest in the hands of investors. As a result, the tax elected fund will not be subject to tax on non-dividend income received provided it is distributed in the same accounting period to investors for taxation in their hands.
In February 2009 draft regulations were published which set out those investment transactions that may qualify under the investment manager exemption (IME).
Prior to the Finance Act 2008, a short definition of investment transaction was contained in the legislation with regulations extending this to cover financial swap transactions. The Finance Act 2008 set the path for an amended definition by introducing legislation enabling the introduction of regulations. The draft regulations set out those transactions which will qualify as investment transactions in greater detail than the old definition and aim to bring the range of qualifying transactions in line with those activities regulated by the Financial Services Authority. Those transactions which were previously contained in the old definition and supplementary regulations, such as transactions in shares, securities, buying and selling foreign currency and carbon emission trading products have been retained. Transactions in futures contracts, options contracts and contracts for differences have also been retained but greater detail has been provided. It is also made clear that if such a contract results in the physical delivery of property which is not covered by another head within the regulations, it will not qualify. The draft regulations widen the range of loan relationships which will qualify as investment transactions, so that debentures, transactions where an exchange gain or loss arises and transactions involving the disposal of an existing debt will now qualify. Finally, the regulations introduce a new qualifying investment transaction; transactions in units in collective investment schemes (broadly, arrangements enabling people to participate in or receive profits or income from the holding, management or disposal of property and in which the participants do not have day to day control over the management of the property).
On 22 April 2009 it was announced that these draft regulations are being finalised with a view to introducing them in May 2009.
Real estate investment trust (REITs)
The Finance Bill 2009 will introduce legislation enabling the introduction of regulations aimed at preventing groups which would not qualify to join the REIT regime from restructuring in order to satisfy the necessary conditions. In addition, a number of amendments will be made to the REIT legislation for clarification purposes.
The Finance Act 2006 introduced the REIT regime which allows property holding companies and groups which meet, and continue to meet, certain conditions to ring fence their property related income so that it is not subject to tax in the hands of the REIT. Under the current legislation, it is possible for groups to satisfy the REIT regime conditions by splitting their activities into more than one group (for the purposes of the REIT legislation), whilst remaining under the same economic ownership, and then renting properties from one “group” to the other. From 22 April 2009, the Government will have the power to introduce regulations to prevent groups from restructuring their activities in this manner.
In addition, the Finance Act 2009 will amend the REIT legislation so that owner occupied properties will be excluded from the REIT’s tax exempt business. A further amendment will be made so that tied premises will be eligible to be included in the tax exempt business of a REIT.
REITs are currently only able to issue one class of ordinary shares and non-voting fixed rate preference shares. From 22 April 2009, REITs will be able to issue convertible preference shares.
One of the conditions a REIT must satisfy to join the REIT regime is that at least 75 per cent of its assets are involved in its property rental business. The definition of asset differs in the condition for group REITs to the definition in the condition for single REITs. From 22 April 2009, this will be amended so that there is one consistent definition based upon an accounting definition.
Where a REIT disposes of a property in its property rental business the REIT can treat the proceeds of the disposal as an asset of the property rental business whilst awaiting reinvestment. If the property disposed of was used partly for the property rental business the funds should be apportioned. The Finance Bill 2009 will introduce legislation clarifying how this apportionment is to be applied.
A REIT is not currently required to satisfy two of the conditions of the REIT regime on part of the first day of the first accounting period when it joins the regime. These conditions are that the shares are listed on a recognised stock exchange and that the company is not a close company. Under current rules, the company may only fail to meet the close company condition if the failure is due to the shares not being listed and dealt with on a recognised stock exchange within the preceding 12 months. The Finance Bill 2009 will amend the legislation so that a company can fail the close company condition on the first day of the first accounting period regardless of the reason for such failure.
The amendments made to amend the REIT legislation are a sensible response to discussions with industry and will ensure that the legislation is clearer and applies in a more consistent manner.
Improvements to the venture capital schemes
A number of amendments will be made to the legislation governing venture capital schemes including relaxing the time limit for the employment of money, extending the time limit for the carry-back of relief and correcting a capital gains tax anomaly for investors.
