2009 Pre-Budget Report: key business tax announcements

Our summary of the key business tax announcements in the 2009 Pre-Budget Report.

PLC Tax, PLC Share Schemes & Incentives, PLC Pensions and PLC Private Client

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There were relatively few surprises in this year's Pre-Budget Report, although employers and employees will wince at the additional 0 ...show full speedread

There were relatively few surprises in this year's Pre-Budget Report, although employers and employees will wince at the additional 0.5% rises in NICs from April 2011 (in addition to the pre-announced 0.5% rises). The levy on bank and building society bonuses was well-trailed in the media. HMRC expect to raise £0.5 billion from that measure and a total of £5 billion from anti-avoidance measures.

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Contents

Anti-avoidance

Capital allowances: amendments to proposed anti-avoidance legislation

Following its 21 July 2009 announcement (as to which, see Legal update, Capital allowances: anti-avoidance measure announced (www.practicallaw.com/0-386-6942)), the government has announced three new changes to the anti-avoidance legislation that will be introduced in the Finance Bill 2010. The anti-avoidance legislation is being introduced to prevent tax avoidance through the transfer of an entitlement to benefit from capital allowances (www.practicallaw.com/4-107-5846) on plant and machinery used for the purpose of a trade where the tax written down value (www.practicallaw.com/5-107-7374) of the plant or machinery exceeds its balance sheet value as HMRC has became aware of a number of transactions in which groups have acquired companies with a large pool of unclaimed capital allowances, with a view to access those allowances.

The provisions will apply to transfers involving the sale of companies and to transfers involving consortia and partnerships, but they will only apply where the transfers are tax-motivated, that is, an unallowable purpose test applies. The majority of the legislation, which was announced on 21 July 2009 (see Legal update, Capital allowances anti-avoidance: what the proposed legislation is targeting (www.practicallaw.com/5-386-8458)), will have effect for transactions taking place on or after that date.

The three changes to the 21 July announcement, which will have effect only for transactions on or after 9 December 2009, are aimed at:

  • Ensuring that sales by non-corporate shareholders come within the scope of the rules.

  • Preventing artificial reductions to the tax written down value of equipment.

  • Ensuring the legislation also applies to postponed allowances for expenditure on ships.

(See Technical Note on Capital allowance buying: anti-avoidance, 2009 Pre-Budget Report - PBRN 12 - Capital Allowances - Anti Avoidance, 2009 Pre-Budget Report - PN 03 Capital Allowances Transfers and HM Revenue & Customs: Main PBR announcements affecting HMRC customers Compliance and Enforcement: Anti-avoidance: Capital Allowances - Anti Avoidance.)

Code of Practice on Taxation for Banks

In a consultation response document, HMRC has reissued (in slightly amended form) its Code of Practice on Taxation for Banks for adoption by banks (including organisations providing banking services) with effect from 9 December 2009 (for background, see Legal update, Code of Practice on taxation for banks: consultation document published (www.practicallaw.com/6-386-3257)). HMRC maintains that the Code is "necessary" but accepts that it should be "voluntary". It has clarified its view of the status of the Code in response to concerns expressed by taxpayers and their advisers during the consultation that the Code was purporting to legislate and impose legally binding obligations. HMRC accepts the Code is not law but instead a code for corporate behaviour in relation to governance, tax planning and the relationship between banks and HMRC. It acknowledges that the determination of the correct tax treatment for a transaction is ultimately a matter for judicial judgment.

Banks will, no doubt, argue that there remain areas of uncertainty in relation to what HMRC terms transactions that are "contrary to the intentions of Parliament" and "too good to be true" but it seems that the key point is that, in areas of reasonable doubt, there should be a dialogue (although in this respect HMRC recognises it cannot require a dialogue and has modified section 4.2 of the draft Code accordingly). It will be fascinating to see how banks respond to the Code in terms of adoption and implementation of its principles, in particular whether a bank that is subject to the Code will desist from proceeding with a transaction that is contrary to the intentions of Parliament. It will also be very interesting to see how HMRC will respond if the Code is not followed and what, if any, impact the Code will have on the courts in deciding cases given the Code's focus on tax planning in accordance with the intentions of Parliament

Among the other important clarifications given by HMRC are the following:

  • Smaller banks (that is to say, those not managed by a Large Business Service) should adopt only section 1 of the Code (it is not clear though whether section 1 is merely a summary of the more detailed sections 2 to 4).

  • HMRC expects that reports to a professional body for breach of the Code would depend on "exceptional circumstances" such as dishonesty and that taking a commercial decision which HMRC "did not like" would not found a report.

  • HMRC is mindful of commercial pressures in transaction timescales and confirms it will seek to respond within the bank's timescale "as far as possible" if the bank approaches HMRC on a transaction.

(See HMRC: Code of Practice on Taxation for Banks and A Code of practice on taxation for banks supplementary guidance note.)

Disclosure of tax avoidance schemes (DOTAS): consultation document on extension of scheme

The government has published a consultation document seeking views on the implementation of measures intended to strengthen and enhance the disclosure of tax avoidance schemes (DOTAS) regime.

The DOTAS regime is a disclosure regime which requires promoters, and in some cases, users of certain tax planning arrangements to disclose details of the arrangements to HMRC. For further detail, see Practice note, Direct tax disclosure regime (www.practicallaw.com/1-107-4933).

The consultation document proposes five measures. These comprise:

  • A change to the trigger point for disclosure of marketed schemes. This is designed to ensure earlier disclosure of schemes.

  • An information power to require persons who introduce scheme promoters to clients to identify who the promoter is.

  • Enhanced penalties for failure to comply with a disclosure obligation.

  • A requirement for a promoter to provide HMRC periodically with a list of clients to whom they have issued scheme reference numbers (SRNs).

  • Revised and extended types of discloseable arrangements, known as "hallmarks". HMRC intends to revise elements of the existing eight hallmarks, including extending the loss hallmark to include corporate loss buying and to introduce three additional hallmarks.

Proposed new hallmarks

HMRC proposes the following three new hallmarks.

  • Employment schemes.

    This hallmark would target schemes that seek to avoid tax in relation to employment income. It contains a generic description of an employment scheme and a list of excepted arrangements.

  • Income into capital schemes.

    This hallmark would target schemes that seek to gain a tax advantage by substituting a capital receipt for income. It contains a generic description of what is meant by "income into capital" and a list of excepted arrangements.

  • Offshoring schemes.

    This hallmark would target schemes where the provision of the tax advantage relies upon a transaction with one of the territories recognised by the G20, currently by way of the OECD list, and thereafter by the UK, as a non-compliant jurisdiction.

For further detail in relation to the employment schemes and income into capital hallmarks, see PLC Share Schemes & Incentives, Legal update, 2009 Pre-Budget Report: consultation on disclosure of tax avoidance schemes: incentives aspects (www.practicallaw.com/2-500-9792).

The consultation document includes draft legislation. An impact assessment has also been published. Responses to the consultation document should be made by 19 February 2010.

The SDLT disclosure regime will also be extended to high value residential property, see Disclosure of SDLT avoidance schemes: extension to high value residential property.

(See 2009 Pre-Budget Report: Disclosure of tax avoidance schemes: Consultation document and 2009 Pre-Budget Report: Impact assessment of strengthening and revising the disclosure of tax avoidance schemes regime.)

Finance leasing anti-avoidance measures

The government has announced measures to counter two types of tax avoidance scheme involving the leasing of plant or machinery and published draft legislation for comment, which is to be included in the Finance Bill 2010.

Creating tax loss where there is a commercial profit

The first scheme involves lessor companies generating tax losses using arrangements intended to result in tax relief in excess of the value of the taxable income. This is done either by creating a company that is taxed on very little income from leasing an asset (because it sells the right to receive rental income while outside the scope of corporation tax) but is able to claim capital allowances on the full cost of the asset. Alternatively, a company may obtain a rebate of rentals to generate a tax loss where there is a commercial profit.

This scheme will be tackled by draft legislation that aims to ensure that the amount on which capital allowances will be available reflects sale of the income. In addition, the amount of a rental rebate that may be deducted in computing profits will be restricted to the value of the taxable income.

Timing advantage

The second scheme involves companies and other businesses turning a tax-timing advantage into a permanent advantage by ceasing to be within the charge to tax following the sale of the right to income from a lease of plant or machinery.

The draft legislation aims to ensure that where a leasing business ceases to be within the charge to tax, an appropriate disposal value is brought into account.

The measures have effect:

  • Where expenditure on plant or machinery is incurred, or a rebate of rentals becomes payable, on or after 9 December 2009.

  • Where the business ceases to be within the charge to tax on or after 9 December 2009.

