Pre-Budget Report 2008: key business tax announcements

The Chancellor, Alistair Darling, delivered his Pre-Budget Report on 24 November 2008. This update summarises the key business tax announcements.
PLC Tax, PLC Share Schemes & Incentives, PLC Pensions and PLC Private Client

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The key tax themes of the 2008 Pre-Budget Report were:Immediate tax cuts and other tax measures designed to help businesses and individuals struggling to cope with the effects of the recession ...show full speedread

The key tax themes of the 2008 Pre-Budget Report were:

As Alistair Darling said in his speech: "... these are exceptional times and require exceptional measures."

Other measures which will be of interest to business tax practitioners include changes to the taxation of foreign profits (see Foreign profits) and Principles-based approach to financial products avoidance: further consultation.

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Contents

Anti- avoidance

Principles-based approach to financial products avoidance: further consultation

As part of the 2008 Pre-Budget Report, HM Treasury and HMRC have published a new consultation document on the rules for both disguised interest and transfers of income streams.

On 6 December 2007, HM Treasury and HMRC launched a joint consultation on a "principles-based" approach to financial products tax avoidance. The consultation document included draft legislation on two areas:

  • Disguised interest.

  • Transfers of income streams.

(See Legal update, Consultation on principles-based approach to financial products tax avoidance (www.practicallaw.com/2-379-8570).)

This was followed by revised draft legislation on disguised interest on 7 February 2008 (see Legal update, HMRC publishes revised draft legislation on disguised interest (www.practicallaw.com/4-380-6729)) and an open day (see Legal update, Open day on principles-based approach to financial products tax avoidance (www.practicallaw.com/7-380-8029)).

The original intention was to include the legislation in the Finance Act 2008. However, as part of the 2008 Budget, the introduction of this legislation was deferred until 2009 (see Legal update, Budget 2008: Financial products avoidance: disguised interest (www.practicallaw.com/8-380-9405)). HMRC was then due to publish further documents on these provisions, including some draft legislation (see Legal update, Financial products avoidance: status update (www.practicallaw.com/8-381-4416)). However, these were delayed (see Legal update, HMRC delays financial products avoidance documents (www.practicallaw.com/8-382-1214)).

As part of the 2008 Pre-Budget Report, HM Treasury and HMRC have published a new consultation document on the rules for both disguised interest and transfers of income streams. In each case, this document summarises responses received to the first consultation document and contains new draft legislation (together with explanatory notes). The new consultation document refers to the "possible introduction" of the legislation as part of the Finance Bill 2009 and the draft legislation contains a commencement date of 1 April 2009 (for corporation tax purposes) or 6 April 2009 (for income tax purposes, in relation to the transfer of income streams provisions), subject to transitional rules. Responses to the document are sought by 11 February 2009.

PLC Tax will produce a more detailed update on the new consultation document shortly. However, it is particularly notable that the introductory "purpose" provision in each of the two original pieces of draft legislation, which was arguably a key feature of the original "principles-based" approach, is not included in the revised drafts.

(See HM Treasury and HMRC: Principles-based approach to financial products avoidance (November 2008).)

Leasing: anti-avoidance measures confirmed

On 13 November 2008, HMRC announced new anti-avoidance legislation to combat tax avoidance in the field of leasing, see Legal update, Leasing tax: draft anti-avoidance legislation published (www.practicallaw.com/5-384-0624)). The 2008 Pre-Budget Report confirmed these measures.

The three areas targeted are:

  • Schemes which seek to circumvent the sale of lessor companies anti-avoidance rules in Schedule 10 to the Finance Act 2006 by the use of intermediate leasing structures.

  • Sale/lease and leaseback schemes which seek to increase plant or machinery allowances while avoiding the recapture of allowances on the initial sale/lease of the plant or machinery.

  • Schemes which seek to avoid tax being chargeable on film lease receivables by using the long funding lease rules. The draft legislation was not published on 13 November 2008 when the anti-avoidance legislation was originally announced but it is now available, see HMRC: Leasing avoidance by film partnerships, draft legislation and explanatory note).

(See 2008 Pre-Budget Report - PBRN11 - Sale of lessor companies, , PBRN12 - Sale and leasebacks and PBRN13 - Film leasing.

Securities transactions between dealing company and associated company: repeal of obsolete provision

The government has announced that it will repeal section 774 of the Income and Corporation Taxes Act 1988.