The Enterprise Investment Scheme (EIS) rules currently require investee companies to employ at least 80 per cent of the money they raise by the issue of shares in a qualifying activity within 12 months of issue or, if later, the commencement of the qualifying activity. The remaining amount must be employed in qualifying activities within a further 12 months. From 22 April 2009, this requirement will be relaxed so that investee companies will be required to employ 100 per cent of such money in qualifying activities within two years of the issue of shares or, if later, the commencement of the qualifying activity.
The Corporate Venturing Scheme and the Venture Capital Trust Scheme also currently require money received by investee companies to be employed within the same time limits. This requirement will also be relaxed so that the investee company will be required to employ 100 per cent of the money within two years of receipt or, if later, the commencement of the relevant trade.
The EIS rules also require money raised from the issue of shares that do not qualify under the EIS, but are of the same class as qualifying shares, to be used in the same time limits. From 22 April 2009, this restriction will be removed.
Currently, when shares qualifying under the EIS are issued prior to 6 October in a given tax year, an investor may carry the associated income tax relief back by treating the shares as having been issued in the previous year. This carry-back is restricted to half of the subscriptions in the period with an overall limit of £50,000. Commencing with tax year 2009/10, shares issued at any time during the year, not just prior to 6 October, can be treated as having been issued in the previous year. In addition, the carry-back will only be limited by an overall limit of £500,000 subscribed.
Investors holding qualifying EIS shares may currently not qualify for relief on a share-for-share exchange thereby resulting in a disposal for capital gains tax purposes. The Finance Bill 2009 will remove this anomaly so that such investors will not be prevented from getting share-for-share exchange relief.
VAT and land
Simplifying the procedure for opting to tax land and buildings
The procedure for opting to charge VAT on supplies of land and buildings where previous exempt supplies of those land and buildings have been made by the same business will be simplified.
Supplies of land and buildings are generally exempt for the purposes of VAT. However, owners can opt to tax their land and buildings so that any supplies they make will be subject to VAT. The benefit of this is that, by making this election, the owner of the land can generally recover any related VAT costs it suffers. Currently when a person has previously made exempt supplies of their land and buildings they may only opt to tax if they receive permission from HMRC or they fall within one of the four conditions for automatic permission. From 1 May 2009, one of the automatic permission conditions will be replaced with a new automatic permission condition which should apply to more taxpayers. The legislation and guidance relating to this are still to be published.
Currently, two informal concessions allow taxpayers to recover more VAT than would be possible on a strict interpretation of the VAT legislation where either a person registers for VAT as a result of opting to tax land and buildings or where the person opts to tax land and buildings on which previous exempt supplies have been made. In each case the current concession requires correspondence with HMRC before it applies. From 1 May 2010 these concessions will be largely withdrawn. As a result, such taxpayers will not be able to recover as much input VAT as previously.
Land and stamp duty land tax (SDLT)
A number of measures have been announced to ease the SDLT burden of acquiring affordable housing. The Finance Bill 2009 will introduce legislation to extend the SDLT relief available to purchases of property by Registered Social Landlords, to purchases by profit-making Registered Providers of Social Housing, where the purchase is assisted by public subsidy. Under the Housing and Regeneration Act the concept of Registered Social Landlord is replaced by Registered Providers of Social Housing. Registered Providers may be either profit making or non-profit making entities. Registered Social Landlords will automatically become non-profit making Registered Providers.
Two measures have also been announced to assist individuals seeking affordable housing:
- a relief from SDLT for purchasers under shared ownership schemes operated by profit-making Registered Providers of Social Housing, where the scheme is assisted by public subsidy; and
- simplification of the SDLT treatment of ‘rent to shared ownership’ schemes (where the individual initially occupies the property under an assured shorthold tenancy, and subsequently takes a shared ownership lease). The transactions between landlord and tenant will not be treated as ‘linked’ for the purposes of calculating the taxable consideration for SDLT purposes.
The “rent to shared” ownership measures have effect from 22 April 2009. The reliefs for Registered Providers of Social Housing have effect from Royal Assent.