For general information on equipment leasing, see Practice note, Equipment leasing: tax (www.practicallaw.com/7-107-3737).

(See 2009 Pre-Budget Report - PBRN 13 - Plant and machinery leasing: Anti-avoidance and HMRC Technical Note: Plant and machinery leasing: anti-avoidance (includes draft legislation and explanatory note).)

Losses from overhedging and underhedging

The Finance Bill 2010 is to include provisions intended to ensure that tax relief is given for losses from certain hedging (www.practicallaw.com/8-107-6684) arrangements only to the extent that a real economic loss is suffered by the claimant's group as a whole.

On 10 August 2009, HMRC published a technical note on "overhedging" and "underhedging". HMRC's concern is that groups of companies are taking advantage of the provisions that operate to make hedging operations tax neutral to secure the benefit of low interest rates on foreign currency loans, while letting HM Treasury bear the tax risk from volatility of exchange rates. The technical note demonstrates how, by splitting the elements of the hedging transaction across different companies and borrowing more than the cost of an asset, a group can ensure that, post-tax, a hedging operation is economically neutral, regardless of which of the currencies appreciates in value against the other. The technical note was accompanied by draft legislation under which tax relief would be given only to the extent that a net pre-tax economic loss resulted from the hedging operation. (For further details, see Legal update, HMRC consultation on hedging (www.practicallaw.com/9-422-1164).)

As part of the 2009 Pre-Budget Report, HMRC published revised draft legislation. Under this, losses from overhedging and underhedging arrangements are to be ringfenced to the extent that they exceed the real economic loss to the group and the excess will only be available to set against profits from the same arrangement. The draft legislation provides that the loss of the entire group from overhedging and underhedging arrangements is divided by the group's real economic loss and that proportion of each company's total loss is treated as its excess loss. A company is then allowed tax relief for the proportion of its excess losses found by dividing its excess profits (calculated in a similar way to its excess losses) from the arrangements (to the extent that these have not previously been set off against excess losses) by its excess losses (subject to a maximum of 100% of the excess losses). Unused excess profits or excess losses may be carried forward to the next accounting period.

The provisions are to have effect for accounting periods beginning on or after 1 April 2010, with accounting periods straddling that date treated as two separate periods for these purposes.

(See 2009 Pre-Budget Report - PBRN 08 - Risk-transfer schemes and Risk transfer schemes: draft legislation and explanatory note.)

Restriction of exemption for index-linked gilts

The Finance Bill 2010 is to include provisions restricting the availability of exemption from tax on inflation-linked returns from index-linked gilts (www.practicallaw.com/7-107-6646) (ILGs) to the extent that a company or group enters into arrangements to ensure that it is not economically exposed to that return. These provisions are to have effect from 9 December 2009.

In general, companies are taxed (or obtain relief) in relation to gilts under the loan relationship (www.practicallaw.com/2-107-6781) rules, broadly, in accordance with their accounts (see Practice note, Loan relationships (www.practicallaw.com/9-219-4959)). ILGs differ from "normal" gilts in that both interest and principal payments under them are adjusted periodically in line with movements in the Retail Prices Index (www.practicallaw.com/5-377-4351) (RPI), the aim being to make them inflation proof. However, this aim would, absent particular provisions, be undermined as the principal movements, reflected in the holder's accounts, could give rise to tax charges under the loan relationship rules. Therefore, sections 399 and 400 of the Corporation Tax Act 2009 provide that accounting adjustments for RPI-related movements are exempt from corporation tax.

This exemption provides scope for tax avoidance if, for example, the holder of an ILG enters into a total return swap (www.practicallaw.com/1-217-7954) (TRS) in relation to the ILG. The TRS eliminates all risk and reward in respect of the ILG. However, while the holder is exempt from tax on RPI-related increases in the accounting value of the ILG, it is entitled to relief for the equivalent decreases in the accounting value of the TRS under the derivatives (www.practicallaw.com/0-107-6094) rules (as to which, see Practice note, Derivatives: tax (www.practicallaw.com/6-204-7955)). The holder therefore obtains tax relief when it has suffered no economic loss.

As part of the 2009 Pre-Budget Report, HMRC published draft legislation intended to counter schemes seeking to exploit this mismatch. The draft legislation aims to deny exemption from corporation tax on RPI-related increases in the accounting value of ILGs in cases where the holder (or its group) is not economically exposed to RPI-related fluctuations in capital return on the ILGs because of the existence of a linked hedging (www.practicallaw.com/8-107-6684) arrangement. This denial is to be proportionate to the extent to which RPI-related increases in the capital return on the ILGs are hedged.

(See 2009 Pre-Budget Report - PBRN 14 - Index-linked gilt-edged securities and Index-linked gilt-edged securities: technical note, draft legislation and explanatory note.)

Simplifying unallowable purpose tests

HMRC has published a response document as part of its consultation on simplifying unallowable purpose tests.

On 31 July 2009, HMRC published a discussion document detailing proposals for simplifying and standardising the "unallowable purpose" tests that are scattered, in various forms, throughout UK tax legislation. The discussion document set out a framework for use in formulating future purpose tests and draft guidance on such tests (existing and future). (For further details, see Legal update, New framework and guidance on "unallowable purpose" tests: discussion document (www.practicallaw.com/6-386-7260).)

As part of the 2009 Pre-Budget Report, HMRC published a documents summarising responses to the discussion document. One of the key responses was that purpose tests should not be used too liberally as a substitute for properly drafted specific legislation. With this in mind, HMRC intends to redraft the framework to emphasise that policy makers should fully consider both the advantages and disadvantages of introducing new purpose tests and to recommend that such new tests should not be adopted if the benefits cannot be identified or are outweighed by the cost to taxpayers. However, HMRC does not intend to accommodate requests for a clearance system.

HMRC will redraft the framework and guidance to take into account the responses and to increase the practical use of the guidance in providing certainty for taxpayers. HMRC intends to expose the revised guidance by spring 2010, to share the redrafted framework and guidance with "key stakeholders" to decide whether to adopt them and, if HMRC decides to do so, formally to adopt the revised framework and guidance from summer 2010.

(See Simplifying unallowable purpose tests: discussion response document.)

Stamp duty and SDRT on transfers of shares to depositary receipt systems and clearance services

HMRC will introduce anti-avoidance measures to prevent the avoidance of stamp duty or SDRT by issuing shares into an EU clearance service or depositary receipt system and then transferring the shares into a non-EU service or system.

Following the decision of the ECJ in Vidacos, HMRC recognised that the 1.5% charge to stamp duty or SDRT on an issue of shares into a clearance service is contrary to EU law. Therefore, on 1 October 2009, HMRC announced that it was disapplying this charge with immediate effect. As part of the 2009 Pre-Budget Report, HMRC appears to confirm that the disapplication extends to issues of shares into EU depositary receipt systems as well as into EU clearance services. (For details of Vidacos and HMRC's announcement, see Legal update, SDRT charge on entry into clearance system contrary to EU law (www.practicallaw.com/5-500-3543).)

In its original announcement, HMRC recognised that the disapplication could lead to avoidance. To avoid double taxation, transfers between clearance services and depositary receipt systems are exempt from stamp duty and SDRT. However, given the disapplication, shares could be issued into a clearance service and then transferred to another clearance service or a depositary receipt system without stamp duty or SDRT being charged at any stage. Therefore, HMRC announced that the government would legislate to ensure that where securities enter a clearance service or a depositary receipt system without incurring a stamp duty or SDRT charge, subsequent transfers of those securities into a clearance service or a depositary receipt system will be subject to stamp duty or SDRT.

As part of the 2009 Pre-Budget Report, HMRC confirmed that anti-avoidance provisions, having effect from 1 October 2009, will be included in the Finance Bill 2010. This legislation will apply where companies and depositary receipt issuers arrange a scheme under which new shares are issued to an EU clearance service or depositary receipt system without the payment of the 1.5% charge and the shares are subsequently transferred to a depositary receipt system or clearance service outside the EU. In this case, the exemptions on the onward transfer will be removed to ensure that a 1.5% charge is payable on that transfer. HMRC notes that this provision is narrower in scope than suggested in its original announcement. It is not clear whether this measure will apply only to shares, as suggested as part of the 2009 Pre-Budget Report, or will extend to all securities, as suggested in HMRC's original announcement.

(See 2009 Pre-Budget Report - PBRN 17 - Stamp duty and stamp duty reserve tax anti- avoidance: transfers of shares to depositary receipt systems and clearance services.)

Transactions in securities legislation: HMRC publishes its consultation response document

HMRC has published a response to its consultation document in respect of a proposed simplification of the transactions in securities (TiS) rules (see Legal update, HMRC consultation on simplification of transaction in securities rules ends on 30 October 2009 (www.practicallaw.com/1-500-3724)). Generally the consultation document was well received by respondents. The main points emerging include:

  • HMRC will consider repealing the TiS legislation for corporation tax purposes.

