2013 Budget: key business tax announcements

Practical Law UK Legal Update 0-525-2318 (Approx. 48 pages)

2013 Budget: key business tax announcements

by PLC Tax

Anti-avoidance

Avoidance involving partnerships

The government announced that it will consult in spring 2013 on measures to:

Remove the presumption of self-employment for partners in limited liability partnerships (LLPs) to combat the disguising of employment relationships through LLPs.
Counter the artificial allocation of profits or losses to partners in LLPs and other partnerships (including using a company, trust or similar vehicle) to secure a tax advantage.

The government aims to introduce legislation in this area in the Finance Bill 2014.

In the 2012 Autumn Statement, the government stated that it would consider reviewing the tax treatment of partnerships to combat avoidance activity in this area (see Legal update, 2012 Autumn Statement: business tax implications: Partnerships and avoidance). In relation to the taxation of partnerships generally, see Practice notes, Partnerships: tax, Limited liability partnerships: tax and Limited partnerships: tax.

(See Overview, paragraph 2.42, HM Treasury, Budget 2013, paragraph 1.209 and HMRC, Levelling the tax playing field.)

Close company loans to participators rules tightened

The Chancellor has announced draft legislation to close three loopholes reportedly being used by close companies to avoid the tax charge on loans to participators imposed by section 455 of the Corporation Tax Act 2010 (see Practice note, Loans to employees and directors: tax issues: Loans to participators: close company tax issues). The amendments will be published in Finance Bill 2013 on 28 March 2013, and will apply to all loans made on or after 20 March 2013.

The 2013 Budget also included a statement that the government will carry out a review of the close company loans to participators rules later in 2013.

For more information, see 2013 Budget: close company loans to participators loopholes closed.

(See HMRC, Technical note, Close company loans to participators, 20 March 2013, Overview, paragraphs 1.63 and 2.44 and TIIN, Loans from close companies to their participators).

Change in ownership of shell company: loss-buying

Finance Bill 2013 will extend the "loss buying" rules in Part 14 of the Corporation Tax Act 2010 (CTA 2010) to apply to changes of ownership of a company not carrying on a trade, investment business or UK property business (shell company) that has non-trading loan relationship debits or deficits and/or non-trading losses on intangible fixed assets.

Under the loss buying rules, if there is a change of ownership of a company and, within the period beginning three years before and ending three years after the change, there is also a major change in the way its business is conducted or it becomes dormant and is then revived, losses incurred before the change of ownership will not be available after the change of ownership. The aim of the rules is to nullify "loss-buying" only when there is some artificiality about the continuance of the trade. For more detail, see Practice note, Asset purchases: tax aspects of hive downs: Using losses post-sale: sections 673 to 676 of CTA 2010.

Finance Bill 2013 will insert a new Chapter 5A into Part 14 of CTA 2010. This Chapter will apply to a shell company that changes ownership and will restrict:

The non-trading loan relationship debits to be brought into account for the purposes of Part 5 of the Corporation Tax Act 2009 (CTA 2009) relating to the period before the change in ownership.
The carry across of non-trading deficits from loan relationships under Part 5 of CTA 2009 to the accounting period beginning immediately after the change in ownership or any subsequent accounting period.
Relief for non-trading losses on intangible fixed assets under section 753 of CTA 2009 relating to the period before the change in ownership.

(For more detail on the loan relationships regime and the taxation of intangible fixed assets, see Practice notes, Loan relationships and Intangible property: tax.)

The legislation treats the accounting period in which the change of ownership took place as two separate accounting periods, one ending and the other beginning with the day of the change. The amounts referred to above are to be apportioned in accordance with new rules that operate on a similar basis to existing equivalent provisions for companies with investment business in Chapter 3 of Part 14 of CTA 2010.

This extension to the loss buying rules will apply to changes of ownership occurring on or after 20 March 2013.

(See TIIN: Corporation tax loss relief: anti-avoidance, HMRC: Corporation tax "loss loophole closure" rules technical note (20 March 2013) and Overview, paragraph 1.64.)

Change in ownership of company and intra-group trade transfer: restriction of trading losses

Finance Bill 2013 will amend the rules in Chapter 2 of Part 14 of CTA 2010 (disallowance of trading losses) so that trading losses are restricted if there is a change in ownership of a company (X) carrying on a trade followed by a transfer of (part of) that trade (by X) to a group company (Y) within Chapter 1 of Part 22 of CTA 2010 (transfers of trade without a change in ownership).

Under Chapter 2 of Part 14 of CTA 2010, if there is a change of ownership of a company and, within the period beginning three years before and ending three years after the change, there is also a major change in the way its business is conducted or it becomes dormant and is then revived, losses incurred before the change of ownership will not be available after the change of ownership. The aim of the rules is to nullify "loss-buying" only when there is some artificiality about the continuance of the trade. For more detail, see Practice note, Asset purchases: tax aspects of hive downs: Using losses post-sale: sections 673 to 676 of CTA 2010.

Chapter 1 of Part 22 of CTA 2010 applies if (part of) a trade is transferred from one company to another without a change of ownership (broadly, within the same 75% group). Under section 944(3) of CTA 2010, if (part of) a trade is transferred, losses can be carried forward against subsequent trade profits of the successor company as if the predecessor had carried on the trade. For more detail, see Practice note, Asset purchases: tax aspects of hive downs: Transfer of trading losses: Chapter 1 of Part 22 of CTA 2010.

Under the existing rules, if a change in ownership within Chapter 2 of Part 14 of CTA 2010 follows a reconstruction under Part 22 of CTA 2010, the nature and conduct of the trade under both the "predecessor" and "successor" companies are relevant. However, section 676 of CTA 2010 does not restrict the carry forward of losses if the Part 22 reconstruction occurs after the change in ownership of the company.

Therefore, Finance Bill 2013 will rewrite section 676 of CTA 2010 to restrict relief for carried forward losses whether the transfer of the trade under Part 22 occurs before or after the change in ownership of the company. The amendment will ensure that the nature or conduct of trade during the period in which it is carried out by company Y is relevant. This is because the three year window to consider whether the trade has changed will now include consideration of the trade in company Y even though there has not been a change in company Y's ownership.

The revised section 676 of CTA 2010 will apply to changes of ownership occurring on or after 20 March 2013.

(See TIIN: Corporation tax loss relief: anti-avoidance, HMRC: Corporation tax "loss loophole closure" rules technical note (20 March 2013) and Overview, paragraph 1.64.)

Corporate loss buying: targeted rules

To prevent taxpayers from circumventing the loss buying rules in Part 14 of CTA 2010 (as to which, see Practice note, Asset purchases: tax aspects of hive downs: Using losses post-sale: sections 673 to 676 of CTA 2010), the government proposes to align the tax treatment of unrealised losses, involved in a transfer between unconnected parties, more closely with the existing treatment of realised losses. The legislation will be published for "technical" consultation on 28 March 2013 and will subsequently be included in Finance Bill 2013.

According to the government, if it is possible to dictate or predict the amount and timing of reliefs, allowances and deductions, this can encourage tax-motivated reorganisations through which unconnected entities may gain access to what are, in effect, unrealised losses, enabling the current loss buying rules to be by-passed. Therefore, the government proposes to:

Extend the existing rules that prevent tax-motivated capital allowance buying.
Those rules are in Chapter 16A of Part 2 of the Capital Allowances Act 2001 (see Legal update, Capital allowances anti-avoidance: what the proposed legislation is targeting). Chapter 16A will be extended so that it applies:
- to allowances taken into account in calculating profits of any of the qualifying activities listed in section 15 of CAA 2001 (and not just those taken into account in calculating trading profits, as is currently the case); and if
- the amount of the relevant excess of allowances (the amount by which the tax written down value of the company's plant or machinery exceeds their balance sheet value) is £50 million or more (regardless of whether the qualifying change has a tax advantage (unallowable) purpose); or
- the amount of the relevant excess of allowance is at least £2 million but less than £50 million and is not an "insignificant benefit" (regardless of whether the qualifying change has an unallowable purpose); or
- the amount is less than £2 million and the qualifying change has an unallowable purpose.
The purpose of the extension to capture transactions in which accessing excess capital allowances was not a main purpose (so the unallowable purpose provision in the existing rules does not apply) but the entitlement to claim such allowances was clearly a significant benefit.
An "anti-fragmentation" rule will apply to the thresholds that apply at the £2 million and £50 million level (in respect of the relevant excess of allowances). This will counter attempts to structure transactions to pass the threshold tests (and escape the scope of the expanded Chapter 16A).
If the expanded Chapter 16A applies, the consequences will be exactly the same as currently: the excess of allowances is treated as qualifying expenditure in a new pool. The way in which relief for allowances for expenditure in new pools or losses attributable to such allowances can be claimed is then restricted.
Introduce a "deduction transfer" targeted anti-avoidance rule (TAAR).
This TAAR denies claims for group relief and relief for trade losses against total profits in accounting periods ending on or after the date of a qualifying change (as defined in Chapter 16A of Part 2 of CAA 2001) in respect of certain deductible amounts. Those amounts are ones which, at the date of the qualifying change, can be regarded as "highly likely" to arise as deductions for an accounting period ending on or after that date. This TAAR only applies if the (or a main) purpose of arrangements connected to the qualifying change is to claim relief for such deductions.
The relevant deductible amounts are an expense of a trade or property business or of managing a company's investment business, a loan relationship or derivative contract non-trading debit and an intangible fixed assets non-trading debit.
Introduce a "profit transfer" TAAR.
This TAAR denies relief for deductible amounts claimed in any accounting period ending on or after the qualifying change in relation to a company (C). It targets the transfer of profits to C (or a company connected to C). (Both "qualifying change" and "deductible amounts" have the same meaning as in the deduction transfer TAAR.) The TAAR applies if both:
- at the date of the qualifying change, it is "highly likely" that the deductible amount would be brought into account as a deduction in an accounting period ending at or after the qualifying change; and
- the (or a main) purpose of the "profit transfer arrangements" is to deduct the amounts for corporation tax purposes in any accounting period ending on or after the day of the qualifying change.

The new rules have effect if a "qualifying change" occurs on or after 20 March 2013, unless that change occurs as a result of an unconditional obligation (which may not be varied or extinguished by the exercise of a right) entered into before 20 March 2013.

The technical note contains a limited discussion on interpreting the "purpose" test, the meaning of "insignificant" (in "insignificant benefit") and the factors to take into account in determining the "highly likely" test. Taxpayers and their advisers will be anxious to consider any further guidance that HMRC produces on these concepts because they will lead to uncertainty.

(See HMRC: Corporation tax "targeted loss buying" rules technical note (20 March 2013) and Overview, paragraph 1.65.)

Disclosure of tax avoidance schemes (DOTAS): high-risk promoters

The government has confirmed that it will consult over summer 2013 on introducing a package of information and penalty powers specifically targeting the behaviour characteristic of high-risk promoters of tax avoidance schemes. The intention is to introduce legislation in the Finance Bill 2014. The measures could include publishing the details of such promoters.