Section 74 of the Finance Act 2003 provides for the reduction in the rate at which SDLT is payable in respect of the acquisition of a freehold by a “Right to Enfranchisement” (RTE) company on behalf of the leaseholders under a statutory right of enfranchisement. Broadly, the rate at which SDLT is chargeable is calculated by dividing the consideration paid for the freehold by the number of flats, and then using the SDLT which would apply for that number (so, for a £600,000 freehold, where there are 10 flats, the rate of SDLT would be zero per cent, as no SDLT is charged where the consideration is £60,000).
Statutory provisions for the formation of RTE companies have not been introduced, so the relief could not be claimed.
Amendments announced will alter the provisions so that the relief may be claimed where any nominee acquires the freehold on behalf of the leaseholders under a statutory right of leasehold enfranchisement. These amendments have effect from 22 April 2009.
Higher income taxpayers and employees
Employers and employees
SAYE option schemes are all-employee schemes in which each share option granted is linked to a savings contract. The employees commit to save a fixed monthly amount of between £5 and £250 for three or five years. A tax-free bonus is paid in lieu of interest at the end of the contract and employees can use their savings plus bonus to exercise their options (or can choose to keep the cash).
Current bonus rates and other terms are set out in the SAYE prospectus sent to employees when they are invited to apply for options. New prospectuses are issued from time to time, usually to reflect changes in the bonus rate. If a new prospectus is issued between the date of invitations and the date the applications are received, the applications will be void because they will have been made on the basis of the old prospectus. Measures announced in the Budget will allow employers to accept applications based on the old prospectus provided they are received within 30 days of the change. This should remove an administrative headache for employers, especially in times of interest-rate volatility.
Employment taxation - living accommodation
An employee provided with rented living accommodation is subject to a benefit-in-kind charge based on the rent paid by his employer. If the employer pays a “lease premium” and thereafter a reduced rent, the benefit-in-kind charge is reduced. From 22 April 2009, in a change designed to stop employees using these rules to reduce the tax charge, any lease premium paid for a lease of ten years or less will be spread over the period of the lease and treated as additional rent paid by the employer.
Cars made available for an employee’s private use give rise to an income tax charge. The amount of that charge depends on the car’s CO2 emissions and the way the car is powered: these affect what is known as “the appropriate percentage”. The value of the benefit-in-kind is found by applying the appropriate percentage to the list price of the car (which is currently capped at £80,000).
From 6 April 2011:
- the price cap will be abolished
- the appropriate percentage will depend solely on the CO2 emissions of the car (so there will be no supplements or discounts depending on how the car is powered).
Over recent months the Government has become aware of two schemes which seek to reduce taxable income through manipulation of the legislation which taxes employment income.
The first scheme involved creating an employment, one of the duties of which involves entering into financial arrangements with another person. Under the terms of those arrangements, if there is a default, the employee is liable to pay damages. The “employee” then defaults and borrows money from another party to the arrangement (which he will never in fact repay) to pay the damages. After he has paid them, he claims to deduct the amount of the damages from his income under statutory provisions which allow deduction of a liability incurred when acting as an employee.
The second scheme involved creating negative employment income through the employee incurring a loss as a result of being contractually obliged to bear a proportion of losses incurred by his employer under the sort of financial arrangements used under the first scheme. The employer would deliberately default and become liable to pay compensation and the employee would have to bear some or all of that cost. He would then claim relief for this loss against his other income.
Unsurprisingly, legislation will be introduced to close both of these schemes down with effect from 12 January 2009. They illustrate both the continued desire of taxpayers and their advisers to devise aggressive schemes to reduce employment tax liabilities (which will only be encouraged by the increase in higher rate income tax), and the drive of the Government to prevent them being effective.
Tax relief on pension contributions
The Government intends from 6 April 2011 to restrict tax relief for individuals with an annual income of £150,000 or more. Relief will be tapered away so that for those earning over £180,000, relief will be worth 20 per cent, the same as to a basic rate taxpayer.
New rules will be introduced under the Finance Bill 2009 to apply from 22 April 2009 to restrict higher rate tax relief on pension contributions for individuals. These will remove the advantage to those individuals of increasing their pension contributions in excess of their normal pattern and benefiting from the higher tax relief rates while these are still available.