  • Some concerns were expressed with regard to the adoption of the section 414 ICTA 1988 close company definition as the definition of "relevant company" in section 691 of the Income Tax Act 2007 in the context of limited partnerships and MBOs. We are considering this issue further. One of the responses quoted under this heading (Q10) indicated that to avoid a TiS counteraction notice, a vendor of shares would be forced to find a purchaser who paid all the consideration up front rather than in the form of deferred consideration. This raises a number of interesting issues, including whether such a transaction would fail the TiS purpose test in section 685 of ITA 2007. For example, if the purchaser agreed to pay an up-front consideration but resiled from that position shortly before the sale was due to sign and insisted on consideration being deferred, it could be said that such a change of position by the purchaser should not cause the vendor to fail the purpose test if the purpose test was otherwise satisfied.

  • HMRC has ruled out a de minimis level of shareholding below which the TiS legislation would not be applied.

  • HMRC is considering a "white list" of acceptable TiS.

(See Simplifying transactions in securities legislation, consultation response document.)

 

Business

Foreign profits

The government will publish a consultation document on the proposed shape of the new controlled foreign company (CFC) (www.practicallaw.com/7-107-6340) regime early in the new year. For background, see Practice note, Foreign profits of companies: tax reform: Future reform of the CFC rules (www.practicallaw.com/8-369-8105). The 2009 Pre-Budget Report also announces that the government intends to open discussions with business about possible changes to the taxation of overseas permanent establishments (www.practicallaw.com/6-107-6996).

(See Paragraphs 4.59 and 4.60, 2009 Pre-Budget Report.)

Film tax relief: correction of legislation restricting surrenderable tax credit

The government has announced that legislation will be introduced in the Finance Bill 2010 to correct an unintended anomaly affecting the amount of film tax relief that may be claimed where films are produced over more than one accounting period.

Film tax relief may be claimed by film production companies for films that satisfy the cultural test for being a British film. Where a film production company satisfies the relevant provisions it may claim an enhanced tax deduction or surrender a loss in return for a payable tax credit. For further detail, see Practice note, Film tax relief (www.practicallaw.com/7-385-1193).

Where a company claims tax credit over two or more accounting periods, the existing legislation has restricted the losses that may be surrendered for payment in respect of any second or subsequent accounting period in an unintended way where there is an increase in UK spend in the second or later periods. HMRC has therefore published corrective draft legislation and an explanatory note. Comments are invited before 12 February 2010.

The change will have effect for accounting periods ending on or after 9 December 2009 and will be treated for those periods as having always had effect.

(See 2009 Pre-Budget Report - PBRN07 - Film tax relief and HMRC: Film tax relief: unused losses - draft legislation and explanatory note.)

Intellectual property

The government will introduce a lower rate of corporation tax (10%) for income from patents (referred to as a "Patents Box") from April 2013. The legislation will be in the Finance Bill 2011 and will apply to income from UK patents granted after the legislation is passed. The government intends to consult on the detail of the legislation.

(See Paragraph 4.40, 2009 Pre-Budget Report and the Chancellor's speech. )

Research and development tax relief: abolition of IP ownership condition for SMEs

The government has announced that legislation will be included in the Finance Bill 2010 to abolish one of the conditions that a small or medium-sized company must satisfy in order to claim the enhanced tax relief for research and development expenditure.

Companies that are small or medium enterprises (SMEs) may claim an enhanced tax relief at the rate of 175% for qualifying expenditure on research and development. For further detail see Practice note, Intangible property: tax: Research and development (www.practicallaw.com/1-107-5008) and Practice note, R&D tax reliefs: practical aspects: Ownership (www.practicallaw.com/9-385-2182).

One of the conditions that a SME company must satisfy in order to claim this relief is that the company owns any intellectual property (IP) deriving from the R&D to which the expenditure is attributable. The government has announced that this condition will be abolished.

The government has also published draft legislation and an explanatory note. Comments are invited before 12 February 2010.

The change will have effect for accounting periods ending on or after 9 December 2009.

(See 2009 Pre-Budget Report - PBRN06 - Research and development tax relief and HMRC: Research and Development (R&D) tax relief for SMEs: Intellectual property condition - draft legislation and explanatory note.)

Islamic finance

The government intends to introduce relief from tax on capital gains for alternative property refinance transactions and will also publish guidance on the VAT treatment of alternative finance investment bonds. For background, see Practice note, Sharia-compliant transactions: tax (www.practicallaw.com/4-201-9755) and Practice note, Sharia-compliant transactions: VAT (www.practicallaw.com/0-376-4477).

(See Paragraph 3.51, 2009 Pre-Budget Report.)

Sale of lessor companies: consortium arrangements

Legislation will be introduced in the Finance Bill 2010 to amend Schedule 10 to the Finance Act 2006 (Schedule 10) to ensure that consortium members are taxed (or obtain relief) as intended when their interests change in a lessor company that the consortium owns indirectly. This legislation is intended to have effect from 9 December 2009.

For general background information on Schedule 10, see Sale of lessor companies: option to elect for alternative treatment.

Schedule 10 applies when a lessor is owned by a consortium and a member of that consortium changes its interest in the lessor. In such a situation, Schedule 10 applies to ensure that proportionate deemed income (and a proportionate matching expense) is deemed to arise in the lessor. This treatment extends to a lessor that is owned by a company that is, in turn, owned by a consortium (the holding company). However, Schedule 10 is not triggered if another company (the intermediate company) is inserted between the holding company and the lessor. The insertion of the intermediate company does not trigger Schedule 10 either as this does not alter the economic ownership of the lessor.

Therefore, if a consortium wished to avoid a tax charge arising under Schedule 10 on a change in interests, it could insert an intermediate company and then carry out the change. Further, a tax charge under Schedule 10 on a sale of a wholly-owned lessor could be reduced by a holding company being inserted between the seller and the lessor (triggering no tax charge), the seller and the buyer forming a consortium (with only a partial tax charge under Schedule 10 as the seller retains an interest in the lessor through the holding company), an intermediate company being inserted between the holding company and the lessor (with no tax charge) and the seller then transferring its remaining interest in the holding company to the buyer.

As part of the 2009 Pre-Budget Report, HMRC has published draft legislation under which a direct or indirect 75% subsidiary of a company owned by a consortium is itself treated as owned by the consortium for these purposes.

(See 2009 re-Budget Report - PBRN 11 - Sale of lessor companies: consortium arrangements and Sale of lessor companies - consortium arrangements: draft legislation and explanatory note.)

Sale of lessor companies: option to elect for alternative treatment

Legislation will be introduced in the Finance Bill 2010 to amend Schedule 10 to the Finance Act 2006 (Schedule 10) to allow a lessor company to elect for an alternative treatment when it is sold. This legislation is intended to have effect from 9 December 2009.

Schedule 10 seeks to prevent profitable groups from extracting (for example, by way of group relief (www.practicallaw.com/5-107-6671)) the benefit of capital allowances (www.practicallaw.com/4-107-5846) on plant and machinery owned by a group company that carries on leasing activities and then selling that lessor company to loss-making groups when the lessor begins to make taxable profits as capital allowances amortise away. (In relation to capital allowances for leased plant and machinery generally, see Practice note, Equipment leasing: tax (www.practicallaw.com/7-107-3737).)

Schedule 10 operates by treating the lessor as receiving on the date when it is sold an amount of income broadly equal to the difference between the balance sheet and tax written down values of the plant or machinery. An accounting period ends on that date. The amount of the deemed income is then allowed as a "matching expense", which is treated as incurred on the following day. This matching expense cannot be carried back (paragraph 5, Schedule 10). In this way, capital allowances are effectively recaptured from the selling group and are transferred to the buying group. This blocks the effectiveness of sale of lessor schemes.

As part of the 2009 Pre-Budget Report, HMRC noted that some groups have found it difficult to realise the full benefit of the matching relief in the current financial climate. This has had an adverse effect on normal commercial transactions as buyers are unwilling to compensate sellers for the tax charge on the deemed income as the buyer cannot realise the tax value of the matching expense. To alleviate this, HMRC has published draft legislation under which a lessor may instead irrevocably elect (within two years of the sale) for its profits after the sale to be isolated for tax purposes rather than the lessor incurring an immediate charge. If the election is exercised, the losses that the lessor may set against its profits are heavily restricted. This includes the disallowance of expenditure incurred mainly (or solely) to obtain a tax advantage. This isolation allows tax to arise on the lessor's profits over time, compensating for the lack of an immediate charge.