Section 774 was originally enacted in 1960. It was intended to prevent avoidance by companies taking advantage of mismatches in the tax treatment between a company carrying on a trade of dealing in securities and an associated non-dealing company.

HMRC considers that the provision is now redundant as a result of the legislation contained in the Finance Act 1996 on loan relationships (see further Practice note, Loan relationships (www.practicallaw.com/9-219-4959)) and in the Finance Act 2002 on derivative contracts (see further Practice note, Derivatives: tax (www.practicallaw.com/6-204-7955)). The provision will now be repealed, presumably by the Finance Act 2009.

(See 2008 Pre-Budget Report - PBRN23 - Simplification of anti-avoidance rules.)

Simplification of anti-avoidance rules for employee securities

The tax treatment of employment-related securities acquired for less than market value under Chapter 3C (notional loans) of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 will be simplified in Finance Bill 2009. These are the only changes to be announced so far from a range of possible improvements to anti-avoidance provisions affecting employment-related securities. For more detail on this change, see PLC Share Schemes & Incentives, Legal update, 2008 Pre-Budget Report: simplification of anti-avoidance rules for employee securities (www.practicallaw.com/1-384-2106).

Tax disclosure regime: amending the scheme reference number system

The government will publish draft regulations to amend the way in which tax avoidance scheme reference numbers (SRNs) are reported to HMRC by users of the schemes.

The Finance Act 2004 and subsidiary regulations introduced a regime pursuant to which promoters and, in certain cases, users of tax avoidance schemes are required to disclose details of those schemes to HMRC. For further detail, see Practice note, Direct tax disclosure regime (www.practicallaw.com/1-107-4933). The Tax Avoidance Schemes (Information) Regulations (SI 2004/1864) (the Information Regulations) prescribe the information that must be provided under the scheme and the time limits within which to do so. Provisions in the Finance Act 2008 amended the operation of the SRN system, including the form and manner in which information must be provided to HMRC. For further detail, see Practice note, Direct tax disclosure regime: Notification and reference numbers (www.practicallaw.com/1-107-4933).

The government has announced in the 2008 Pre-Budget Report that it will amend the Information Regulations to further amend the procedure by which scheme users report a SRN to HMRC. Specifically:

  • A user will have to first report a SRN in the tax return for the year or accounting period in which the scheme is implemented (rather than the year or accounting period in which the SRN is received, as is currently the case).

  • The circumstances in which the user must report an SRN on form AAG4 rather than on a tax return are to be extended to include:

    • where the user is an individual who makes a freestanding claim for loss relief which is affected by the use of the scheme; and

    • where there are insufficient boxes on the return for the user to report all of the SRNs required to be reported.

The government intends to publish draft regulations implementing these changes before the end of the year. The changes will have effect for tax return periods beginning on or after 1 April 2009.

(See 2008 Pre-Budget Report - PBRN22 - Disclosure of tax avoidance schemes.)

 

Business

Foreign profits

The government has announced that it will introduce changes to the taxation of the foreign profits of companies in the Finance Bill 2009, including the introduction of an exemption for foreign dividends, a cap on interest relief calculated by reference to worldwide debt and changes to the controlled foreign company (CFC) (www.practicallaw.com/7-107-6340) rules. The government will continue to consult on reform of other aspects of the CFC rules.

In June 2007, HM Treasury and HMRC published a joint discussion document entitled "Taxation of the foreign profits of companies". Despite an announcement in July 2008 suggesting that any reform would not be enacted for some time, the 2008 Pre-Budget Report announces that draft legislation along the lines set out below will form part of the Finance Bill 2009. (For further detail of the consultation process so far, see Practice note, Foreign profits of companies: tax reform (www.practicallaw.com/8-369-8105).)

The government intends that the draft legislation will contain the following measures:

  • Overseas source dividends received by large and medium-sized groups on ordinary shares and most non-ordinary shares will be exempt from UK tax. A targeted anti-avoidance rule will protect against avoidance activity seeking to exploit these dividend exemptions. This new exemption will be supported by:

    • a worldwide cap on interest deductions. Tax deductions for interest claimed by UK members of a group will be restricted by reference to the group's consolidated net external finance costs;

    • an extension of the loan relationships unallowable purpose rules (which disallow a deduction for interest) to include schemes or arrangements; and

    • consequential changes to the CFC rules. The acceptable distribution policy exemption and the local holding company exemption will be repealed. However, there will be a 24 month transitional period to allow time for groups to unwind holding company structures.