The restrictions will apply to people with annual incomes of £150,000 or more who, on or after 22 April 2009, change:
- their “normal pattern” of regular pension contributions; or
- the normal way in which their pension benefits are accrued; and
- their total annual pension contributions/benefits accrued (“pension savings”) exceed £20,000.
These changes will affect those who have a total annual income of £150,000 or higher in the current tax year or in either of the preceding two tax years. For these people, it will be crucial to determine what is their so-called normal pattern of contributions. The material published restricts this to regular payments made at least quarterly; this would therefore seem to hit individuals who habitually make irregular contributions, for instance on receipt of a bonus.
The special annual allowance, which is set at £20,000, sets an upper limit on the amount of additional pension savings for which full tax relief at the higher rates of tax can be given. Tax relief on additional pension savings above the amount of this allowance will be at the basic rate of tax only.
Avoiding unintended tax consequences in relation to pension savings
Legislation will also be introduced in the Finance Bill 2009 so that, in circumstances where the Financial Services Compensation Scheme (the FSCS) assists an insurance company, there will be broadly the same tax treatment for the resulting payments or transfers as if the FSCS had not intervened. This change will be effective on and from the date the Finance Bill 2009 receives Royal Assent.
FSCS assistance can include transferring an individual’s rights to another insurer or paying compensation to the individual. Without the proposed changes, tax rules would apply differently as the FSCS is not a registered pension scheme. The new measure will ensure that the individual will not be disadvantaged following FSCS involvement.
The proposed legislation will also extend other regulation-making powers in relation to registered pension schemes by allowing regulations to be backdated to before Royal Assent of the Finance Bill 2009, provided that they do not disadvantage the individual.
Rates and allowances
Additional income tax rate and income-related reduction of personal allowance
The main rates of income tax will remain unchanged until April 2010 with a £1,400 increase in the basic tax rate band. From 6 April 2009, the 20 per cent basic rate of income tax will apply to taxable income up to £37,400 and the 40 per cent higher rate will apply to taxable income above £37,400. Meanwhile the 10 per cent and 32.5 per cent dividend ordinary and dividend upper rates will continue to apply to dividends otherwise taxable at the 20 per cent basic and 40 per cent higher rate respectively.
From 6 April 2010 a new 50 per cent additional rate of tax will apply to taxable income above £150,000 and a new 42.5 per cent dividend additional rate will apply to dividends otherwise taxable at the new 50 per cent rate. From this date the dividend trust rate will also be increased from 32.5 per cent to 42.5 per cent and the trust rate will be increased from 40 per cent to 50 per cent.
From 6 April 2010 the basic personal allowance for income tax will be gradually reduced to nil for individuals with “adjusted net incomes” above £100,000. Adjusted net income is a figure derived from taking the total of an individual’s income and then adjusting it to reflect for instance certain losses and pension and Gift Aid contributions. Where an individual’s adjusted net income is above £100,000, the amount of the allowance will be reduced by £1 for every £2 above this limit. This does not affect individuals whose adjusted net income is below or equal to £100,000 who will continue to be entitled to the full amount of the basic personal allowance. The Budget also includes measures to vary the tax rates for certain charges applying to registered pension schemes for example, the charge (currently 40 per cent) which applies to payment from a registered pension scheme which does not qualify as an authorised payment. The new measures enable rates on such charges to be linked to the new additional higher rate of income tax.
Taxation of personal dividends
As announced in the 2008 Budget, changes are to be introduced in the Finance Bill 2009 for individuals who receive dividends from non-UK resident companies in which they have a shareholding of 10 per cent or more. In addition, changes will be introduced for individuals who receive dividends from offshore funds. The changes are intended to align the tax treatment for such individuals with the tax treatment for individuals receiving dividends from UK companies or non-UK resident companies where their shareholding is less than 10 per cent.