The announcement does not state specifically that the forthcoming consultation relates to the DOTAS legislation. However, it is understood that this is the case. The government first announced that it intended to amend the DOTAS legislation in this respect in December 2012 (see Legal update, Draft Finance Bill 2013 legislation: key business tax measures: Disclosure of tax avoidance schemes: new powers). For more information on the DOTAS legislation, see Practice note, Disclosure of tax avoidance schemes under DOTAS: direct tax.

(See Overview, paragraph 2.43 and HMRC, Levelling the tax playing field.)

Disclosure of tax avoidance schemes (DOTAS): penalties: previously defeated schemes

The government has announced that it will consult on a proposal to introduce a penalties-based approach to taxpayers who have used avoidance schemes that have been defeated in court in litigation against another party. These taxpayers will be asked to acknowledge to HMRC that the judgment applies to them and amend their returns accordingly, or confirm that they stand by their original return. Penalties would be charged if the taxpayer failed to take reasonable care. The government intends that the measures will be included in the Finance Bill 2014.

For further information on the DOTAS regime, see Practice note, Disclosure of tax avoidance schemes under DOTAS: direct tax.

(See Overview, paragraph 2.45, HM Treasury, Budget 2013, paragraph 2.224 and HMRC, Levelling the tax playing field.)

General anti-abuse rule

The government has confirmed that the Finance Bill 2013 will include legislation introducing a general anti-abuse rule (GAAR). The GAAR will counteract tax advantages arising from abusive avoidance schemes subject to certain procedural requirements. Specifically, counteraction must first be notified by a designated HMRC officer. Unless, having considered any representations made by the taxpayer, a designated HMRC officer then decides that counteraction ought not to apply, the arrangements must be referred to an Advisory Panel for its opinion. Counteraction will be on a just and reasonable basis.

The GAAR will apply to income tax, NICs, corporation tax, capital gains tax, inheritance tax, petroleum revenue tax, stamp duty land tax and the new annual tax on enveloped dwellings (previously known as the annual residential property tax) due to be enacted in the Finance Bill 2013. The legislation will apply to abusive tax arrangements entered into on or after the date of Royal Assent to the Finance Bill 2013. Separate legislation will be introduced later in 2013 to apply the GAAR to NICs.

The government first announced that it would consider introducing a legislative general anti-avoidance rule in the June 2010 Budget. This led to a study group and a series of consultations. Draft Finance Bill 2013 clauses were published in December 2012 (see Legal update, General anti-abuse rule (GAAR): response document, draft Finance Bill 2013 provisions and draft guidance).

(See Overview, paragraph 1.59 and TIIN: General anti-abuse rule.)

Group relief and CFCs

Finance Bill 2013 will amend the group relief rules so that chargeable profits of a controlled foreign company (CFC) that are apportioned to a surrendering company are included in the threshold that certain amounts capable of surrender must exceed before group relief is available.

A company can surrender certain types of corporation tax loss to another company in its group. The claimant company can then use this relief, called group relief, to set against its taxable profits, resulting in a lower corporation tax liability. For more detail, see Practice note, Groups of companies: tax: Group relief. However, excess losses on transactions in UK real property, excess losses arising in respect of intangible assets, qualifying charitable donations and management expenses (together, relevant amounts) can be surrendered only to the extent that they exceed a certain threshold, namely the profits of the surrendering company before those profits are reduced by any losses or allowances available from any other accounting period of the surrendering company (gross profits) (see Practice note, Groups of companies: tax: Losses available for surrender).

The aim of the CFC regime is to identify whether all or part of the profits of a non-UK resident company should be brought into the charge to UK tax by attributing those (chargeable) profits to a UK resident person or persons. For details of the regime, see Practice notes, Controlled foreign companies and attribution of gains: tax (for accounting periods beginning before 1 January 2013) and Controlled foreign companies (new regime): overview (for accounting periods beginning on or after that date). However, those CFC apportioned chargeable profits are not currently taken into account in calculating gross profits for the group relief restriction.

The proposed legislation amends the group relief rules so that CFC chargeable profits apportioned to the surrendering company are included in the threshold that relevant amounts must exceed before group relief is available. This threshold is described as the "profits related threshold" and is the sum of the surrendering company's gross profits and the chargeable profits of a CFC apportioned to the surrendering company in its surrender period. On this basis, if CFC chargeable profits are apportioned under the CFC rules, any management expenses (for example) would have to exceed those chargeable profits before they could be surrendered.

The profits related threshold covers apportionments under both the old and new CFC regimes. The proposed legislation is to have effect for a surrender period of the surrendering company ending on or after 20 March 2013. Any chargeable profits for an accounting period of a CFC ending before that date will be disregarded. Chargeable profits of a CFC in an accounting period which falls partly before and partly after 20 March 2013 are to be apportioned on a time or just and reasonable basis, with any profits apportioned to the part ending before 20 March 2013 being disregarded.

(See TIIN: Corporation tax loss relief: anti-avoidance, HMRC: Corporation tax "loss loophole closure" rules technical note (20 March 2013) and Overview, paragraph 1.64.)

Trade and property business deductions loophole closed

As announced on 21 December 2012, Finance Bill 2013 will add targeted anti-avoidance rules (TAARs) (effective from that date) to the income tax and corporation tax provisions governing the relationship between rules prohibiting and allowing deductions from profits of a trade or property business. The TAARs will apply where a permissive rule would otherwise allow a deduction in calculating the profits of a trade or property business for an amount which arises from tax avoidance arrangements and will ensure that the rules prohibiting a deduction take precedence over those allowing a deduction. For more detail, see Legal update, Scheme exploiting trading and property business deduction priority rules closed.

(See Overview, paragraph 1.61.)

Transfer of assets abroad and attribution of gains rules

The government has announced, but not published, changes to the draft Finance Bill 2013 legislation published on 11 December 2012 to amend anti-avoidance rules dealing with the transfer of assets abroad (Chapter 2, Part 13, Income Tax Act 2007) (TAA rules) and the attribution of chargeable gains realised by non-UK tax resident companies that are closely controlled by UK participators (section 13, Taxation of Chargeable Gains Act 1992) (section 13). The purpose of this legislation is to make both sets of rules compliant with EU law and clarify certain aspects of their operation.

The changes to the draft legislation amending the TAA rules are that:

The exemption for genuine transactions will allow HMRC to make an apportionment where part of a transaction is genuine and part not, so that only income attributable to the non-genuine part is chargeable to tax. This change will take effect with the exemption itself on 6 April 2012. (The last version of the draft legislation required an apportionment to be made but did not indicate how it should be done, so this seems to be an attempt to address this.)
The provisions to clarify the matching rules for benefits received by persons other than the person who transferred the assets abroad have been removed. There will be a further consultation on these provisions, which will now be postponed until the Finance Bill 2014.

The change to the draft legislation amending section 13 is that the new exemption for economically significant activities no longer requires activity to be carried on wholly outside the UK through a non-UK business establishment.

HMRC has published an amended TIIN on the TAA rules, replacing the TIIN published on 11 December 2012, but there is no new TIIN on section 13.

We will review the effect of the changes after the revised legislation is published in the draft Finance Bill on 28 March 2013. Without sight of the draft legislation it is not possible to assess whether it will now achieve EU compliance.

For the last version of the draft legislation and to follow further developments, see Private client tax legislation tracker 2012-13: Transfer of assets abroad and attribution of gains rules.

(See TIIN, Amendments to the transfer of assets abroad legislation, HM Treasury, Budget 2013, paragraph 2.195 and Table 2.1 and Overview, paragraph 1.15.)

Business

Corporation tax main rate reduced to 20% from 2015

The main rate of corporation tax (CT) for non-ring fenced profits will be reduced to 21% for the financial year commencing 1 April 2014 and to 20% for the financial year commencing 1 April 2015. The 21% rate for 2014-15 was announced in the 2012 Autumn Statement (see Legal update, 2012 Autumn Statement: business tax implications: Corporation tax rate further reduced). The further 1% cut for 2015-16 was announced for the first time on Budget day. Both rate changes will be implemented by the Finance Bill 2013.

The main rate applies to companies and groups whose annual profits exceed £1.5 million. Finance Bill 2013 will keep the small profits rate of CT (which applies to companies and groups whose annual profits do not exceed £300,000) at 20% for the financial year commencing 1 April 2013. Legislation in Finance Bill 2014 will, as a result of the reduction of the main rate of CT to 20%, unify the small profits rate and the main rate of CT to create a new unified CT main rate from 1 April 2015. (Presumably the small profits rate will remain at 20% for 2014-15, although this has yet to be confirmed.)

(See TIIN, Corporation tax: main rate and small profits rate and Overview, paragraphs 1.21, 2.19 and Annex B12.)

CFCs: amendments

In addition to the proposed changes to the CFCs regime published in December 2012 (see Legal update, Draft Finance Bill 2013 legislation: key business tax measures: CFCs: amendments to the new regime), the government will introduce, in the Finance Bill 2013, the following:

An amendment to the matched interest rule (as to which, see Practice note, Controlled foreign companies: the new regime: Matched interest rule) in section 371IE of Taxation (International and Other Provisions) Act 2010 (TIOPA 2010), so that the leftover profits are not restricted to only those profits within section s314A of TIOPA, thereby ensuring, for example, that a FOREX gain can be exempt leftover profits.
Measures relaxing the qualifying resources limitation rules in section 371IB(9) of TIOPA (see Practice note, Controlled foreign companies: the new regime: Qualifying resources limitation) for:
- UK debt incurred and repaid under "daylight facilities" (incurred and repaid within 48 hours) or "similar" arrangements; and
- UK third party debt incurred as part of an arrangement requiring short term (up to six months) bridging finance, which is repaid from a subsequent rights issue (for example, in connection with the acquisition of a target company).
An amendment to the definition of group treasury companies to fully align the CFC definition with the definition for debt cap purposes, which will be amended in the Finance Bill 2013 (see Tax legislation tracker: finance: Debt cap: group treasury companies).

These measures will apply from 1 January 2013, except that the group treasury companies amendment will be subject to a transitional rule enabling the existing definition to be used for accounting periods ending, or treated as ending, before 20 March 2013.

For background on the CFC rules, see Practice notes, Controlled foreign companies (new regime): overview and Controlled foreign companies: the new regime.

(See Overview, paragraph 1.28 and TIIN: Controlled foreign companies regime.)

Exit charges: election to defer payment extended to non-UK resident companies within the charge to corporation tax

The government announced an extension to the proposed "exit charge" deferral election (election), which is to be introduced in the Finance Bill 2013 with retrospective effect. The original proposal applied to companies that ceased to be resident in the UK (see the draft legislation intended to implement the original proposal published for consultation on 11 December 2012: Legal update, Deferring payment of corporate exit charges: draft Finance Bill 2013 provisions and consultation document). The election is to be extended to non-UK resident companies that are incorporated in another EEA member state that carry on a trade in the UK through a permanent establishment provided that the trade is transferred (in whole or in part) to another EEA member state. The list of corporation tax charges that can be deferred will need to be amended consequent upon this change.

In addition, the list of corporation tax charges that can be deferred will be extended to include the corporation tax attributable to the revaluation of trading stock.