  • The existing Treasury consent rules and notification requirements will be repealed and replaced with a quarterly reporting requirement for high-risk transactions with a de minimis limit of £100 million.

Draft legislation will be published in December 2008 for consultation in order to implement these reforms in Finance Bill 2009.

The announcement is supplemented by two open letters to the Hundred Group and the CBI on the future direction of travel for taxing foreign subsidiaries. The letters invite comment on the proposed reforms and process.

The introduction of a tax exemption for overseas source dividends and the repeal of the Treasury consent rules will be welcomed by business. However, the abolition of the acceptable distribution policy and the local holding company exemptions from the CFC rules will have a significant impact on some multinationals (perhaps reduced by the effect of current economic difficulties). In addition, there are concerns about how the worldwide interest cap will operate in practice and businesses will be eager to see the scope of the anti-avoidance legislation which will accompany the overseas dividend exemption. The government has confirmed that the aim of the CFC reform is to ensure that it does not tax profits genuinely earned overseas.

(See 2008 Pre-Budget Report 2008: paragraphs 4.24 - 4.25, HM Treasury: Open letter to the Hundred Group and HM Treasury: Open letter to the CBI.).)

Extension of trading loss carry-back for business

As a temporary measure only, businesses will be able to carry back trading losses against the profits of the three preceding years and obtain a repayment of tax.

For corporation tax (www.practicallaw.com/1-107-5999) purposes, the rule will apply to losses for accounting periods ending in the period 24 November 2008 to 23 November 2009 and for unincorporated businesses it will apply to losses in the accounts forming the basis period for the 2008/2009 income tax (www.practicallaw.com/4-382-5643) liability. In both cases, while the carry-back to the previous year remains unlimited, the amount that can be carried back against the profits or other income of the earlier two years will be limited to £50,000 in total. For accounting periods of less than 12 months, the £50,000 limit will apply pro-rata, and if more than one accounting period ends in the relevant period, the extended loss carry-back for the two periods will be capped at £50,000. The relief is available in respect of losses on furnished holiday lettings as well as trading losses.

For current corporation tax rules relating to the use of losses, see Practice note, Direct taxes: Trading losses (www.practicallaw.com/5-107-3724).

This relief will be of assistance to businesses that have been established for more than three years and should make available tax refunds that could otherwise be obtained only by closing down the business and claiming terminal loss relief. In order to maximise claims for the relief, businesses may be encouraged to incur expenditure that qualifies for capital allowances (www.practicallaw.com/4-107-5846) in the relevant period. Companies making a loss in the current year may need to review their group relief (www.practicallaw.com/5-107-6671) surrender strategy, while unincorporated businesses may wish to change their year-end to 31 March, particularly if they currently make up their accounts to 30 April.

(See 2008 Pre-Budget Report - PBRN3 and HMRC: Technical note: Extension Of Loss Relief Rules – Carry-back Of Trading Losses.)

Debt: changes to connected parties rules

HMRC has announced two measures relating to the taxation of debts between connected companies:

HMRC is to publish draft legislation on each of these measures later this year. The measures are to take effect for company accounting periods beginning on or after 1 April 2009.

The removal of the charge to tax on connected party trade debts when the creditor may not be entitled to a deduction is a welcome removal of a potential taxpayer-unfriendly imbalance. However, it remains to be seen exactly how the late interest payment rules will be changed. In the meantime, it remains prudent for groups to bear in mind the impending reform when putting in place, or restructuring, long-term intra-group debt.

(See 2008 Pre-Budget Report - PBRN 04 - Corporation tax: loan relationships: connected companies.)

Tax relief for business expenditure on cars

At present, cars costing less than £12,000 (other than those with very low carbon emissions that can qualify for a 100% first year allowance), are included in the main pool for the purposes of capital allowances and are written down at the rate of 20% per annum on a reducing balance basis. Cars costing £12,000 or more are dealt with separately and the writing down allowance is restricted to £3,000 per annum, although a balancing charge (www.practicallaw.com/2-107-6465) or balancing allowance (www.practicallaw.com/5-107-6464) will be calculated on disposal.