Currently, UK tax resident companies pay dividends out of profits which in principle will have been subject to corporation tax. To take account of this, individuals receiving dividends from UK resident companies are entitled to a tax credit to offset against any income tax that may be due on their dividend income. The tax credit, representing one-ninth of the dividend received, satisfies the income tax liability for basic rate taxpayers and reduces the effective rate of tax for higher rate taxpayers from 32.5 per cent to 25 per cent. From 6 April 2008, this tax credit was extended to individuals receiving dividends from non-UK resident companies provided such individuals owned less than a 10 per cent shareholding in the non-UK resident company and the non-UK resident company was not an offshore fund. From 22 April 2009, this tax credit will also be available to individuals receiving dividends from non-UK resident companies where the individual has a shareholding of 10 per cent or more. The tax credit will also be available to individuals receiving dividends from non-UK resident companies which are offshore funds.
To qualify for the dividend to carry this tax credit, the country in which the non-UK resident company is resident must be a “qualifying territory”. A territory is a “qualifying territory” if there is a double taxation agreement with the UK with a non-discrimination article. This will mean in effect that dividends from most of the UK’s trading partners (including EU member states) will be included; it will not include dividends from corporates based in so-called tax havens, such as Bermuda, Bahamas and the Channel Islands.
Where the dividend is paid by an offshore fund, to qualify for the dividend to carry this tax credit the offshore fund must be a company and must invest mainly in equities. Where an offshore fund’s assets comprise more than 60 per cent interest-bearing assets distributions to UK individuals will be treated as payments of yearly interest. The effect of this is that no tax credit will be available. In addition, individuals will be taxed at the income tax rates applicable to interest payments (20 per cent for basic rate taxpayers and 40 per cent for higher rate taxpayers) rather than the rates applicable to dividend payments (no further tax for basic rate taxpayers and 25 per cent (net of the tax credit) for higher rate taxpayers).
Interest relief for individuals - anti-avoidance
Individuals are entitled to claim a deduction for interest on loans used for certain specified purposes, such as investing in a partnership or close company.
On 19 March 2009, the Government announced further restrictions on the ability of individuals to claim a tax deduction for interest paid on such loans. The aim of these provisions is to ensure that interest relief is only available where there is genuine uncertainty as to the return that the individual will receive. If the return is effectively guaranteed so that in all but unexpected circumstances a post-tax profit will be produced for the individual, interest relief will be denied. The Budget press release indicates that the draft legislation will be amended so that ‘normal commercial transactions’ are not affected.
The anti-avoidance rules have effect from 19 March 2009.
Avoidance using life insurance policies
The Finance Bill 2009 will introduce legislation, with effect from 6 April 2009, to counter schemes designed to exploit income tax loss relief rules using offshore life insurance polices. Individuals who own offshore life insurance policies pay income tax on gains made on chargeable events such as the assignment or surrender of a policy. Income tax loss relief applies in certain circumstances to offshore life insurance policies. However under the chargeable events legislation, where there is no gain and the chargeable events calculation could be said instead to produce a loss, certain schemes have used this to create an income tax loss and thereby benefited from income tax relief. The Finance Bill 2009 makes it clear that claims for income tax loss relief may not be made in such circumstances in relation to chargeable events occurring on or after 6 April 2009.
Transitional measures also apply to cover transactions taking place on or after 1 April 2009 and to ensure that there can be no deduction for income tax loss relief in 2009-10 and thereafter regardless of when the chargeable event actually took place.
Income shifting and transactions in securities
In 2007, following a defeat in the House of Lords Arctic Systems case, HMRC announced that they intended to introduce income shifting legislation to ensure anti-avoidance rules applied where a tax bill was reduced through the use of a company and income being paid to a partner or spouse who was subject to a lower effective rate of tax. In the 2008 Pre-Budget Report, action on income shifting was deferred and as a result, no legislation will be introduced covering such situations in the Finance Bill 2009. This is to be kept under review.
The Government has also confirmed that it will be consulting on the so-called transactions in securities (known to most practitioners as the section 703 regime, the historic section number) rules. These rules are widely considered to be in need of reform and this is to be welcomed.
Non-residents and non-domicilaries
Amendments to the remittance basis
Individuals with small amounts of foreign employment income
Resident, but not domiciled, or not ordinarily resident individuals employed in the UK with overseas employment income of less than £10,000 and overseas bank interest of less than £100 in any tax year, all of which is subject to foreign tax, will no longer be required to file a Self Assessment tax return, with effect from 6 April 2008.