The tax information and impact note published on 20 March states that the measure will apply in respect of exit charges arising on or after 11 March 2012. This was subsequently corrected to 11 December 2012 (and a fresh TIIN promised for 21 March). The error no doubt arises from the fact that companies may elect for deferred payment for an accounting period if the day that is nine months and one day after the end of the accounting period (relevant day) falls on or after 11 December 2012. Therefore, companies may apply to defer tax payments for an exit charge arising for accounting periods ending on or after 10 March 2012.

NOTE ADDED ON 22 MARCH 2013: A fresh TIIN has not yet been published, nor has the 20 March TIIN been corrected, However, the following note dated 21 March has been added to HMRC - 20 March 2013:

"The Tax Information and Impact Note (TIIN) published yesterday referred to "exit charges arising on or after 11 March 2012" and OOTLAR [Overview] stated at paragraph 1.26 that "the changes have effect from 11 December 2012". The following paragraph clarifies the correct position.

From 11 December 2012, companies can apply for an exit charge payment plan to defer payment of that part of their corporation tax bills which relates to exit charges where the statutory date for payment of that tax under section 59D TMA 1970 has not already passed. This means that where a company has migrated from the UK on or after 11 March 2012, any tax related to exit charges for its final accounting period can be deferred. Whilst the application for deferral must generally be made within 9 months of the end of the accounting period for which the charges arise, companies have until 31 March 2013 to apply for deferral where that time limit falls between 11 December 2012 and 31 March 2013, in order to allow them time to make the necessary application."

(See TIIN, Corporation tax: deferral of payment of exit charges (but see note above re dates), Overview, paragraph 1.26 and Budget 21 March update.)

Foreign currency assets and chargeable gains: extension to ships and aircraft

The Finance Bill 2013 is to include legislation allowing chargeable gains (or allowable losses) arising on disposals of shares by companies to be calculated in a non-sterling currency and the gain (or loss) then converted into sterling (using the exchange rate at the time of disposal). This replaces the current system of converting both the acquisition costs and disposal proceeds into sterling and then calculating the difference (see Practice note, Taxation of foreign exchange gains and losses for UK companies: Chargeable gains). This measure was announced as part of the 2012 Budget and draft legislation was published on 11 December 2012 (see Legal update, Draft Finance Bill 2013 legislation: key business tax measures: Foreign currency assets and chargeable gains and Tax legislation tracker: corporate: Foreign currency assets and chargeable gains).

However, as part of the 2013 Budget, the government announced that, following consultation, this measure will be extended to cover not only disposals of shares but also disposals of ships, aircraft and interests in shares. This is a welcome extension as the original proposal was viewed as overly limited; indeed, it is to be hoped that the measure will be widened even further in time as this will reduce the administrative burden on taxpayers.

The measure will have effect on a date to be appointed, shortly after Royal Assent to the Finance Bill. Corresponding changes will be made to the Exchange Gains and Losses (Bringing into Account Gains and Losses) Regulations (SI 2002/1970), relating to hedged assets.

(See TIIN, Foreign currency assets and chargeable gains.)

Group relief for UK permanent establishments of EEA resident companies

The government has confirmed that the amendments to the UK's group relief rules, announced on 11 December 2012, to ensure that they are compatible with the EU freedom of establishment following the ECJ's ruling in HMRC v Philips Electronics UK Ltd (Case C-18/11), will be introduced as planned in the Finance Bill 2013. (For the draft legislation, see Legal update, Group relief for UK permanent establishments of EEA resident companies: draft Finance Bill 2013 clauses). A technical note will be published on 28 March 2013, to clarify how the amended rules will interact with existing group relief legislation.

(See Overview, paragraph 1.27.)

Multinationals: UK to press for international tax reform

In his speech, the Chancellor appeared to reiterate the commitment made in the 2012 Autumn Statement to use the UK's presidency of the G8 to press for reform of the OECD transfer pricing rules (see Legal update, 2012 Autumn Statement: business tax implications: Transfer pricing and multinationals).

He said:

"We want the global rules governing the taxation of multinational firms to be updated from the 1920s when they were first written, and made relevant to the global internet economy of the twenty first century."

(See HM Treasury, Budget 2013 statement.)

Stamp duty on junior shares

The government has announced that it will consult on the abolition of stamp duty on shares quoted on growth markets such as the Alternative Investment Market (AIM) and the ISDX Growth Market. The legislation will be in the Finance Bill 2014 and will take effect from April 2014. Some of the Budget materials refer to "stamp taxes" on shares and some to "stamp duty" on shares: the expectation must be that the stamp duty reserve tax charge will also be abolished.

(See Overview, paragraph 2.28. and HM Treasury, Budget 2013, paragraphs 1.132 and 2.121.)

Tax and procurement: changes to government's proposals

HMRC has published a summary of responses to the informal consultation on the government's proposals requiring potential government contractors to certify occasions of non-compliance as part of the procurement selection stage and for contractual documentation to include provisions enabling the contracting authority to terminate the contract for non-compliance. For more information on the original proposals, see Legal update, Bidder tax behaviour may affect award of government contracts.

The response document, which confirms the 1 April 2013 start date, sets out the following key changes to the original proposals:

The certification period will look-back only 6 years (instead of the proposed ten years) and bidders will only be required to certify occasions of non-tax compliance occurring on or after 1 April 2013, relating to tax returns filed on or after 1 October 2012 (removing the draconian retrospective aspect to the proposals).
The rather vaguely drawn definition of "occasion of non-compliance" is to be tightened (but will also be reviewed within a year) so that it only covers:
- any tax return found to be incorrect because of HMRC successfully taking action under the General Anti-Abuse Rule (GAAR) to be enacted in Finance Bill 2013 or under the "Halifax abuse" principle;
- any tax return found to be incorrect because of participation in a failed scheme which was, or should have been, notified under the Disclosure of Tax Avoidance Scheme (DOTAS); or
- unspent criminal convictions for tax related offences or penalties for civil fraud or evasion.
Generally, a certificate will only extend to the activities covered by the "economic operator" fulfilling the contract, as follows:
- if the economic operator is a joint venture or consortium, the certificate must cover all members;
- the economic operator is not required to certify on behalf of any subcontractor or any other members of the supply chain;
- if the economic operator is a partnership, limited partnership or limited liability partnership (LLP) (specified partnerships), the certificate covers the specified partnerships, but not the individual members; and
- if the economic operator is a member of a group, the certificate does not cover other group companies.

The government will review (within a year) how these rules apply to foreign economic operators, who will be required to certify their compliance with equivalent foreign tax rules (respondents to the informal consultation registered concern that UK bidders would be caught more easily than foreign bidders).

The government will also review this policy (within a year) to ensure that it has not discouraged taxpayers from settling cases with HMRC (a concern raised by some respondents).

The government's view is that this policy is consistent with EU law and public procurement regulations.

(See HMRC: Tax and Procurement: Summary of consultation responses.)

Compliance

Collection of tax debts through PAYE (coding out)

The 2013 Budget announced that the government will consult on improving the system for collecting tax debts through PAYE (known as coding out). Changes will be made to the rules through secondary legislation, including increasing the amounts that can be collected in this way. In 2011, the government held a consultation on coding out and issued a response document to the consultation (see Legal update, Collecting small debts through PAYE: response document and next steps).

See Overview, paragraph 2.46 and HM Treasury, Budget 2013, paragraph 1.215.

Customs civil penalties regime: modernisation

The government has announced that it will consult on modernising the customs civil penalties regime to bring it in line with other HMRC penalties.

The legislative regime for tax penalties has recently gone through a period of change. Previously, various penalty regimes existed in different areas of the legislation applying separate penalty codes to each type of tax. The new regime applies broadly the same principles across all taxes. (For more information, see Practice note, Tax penalties: overview.)

Following consultation, legislation will be introduced in the Finance Bill 2014 to reform the civil penalties regime to bring it within the scope of the principles of the new penalties legislation.

(See Overview, paragraph 2.48.)

Data gathering from card payment processors

The government has confirmed that the Finance Bill 2013 will introduce provisions allowing HMRC to require merchant acquirers to provide bulk data to HMRC about businesses accepting card payments. The legislation will effect amendments to Schedule 23 to the Finance Act 2011.

The proposal was first included in the government's December 2012 announcements intended to strengthen HMRC's powers to tackle avoidance and evasion (see Legal update, HM Treasury and HMRC outline approach to tackling tax evasion). Draft legislation was contained in the draft Finance Bill 2013 published later that month (see Legal update, Draft Finance Bill 2013 legislation: key business tax measures: Data-gathering from merchant acquirers). The government states that it has considered responses to that draft legislation and has amended the drafting to ensure that the measure is comprehensive. In particular, the measure now also refers to other businesses that contract with retailers to settle credit, debit and charge card transactions.

As previously announced, the measure will have effect from the date on which the Finance Bill 2013 receives Royal Assent. The government intends to put the necessary secondary legislation in place by autumn 2013.

(See Overview, paragraph 1.68 and TIIN: Data gathering from card payment processors.)

HMRC's offshore evasion strategy

HMRC has outlined its strategy for tackling offshore evasion in a document entitled No safe havens. The strategy has been developed by HMRC's new Offshore Evasion Strategy Team and its publication forms part of a package of measures originally announced in HMRC's 3 December 2012 report entitled Closing in on tax evasion (see Legal update, HM Treasury and HMRC outline approach to tackling tax evasion).

There are three main limbs to HMRC's strategy:

Taking action to reduce the opportunities for offshore tax evasion, including:
- making it easier for taxpayers to understand their obligations;
- providing simple ways for non-compliant taxpayers to put their tax affairs on the right footing and then helping them to remain compliant through a new support programme entitled Sustaining Offshore Voluntary Compliance;
- concluding further bilateral agreements with foreign jurisdictions providing for disclosure of past liabilities and automatic information exchange going forward (future agreements are likely to follow those already entered into with the US, Switzerland, Liechtenstein and the Crown Dependencies of Jersey, Guernsey and the Isle of Man; for further information on these agreements, see Private client tax legislation tracker 2012-13: FATCA: information powers and FATCA-style agreements with other jurisdictions, and Practice notes, UK/Switzerland tax co-operation agreement and UK/Switzerland tax co-operation agreement and Liechtenstein Disclosure Facility: comparison tables); and
- working multilaterally with foreign jurisdictions to share expertise, experience and best practice on tackling offshore tax evasion.
Taking steps to increase the likelihood of catching offshore evaders and their professional facilitators, including:
- investing in new technology and processes for data analysis and taxpayer risk-profiling; and
- undertaking a pilot study to identify the risks posed by offshore trust and company service providers.
Strengthening the severity of punishment for those who are caught evading tax offshore, including:
- reviewing the effectiveness of existing offshore penalties (see Practice note, Tax penalties: consolidated regime for culpable penalties: Offshore non-compliance);
- considering the introduction of enhanced information powers and penalties for facilitators who poses a high risk; and
- naming and shaming those who are guilty of offshore evasion (see Practice note, Tax penalties: consolidated regime for culpable penalties: Publishing details of deliberate tax defaulters).