(See 2009 Pre-Budget Report - PBRN 10 - Sale of lessor companies: alternative treatment and Sale of lessor companies - option to elect: draft legislation and explanatory note.)

Simplification of business tax

The government is progressing two business tax simplification reviews:

  • VAT partial exemption regime and option to tax.

  • A consultation document on simplifying chargeable gains legislation for groups will be published in early 2010.

(See Paragraph 4.57, 2009 Pre-Budget Report.)

Small companies' rate of corporation tax

The Chancellor announced that, to assist small companies, the increase in the small companies' rate of corporation tax will be deferred for a further year. The rate will, therefore, remain at 21% for 2010-11 and will increase to 22% for 2011-12 and subsequent years. (see page 23 of HM Treasury Pre-Budget Report 2009 Press Notice 01).

Taxation of financial instruments

The taxation of financial instruments such as loans, securities and derivatives, is based on the profits or losses shown in the company's statutory accounts, which are prepared in accordance with either International Accounting Standard (IAS) (www.practicallaw.com/6-107-6722) 39 or UK Financial Reporting Standards (FRS) (www.practicallaw.com/1-107-5758) 26.

In order to ensure that any changes to the tax legislation that may become necessary as a result of changes to the way in which financial instruments are classified, measured or, recognised on the balance sheet, or how hedging arrangements are accounted for or impairment losses quantified (changes in all these areas are currently being considered by the International Accounting Standards Board), legislation is to be introduced in the Finance Bill 2010 to insert a power for the tax legislation in relation to financial instruments to be amended by secondary legislation.

It is proposed that the secondary legislation will have effect from 1 January in the year in which it is made but can also be applied retrospectively if companies opt to apply accounting changes retrospectively.

For more information on the taxation of financial instruments, see practice notes on Loan relationships (www.practicallaw.com/9-219-4959), Repos: tax (www.practicallaw.com/2-202-0991) and Derivatives: tax (www.practicallaw.com/6-204-7955).

(See PBRN 5 Tax and Accountancy: Changes to Accounting Standards on Financial Instruments.)

Time to pay: new arrangements for sums of £1 million or more

HMRC's Business Payment Support Service (BPSS) helps viable businesses facing temporary financial difficulties to spread tax payments over an agreed timetable. In the 2009 Pre-Budget Report, HMRC announced that:

  • The time to pay facility will continue for as long as it is needed.

  • HMRC will require businesses seeking time to pay arrangements worth £1 million or more to provide an Independent Business Review (IBR) in support of their request. It is expected that the new requirement will be implemented from April 2010 and HMRC has stated that it will informally consult on how this will work prior to implementation. HMRC believes that IBRs will be relevant to around one in every thousand businesses seeking time to pay - a very small minority of substantial businesses with substantial debts.

For information on time to pay arrangements, see Practice note, Tax penalties: direct tax: Failure to pay tax (www.practicallaw.com/5-384-0186).

(See Pre-Budget Report 2009: HM Revenue & Customs: Compliance and Enforcement.)

Venture capital schemes

On 29 April 2009, HM Treasury and the European Commission (www.practicallaw.com/1-107-6244) confirmed that state aid (www.practicallaw.com/9-385-1413) approval had been granted in respect of the Enterprise Investment Scheme (www.practicallaw.com/9-107-6532) (EIS) and the Venture Capital Trust scheme (www.practicallaw.com/0-107-7480) (VCT). The approval was, however, conditional on certain amendments being made to the scheme rules, including:

  • Replacing the current rule that requires at least 50% of a company's qualifying activities to be in the UK with a requirement to have a permanent establishment in the UK.

  • Preventing "enterprises in difficulty" from being eligible for investment under the schemes.

  • VCTs will be required to hold at least 49% of their total funds in "equity".

  • Replacing the current requirement that VCTs must be listed in the UK with a requirement that their shares must be traded on an EU "Regulated Market".

(For further detail, see Legal update, EIS, VCTs and CVS obtain state aid approval (www.practicallaw.com/3-385-8931)).

HMRC has published draft legislation intended to implement these amendments. The draft legislation additionally includes a new EIS and VCT qualifying condition: the "small enterprise" requirement. The requirement replaces the current gross assets and number of employees requirements (as to which, see Practice note, Enterprise Investment Scheme: Conditions relating to the investee company (www.practicallaw.com/2-375-9154) and Practice note, Venture Capital Trusts: Conditions relating to the investee companies (www.practicallaw.com/8-375-8156)). A small enterprise is defined by reference to the definition contained in the Annex to Commission Recommendation 2003/361/EC of 6 May 2003. The intention is to ensure that relief is targeted at smaller, higher risk businesses. Comments on the draft legislation are requested by 1 February 2010.

HMRC has also published a technical note setting out its revised interpretation of the EIS qualifying condition that requires the relevant business activity to be carried on by the issuing company or a 90% subsidiary. HMRC will now regard that condition as not satisfied if the activity is carried on by the relevant company in partnership (or by a limited liability partnership of which the company is a member).

HMRC will not apply its revised interpretation to shares issued before 9 December 2009 if the EIS compliance certificate has been issued (or if the compliance certificate has not been issued but an advance assurance given provided that full disclosure about the partnership arrangement was made).

(See HMRC Technical note: Enterprise Investment Scheme (EIS) and Partnerships, Draft legislation and explanatory note: venture capital schemes and Impact assessment.)

Worldwide debt cap: draft legislation published following 9 November 2009 announcement

HMRC has published draft legislation covering the changes to the debt cap rules announced on 9 November 2009 (see Legal update, Worldwide debt cap: HMRC announces changes (www.practicallaw.com/2-500-7279)). We will review the draft legislation and report separately on any significant issues not already covered in our previous update. Any comments on the draft legislation are requested by 29 January 2010.

(See HMRC: Worldwide debt cap and 2009 Pre-Budget Report - PN04 - Relief for Interest: Amendments to "Worldwide Debt Cap" Legislation.)

 

Compliance

Consultation on tackling offshore tax evasion

HMRC has launched a consultation, Modernising Powers, Deterrents and Safeguards: Tackling Offshore Tax Evasion. Comments are invited on:

  • The best way to implement two new measures announced in PBR 2009:

    • Increased sanctions on offshore evasion - proposed introduction of a more robust penalty regime for offshore non-compliance (in line with that for deliberate domestic non-compliance, with penalties of 20% of unpaid tax for unprompted disclosure, 35% for prompted disclosure, 70% where no disclosure and 100% for non-disclosure and concealment). The safeguards in Schedule 24 to the Finance Act 2007 (including a reasonable excuse provision and right to appeal) would apply.

    • Requirement to notify HMRC of the creation of certain new offshore bank accounts - proposed compulsory notification to HMRC within 60 days of opening of all new accounts in high risk jurisdictions (those without adequate tax information exchange agreements with the UK) and in other jurisdictions where the account balance exceeds £25,000, subject to various exemptions and thresholds, with penalties for non-compliance (£100 fixed penalty, followed by a period of daily penalties and tax geared penalties). This notification requirement will not apply to remittance basis users.

  • Reforms to information requirements for non-resident trusts and other offshore financial structures - proposals to eliminate perceived weaknesses in current rules to prevent the use of offshore vehicles to avoid increased information requirements on offshore bank accounts. These new information requirements will not apply to remittance basis users (in line with the Chancellor's commitment not to introduce further changes after those in Finance Act 2008).

The consultation period runs from 9 December 2009 to 3 March 2010. HMRC has also published an Impact Assessment: Tackling Offshore Tax Evasion to be read alongside the consultation paper.

This consultation is the latest step in HMRC's concerted attack on offshore tax evasion and follows on from the 2007 Offshore Disclosure Facility (ODF), the New Disclosure Opportunity (NDO) (see PLC Tax Legal update, New disclosure opportunity for offshore accounts and assets: HMRC guidance and forms (www.practicallaw.com/8-422-3125)), the Liechtenstein Disclosure Facility (LDF) (see PLC Private Client Legal update, Liechtenstein disclosure facility: terms published (detailed update) (www.practicallaw.com/3-422-3948)) and HMRC's new information and investigation powers for general compliance (see PLC Tax Practice note, HMRC enquiry and investigation powers: overview (www.practicallaw.com/0-378-9393) and Legal update, HMRC allowed to issue unnamed taxpayer notices to 308 financial institutions: decision published (www.practicallaw.com/0-500-3300)).

(See 2009 Pre-Budget Report - Press Notice 3 - Protecting Tax Revenues, Modernising Powers, Deterrents and Safeguards: Tackling Offshore Tax Evasion and HMRC Impact Assessment: Tackling Offshore Tax Evasion.)