Extension of exempt asset rule
From 6 April 2008, the current exemptions which allow individuals using the remittance basis to bring certain property into the UK which has been purchased from relevant foreign income (ie, broadly income from overseas investment and savings) without triggering a UK tax liability, will be extended. The extension of the rule will mean that property purchased out of foreign employment income and foreign chargeable gains as well as relevant foreign income will be able to be remitted to the UK without triggering a UK tax liability.
Formal claims under the remittance basis
There had been some uncertainty about whether individuals with unremitted foreign income and gains of less than £2,000 in a tax year needed to make a claim to use the remittance basis of taxation. From 6 April 2008 they will be treated as having used the remittance basis unless they notify HMRC that they wish to be taxed under the arising basis. In addition, individuals with total UK income or gains of no more than £100 which has been taxed in the UK and who make no remittances to the UK in that tax year will not be required to make a claim to be taxed under the remittance basis.
Remittance basis and settlements
Provisions preventing certain income which arises before 6 April 2008 from being taxed as a remittance if it is bought to the UK on or after that date will be extended, with effect from 6 April 2008, to ensure they apply to individuals taxed under the UK settlements legislation. From 22 April 2009, legislation will also be introduced to deal with the interaction between the remittance basis regime and settlor-interested settlements.
The Finance Bill 2009 will amend the remittance basis rules, with effect from 6 April 2008, to ensure that the Remittance Basis Charge is treated in the same way as other types of income tax or capital gains tax in determining whether a donor has paid sufficient UK tax for a particular charity to claim tax relief on gifts from individual donors.
Clarification of anti-avoidance legislation
Under the remittance basis, individuals are taxed on income remitted to the UK, ie, on certain property brought to, received or used in, the UK for the benefit of a relevant person or services provided in the UK to or for the benefit of a relevant person. With effect from 22 April 2009, the legislation will be amended to clarify the meaning of relevant person which currently includes participators in a close company to ensure that participator is clearly defined and that references to close companies include subsidiaries of companies. Amendments will be made, with effect from 22 April 2009, to make it clear that the current rules on notional remitted amounts which apply to determine the value of items purchased out of overseas income and gains which form part of a set, apply in all cases where individual items forming part of a larger set are purchased out of overseas income and gains and brought to the UK.
Employees who are not ordinarily resident and have offshore bank accounts
Statement of Practice 1/09 simplifies the application of the remittance rules for resident but not ordinarily resident individual employees who have a single employment under which they perform UK and non-UK duties and who transfer income to the UK from an offshore bank account, where that account holds only those earnings plus income and gains relating thereto. The Statement of Practice:
- enables such employees to calculate their tax liability by reference to the total amount of funds transferred to the UK rather than, as is usually the case with a mixed fund, by reference to individual transfers; and
- treats transfers to the UK out of such mixed funds as firstly comprising earnings in respect of duties performed in the UK (taxable on the arising basis) and only treats any excess as remittances of earnings for non-UK duties.
This significant easing of the administrative burden (in these limited circumstances) will be put on to a statutory basis in 2010 following a consultation exercise.
Withdrawal of allowances and reliefs for non-resident Commonwealth citizens
Currently a limited number of non-UK residents benefit from UK personal allowances and reliefs from income tax, including Commonwealth citizens. Non residents will no longer qualify for such reliefs or allowances solely by virtue of being a Commonwealth citizen, but they may still qualify under other arrangements such as a Double Taxation Agreement or if they are EEA nationals and in certain other limited circumstances.
The Green economy
Enhanced Capital Allowances for Energy-Saving and Water Efficient Technologies
The Energy Saving and Water Efficient Enhanced Capital Allowance (ECA) schemes allow businesses investing in certain technologies designed to reduce energy consumption or to save water or improve water quality to obtain a tax deduction for 100 per cent of the cost against the taxable profits of the period during which the investment was made.
The list of qualifying technologies will be revised to include uninterruptible power supplies, air to water heat pumps and close control air-conditioning systems. Three existing sub-technologies (single duct and packaged double duct heat pumps, prime to air heat pumps and package heat pumps) will be removed. The changes to the schemes will have effect after a date to be appointed by Treasury order to be made prior to the Summer 2009 Parliamentary recess.