(See HM Treasury, Budget 2013, paragraph 2.197 and HMRC: No safe havens: Our offshore evasion strategy 2013 and beyond.)

Jersey and Guernsey disclosure facilities

The Chancellor announced in his Budget statement that the UK had reached agreements with the Isle of Man (IOM), Jersey and Guernsey to bring in over £1 billion of unpaid taxes as part of a package of tax avoidance and evasion measures, which includes HMRC's offshore evasion strategy (see HMRC publishes offshore evasion strategy).

The Budget documents include the text of a memorandum of understanding (MOU) with each of Jersey and Guernsey setting out the terms of a disclosure facility to run from 6 April 2013 to 30 September 2016. The MOUs are unsigned and undated. The terms of these facilities appear to be identical to those agreed with the Isle of Man (IOM) and published on 19 February 2013, except for the range of capped penalties. In the IOM facility, penalties are capped at 10% except for penalties relating to inaccuracies in documents under Schedule 24 to the Finance Act 2007, which range from 20% to 40%. In the Jersey and Guernsey facilities, the higher penalties may also apply in relation to failure to notify chargeability to tax under Schedule 41 to the Finance Act 2008 and late filing of tax returns under Schedule 55 to the Finance Act 2009. We suspect that the omission of these provision from the IOM facility may be an oversight and so may be rectified (for example, in a joint declaration).

The government has not yet published the automatic tax information exchange agreements that will accompany the three disclosure facilities, which it has previously announced would be along the lines of the agreement between the UK and the US to implement the Foreign Accounts Tax Compliance Act (FATCA). According to an action plan at the end of the offshore evasion strategy, automatic information exchange with both the US and the Crown Dependencies will begin in 2015. However, the plan may be inaccurate, as it also shows that the disclosure facilities will run from mid-2014 to the end of 2016 rather than on the dates above (which are the same in all three facilities).

The Guernsey government had already confirmed that it would enter into a package of this kind with the UK, but Jersey had only confirmed that it was consulting its financial institutions about the proposal. That consultation ended on 15 March, so this announcement is earlier than might have been expected. The government will look to sign similar agreements with other jurisdictions and is already in discussions with the Overseas Territories.

For more background, see Private client tax legislation tracker 2012-13: FATCA-style agreements with other jurisdictions. For details of the IOM facility and links to information about the concurrent Liechtenstein disclosure facility and UK/Switzerland tax co-operation agreement, see Legal update, Isle of Man disclosure facility and tax information exchange agreement announced. For information about tax penalties, see Practice note, Tax penalties: consolidated regime for culpable penalties.

(See HM Treasury, Budget 2013, Executive Summary and paragraphs 1.206, 1.207, 2.196 and Table 2.1, HMRC: No safe havens, Memorandum of Understanding between Jersey and HMRC and Memorandum of Understanding between Guernsey and HMRC.)

Real time information: penalties

The 2013 Budget confirmed that, as previously announced (see Legal update, Draft Finance Bill 2013: Real time information: penalties), Finance Bill 2013 will contain provisions to impose penalties for late filing of returns under real time information (RTI). The government has published an updated tax information and impact note (TIIN) for these proposals, replacing the one published on 11 December 2012.

(See Overview, paragraph 1.66 and TIIN, Securing compliance with real time information: penalties.)

UK-US FATCA agreement: implementation

Finance Bill 2013 will contain primary legislation to implement international agreements to improve tax compliance. The government will also shortly issue regulations to implement the UK-US Foreign Account Tax Compliance Act (FATCA) agreement, signed on 12 September 2012 (see Legal update, UK and US sign agreement to implement FATCA). The government will publish an updated TIIN for (presumably) the primary legislation alongside the regulations. Further regulations will be introduced to implement subsequent similar automatic exchange agreements that the UK enters into.

The primary legislation was published in draft for comment in December 2012 (see Legal update, Draft Finance Bill 2013 legislation: key business tax measures: Implementing the UK-US FATCA agreement). Also in December 2012, HMRC published a summary of responses to its September 2012 consultation on implementing the UK-US FATCA agreement, draft regulations, draft guidance and FAQs on data protection aspects of the regime (see Legal update, Implementing the UK-US FATCA agreement: response document and draft regulations and guidance).

For more information about FATCA, see Practice note, A guide to PLC's FATCA resources.

(See Overview, paragraph 1.67.)

Employment and pensions

Approved employee share plans: self-certification

The 2013 Budget confirms that the government will proceed with a proposal to replace the current system of HMRC approvals for company share option plans, SAYE option schemes and share incentive plans with a self certification regime. It will publish further details shortly. Legislation to implement the self-certification regime will be included in Finance Bill 2014.

(See Overview, paragraph 2.3.)

Benefit in kind exemption for health-related expenditure

It was announced in the 2013 Budget that the government will introduce a new tax exemption for health-related benefits paid for by employers on the recommendation of the Health and Work Assessment and Advisory Service to support an employee's return to work. The exemption will be capped at £500. The government will consult on the exemption later in 2013 and legislation will be in the Finance Bill 2014.

(See Overview, paragraph 2.8.)

Company cars: tax rates and fuel benefits

HMRC has published details of changes to the tables that set out the values on which employees who are provided with company cars will be taxed from 6 April 2015. The changes, which were announced in the 2012 Budget (see Legal update, 2012 Budget: key business tax announcements: Company cars), encourage the use of very low emission cars.

Finance Bill 2013 will amend the table in section 139 of ITEPA 2003 which gives the percentage of the original cost of a car that will be treated as an employee benefit for 2015-16. The lower the emissions, the lower the benefit in kind charge. The rates for 2015-16, based on emissions of carbon dioxide per kilometre, will be as follows:

0-50g : 5%
51-75g: 9%
76-94g: 13%
over 94g: 13% +2% for every additional 5g up to a maximum of 37 %.

Section 140 of ITEPA 2003 will be amended so that, for 2015-16, the rate for cars that are incapable of producing carbon emissions will be 5%, while the rate for all other cars for which no carbon emission status is available will be 37%.

The 2013 Budget also commits the government to legislating in a future finance bill for the lower rate to increase to 7% and for there to be a 4 percentage point differential between each of the bands for 2016-17, 3% differential for 2017-18 and 2% for 2018-19. The existing 3% differential for diesel cars will be abolished.

Car and van fuel benefit charges for 2014-15 will increase in line with the RPI and secondary legislation will be introduced in the autumn.

(See TIIN: Company car tax rates, and Overview (paragraphs 1.17. 1.18 and 2.15.)

Corporation tax relief for employee share acquisitions

The government has published draft legislation, which applies from 20 March 2013, to clarify the scope of corporation tax deductions in respect of employee share acquisitions under Part 12 of the Corporation Tax Act 2009 (CTA 2009). The draft legislation replaces section 1038 of the CTA 2009 with a revised section 1038, and adds a new section 1038A. The new provisions are designed to put beyond doubt that where a corporation tax deduction is available under Part 12 of the CTA 2009, no other deduction is available in connection with the provision of the shares or the option, or any matter connected with the shares or the option. The new provisions also disallow any corporation tax deduction in respect of share options where shares are not ultimately acquired pursuant to the option. The measures are intended to prevent companies attempting to claim deductions for accounting deductions for share-based payments in addition to a deduction under Part 12, or in connection with an option on occasions where shares are not acquired pursuant to a share option (and therefore no deduction is available in connection with the acquisition of the shares).

For further detail on this development, see PLC Share Schemes & Incentives, Legal update, 2013 Budget: Corporation tax relief for employee share acquisitions.

(See Corporation tax relief for employee share acquisitions: draft legislation and explanatory note and TIIN, Corporation tax deductions for employee share acquisitions.)

EMI options and entrepreneurs' relief

As announced in the 2012 Budget, capital gains tax entrepreneurs' relief will be available on disposals of shares acquired on exercise of EMI options (EMI option shares) from 6 April 2013, regardless of whether the option holder holds 5% of the shares in the company (as is usually required). The holding period of an EMI option will count towards the one year holding period required for shares to qualify for entrepreneurs' relief, as specified in a draft clause for the Finance Bill 2013 published in December 2012 (see Legal update, Draft Finance Bill 2013: enterprise management incentives (EMI) options and entrepreneurs' relief). The draft legislation has been revised so that the relief will also be available on the same basis for shares that replace EMI option shares on a company reorganisation, and for certain shares following an exchange of EMI option shares for shares in another company. Legislation to amend entrepreneurs' relief as it applies to EMI option shares will be included in the Finance Bill 2013, which is expected to be published on 28 March 2013.

(See Overview, paragraph 1.9.)

Employee shareholder shares: tax treatment

The 2013 Budget included further details about the proposed new "employee shareholder" employment status:

The tax provisions relating to employee shareholder shares will take effect on 1 September 2013, along with the separate legislation introducing the new employment status.
The draft legislation to provide a capital gains tax exemption for disposals of employee shareholder shares has been revised to exclude an income tax charge on a buyback of CGT-exempt employee shareholder shares, and to strengthen the "material interest" restriction.
Income tax and National Insurance contributions (NICs) legislation will be amended to deem, for tax and NICs purposes, that an employee shareholder pays £2,000 for employee shareholder shares. This will make the first £2,000 worth (only) of employee shareholder shares free from income tax and NICs.

For more detail, see PLC Share Schemes & Incentives, Legal update, 2013 Budget: tax treatment of employee shareholder shares.

Employment-related beneficial and notional loans: increased exemption threshold

The exemption threshold for the aggregate value of employment-related beneficial and notional loans will be increased from £5,000 to £10,000 with effect from 6 April 2014. Legislation will be included in the Finance Bill 2014. Income tax (under self-assessment) and class 1A NICs liabilities arise annually on the benefit of interest below HMRC's official rate on:

Employment-related loans, under sections 175 - 180 of ITEPA 2003.
Notional loans in respect of employment-related securities acquired for less than market value, under sections 446Q - 446W of ITEPA 2003.

In both cases, there is an exemption for taxable loan values in aggregate not more than £5,000. For more information, see Loans to employees and directors: tax issues: Benefit in kind tax charge on beneficial loans and Notional loans: acquisition of securities for less than market value (including nil paid or partly paid shares).

(See TIIN, Exemption threshold for employment-related loans and Overview, paragraph 2.9.)

Measures to encourage employee ownership

The government will provide £40 - 50 million annually from tax year 2014-15 to encourage uptake of employee ownership structures for businesses. This will fund:

Responses to the Nuttall Review recommendations on employee ownership (see Legal update, Nuttall review of employee ownership: government response) and to proposals from other employee ownership advocates.
A new capital gains tax relief on the sale of a controlling interest in a business to an employee ownership structure. This relief is related to the development of an "off the shelf" employee owned company model by the Department for Business, Innovation and Skills and the Implementation Group on Employee Ownership. The intention is to introduce legislation for the relief in the Finance Bill 2014.

The government will also consider further incentives in this area, including measures targeted at indirect employee ownership models.

(See HM Treasury, Budget 2013, paragraph 1.134.)