Working with tax agents: next steps

As part of its "Modernising Powers, Deterrents and Safeguards" review, HMRC issued a "high level" consultation paper in April 2009 on how it should best work with tax agents. The consultation closed on 7 August 2009 and HMRC has published a response document summarising the responses received.

HMRC has also published its "Next Stage" consultation paper, which aims to explore how HMRC interacts with tax agents to ensure that their clients' returns and claims are correct when submitted. The paper seeks views on the following matters in particular:

  • The procedure for dealing with tax agents who fail to take reasonable care. HMRC envisages a procedure along the following lines: engagement with the agent, disclosure to any professional body of which the agent is a member if engagement doesn't resolve the matter and civil sanctions.

  • The procedure for dealing with tax agents engaged in fraud or dishonest evasion (examples of this "deliberate wrongdoing" are given in the consultation document). HMRC envisages a procedure along the following lines: it will first consider criminal sanctions, if criminal sanctions are not considered to be appropriate, it will consider civil proceedings and "naming and shaming". This procedure would involve:

    • extending HMRC's existing powers of access to tax agent's working papers for all of the tax agent's clients where the tax agent has been engaged in deliberate wrongdoing (the consultation document recognises that appropriate safeguards would need to be put in place, including obtaining consent of an appropriate judicial authority);

    • creating an effective civil remedy (likely to be based on tax-geared penalties);

    • new powers to enable HMRC to publish the names of tax agents found to have engaged in deliberate wrongdoing.

  • Creating two new powers aimed at "high volume agents". The first power would enable HMRC to direct high volume agents to verify repayment claims in respect of all clients on a bulk basis. Failure to comply with the direction would enable HMRC to withhold repayment in all cases, ultimately, permanently. The second power would enable HMRC to recover overpayments jointly from the tax agent (but only to the extent of their fees) and the client.

Comments are required by 3 March 2010.

(See Response document: Modernising Powers, Deterrents and Safeguards: Working with tax agents, Consultation document: Modernising Powers, Deterrents and Safeguards: Working with tax agents - The Next Stage and Impact assessment: Working with tax agents: The Next Stage.)

Bulk and specialist information powers

HMRC has published a response document summarising responses to its consultation paper "Bulk and specialist information powers", published in July 2009, see Legal update, HMRC consultation on bulk and specialist information powers (www.practicallaw.com/6-386-6053). The response document also confirms that HMRC intends to publish draft legislation implementing new bulk and specialist information powers in a second consultation document (to be published "in due course").

(See Consultation response document: Bulk and specialist information powers.)

Interest harmonisation: corporation tax and petroleum revenue tax

The Finance Act 2009 created a harmonised interest regime for most taxes and duties, with the exception of corporation tax and petroleum revenue tax. (For background, see Practice note, Penalties, compliance and powers reforms: legislation tracker (www.practicallaw.com/7-385-1046)). HMRC has published draft legislation, which if enacted, will bring corporation tax (other than corporation tax paid under the quarterly instalments payment regime) and petroleum revenue tax into the harmonised interest regime. The corporation tax draft legislation includes special provisions to deal with repayment interest when losses and non-trading loan relationship deficits are carried back to earlier accounting periods.

Subject to the outcome of the consultation, the intention is to introduce the legislation in the Finance Bill 2010. However, the new regime will be phased in over a number of years.

Comments on the draft legislation are required by 3 March 2010.

(See Consultation document: Interest - Working towards a harmonised regime.)

Penalties for late filing and late payment of tax: extension to remaining taxes and duties

The Finance Act 2009 introduced a new penalty regime for late filing of tax returns and late payment of tax for income tax, corporation tax, PAYE (www.practicallaw.com/4-200-3405), NICs (www.practicallaw.com/8-201-8297), the construction industry scheme, Stamp duty land tax (SDLT) (www.practicallaw.com/2-107-7304), stamp duty reserve tax (www.practicallaw.com/9-107-7305), inheritance tax, pension schemes and petroleum revenue tax. At the 2009 Budget, the government announced its intention to introduce legislation in the Finance Bill 2010 to bring into the new regime the remaining taxes and duties administered by HMRC (namely, VAT (www.practicallaw.com/5-107-7468), climate change levy, aggregates levy, landfill tax, air passenger duty, excise duties, betting duties and insurance premium tax) (remaining taxes and duties). (For further background, see Practice note, Penalties, compliance and powers reforms: legislation tracker (www.practicallaw.com/7-385-1046)).

HMRC has published draft legislation (together with an explanatory note), which is intended to bring in the remaining taxes and duties into the new penalty regime. Two new penalty models are introduced to reflect the filing and payment periods that apply to those taxes and duties. Comments on the draft legislation are required by 3 March 2010.

The new penalty regime for the remaining taxes and duties will be phased in over a number of years and will be brought into effect by Treasury Order.

(SeeHMRC: Meeting the obligations to file returns and pay tax on time.)

Enforcement of judgments in litigation

HMRC has announced that it is to adopt a consistent approach in relation to collecting tax following a judgment in its favour even if the taxpayer is to appeal.

HMRC is required to repay overpaid tax if there is a judgment in favour of a taxpayer even if HMRC appeals. However, HMRC has not always collected underpaid tax before an appeal when there is a judgment in its favour. With effect for judgments (including tribunal decisions) in HMRC's favour on or after 1 April 2010, HMRC will adopt a consistent approach under which it will normally demand payment of underpaid tax in all such cases even if the taxpayer appeals.

(See HMRC: Compliance and enforcement: Tax administration and debt management: Enforcement of judgments in litigation.)

Recovery of overpaid tax

HMRC intends to make changes to the rules relating to repayment of stamp duty land tax or petroleum revenue tax where there is an overpayment because of error or mistake.

The new rules will be modelled on Schedule 52 to the Finance Act 2009, which applies to income tax, capital gains tax and corporation tax. HMRC states that the new rules will prevent alternative claims for repayment and will have a four-year time limit. There will be an as yet unspecified transitional period before the new rules have exclusive effect. HMRC states that it will shortly publish draft legislation effecting this change, which will be subject to consultation.

(See HMRC: Compliance and enforcement: Tax administration and debt management: Recovery of overpaid tax.)

Equitable liability

The Chancellor has confirmed that the "equitable liability" extra-statutory concession (www.practicallaw.com/8-107-5731) which allows HMRC not to pursue tax in certain circumstances, is to be introduced into statute. It had previously been announced that the concession was due to be withdrawn from 1 April 2010 (see Legal update, "Equitable liability" concession to be withdrawn (www.practicallaw.com/5-386-1683)).

In cases where, in the absence of a tax return HMRC has issued a determination and, outside the statutory time limits, the taxpayer produces information to establish that he should have been assessed to tax on a lower sum, HMRC will be permitted to collect only the tax that would have due had the tax return been submitted on time (together with interest and penalties).

(See 2009 Pre-Budget Report - PBRN 34 - Equitable Liability.)

Naming and shaming

HMRC expects the measure introduced by section 94 of the Finance Act 2009 permitting HMRC to publish the details of persistent tax defaulters to apply to tax periods starting on or after 1 April 2010. For background, see Practice note, Penalties, compliance and powers reforms: legislation tracker: Publishing details of deliberate tax defaulters (www.practicallaw.com/7-385-1046).

(See Paragraph 5.13, Protecting Tax Revenues 2009.)

 

Employment and pensions

Payroll tax on financial sector companies which pay bonuses before 6 April 2010

In the 2009 Pre-Budget Report, the Chancellor announced a new one-off Bank Payroll Tax (BPT) payable by banks and other financial services firms. The BPT will be chargeable at 50% on bonuses (in any form) exceeding £25,000 per employee awarded between 12.30pm on 9 December 2009 and 5 April 2010, although certain payments (including existing contractual arrangements) are excluded. The draft legislation to enact the BPT includes carefully drafted anti-avoidance provisions.

For more detail, see PLC Share Schemes & Incentives, Legal update, 2009 Pre-Budget Report: New Bank Payroll Tax on financial sector companies which pay bonuses before 6 April 2010 (www.practicallaw.com/8-500-9770).

Implementing the restriction on higher-rate pensions tax relief

It was announced in the 2009 Budget that from 6 April 2011 the availability of higher-rate tax relief on contributions to registered pension schemes (www.practicallaw.com/5-201-6474) will be restricted for those with income of more than £150,000 a tax year. Tapering will operate so that for those with income above £180,000 a tax year, relief will be available only at the basic rate (20%) (see Legal update, 2009 Budget: key tax announcements: Higher-rate relief restricted for pension contributions from April 2011 (www.practicallaw.com/2-385-7946)). At the same time, anti-forestalling legislation was introduced to prevent those affected by the new measure forestalling the change (for the detail of the anti-forestalling legislation, see Practice note, Restricting higher-rate pensions tax relief: anti-forestalling measures (www.practicallaw.com/5-422-1726)).