Climate Change Levy
Climate change agreements (CCAs) enable energy intensive businesses to claim up to 80 per cent relief from the climate change levy (CCL) provided they make reductions in their emissions and/or energy use. CCAs are agreed between the relevant sector association and the Department of Energy and Climate Change (DECC). A restricted entitlement to claim this relief, applying to supplies of electricity and liquefied petroleum gas only, is being introduced for certain plastics manufacturers. However, the plastics sector will be unable to enter into a CCA with the DECC until regulations laid by the DECC are in force.
HMRC will be able to recover CCL where a business that claims relief from the levy fails to meet its target(s) under the scheme, and is in a sector that fails to meet its sector level target(s) for the same period. This mechanism will apply to CCA certification periods starting on or after 1 April 2009.
Supplies of low value solid fuel valued at no more than £15 per tonne will become subject to CCL for relevant supplies made on or after 1 January 2010.
The Government has also announced that it will extend the CCL exemption for indirect sales of electricity from combined heat and power (CHP) beyond 2013 to 2023, subject to State Aid approval, and also commits to continue other levy exemptions for CHP.
The standard rate of landfill tax is currently £40 per tonne. This will increase to £48 per tonne from 1 April 2010 and will increase by a further £8 per tonne on 1 April each year from 2011 to 2013.
In a recent case, the Court of Appeal ruled that materials received on a landfill site which are put to a use on that site are not treated as having been disposed of for the purposes of triggering a charge to landfill tax. Following this case, HMRC had accepted that, across the UK, a significant amount of waste falls outside the scope of landfill tax. However, the Government's policy is that much of this waste should fall within the scope of landfill tax. Therefore legislation in the Finance Bill 2009 and associated secondary legislation will reduce the activities and uses of material on a landfill site which will be outside the scope of the tax.
The Treasury has announced a consultation on the way in which landfill tax currently works with a view to overhauling the tax in 2010.
Comments are requested before 24 July 2009.
Changes to tax relief for business expenditure on “expensive” cars
There are new special capital allowances rules for cars costing more than £12,000. Qualifying expenditure incurred on such cars on or after 1 April 2009 (for businesses in the charge to corporation tax) or 6 April 2009 (for businesses in the charge to income tax) will be allocated to one of two general plant and machinery pools depending on the car’s CO2 emissions. Expenditure on cars with CO2 emissions exceeding 160g/km will attract a writing down allowance of 10 per cent per annum. Expenditure on cars with CO2 emissions of 160g/km or less will attract a writing down allowance of 20 per cent per annum. Expenditure incurred before April 2009 will continue to be subject to the old rules for cars costing more than £12,000 for a transitional period of around five years.
The special rules that restrict the amount of car lease rental payments that can be deducted for tax purposes will also be reformed. The restriction will be changed to a flat rate disallowance of 15 per cent of relevant payments and will apply only in respect of cars with CO2 emissions exceeding 160g/km. At present the restriction applies to all links in a chain of leases; however, from April 2009, it will only apply to one lease in any chain (which will most likely be the lease to the ultimate business user). The rules also make it clear that the restriction will not apply to a lessee under a long funding lease as they are already subject to restrictions on rental deductions under the long funding lease rules. Expenditure under leases commenced before April 2009 will continue to be subject to the old rules until the end of the lease.
There will be anti-avoidance rules to prevent companies from manipulating pools of allowances relating to cars by selling cars intra-group or at less than market value.
Other “Green” Items
Car Scrappage Scheme
The Government announced a temporary vehicle scrappage scheme whereby a discount of £2,000 will be offered to consumers buying a new vehicle to replace a vehicle more than 10 years old which they have owned for more than 12 months. The detail of the scheme remains to be fleshed out.
Cushion Gas Storage
Following calls for clarification of the tax treatment of cushion gas in gas storage facilities, the Government confirmed, in a welcome move, that cushion gas is eligible for plant and machinery capital allowances.
Although a gas, cushion gas qualifies on the basis that it is plant, being the certain bare minimum of gas that is required in a gas storage facility in order to retain the required pressurisation. Whilst this has always been our view, it is welcome that HMRC have clarified the position.
Please click here to view Tax rates and allowances (2009-10)