NICs employment allowance

From April 2014, all businesses and charities will be entitled to an allowance of £2,000 per year, which will be set off against their employer Class 1 secondary national insurance contribution (NIC) bills. The allowance will be operated as part of the normal payroll process of a business using HMRC's real-time information system (as to which, see Practice note, Pay as you earn (PAYE): Real-time information). The government states that employers will merely need to confirm their eligibility through their regular payroll processes, following which the allowance will be deducted from their employer NICs over the course of the year.

The government intends to discuss the details of the design and operation of this measure with taxpayers and advisers to make the system as simple and effective as possible. The government's aim is to introduce legislation to effect this new allowance later in 2013.

The government anticipates that up to 1.25 million businesses will benefit from this measure, with over 90% of the benefit accruing to small businesses. This is, therefore, likely to be a welcome boost to the UK's small enterprises.

(See Overview, paragraph 1.19 and HM Treasury, Budget 2013, paragraph 1.128.)

Office of Tax Simplification: Review of tax-advantaged share schemes

As announced in December 2012, Finance Bill 2013 will include legislation to simplify tax-advantaged share schemes, following the Office of Tax Simplification's (OTS) review of tax-advantaged share schemes. The draft legislation has been revised following consultation to:

Protect the position of existing SAYE participants who reach a specified age.
Widen the range of circumstances in which tax-free exercise of SAYE and CSOP options will be available on the cash takeover of a company.
Ensure that SIP partnership shares may not be subject to forfeiture provisions.
Allow companies flexibility to limit the amount of cash dividends that can be reinvested in SIP dividend shares.

For more information on the OTS review of tax-advantaged share schemes and the proposed changes, see Legal update, Draft Finance Bill 2013: Tax-advantaged share scheme simplification.

(See Overview, paragraph 1.10.)

Office of Tax Simplification: Review of unapproved share schemes

The government will consult on some of the recommendations that the OTS made in its review of non tax-advantaged share schemes. Legislation will be introduced in future finance bills. For more information on the OTS review of unapproved share schemes, see Legal update, OTS final report on unapproved share schemes.

(See Overview, paragraph 2.4.)

For all Budget developments relevant to share schemes, see Legal update, 2013 Budget: tax developments relevant to share schemes.

Remittance basis for international employees: enactment of Statement of Practice 1/09

The government has confirmed its announcement in the 2012 Budget that Statement of Practice (SP) 1/09 is to be enacted in the Finance Bill 2013 and will take effect from 6 April 2013.

Draft legislation to enact SP 1/09 was published for consultation on 11 October 2012 (see Legal update, SP1/09: Consultation on legislation for internationally mobile employees' mixed fund concession). The draft legislation applies to certain non-UK domiciled employees carrying out employment duties both in the UK and overseas under a single contract of employment and provides for:

An apportionment of earnings on a just and reasonable basis.
Simplified "mixed fund" rules that permit eligible employees to calculate their UK tax liability by reference to the total amount remitted to the UK from a nominated account rather than having to apply the complex remittance basis mixed fund ordering rules on a transaction-by-transaction basis.

Revisions to the draft legislation were published for consultation on 11 February 2013 (see Legal update, SP1/09: Revised draft legislation and further consultation questions). However, a response document has not been published and no new or additional information provided.

(See TIIN, Statement of Practice 1/09.)

Tax relief for pensions: reduction in the annual and lifetime allowances and family pension plan restriction confirmed

The government confirmed the 2012 Autumn Statement announcement that the lifetime allowance will be reduced from £1.5 to £1.25 million and the annual allowance from £50,000 to £40,000 from 6 April 2014. Draft legislation for these measures, together with the proposed "fixed protection 2014" transitional relief, was published on 11 December 2012 (see Practice note, Finance Bill 2013: pensions provisions: Reductions in the annual and lifetime allowances and Transitional relief: fixed protection 2014).

In addition, it was confirmed that the previously announced anti-avoidance measure to curtail the use of so-called family pension plans that are sometimes offered as part of employees' flexible benefits arrangements will be implemented to take effect from 6 April 2013 (see Practice note, Finance Bill 2013: pensions provisions: Restricting relief for family pension plans).

It was also announced that the government plans to consult on amendments to the tax rules relating to investment-regulated pensions schemes (in most cases self-invested personal pensions (SIPPs) or schemes that were formerly small self-administered schemes). The apparent aim is to encourage the conversion of unused space in commercial properties to residential property. At the moment, investment-regulated schemes are effectively barred from investing in residential property under the "taxable property" provisions enacted in the Finance Act 2004.

For a summary of all the 2013 Budget pensions-related measures, see Legal update, 2013 Budget: pensions implications.

(See TIIN: Reducing the pensions tax annual and lifetime allowances, Overview, paragraphs 1.12 to 1.14 and Budget report, paragraph 2.18.)

Environment

Extension of first year allowances to expenditure incurred on railway assets and ships

Legislation will be introduced in Finance Bill 2013 to remove the general exclusions from 100% first year plant and machinery capital allowances (FYAs) for expenditure incurred on railway assets and ships. These changes will have effect for qualifying expenditure incurred on or after 1 April 2013.

This measure is aimed at promoting fairness in the tax system: the current exclusions are an anomaly since investors in similar assets in other industry sectors are entitled to FYAs. The measure will also make available FYAs for expenditure on energy efficient and environmentally beneficial plant and machinery to function more generally as green incentive measures for the railway and shipping industries.

100% FYAs are currently available for expenditure on certain classes of assets detailed at section 39 of the Capital Allowances Act 2001. However, there are some exclusions, which currently include expenditure on ships and railway assets (General exclusions 3 and 4, section 46(2), Capital Allowances Act 2001). For general background on FYAs, see Practice note, Capital allowances on property transactions: First year allowances.

(See TIIN, Capital allowances for railway assets and ships and Overview, paragraph 1.35.)

Extension of 100% first year allowances for low emissions vehicles and gas refuelling equipment

The government has announced that it is to introduce legislation in the Finance Bill 2015 to extend the 100% first year allowance (FYA) for expenditure incurred on cars with low carbon dioxide emissions and electrically propelled cars for an additional three years to 31 March 2018. At the same time, to ensure the FYA remains appropriately targeted, the carbon dioxide emissions threshold below which vehicles are eligible for the FYA will be reduced from 95g/km to 75g/km. The complementary 100% FYA for gas refuelling equipment will also be extended to 31 March 2018.

The government has also announced that it will consider the case for extending the FYA for cars beyond April 2018 in the 2016 Budget, alongside a review of the 130g/km main rate threshold.

For background on allowances for low emissions vehicles and gas refuelling equipment, see Practice note, Enhanced capital allowances (ECAs) for investment in environmental technologies.

(See Overview, paragraph 2.29.)

Updating of lists of technologies and products for energy-saving and water efficient enhanced capital allowances schemes

Subject to EU state aid approval, the energy-saving and water-efficient enhanced capital allowances schemes will be updated by Treasury Order in summer 2013. The main changes will be the inclusion of two new technologies to the schemes: carbon dioxide heat pumps for water heating and grey water re-use technology. In addition, four technologies will be removed from the energy-saving scheme, and one will be removed from the water efficient scheme. The qualifying criteria for a number of technologies in both schemes will also be revised.

The schemes allow 100% of the cost of an investment in qualifying plant and machinery to be written off against the taxable profits of the period in which the investment is made, benefiting a business’s cash flow. For background on energy saving technologies and water-efficient enhanced capital allowances schemes, see Practice note, Enhanced capital allowances (ECAs) for investment in environmental technologies.

(See TIIN: Update of the enhanced capital allowances schemes for energy-saving and environmentally beneficial (water efficient) technologies and Overview, paragraph 1.36.)

For all environmental Budget developments, see Legal update, Budget 2013: key environmental announcements.

Finance

Income tax rules on interest

The government has confirmed its intention to legislate in the Finance Bill 2013 on disguised interest and on withholding from interest on compensation payments, specialty debt and payments in kind (see Legal update, Draft Finance Bill 2013 legislation: key business tax measures: Disguised interest: income tax and Withholding from interest, and Tax legislation tracker: finance: Income tax rules on interest). As part of the 2013 Budget, the government has announced that, following consultation, the draft disguised interest rules have been revised to exclude certain types of share, subject to an anti-avoidance rule. Further details are currently unknown and will be clarified when the revised draft legislation is published.

(See Overview, paragraph 1.16.)

Review of loan relationship and derivative contract rules

The government has announced that it will consult on modernising the loan relationship and derivative contract rules (as to which, see Practice notes, Loan relationships and Derivatives: tax) with a view to introducing legislation in the Finance Bill 2014 and the Finance Bill 2015. The government states that the aim will be to provide "simpler and fairer" tax treatment, to reduce uncertainty, to improve structural and legislative clarity, and to reduce administrative burdens. However, no further details are currently known on this potentially major consultation.

(See Overview, paragraph 2.23.)

Financial services

Additional tier one capital instruments

The government has announced that, following the conclusion of the Capital Requirements Directive IV (CRD IV, as to which, see PLC Financial Services, Practice note, Hot topics: CRD IV), it will issue secondary legislation to confirm and ensure that banks' additional tier one debt capital instruments will be deductible in calculating the bank's profits for corporation tax purposes, whether the instrument is already in issue or has yet to be issued.

For background to this measure, see Legal updates, Tax implications of Basel III and CRD IV: joint HMRC and industry working group discussions, Tax implications of Basel III and CRD IV: going concern and gone concern working group discussions (August 2011) and HMRC update on its views on current tax treatment of CRD IV-compliant regulatory capital. The government has already produced draft legislation ensuring the deductibility of coupons on CRD IV-compliant tier 2 regulatory capital instruments: see Legal update, Draft Finance Bill 2013 legislation: key business tax measures: Corporation tax treatment of banks' tier 2 regulatory capital. See also Tax legislation tracker: finance: Tax treatment of new capital instruments to accommodate Basel III.

(See Overview, paragraph 2.26.)

Bank levy: increase in rates

The government has announced that the rates of the bank levy will increase again from 1 January 2014 (for periods falling wholly or partly after that date). The new rates (to be included in the Finance Bill 2013) will be:

For long-term equity and liabilities: 0.142% (current rate is 0.130%).
For short-term liabilities: 0.071% (current rate is 0.0625%).

This is intended to ensure that the bank levy continues to meet its revenue target of £2.5 billion a year and to take into account the impact of the reduction in the main rate of corporation tax for the banking sector. The bank levy will be reviewed during 2013 to ensure it is operating efficiently. (For more information on the bank levy, see Practice note, Bank levy.)

(See TIIN, Bank Levy 2014 rate change.)

Banks: compliance with Code of Practice on Taxation

The government will consult on legislation allowing HMRC to publish an annual report on the operation of the Code of Practice on Taxation for Banks (Code).

HMRC issued the final form of the Code in December 2009. It states that the government expects banks to comply with the spirit, as well as the letter, of tax law. On 26 March 2012, HMRC published a governance protocol on compliance with the Code setting out when HMRC may express concerns about a bank's compliance with the Code. (For further information, see Legal update, HMRC governance protocol on compliance with Code of Practice on Taxation for Banks.)