As promised in the 2009 Budget, the government is now consulting on how the restriction (referred to as the "excess recovery charge") will be implemented from April 2011. In addition, significant changes to the 2009 Budget proposals have been announced, including:

  • Changes to the way the £150,000 income threshold will be defined. For this threshold, income will be gross income before deducting employee pension contributions and charitable donations. It will also include the value of any pension benefit funded by (or eventually funded by) the employer or a third party (employer pension contributions).

  • The introduction of an income floor of £130,000 below which the excess recovery charge and anti-forestalling legislation will not apply. The £130,000 income threshold will be gross income before deducting employee pension contributions and charitable donations but excluding the value of any employer pension contributions.

The introduction of the £130,000 income floor will be reflected in the anti-forestalling legislation (legislation will be introduced in the Finance Bill 2010 effective from 9 December 2009). Accordingly, with effect from 9 December 2009, the anti-forestalling legislation will apply to individuals with income of £130,000 or more who make changes in their normal pattern of pension saving and whose total pension saving exceeds £20,000 (or in certain circumstances, £30,000) a year.

The consultation document sets out the government's proposals for:

  • How relief will be tapered (for example 1% for every £1,000 above £150,000 or 0.01% for every £10).

  • How the excess recovery charge will be collected. (The proposal is through self-assessment but with an obligation on the employer to identify employees with gross pay and taxable benefits of over £130,000 for whom employer pension contributions are made.)

  • How and when liability for paying a large excess recovery charges may be passed from the individual to the pension scheme or payment spread over a number of years.

  • Measuring the value of employer pension contributions provided through defined benefit schemes.

  • How the restriction will apply to particular schemes.

  • Exempting the first £30,000 of a redundancy payment from the definition of income for these purposes.

For further analysis and comment on the measure, see PLC Pensions, Legal update, 2009 Pre-Budget Report: pensions (www.practicallaw.com/7-500-9723).

(See 2009 Pre-Budget Report - PBRN 18 - Restricting tax relief for high income individuals (anti-forestalling), Consultation document: Implementing the restriction of pensions tax relief, Draft legislation and explanatory note: High income excess relief charge and Technical note: Pensions: Special annual allowance charge.)

Tax rates and allowances

The Chancellor announced a number of measures, the effect of which will, over the next four to five years, significantly increase the tax and national insurance contributions (NICs) (www.practicallaw.com/8-201-8297) yields. We set out below the effect of the changes year by year.

2010-11

  • As a result of a negative movement in the Retail Prices Index (RPI) (www.practicallaw.com/5-377-4351), there will be no increase in personal allowances. For persons aged under 65, the personal income tax allowance will, therefore, remain at its current level of £6,475.

  • There will be no change in the higher rate threshold (which is the same as the upper earnings limit or upper profits limit for NICs). Individuals will pay tax at 20% on the first £37,400 of taxable income and 40% on taxable income above that figure and under £150,000.

  • The new top rate of tax of 50% announced in the 2009 Budget will apply to income over £150,000.

  • Pensions tax relief will be restricted for those with income over £150,000 (see 2009 Pre-Budget Report: pensions (www.practicallaw.com/7-500-9723)).

  • The 2009 Pre-Budget Report also confirmed that the gradual withdrawal of the personal allowance for those with incomes over £100,000 will start in 2010-11 (See Paragraph B43, 2009 Pre-Budget Report).

2011-12

  • Employers' NICs will rise from their current level of 12.8% to 13.8% (an increase of 0.5% having been announced in the 2008 Pre-Budget Report and a further 0.5% just announced).

  • Class 1 (employees') NICs on earnings between the primary threshold and upper earnings limits will rise from 11% to 12% (an increase of 0.5% having been announced in the 2008 Pre-Budget Report and a further 0.5% just announced), as will Class 1A and 1B (payments by employers on benefits provided) and Class 4 (self-employed) NICs will rise from 8.5% to 9.5%.

  • The additional rate of Class 1 and Class 4 NICs (on earnings above the upper thresholds) will increase from 1% to 2%, (an increase of 0.5% having been announced in the 2008 Pre-Budget Report and a further 0.5% just announced).

  • To compensate the lowest earners for the increase in the Class 1 and Class 4 NICs, the primary threshold and lower profits limit will be increased by £570 over the rate of the personal allowance (the alignment of the lower threshold, currently £4,940, with the personal allowance having been announced in the 2008 Pre-Budget Report). The increase in the threshold will mean that workers earning less than £20,000 will not pay increased NICs.

  • No announcement has been made about the NIC higher threshold/ Income tax higher rate threshold for this year.

2012-13

The Chancellor announced that the NIC higher threshold/income tax higher rate threshold will be frozen in this year. It is unclear whether his intention is to freeze the limit at the same level as for 2011-12 or to set a limit that will remain frozen for future years.

(See 2009 Pre-Budget Report - PBRN 01- National Insurance Contributions Rates and Thresholds and HM Treasury: Achieving Fairness and Providing Opportunity, see page 11.)

Salary sacrifice and workplace canteens

Legislation will be introduced in the Finance Bill 2010 to amend section 317 of the Income Tax (Earnings and Pensions) Act 2003, which provides an exemption from tax on the benefit of free or subsidised meals provided by an employer in its workplace canteen. The exemption will be restricted where an employee is entitled to the meals as a result of entering into a salary sacrifice scheme or other flexible benefit arrangement. The measure will come into effect on 6 April 2011.

(See 2009 Pre-Budget Report - PBRN 25 - Salary sacrifice: Restricting the tax exemption for workplace canteens.)

Changes to company car, van and fuel benefit rates

Legislation will be introduced in the Finance Bill 2010 to:

  • Set the company car tax appropriate percentage figures for 2012-13.

    (The company car benefit is calculated by taking the manufacturer's list price of the car when new, and multiplying that price by an appropriate percentage, depending on the carbon dioxide emissions of the car.)

  • Reduce the appropriate percentage figure for electric cars for the tax year 2010-11 and the following four tax years to nil.

  • Set a new lower flat rate benefit charge for electric vans for the tax year 2010-11 and the following four tax years to nil.

  • Include a definition of an electric van for the purposes of the van benefit charge.

  • Set the fuel benefit charge for company cars (£18,000) and company vans (£550) from 6 April 2010.

(For an explanation of how employees are taxed on the provision of company cars and car-related benefits, see Practice note, Taxation of employees (www.practicallaw.com/6-200-2122).)

(See 2009 Pre-Budget Report - PBRN26 - Changes to company car tax; 2009 Pre-Budget Report - PBRN27 - Company car tax: electric cars; 2009 Pre-Budget Report - PBRN28 - Van benefit charge: electric vans and 2009 Pre-Budget Report - PBRN29 - Cars and vans: changes to fuel benefit tax.)

Enterprise management incentives (EMI)

The 2009 Pre-Budget Report confirmed that, as previously announced, provisions will be included in Finance Bill 2010 to amend the rules about which companies qualify to grant enterprise management incentives (EMI) options. The amendments will extend the definition of a "qualifying company" to cover companies which have a UK permanent establishment (and meet the other EMI qualifying requirements). These changes are necessary to ensure that the EMI regime complies with EU state aid guidelines.

For more detail, see PLC Share Schemes & Incentives, Legal update, 2009 Pre-Budget Report: amendments to enterprise management incentives legislation (www.practicallaw.com/9-500-9779).

 

Environment

Below is a summary of the key environmental tax announcements. For more detailed coverage of the environment-related announcements, see PLC Environment, Legal update, 2009 Pre-Budget Report: environmental announcements (www.practicallaw.com/4-500-9729).

Extension of reduced duty for used cooking oil biofuels

As originally announced in the 2008 Budget (see Legal update, Budget 2008: environmental announcements: Biofuels (www.practicallaw.com/3-380-9257)), the 20 pence per litre duty differential for biofuels will cease from 1 April 2010. In the 2009 Pre-Budget Report, the government announced that the reduced duty for biofuels made from used cooking oils will continue for two years.

This measure has effect on and after 1 April 2010 and will be welcome news for businesses that produce biodiesel from used cooking oil.

For information on biofuels generally, see Practice note, Biofuels (www.practicallaw.com/0-324-2954).

(See 2009 Pre-Budget Report - PBRN 31 - Biofuels duty.)

Change to the reduced rate of climate change levy

The government has announced that it will introduce legislation in the Finance Bill 2010 to increase the reduced rate of climate change levy from 20% to 35%. Following Royal Assent to Finance Bill 2010, secondary legislation will be introduced to require relief claimants affected by the change in the reduced rate to give their energy suppliers fresh certificates confirming their new relief entitlement. The reduced rate is available to energy intensive businesses in sectors where the relevant trade association has entered into a Climate Change Agreement containing energy efficiency commitments.