With effect from 1 April 2009 (for the purposes of corporation tax) or 5 April 2009 (for the purposes of income tax), cars will be allocated to one of two capital allowance pools depending on their CO2 emissions. Those with carbon emissions of 160g/km and below will be added to the main pool (attracting allowances ar the 20% rate), while those with emissions above that level will be added to the special pool and attract a writing down allowance of 10% per annum. Cars with some private use will continue to be held outside the pools, but the relevant rates of writing down allowance will apply. As a transitional measure, cars acquired for more than £12,000 before 1 or 6 April 2009 will continue to be held separately.

Restrictions to the deduction available in respect of leasing payments for cars will, in future be by reference to carbon emissions rather than value of the car, with a flat rate disallowance of 15% of lease payments being applied to cars with CO2 emissions above 160g/km. The emissions-based rules will also apply to taxis, daily hire cars and cars leased to disabled people (all of which are outside the current "expensive car rules").

(See 2008 Pre-Budget Report - PBRN17.)

Foreign exchange gains and losses: change of accounting basis

In general, companies are taxed on their loan relationships and derivative contracts in accordance with their accounts (see Practice note, Loan relationships (www.practicallaw.com/9-219-4959) and Practice note, Derivatives: tax (www.practicallaw.com/6-204-7955)). However, the introduction of international accounting standards (IAS) (www.practicallaw.com/6-107-6722), and the modification of UK generally accepted accounting practice (UK GAAP) (www.practicallaw.com/4-107-7435) to reflect IAS, has led to volatility in the recognition of amounts payable under financial instruments in companies' accounts. The Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004 (SI 2004/3271) (the accounting regulations) were introduced to ensure that any credits or debits arising from a change of accounting basis are usually spread over a ten-year period (see Legal update, New tax regulations for loan relationships and derivative contracts (www.practicallaw.com/6-207-4048)).

As part of the 2008 Pre-Budget Report, HMRC recognised that these rules give rise to an anomaly in certain circumstances. Where certain foreign-denominated financial instruments were treated for accounting purposes as a hedge of a company's economic risk from holding foreign investments prior to the change of accounting, the foreign exchange movements were not taxed. However, the accounting regulations tax or relieve the reversal of these movements even where the relevant amounts were not previously taxed or relieved.

HMRC has announced that legislation will be introduced, with effect from 1 January 2009, to prevent such double taxation (or double relief) by disregarding adjustments to the extent that they would otherwise be brought into account during the proportion of the ten-year period arising after 31 December 2008. HMRC is to publish draft legislation for consultation shortly.

(See 2008 Pre-Budget Report - PBRN 10 - Change of accounting practice regulations: foreign exchange.)

Islamic finance

Over recent years, the government has introduced a series of tax measures aimed at ensuring that sharia-compliant finance (or, in the language of the UK tax code, "alternative finance") arrangements are not less appealing than their "conventional" counterparts (see Practice note, Sharia-compliant transactions: tax (www.practicallaw.com/4-201-9755)). These include provisions relating to SDLT (see Practice note, Sharia-compliant transactions: tax: Stamp duty land tax (www.practicallaw.com/4-201-9755)).

Sharia-compliant bonds (sukuk (www.practicallaw.com/5-203-8720)) were not within the ambit of the original rules, and direct tax provisions were introduced in relation to sukuk in 2007 (see Practice note, Sharia-compliant transactions: tax: Extension of regime: sukuk (www.practicallaw.com/4-201-9755)).

On 26 June 2008, HMRC published a consultation document setting out proposals for SDLT relief for the creation, issue and transfer of commercial sukuk backed by UK land interests (see Practice note, Sharia-compliant transactions: tax: Extension of relief: sukuk (www.practicallaw.com/4-201-9755)).

As part of the 2008 Pre-Budget Report, the government announced that it will publish responses to this consultation in January 2009, with a view to including legislation granting relief in the Finance Bill 2009. The government also announced that it will examine the regulatory treatment of sukuk but that the government does not intend to issue sovereign sukuk at present (although it will keep the situation under review).

(See paragraphs 4.30 and 4.34, 2008 Pre-Budget Report.)