Legislation will be introduced in the Finance Bill 2014 allowing HMRC to publish an annual report on the operation of the Code. The report may contain names of banks that HMRC consider are not complying with the Code. Prior to introduction of legislation, the government will consult on how non-compliance shall be determined and the nature of the report.

(See Overview, paragraph 2.20.)

Bond funds: withholding from interest distributions

The government is to consult on a proposal to remove the requirement to withhold tax from interest distributions by UK-domiciled bond funds (as to which, see Practice note, Unit trusts and open-ended investment companies: tax: Interest distribution) when sold via reputable intermediaries and marketed only to non-UK investors. If this proposal is taken forward, subject to the details of the measure, this is likely to increase the attractiveness of UK bond funds for overseas investors.

(See Overview, paragraph 1.32 and HM Treasury, The UK investment management strategy, paragraphs 3.8 and 3.9.)

Consultation on expanding the "white list" of investment transactions

The government has announced that it will consult on the possibility of expanding the "white list" of investment transactions which apply to legislation on the investment manager's exemption (IME), authorised investment funds (AIFs), investment trusts and offshore reporting funds. In particular, the government is considering the application of the white list to traded life policy investments and certain forms of carbon credit that are not currently covered.

(In relation to the IME, see Practice note, Offshore funds: tax: Investment manager's exemption, in relation to the taxation of authorised investment funds, see Practice note, Unit trusts and open-ended investment companies: tax, in relation to the taxation of investment trusts, see Practice note, Investment trusts: tax and in relation to the taxation of offshore reporting funds, see Offshore funds: tax: Offshore funds legislation.)

Broadly, the IME ensures that non-residents are not exposed to any additional liability to UK income tax or corporation tax by using the services of independent fund managers in the UK. The IME only applies to "investment transactions" carried out on behalf of a non-resident. What constitutes an "investment transaction" is set out in a "white list" contained in the Investment Manager (Specified Transactions) Regulations 2009 (SI 2009/May). AIFs and investment trusts are exempt from taxation on chargeable gains arising on investment transactions. The Authorised Investment Funds (Tax) Regulations 2011 (SI 2006/964) and the Investment Trust (Approved Company) (Tax) Regulations 2011 (SI 2011/2999) contain "white lists" of transactions which will constitute investment transactions for these purposes. Investors in offshore funds which are reporting funds are subject to tax on their share of the offshore fund's reported income. Gains realised on investment transactions will not constitute income of the offshore fund which must be reported to investors. The Offshore Funds (Tax) Regulations 2009 (SI 2009/3001) contain a "white list" of transactions which will constitute investment transactions for these purposes.

(See Overview, paragraph 1.31 and HM Treasury, The UK investment management strategy, paragraphs 3.10 to 3.13.)

Limited partnerships: optional legal personality

The government will consult with a view to making technical changes to the Limited Partnership Act 1907 as it applies to funds, including the possibility of allowing limited partnerships to elect to have legal personality. This is in order to more effectively accommodate their use for private equity and venture capital investments.

For general information on the taxation of limited partnerships, see Practice note, Limited partnerships: tax.

(See HM Treasury, Budget 2013, paragraphs 1.145 and 2.124 and HM Treasury, The UK investment management strategy, paragraph 4.10.)

Investment trusts legislation: changes

The investment trust companies legislation will be amended to correct two unintended consequences of previous changes to the legislation. (In relation to the taxation of investment trust companies, see Practice note, Investment trusts: tax.)

Investment trusts are subject to corporation tax on their income but are exempt from tax on chargeable gains. In order to qualify as an investment trust a company must satisfy various conditions. One of these conditions is that the business of the company consists of investing its funds in shares, land or other assets with the aim of spreading investment risk and giving members of the company the benefit of the results of the management of its funds (Condition A). Subject to certain exceptions, investment trusts are required to distribute at least 85% of their income in each accounting period (the distribution requirement).

Draft legislation will be included in the Finance Bill 2013 to amend Condition A. The amendment will clarify that, provided all (or substantially all) of the business of a company consists of investing its funds in shares, land or other assets with the aim of spreading investment risk, other ancillary activities will not prevent the company from satisfying the condition. This amendment will have retrospective effect for accounting periods commencing on or after 1 January 2012.

Draft regulations for consultation will be published in spring 2013 to introduce a further exception to the distribution requirement. This new exception will apply where an investment trust has accumulated realised revenue losses in excess of its income for an accounting period, so that a distribution out of capital will not be required. It is expected to have effect for accounting periods commencing on or after 1 July 2013.

(See TIIN, Investment trust amendments and Overview, paragraph 1.29.)

Offshore funds regulations: immediate changes and further future amendments

Two statutory instruments will be introduced to amend the offshore funds regulations. The first, which takes effect from 3pm on 20 March 2013, clarifies that an offshore income gain cannot be avoided by a merger or reorganisation of the offshore fund. The second will introduce amendments ensuring that investors are taxed on the correct proportionate share of income of an offshore fund. (In relation to the taxation of offshore funds, see Practice note, Offshore funds: tax: Offshore funds legislation.)

The original offshore funds legislation was introduced to prevent income being rolled up offshore and effectively converted into chargeable gains. The regime was reformed and new legislation, which took effect from 1 December 2009, was introduced. Under the new regime, investors in offshore funds which are reporting funds are subject to capital gains tax on a disposal of their interest in the fund and are subject to income tax on their share of the annual reported income of the fund. Investors in offshore funds which are non-reporting funds are subject to income tax on a disposal of their interest in the fund.

The Offshore Funds (Tax) (Amendment) Regulations 2013 (SI 2013/661), which came into force at 3pm on 20 March 2013, introduce a new paragraph 3A into regulation 17 of the Offshore Funds (Tax) Regulations 2009 (SI 2009/3001). This paragraph provides that an investor will be subject to income tax on a disposal of an interest in a reporting fund if that interest was acquired in consequence of an arrangement to which section 135 or 136 of the Taxation of Chargeable Gains Act 1992 applied and the interest which they held prior to the exchange of securities or scheme of reconstruction was in a non-reporting fund.

Further regulations, which will contain additional amendments, will be published for comment shortly after 20 March 2013 and are expected to come into force by 30 June 2013. These regulations will:

Correct the rules for calculating total reported income and the amount reported to individual investors so that mismatches do not occur.
Amend the regulations so that a fund operating "full equalisation" can offset capital returned on a new subscription against the first distribution made.
Amend the regulations to allow excess expenses of one computation period to be set against income of another computation period within the same reporting period.

(See TIIN, Amendments to the Offshore Funds (Tax) Regulations 2009 and The Offshore Funds (Tax) (Amendment) Regulations 2013 (SI 2013/661).)

SDRT: abolition on dealings in unit trusts and OEICs

Legislation will be introduced in Finance Bill 2014 to abolish stamp duty reserve tax (SDRT) on dealings in unit trusts and open-ended investment companies (OEICs), to take effect in 2014-15.

Dealings in unit trusts and OEICs are generally subject to a special SDRT regime contained in Schedule 19 to the Finance Act 1999. SDRT, at the rate of 0.5%, is chargeable on the market value of a unit if it is a "chargeable security" and is surrendered. (For more information, see Practice note, Unit trusts and open-ended investment companies: tax: Stamp duty surrenders and transfers of units in a unit trust or shares in an open-ended investment company.)

This follows on from previous government announcements relating to simplifying the Schedule 19 SDRT charge.

(See Overview, paragraph 2.27 and paragraphs 1.145 and 2.124 and HM Treasury, The UK investment management strategy, paragraphs 3.4 and 3.5.)

Tax transparent funds

The government reconfirmed its commitment to introducing tax transparent funds and stated that regulations would be introduced to Parliament shortly.

It was announced in the 2011 Budget that a new, regulated, UK-domiciled tax transparent fund would be introduced (see Legal update, 2011 Budget: key business tax announcements: Tax transparent fund: consultation). The first draft of the regulations facilitating this was published for consultation in July 2012 (see Legal update, HMRC publishes draft regulations on tax transparent funds). A revised version of the regulations was published on 31 January 2013 (see Legal update, Authorised contractual (tax transparent) funds: revised draft regulations.)

(See Overview, paragraph 1.33.)

UK management of offshore funds

The government has announced that it will consult on widening the scope of current legislation to provide certainty that UK management of certain non-UCITS funds will not result in the fund being resident in the UK for tax purposes.

Section 363A of the Taxation (International and Other Provisions) Act 2010 provides that a UCITS fund resident in a member state of the EU (other than the UK) will not be resident in the UK for tax purposes if it has a UK resident fund manager. Following consultation, legislation will be included in the Finance Bill 2014 to extend the scope of this section to certain non-UCITS funds. In particular, this is expected to benefit managers who wish to operate offshore funds under the AIFM Directive.

(See Overview, paragraph 2.25 and paragraphs 1.145 and 2.124 and HM Treasury, The UK investment management strategy, paragraph 3.7.)

For all Budget announcements relevant to financial services, see PLC Financial services, Legal update, 2013 Budget: financial services implications.

Intellectual property and R&D

Research and development: "above the line" tax credit set at 10%

The government has announced that the new "above the line" (ATL) R&D tax credit for large companies will be paid at the rate of 10% of qualifying expenditure, an increase from the 9.1% rate in the December 2012 draft legislation. The ATL credit is intended to increase the visibility of large company R&D relief and provide greater cash-flow support to companies with no corporation tax liability.

The credit will be available for companies with qualifying expenditure incurred on or after 1 April 2013. The scheme will initially be optional, but will become mandatory with effect from 1 April 2016.

The government first announced plans to introduce an ATL tax credit as part of its 2011 Autumn statement (see further Legal update, 2011 Autumn Statement: business tax implications: R&D "above the line" tax credit). Draft legislation was published on 6 December 2011 (see Legal update, R&D tax credit and vaccine research relief: draft Finance Bill 2012 provisions and consultation response). The announcement was confirmed in the 2012 Budget (see Legal update, 2012 Budget: key business tax announcements: Research and development (R&D): above the line tax credit) and a further consultation was launched (see Legal update, Consultation on "above the line" R&D credit). Further draft legislation was published in December 2012 (see Legal update, Research and development "above the line" tax credit: draft Finance Bill 2013 legislation and response document), which indicated that the rate of the credit would be 9.1%.

For further detail on the existing R&D regime, see Practice notes, Intangible property: tax: Research and development and R&D tax reliefs: practical aspects.

(See TIIN: Research and development tax credits reform: Above the line .)

Visual effects industry: consultation on tax support

The government has announced that it will consult on options to provide support to the visual effects industry through the tax system, possibly along the lines of the new reliefs for high-end television and animation, see Legal update, Creative sector tax relief: draft Finance Bill 2013 legislation and response document.

(See Overview, paragraph 2.22.)