The new reduced rate will have effect for supplies of taxable commodities (electricity, gas, solid fuels and liquidated gas) treated as taking place on and after 1 April 2011. The requirement to give new certificates will have effect on and after 1 April 2011.

For information on the climate change levy generally, see Practice note, Climate change levy and climate change agreements (www.practicallaw.com/8-204-8341).

(See 2009 Pre-Budget Report - PBRN32- Climate change levy - reduced rate.)

Tax-free clean energy cash-back worth around £900 per year

The 2009 Pre-Budget Report confirms that the income received by those who generate small scale renewable electricity for their own use through the clean energy cash back scheme (feed-in tariffs), worth on average £900 in 2010, will be tax-free. This will save £180 on average for a household paying the basic tax rate in 2010. No further details were announced.

For more information on feed-in tariffs, see Legal update, Government consults on renewable heat and energy efficiency, CERT and CESP: Renewable heat incentives and feed-in tariffs (www.practicallaw.com/4-385-0166). See also Feed-in tariffs - Department of Energy and Climate Change.

(See 2009 Pre-Budget Report - PN01 - Supporting low carbon growth: Tax-free clean energy cash-back worth around £900 per year (page 23).)

Introduction of 100% capital allowances for new electric vans

The government has announced that, subject to confirming compatibility with the state aid rules, legislation will be introduced to provide a 100 per cent first-year allowance (a category of capital allowance (www.practicallaw.com/4-107-5846)) for business expenditure on new, unused (not second hand) electric vans. This measure will have effect for expenditure incurred on or after 1 April 2010 (corporation tax) or 6 April 2010 (income tax).

(See 2009 Pre-Budget Report - PBRN30 - Electric vans: 100 per cent first-year allowances.)

 

Personal tax and investment

Below is a summary of the key personal tax announcements. For more detailed coverage, see PLC Private Client, Legal update, 2009 Pre-Budget Report: key private client tax announcements (www.practicallaw.com/0-500-9383).

IHT nil rate band to remain at £325,000

The inheritance tax (IHT) nil rate band will remain at its current level of £325,000 instead of increasing to £350,000 on 6 April 2010. The Finance Bill 2010 will stop the increase that had been fixed in the Finance Act 2007. For chargeable transfers above the value of the nil rate band, IHT is charged at 40% on death and 20% on lifetime transfers to most trusts. For more information about how IHT applies, see Practice note, Inheritance tax: overview (www.practicallaw.com/3-383-5652). For current and previous IHT rates, exemptions, reliefs and deadlines for returns and payments, see Practice note, Tax data: inheritance tax (www.practicallaw.com/6-385-5460).

(See 2009 Pre-Budget Report - PBRN 20 - Inheritance tax: nil rate band.)

IHT anti-avoidance: future interests in trusts and purchased interests in trusts

The Finance Bill 2010 will include legislation countering inheritance tax (IHT) avoidance schemes involving future interests in trusts and purchased interests in trusts. Both types of scheme aim to avoid or reduce IHT charges on transferring assets to relevant property trusts (www.practicallaw.com/0-382-6277).

The government has also announced that it is examining wider solutions to the problem of IHT avoidance using trusts.

For more detail, see PLC Private Client, Legal update, 2009 Pre-Budget Report: key private client tax announcements (www.practicallaw.com/0-500-9383).

Measures to assist shared lives carers

The government will introduce legislation in Finance Bill 2010 to establish a new income tax relief, along the same lines of and, where applicable, taken together with, Foster Carers' relief, for those who share their homes and family life with individuals, including adults, placed with them under the Shared Lives scheme. Broadly, the carer's household will be entitled to claim up to £10,000 relief per year against income from Shared Lives placements or foster care. A simplified method of calculating taxable income will be available for those whose income from those sources exceeds £10,000 per annum. The relief will be introduced with effect from 6 April 2010.

An amendment will also be made to section 224 of the Taxation of Chargeable Gains Act 1992 to endure that home owners do not suffer a restriction to the capital gains tax principal private residence relief on disposal of their home as a result of having acted as a carer to adults under the Shared Living placement scheme. This amendment will have effect for disposals on or after 9 December 2009. For more detail on the CGT change, see Legal update, 2009 Pre-Budget Report: key private client tax announcements (www.practicallaw.com/0-500-9383).

(See PBRN 22 - Income Tax: Treatment of Shared Lives Carers and PBRN 16 - Capital Gains Tax: Private Residence Relief and Adult Placement Carers.)

 

Property

Below are the key property tax announcements. For detail of all property related announcements, including the extension of empty property relief from business rates, see PLC Property, Legal update, 2009 Pre-Budget Report: implications for Property (www.practicallaw.com/3-500-9334).

Withdrawal of furnished holiday lettings tax treatment from April 2010

As announced in the 2009 Budget (see Legal update, 2009 Budget: key tax announcements: Furnished holiday lettings in the European Economic Area: Technical note (www.practicallaw.com/2-385-7946)), draft legislation, which will be introduced in the Finance Bill 2010 to withdraw the furnished holiday lettings (FHL) rules from 2010-11, was published alongside the 2009 Pre-Budget Report.

From April 2010, the tax treatment of FHL businesses will be the same as for other property businesses, that is, they will be taxed as property income (for individuals, under Part 3 of the Income Tax (Trading and Other Income) Act 2005 and for companies, under Part 4 of the Corporation Tax Act 2009). Tax relief will still be available for business expenses, such as mortgage interest, repairs, rates, utilities and wages.

Currently, under the FHL rules, property businesses are treated as trading for specified tax purposes. The FHL rules allow more flexible loss relief, additional capital allowances, certain capital gains reliefs and relevant UK earnings treatment for pension purposes.

After the withdrawal of the FHL rules, landlords (whose FHL business is not actually a trade) will be taxed under the property income rules. This will affect the way in which losses from letting the property can be used for loss relief purposes. For example, from April 2010:

  • Unrelieved FHL losses will be treated as losses carried forward from a property business.

  • Certain loss reliefs may no longer be available for capital or chargeable gains tax purposes (including business asset roll-over relief, entrepreneurs' relief, relief for gifts of business assets, relief for loans to traders and exemptions for disposals of shares by companies with a substantial shareholding).

Although capital allowances will no longer be available from April 2010 (unless lettings are on a commercial basis), landlords will be able to claim the ten per cent wear and tear allowance and the landlord's energy savings allowance (see Practice note, Tax savings for energy-saving measures in homes (www.practicallaw.com/0-205-2959)).

For individuals, income from letting furnished holiday accommodation will no longer be relevant UK earnings for pension relief purposes from 6 April 2010 and this may affect the maximum income tax relief available for pension contributions.

For more information on the taxation of corporate landlords, see Practice note, Holding an interest in property: tax: Income from property (www.practicallaw.com/8-371-5973).

(See 2009 Pre-Budget Report - PBRN24 - Furnished holiday lettings, HM Revenue & Customs: Technical note:Withdrawing the Furnished Holiday Lettings Rules from 2010-11, Draft Legislation to Repeal the Furnished Holiday Lettings Rules from 2010-11 and Explanatory note and Impact Assessment of Withdrawing the Furnished Holiday Letting rules.)

Disclosure of SDLT avoidance schemes: extension to high value residential property

The government has announced that regulations will be introduced to extend the Disclosure of Tax Avoidance Schemes (DOTAS) rules to require the disclosure of certain stamp duty land tax (SDLT) avoidance schemes that concern residential property with a value of at least £1 million.

Since 1 August 2005, promoters of certain schemes to avoid SDLT on commercial property transactions with a value of at least £5 million have been obliged to disclose those schemes to HMRC. The SDLT disclosure regime adopts the same basic form, and is implemented under the same primary legislation, as the direct tax disclosure regime.

The regime does not currently require the disclosure of pure residential property SDLT avoidance schemes (although schemes to save SDLT on transactions involving both residential and non-residential property are discloseable if the value of the non-residential property is at least £5 million). Nor does the regime currently require users of SDLT schemes to identify themselves to HMRC through the scheme reference number (SRN) system, a requirement that does apply to users of direct tax avoidance schemes.

For further detail, see Practice note, SDLT disclosure regime (www.practicallaw.com/6-201-2437).

As part of the 2009 Budget HMRC issued a consultation paper indicating that the government intended to introduce regulations extending the SDLT disclosure regime to residential property transactions with a value of at least £1 million and also that such a regime would include a mechanism for identifying users of schemes that are disclosed. For further detail see Legal update, Extending the SDLT disclosure regime for high value residential properties.

The government has now announced that it is to go ahead with the proposed extension of the SDLT disclosure regime. Regulations will be made in the new year and will come into effect no later than 1 April 2010.

The regulations will amend the Stamp Duty Land Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations (SI 2005/1868) so that:

  • The disclosure provisions will apply to schemes that concern either:

    • non-residential property with an aggregate value of at least £5 million; or

    • residential property with an aggregate value of at least £1 million.

  • The disclosure provisions will also apply to schemes that concern mixed non-residential and residential property where either:

    • the value of the residential property is at least £1 million; or

    • the value of all the property is at least £5 million.

  • Grandfathering provisions will apply so that there will be no obligation to disclose schemes first made available for implementation before these changes come into effect. This rule will also grandfather schemes "substantially the same" as schemes first made available before the start date.

In addition, any user of a SDLT avoidance scheme (in relation to commercial or residential property), if they expect to obtain a SDLT advantage from the scheme, will be required to report the use of the scheme to HMRC. This will be done using a new form to be published on HMRC's website before the start date.

(See 2009 Pre-Budget Report - PBRN35 - Disclosure of tax avoidance schemes: stamp duty land tax and Disclosure of tax avoidance schemes (DOTAS): stamp duty land tax: consultation response document.)

Community infrastructure levy

The government confirmed that the community infrastructure levy (CIL) will be introduced from April 2010 and will shortly announce detailed arrangements for its implementation. The CIL will be a new charge that local planning authorities in England and Wales will be able to levy on development in their areas. For more detail on the CIL, see Practice note, Community Infrastructure Levy (www.practicallaw.com/6-385-1570).

(See Paragraph 4.35, 2009 Pre-Budget Report.)

Update on consultation on false self-employment in the construction industry

HMRC has announced that a summary of responses to the consultation on false self-employment in the construction industry will be published in the New Year. For more information on the consultation, see Legal update, Consultation on false self-employment in the construction industry (www.practicallaw.com/7-386-7132).

(See HMRC: Compliance and Enforcement..)

 

VAT

VAT standard rate increase: transitional arrangements confirmed

The standard rate (www.practicallaw.com/7-107-7306) of VAT on goods and services was temporarily reduced to 15% with effect from 1 December 2008. The rate will revert to 17.5% with effect from 1 January 2010.

The 2009 Pre-Budget Report confirms arrangements that help the smooth the transition for businesses back to the 17.5% standard rate of VAT:

(See 2009 Pre-Budget Report- PN01- End of the temporary reduction in the VAT standard rate on 31 December (page 7).)

New VAT flat rate scheme percentages published

The VAT flat rate scheme percentages were adjusted in December 2008 to reflect the temporary reduction in the standard rate (www.practicallaw.com/7-107-7306) of VAT to 15 per cent. In light of the reversion of the standard rate to 17.5% from 1 January 2010, the percentages have now been recalculated to reflect a standard rate of VAT of 17.5 per cent and to reflect current business patterns across the different sectors. The government has published a table of the new flat rate percentages, which have effect on and after 1 January 2010.

For general information on the VAT flat rate scheme, see Practice note, Value added tax: Accounting for VAT (www.practicallaw.com/2-107-3725).

(See 2009 Pre-Budget Report- PBRN33 - VAT flat rate scheme: changes to the flat rate percentages and VAT Flat rate scheme (FRS): Impact Assessment of changes to the flat rate percentages in January 2010.)

 

Other miscellaneous announcements

Insurance premium tax: administration fees

The Finance Bill 2010 will include provisions under which certain administration fees will be treated as payable under insurance contracts, rather than separate contracts, and will therefore be treated as taxable premiums for the purposes of insurance premium tax (IPT). These provisions are to apply to payments made from 9 December 2009.

Following the decision of the High Court in Homeserve [2009] EWHC 1311 (Ch), HMRC issued Revenue & Customs Brief, in which it stated that it would close a loophole exposed by that case allowing taxpayers to avoid IPT on amounts that would normally be classified as premiums by labelling them as "administration fees" and charging them under a separate contract (rather than under the contract of insurance). (See Practice note, Insurance premium tax: Premiums (www.practicallaw.com/7-200-9364).)

As part of the 2009 Pre-Budget report, HMRC published draft legislation implementing this proposal. Under the draft legislation, a contract is not to be regarded as a separate contract if either of the following applies:

  • The services provided under the contract include those commonly supplied in connection with claims or payments under, or the arrangement or administration of, insurance contracts.

  • The insured:

    • is required to enter into the separate contract under, or as a condition of, the insurance contract; or

    • would be unlikely to enter into the separate contract without entering into the insurance contract.

However, this does not prevent an amount from being treated as payable under a separate contract if that amount is either:

  • Wholly referable to a facility for deferred payment or payment by instalments (including fees for payment by credit or debit card).

  • Payable in respect of, and at the time of, an adjustment to (or termination of) any cover provided by the insurance contract.

The legislation only applies if the insured is an individual as this is where HMRC believes avoidance has been found to date. However, HMRC will keep the position under review and will consider extending the scope of the legislation if there is any evidence of the avoidance moving into other areas.

(See 2009 Pre-Budget Report - PBRN 15 - Insurance premium tax: premium splitting and Insurance premium tax (IPT) premium splitting: draft legislation and explanatory note.)

Extension of the new field allowance regime announced for North Sea assets

The Finance Act 2009 introduced a new field allowance for supplementary charge purposes (giving relief against the 20% additional rate of tax on top of the 30% ring-fence corporation tax rate) as an incentive to develop certain types of challenging field – "small fields", ultra-high temperature/pressure fields and ultra-heavy oil fields. (Section 90 and Schedule 44 (see Practice Note, Oil taxation (www.practicallaw.com/2-200-9267)). HMRC proposes to extend this relief to investment in fields that have previously been decommissioned with effect on or after 22 April 2009. It is also proposed to reduce the field allowance thresholds to qualify as an "ultra high temperature/pressure field".

The Finance Bill 2010 will also remove some payments made under licence swap arrangements from liability to tax on chargeable gains and extend chargeable gains reinvestment relief to expenditure on exploration and development, including drilling costs.

(See 2009 Pre-Budget Report - PBRN 03 North Sea Fiscal Regime.)

Enactment or withdrawal of extra-statutory concessions

Following the case of R (on the application of Wilkinson) v Inland Revenue Commissioners [2005] UKHL 30 [2006] STC 270, HMRC has been reviewing its extra-statutory concessions (www.practicallaw.com/8-107-5731) to make sure they are within the scope of its administrative discretion (see Legal update, Budget 2008: New power to give statutory effect to existing concessions (www.practicallaw.com/8-380-9405)).

Following the review, HMRC determined that some of the concessions can remain as they are, some can be enacted to preserve their effect, and the remainder will need to be withdrawn. Some concessions have already been enacted and others withdrawn (see, for example, Legal update, Second set of regulations enacting Extra-Statutory Concessions laid (www.practicallaw.com/3-500-7453) and Legal update, 2009 Budget: key tax announcements: Withdrawal of extra-statutory concessions (www.practicallaw.com/2-385-7946)).

As part of the 2009 Pre-Budget Report, HMRC has identified the following concessions as needing to be enacted:

  • Lump sums paid under overseas pension schemes (A10).

  • Life assurance premium relief by deduction: pre-marriage policies: premium relief after divorce (A31).

  • Repayment supplement: life assurance premium relief (A51).

  • Termination payments and legal costs (A81).

  • Trading activities for charitable purposes (C4).

  • Qualifying life assurance policies: reinstatement within 13 months (an informal concession in paragraph IPTM8065 of HMRC's Insurance Policyholder Taxation Manual).

  • Insurance premium tax: arrangements for discounted insurance (4.5).

HMRC has published draft legislation to enact these concessions. Following consultation, HMRC expects to enact this legislation during 2010.

HMRC has also identified the following concessions as needing to be withdrawn, with effect from 9 December 2010:

  • VAT: welfare agencies pending social registration (3.37).

  • Life assurance: variation of term assurance policies (A45).

  • House purchase loans made by life offices to staff of insurance associations (A47).

  • Benevolent gifts (B7).

  • Life assurance business: calculation of investment return and profits (C27).

  • Mourning: as a funeral expense (F1).

  • Property of Roman Catholic religious communities (F2).

  • VAT on Ofsted inspections.

  • The ring fence: interaction of finance costs and transfer pricing (the practice set out in paragraph TTM07500 of HMRC's Tonnage Tax Manual).

(See Extra statutory concessions: third technical consultation on draft legislation and Withdrawal of extra statutory-concessions: technical note.)

Landline duty

The government will consult shortly on the implementation of a 50p per month duty for each landline to fund the roll-out of superfast broadband.

 
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