Oil and gas

Decommissioning tax relief

The government has published a TIIN on the draft legislation to be included in the Finance Bill 2013 on decommissioning relief deeds (as to which, see Practice note, Oil taxation: Decommissioning Relief Deeds). In the Overview, the government states that, following consultation, aspects of the legislation have been revised to ensure that it will operate effectively. Much of the TIIN comprises high-level summaries of the existing draft legislation, so it is not possible to determine whether any changes have been made to that until further draft legislation is produced. However, the TIIN suggests that the following new provisions will be added to that draft legislation:

A provision preventing claims for decommissioning relief from being used for petroleum revenue tax (PRT) purposes in priority to oil allowance (see Practice note, Oil taxation: Special reliefs) so as to release "surplus" oil allowances that may be set against the profits of other companies (which would be possible with other PRT losses). This provision is to have effect for sums payable under decommissioning relief agreements on or after the date of Royal Assent to the Finance Bill 2013.
A provision ensuring that no debits or credits are brought into account under the loan relationships legislation (as to which, see Practice note, Loan relationships) in relation to a decommissioning security agreement trust fund (the sole (or main) purpose of the trust being to provide security for the purpose of obligations under an approved decommissioning scheme). This is to prevent interest on funds invested by the trust being taxed twice (in the hands of the trustee and as a loan relationship credit of the company paying into the trust). This provision is to have effect for accounting periods beginning on or after the date of Royal Assent to the Finance Bill 2013.
A provision ensuring that capital allowances for the decommissioning of offshore installations under sections 163 to 165 of the Capital Allowances Act 2001 applies to plant and machinery that a person incidentally acquires as part of a field acquisition if that person later decommissions without having used that plant or machinery ("redundant" plant and machinery).

A model decommissioning relief deed is to be published alongside the Finance Bill 2013 and placed in the House of Commons library.

(See TIIN, Decommissioning: increasing tax certainty for oil and gas investment in the UKCS, Overview, paragraph 1.25 and HM Treasury, Budget 2013, paragraphs 2.134 and 2.135.)

Mineral extraction allowances informal consultation

Following the introduction of the foreign branch exemption, the government has announced that it will consult informally on proposals to align the treatment of assets for mineral extraction allowances with that for assets eligible for plant and machinery allowances, where profits are not taxed in the UK. The government has announced that it will include legislation in the Finance Bill 2014.

For background on mineral extraction allowances, see Practice note, Oil taxation: Mineral extraction allowances. For information on the foreign branch exemption, see Practice note, Foreign permanent establishments exemption.

(See Overview, paragraph 2.24.)

Shale gas tax incentives consultation

As previously announced in the 2012 Autumn Statement, the government is to consult on tax measures to encourage investment in the exploration and production of shale gas, including a new shale gas field allowance and the extension of the Ring Fence Expenditure Supplement for shale gas from 6 to 10 years.

In the 2013 Budget, the government announced that legislation will be introduced in the Finance Bill 2014 and that it will produce "robust planning guidance" on shale gas by July 2013. In implementing these measures, one of the government's objectives is to ensure that local communities benefit from shale gas development in their area so it will work with industry and communities to bring forward proposals by the summer.

For background, see Legal update, 2012 Autumn Statement: environmental implications: Shale gas tax regime.

(See Overview, paragraph 2.21 and HM Treasury, Budget 2013, paragraph 1.93.)

Owner-managed businesses

Collection of Class 2 NICs

HMRC is to consult on possible changes to the way in which Class 2 NICs are collected. Class 2 NICs are payable at a fixed rate by all self-employed persons (subject to claims for exemption on the grounds of very low income or a loss). Unlike Class 4 contributions, which are profit-related, they are not collected by self-assessment but are separately administered. Following consultation, the government will decide whether changes to the collection system are required and will legislate accordingly.

(See Overview, paragraph 2.18.)

Partnerships: OTS review

The government has asked the OTS to carry out a review of ways to simplify the taxation of partnerships.

(See Overview, paragraph 2.6.)

Seed enterprise investment scheme: concession for off-the-shelf companies

The government has announced that legislation will be introduced in the Finance Bill 2013 to amend the seed enterprise investment scheme (SEIS) independence requirement. The amendment will have effect for shares issued on or after 6 April 2013.

The independence requirement is that the issuing company must not be a 51% subsidiary of another company or under the control of another company (or another company together with persons connected with that other company) at any time from the date of its incorporation to the three year anniversary date of the relevant share issue (section 257DG(2), ITA 2007). (This contrasts with the Enterprise Investment Scheme rules that apply the independence requirement from the date of issue of shares.) The SEIS independence requirement causes a problem for off-the-shelf companies because it is common for a corporate shareholder to hold the subscriber share, which means, for a period, the off-the-shelf company is controlled by another company. The amendment will ensure that such off-the-shelf companies are not disqualified provided that control exists only during a period where the company has issued only subscriber shares and has not yet begun, or begun preparations for, its trade or business.

For further details about SEIS, see Practice note, Seed Enterprise Investment Scheme (SEIS).

(See TIIN: Seed Enterprise Investment Scheme: eligible companies.)

Seed enterprise investment scheme: extension to reinvestment relief

The government has announced an extension to seed enterprise investment scheme (SEIS) reinvestment relief.

Currently, SEIS reinvestment relief provides an exemption from capital gains tax (CGT) for gains on disposals of any assets made in 2012-13 if a SEIS qualifying investment is also made in 2012-13. (For further detail, see Practice note, Seed Enterprise Investment Scheme (SEIS): Capital gains tax reinvestment relief). Legislation will be introduced in the Finance Bill 2013 to extend the exemption to gains accruing in 2013-14 provided they are re-invested in SEIS qualifying shares in 2013-14 or 2014-15. However, the exempt amount is half the qualifying re-invested amount.

(See TIIN, Seed Enterprise Investment Scheme: CGT re-investment relief.)

Simplification of income tax for small businesses

In the 2013 Budget, the government has announced changes to the design of the proposed cash basis scheme for which legislation will be included in the Finance Bill 2013 and which will take effect from 6 April 2013 (for details, see Legal update, Cash basis for unincorporated small businesses: Finance Bill 2013 legislation).

The design changes include:

Businesses using the cash basis will continue to do so until their circumstances change so that the cash basis is no longer suitable for them. (No details are available as to whether a switch to the accruals basis will be permitted only when the qualifying criteria for using the cash basis are no longer met or whether circumstances permitting a voluntary switch are also envisaged. The original draft legislation provided for free movement between cash and accruals basis, with an election for use of the cash basis being made annually.)
Businesses will not be required to align their accounting with the tax year.
An adjustment on a "just and reasonable" basis will be made when an individual takes business goods for his own use.
Use of the simplified flat rate expenses will not be compulsory for cash basis users. (This removes a major flaw in the original proposals and will make it possible for cash basis users to claim capital allowances on cars.)
Simplifying the legislation.

The changes, which are in response to comments received (no doubt, a summary of responses will be published shortly) appear to address some of the issues identified in our legal update. In particular, compulsory use of the fixed rate tables for motoring expenses (and corresponding denial of capital allowances), which would have encouraged businesses to keep older vehicles on the road as long as possible, was in conflict with the government's objective of encouraging the use of low-emission cars. Its removal appears to be a significant step in the right direction, although we shall not know the detail until the Finance Bill is published.

(See TIIN: Simpler Income Tax for the Simplest Small Businesses and Overview paragraph 1.20.)

VCTs: buy-backs

The government is concerned that venture capital trusts offering enhanced buybacks are not operating within the spirit of the legislation and will be monitoring the situation. For background on VCTs, see Practice note, Venture Capital Trusts.

(See HM Treasury, Budget 2013, paragraph 1.131

Personal tax and investment

Abolition of ordinary residence

The government is proceeding with its planned abolition of the concept of ordinary residence for tax purposes and the enactment of overseas workday relief (OWR). These measures will take effect from 6 April 2013. Following consultation on its second draft of the legislation (published on 11 December 2012), the government has amended the transitional rules for claiming OWR, although we will need to wait for publication of the Finance Bill on 28 March 2013 to see the details.

For more information on these measures, see Private client tax legislation tracker 2012-13: Abolition of ordinary residence.

(See Overview, paragraph 1.4.)

CGT annual exempt amount for 2013-14

The capital gains tax (CGT) annual exempt amount for 2013-14 will be £10,900, increased from £10,600 in 2012-13. This is the first time that an annual increase has been calculated using the consumer prices index (CPI). The government has already announced that the amounts for the following two tax years will be increased by 1% (to £11,000 in 2014-15 and £11,100 in 2015-16) (see Private client tax legislation tracker 2012-13: CGT: annual exempt amount for 2014-15 and 2015-16).

For CGT rates and limits, see Practice note, Tax data: capital gains tax.

(See Capital Gains Tax (Annual Exempt Amount) Order 2013 (SI 2013/662).)

Personal income tax allowance reaches £10,000 in 2014-15

As anticipated, the Chancellor announced that the coalition government's plan to increase the personal allowance to £10,000 over the parliament will be accelerated. The personal allowance for those born after 5 April 1948 will increase (by £560) to £10,000 in 2014-15. At the same time, the basic rate limit will be reduced to £31,865, giving a higher rate threshold of £41,865. This figure reflects the increase of 1% in the higher rate threshold (tax-free amount plus basic rate band) that was announced in the 2012 Autumn Statement (see Legal update, 2012 Autumn Statement: business tax implications: Personal allowance increase to £9,440 from April 2013). For 2015-16, the personal allowance will increase in line with the Consumer Prices Index, while the higher rate threshold will increase by 1% to £42,285.

The Budget also confirms the rise in the personal income tax threshold from £8,105 to £9,440 with effect from 6 April 2013, with the basic rate limit being reduced to £32,010 (giving a higher rate threshold of £41,450).

(See TIIN: Income tax personal allowance for those born after 5 April 1948 and basic rate limit for 2014-15.)

Scottish rate of income tax: administration

Legislation will be introduced in the Finance Bill 2014 to require the National Audit Office to report to the Scottish Parliament on the administration of the Scottish rate of income tax by HMRC.

The Scotland Act 2012 provides for a reduction in the basic, higher and additional rates of income tax for Scottish taxpayers by 10p in the pound. A single rate of Scottish income tax on Scottish taxpayers will be added to the reduced basic, higher and additional rates by the Scottish Parliament with effect from April 2016. On 22 May 2012, HMRC published a technical note setting out how the Scottish rate of income tax will interact with other areas of the income tax system (see, Legal update, Scottish rate of income tax: interaction with other areas of income tax system). (For more information, see Legal update, Scotland Act 2012 receives Royal Assent: Income tax.)

(See Overview, paragraph 2.47.)

Statutory residence test

As expected, the Finance Bill 2013 will include legislation introducing a statutory residence test for individuals (SRT), placing HMRC's concessionary split-year treatment on a statutory footing, and amending and extending anti-avoidance rules that tax temporary non-residents. These measures will take effect from 6 April 2013. Following consultation on its second draft of the legislation (published on 11 December 2012), the government has made amendments to the SRT concepts of full-time work and international transportation workers, as well as to the new rules on split-year treatment, although we will need to wait for publication of the Finance Bill on 28 March 2013 to see the details.

For more information on these measures, see Private client tax legislation tracker 2012-13: Statutory residence test and Practice note, Statutory residence test for individuals.

(See Overview, paragraph 1.3.)

For all private client and charities Budget developments, see Legal update, 2013 Budget: key private client tax announcements.

Property

ARPT (to be known as the annual tax on enveloped dwellings)

The annual residential property tax (ARPT) is to be introduced from 1 April 2013 (see Legal updates, Annual residential property tax (ARPT): draft Finance Bill 2013 and Annual residential property tax (ARPT): draft Finance Bill 2013 amendments). Apart from confirming that the reliefs promised in the summary of responses to the consultation (see Legal update, Annual residential property tax (ARPT): draft Finance Bill 2013: Next steps) will be included in the Finance Bill 2013, it appears that the government is to call the tax, the annual tax on enveloped dwellings (ATED). ATED may better convey its target than ARPT (perhaps, this is being reserved for a future mansion tax), but seems rather colloquial for tax legislation.

No mention is made of the de minimis rules relating to fragmentation of interests, but it is understood these will be included in the Finance Bill 2013 (see, Ask, Where does the policy statement on ARPT aggregation and fragmentation come from?).

(See Overview, paragraph 1.39 and TIIN: Taxation of high-value UK residential property held by certain non-natural persons.)

CGT: Disposals of high value residential property by non-natural persons

The draft legislation extending the charge to capital gains tax to resident and non-resident non-natural persons was published for consultation on 31 January 2013. The TIIN on this measure (together with details of amendments to the legislation on the related annual tax on enveloped dwellings (ATED) charge and 15% SDLT rate for high value residential property) does not indicate whether shortcomings in the draft legislation (specifically relating to the formula for calculating tapering relief for gains to prevent a cliff edge effect round the £2 million threshold and the anomalous measure on principal private residence relief for property owned by a trust) will be ironed out in the Finance Bill 2013 when it is published.

The TIIN gives details of reliefs that will apply to the charge to CGT as well as the related SDLT and ATED charges. As the draft CGT legislation is structured to bring into charge only non-natural persons that are liable to the ATED, presumably the changes to the relief provisions will be contained within the revised ATED provisions rather than the CGT legislation.

For details of the draft legislation published on 31 January 2013, see Legal update, ARPT-related CGT for non natural persons: draft Finance Bill 2013 clauses.

To follow progress of this measure see Private client tax legislation tracker 2012-13: CGT: disposals of enveloped residential property by non-residents.

(See TIIN, Taxation of high-value UK residential property held by certain non-natural persons and Overview, paragraph 1.41.)

SDLT: avoidance schemes retrospectively countered

True to his word, the Chancellor has carried out his 2012 Budget threat to counter, retrospectively, any new SDLT avoidance schemes (see Legal update, 2012 Budget: key business tax announcements: SDLT: possible retrospective anti-avoidance legislation). Section 45 of the Finance Act 2003, which deals with the transfer of rights relief (see Practice note, SDLT and contracts for the transfer of land: Transfers of rights: sub-sales, assignments and other transactions), will be amended, by the Finance Act 2013, so that the original contract (A/B contract) will not be disregarded if all of the following apply:

The secondary contract (B/C contract) is substantially performed but not completed at the same time as the substantial performance or completion of the A/B contract.
The purchaser under the A/B contract (or a connected person) is in possession of the land after that date.
The main purpose, or one of the main purposes, of the transfer of rights is the obtaining of a tax advantage by the purchaser under the A/B contract.

The amendments counter schemes under which B contracts to purchase a property and contracts with C (a trust or company formed by B) to sell that property to C for an amount falling below the nil rate SDLT threshold. C pays that sum at the same time that the A/B contract is substantially performed, but completion of the B/C contract takes place at some distant time in the future. The taxpayer's position is that the A/B contract is disregarded because the A/B and B/C contracts are substantially performed at the same time and that the amount paid under the B/C contract falls within the nil rate band. Presumably, the future sale to C is aimed at countering any argument that section 75A of the Finance Act 2003 (see Practice note, Stamp duty land tax: Scheme transactions: an anti-avoidance measure) applies. HMRC advertise these proposals as putting the position beyond doubt, implying that HMRC does not accept that the schemes work under the current section 45.

The amended section 45 will apply to transfers of rights entered into on or after 21 March 2012, but before the date of Royal Assent to the Finance Bill 2013 (the date from which the new transfer of rights relief will take effect, see Tax legislation tracker: property, energy and environment: SDLT: sub-sale relief anti-avoidance).

In relation to affected transactions completed before 20 March 2013, a land transaction return (or an amended return) must be filed by 30 September 2013. Provided that this is done, no penalty will arise although interest runs from 30 days after the date of completion. For transactions completed after 20 March 2013, the normal filing date will apply (that is, within 30 days of the effective date).

(See Overview, paragraph 1.43, HMRC: Stamp duty land tax avoidance: retrospective changes to section 45 of the Finance Act 2003 and TIIN: Stamp duty land tax avoidance.)

SDLT: changes to relief from the 15% rate

As previously announced, the Finance Bill 2013 will include a number of reliefs which reduce the SDLT rate from 15% to 7% on acquisitions of high value residential property by non-natural persons. The reliefs will, broadly, match those where there is relief against the annual tax on enveloped dwellings (ATED). However, these SDLT reliefs will apply only if the property continues to satisfy the qualifying conditions throughout the following three years. Otherwise, clawback provisions will apply and additional SDLT will become payable.

For more information on the previous announcement, see Legal update, New reliefs from the 15% rate of SDLT: draft Finance Bill 2013.

For more on the ATED (formerly known as the annual residential property tax, ARPT), see Legal updates, Annual residential property tax (ARPT): draft Finance Bill 2013 amendments and Annual residential property tax (ARPT): draft Finance Bill 2013 amendments.

(See Overview, paragraph 1.40)

SDLT: simplification of rules for leases

As announced in the 2012 Budget, legislation will be included in the Finance Bill 2013 to simplify the reporting requirements that apply when a lease continues after the expiry of its fixed term and where an agreement for lease is substantially performed before the actual lease is granted. The rules on abnormal rent increases will also be abolished. The measures will have effect from the date of Royal Assent to the Finance Bill 2013.

Following consultation, the legislation has been revised to provide clarification of how the provisions apply in certain circumstances. We expect the detail of those revisions only to be available when the draft Finance Bill 2013 is published on 28 March 2013.

For background, see Legal update, Simplification of the SDLT treatment of leases: draft Finance Bill 2013.

(See Overview, paragraph 1.44.)

SDLT: transfer of rights changes

The government has announced that the draft Finance Bill 2013 measures re-writing the transfer of rights relief in section 45 of the Finance Act 2003 (see Legal update, SDLT transfer of rights: draft Finance Bill 2013), which were not a model of clear drafting, have been revised to improve their clarity and structure as well as addressing certain technical deficiencies.

(See Overview, paragraph 1.42.)

For all Budget developments relevant to property, see Legal update, 2013 Budget: property implications.

For all Budget developments relevant to construction, see Legal update, 2013 Budget: construction industry implications.

VAT

Fuel scale charges

The Finance Bill 2013 will contain provisions amending the process by which the charges for private use of business fuel are revalorised annually. At present, an order must be made in accordance with the provisions of section 57(4) and (4A) of VATA 1994. For the charges taking effect from 1 May 2013, an order was made on 19 March 2013 (SI 2013/659).

The change in the legislation is intended to simplify the annual revalorisation process and take it outside the Budget. It will give HM Treasury the power to amend the way in which the revalorisation is done and the definition of road fuel, after a parliamentary debate. This will not affect the way the legislation operates.

(See Overview, paragraphs 1.55 and 1.56.)

Place of supply rules for telecommunications services and Mini One Stop Shop (MOSS)

Legislation will be introduced in Finance Bill 2014 to subject intra-EU business to consumer supplies of telecommunications, broadcasting and e-services to VAT in the member state in which the consumer is located. These services are currently subject to VAT in the member state in which the business is established. The changes will take effect from 1 January 2015 and implement already agreed EU legislation into UK legislation, ensuring that these services are taxed in the member state of consumption.

To save the need for businesses affected by these changes to register for VAT in other member states, a Mini One Stop Shop will also be introduced from 1 January 2015. This is an IT system that will give businesses the option of registering for VAT only in the UK and accounting for VAT due in other member states using a single return.

For background, see Practice note, Cross-border transactions and VAT: place of supply of services, refunds and EC sales lists: One-stop shop .

(See HMRC Q & A Guidance: Changes to the VAT place of supply rules and the introduction of the Mini One Stop Shop (MOSS) and Overview, paragraph 2.37.)

Refunds by manufacturers

The Finance Bill 2014 will include legislation enabling secondary legislation to permit manufacturers to reduce their VAT payments to take account of refunds that they make directly to final customers (for example, due to goods being faulty or damaged). No further details are available at present, as the government intends to consult on this measure to gain a better understanding of industry practices to be reflected the design of the legislation.

(See Overview, paragraph 2.38.)

Registration and deregistration thresholds increased

A Treasury order increases the VAT registration limit for both taxable supplies and for acquisitions from other member states from £77,000 to £79,000 with effect from 1 April 2013.

The order increases the VAT deregistration limit:

To £79,000 for acquisitions from other member states.
To £77,000 for taxable supplies within the UK.

The revised deregistration limits also take effect from 1 April 2013.

For general information about VAT registration and deregistration, see Practice note, Value added tax: Taxable persons and VAT registration. For information about intra-Community acquisitions, see Practice note, Cross-border transactions and VAT: UK inbound supply of goods.

(See The Value Added Tax (Increase of Registration Limits) Order 2013 (SI 2013/660) and Overview, B28 of Annex B – Rates and Allowances at page 188.)

Withdrawal of exemption for business supplies of research between eligible bodies

The consultation on the withdrawal of the VAT exemption for business research supplied by one eligible body to another closed on 14 March 2013. Subject to the responses, the government plans to introduce secondary legislation and proceed with the withdrawal of the exemption on 1 August 2013. The government is considering the possibility of transitional reliefs.

For information on the consultation, see Legal update, Consultation on withdrawal of VAT exemption for research supplies.

(See Overview, paragraph 1.58.)

Zero-rating of exports from the UK

The government has announced that it will consult on secondary legislation on VAT zero-rating of certain supplies of goods for export outside the EU. These changes will treat sales to businesses who are VAT registered in the UK but have no business establishment here as zero-rated where they arrange for the export of the goods to a non-EU destination. Current UK law applies VAT to such transactions and is not compatible with EU law.

Following consultation, a statutory instrument will be laid in late summer or early autumn. A minor housekeeping change will also be made to UK law on zero-rating of goods dispatched to other EU Member States to amend an outdated reference to excise law.

For information on the current VAT treatment of UK outbound supply of goods, see Practice note, Cross-border transactions and VAT: an introduction: UK outbound supply of goods is generally zero-rated.

(See Overview, paragraph 2.36.)

Measures unchanged following consultation

The Budget also confirmed that the Finance Bill 2013 is to contain the following measures on which the government has previously consulted, which consultations have led to no (or only "small, technical") amendments to the draft legislation previously published. The Finance Bill 2013 will be published on 28 March 2013.

(See Overview, paragraph 1.69.)

Other announcements

For all HMRC and HM Treasury Budget materials, see HMRC: Budget - 20 March 2013 and HM Treasury, Budget 2013.

2013 Budget: key business tax announcements | Practical Law