Stock lending and repos: disapplication of tax charges

As part of the 2008 Pre-Budget Report, HMRC has announced the introduction of new rules relating to the taxation of stock-lending (www.practicallaw.com/4-107-7322) arrangements (as to which, see generally Practice note, Stock lending: tax (www.practicallaw.com/0-202-1977)) and repos (www.practicallaw.com/2-107-7144) (as to which, see generally Practice note, Repos: tax (www.practicallaw.com/2-202-0991)). The changes concern:

  • Chargeable gains.

  • Stamp duty and SDRT.

Legislation effecting these changes is to be included in the Finance Bill 2009. Broadly, the new provisions prevent tax on chargeable gains, stamp duty or SDRT arising in certain situations where one of the parties to the arrangement becomes insolvent. This will be a welcome relaxation of the tax burden on companies that are already in financial difficulty.

Chargeable gains

Transfers and transfers back of shares (and, in the case of non-corporates, debt instruments) between the lender and the borrower under a stock-lending arrangement are exempt from taxation as chargeable gains (see Practice note, Stock lending: tax: Transfer of title (www.practicallaw.com/0-202-1977)). However, where it becomes apparent that there will be no transfer back, the lender is deemed to dispose of the securities at market value for chargeable gains purposes.

As part of the 2008 Pre-Budget Report, HMRC has announced that legislation is to be introduced under which the lender will not be deemed to dispose of the securities lent if the borrower has become insolvent and the lender uses the collateral provided by the borrower to buy replacement securities of the same kind (subject to "appropriate safeguards").

These changes are to take effect where the borrower becomes insolvent on or after 24 November 2008, although it will be possible to elect for the changes to have effect from 1 September 2008.

HMRC is considering introducing corresponding changes to the rules relating to the taxation of repos.

Stamp duty and SDRT

Transfers of securities (including shares) under stock-lending arrangements and repos are often exempt from SDRT provided that securities of the same kind are returned to the lender (in the case of stock-lending arrangements) or the seller (in the case of repos) at the end of the arrangement (see Practice note, Stock lending: tax: Stamp duty and stamp duty reserve tax (www.practicallaw.com/0-202-1977), Practice note, Stock lending: tax: Stamp duty and stamp duty reserve tax (www.practicallaw.com/0-202-1977), Practice note, Repos: tax: Stamp duty and stamp duty reserve tax (www.practicallaw.com/2-202-0991) and Practice note, Repos: tax: Stamp duty and stamp duty reserve tax (www.practicallaw.com/2-202-0991)). However, if the securities are not transferred back, the borrower (in the case of stock-lending arrangements) or the buyer (in the case of repos) is subject to an SDRT charge.

As part of the 2008 Pre-Budget Report, HMRC has announced that legislation will be introduced to remove this charge where the transfer back does not occur because the borrower (in the case of stock-lending arrangements) or the buyer (in the case of repos) becomes insolvent.

At present, where the lender under a stock-lending arrangement uses collateral provided by the borrower to acquire replacement securities on default by the borrower, a stamp duty or SDRT charge may arise.

As part of the 2008 Pre-Budget Report, HMRC has also announced that legislation will be introduced to remove this charge where the transfer back does not occur because the borrower becomes insolvent. It is not clear from the announcement whether an equivalent rule will be introduced for repos.

These changes are to have effect for arrangements where the borrower (in the case of stock lending arrangements) or the purchaser (in the case of repos) becomes insolvent on or after 1 September 2008.

(See 2008 Pre-Budget Report - PBRN 06 - Tax on chargeable gains, stamp duty and stamp duty reserve tax: stock lending arrangements.)

Corporation tax rules for related companies

The government will continue its discussions with business about further simplification of the corporation tax associated company rules and also intends to consult in 2009 on proposals to simplify group aspects of corporate gains.

(See 2008 Pre-Budget Report: paragraph 4.26.)

Company cars, employee car ownership scheme cars and mileage allowance payments

HMRC has published a report that sets out the findings of the review of the taxation of Employee Car Ownership schemes (ECOS) announced by the government as part of the 2006 Budget, and the interaction between ECOS, company car tax (CCT) and tax-free mileage allowance payments (AMAPs).

Interim reports on the review have previously been published as part of the 2006 Pre-Budget Report, the 2007 Budget and the 2007 Pre-Budget Report.

HMRC's conclusion is that the administrative and simplification benefits of the current structure outweigh the benefits of reform at this time.

(See Report on the interaction between company cars, employee car ownership scheme cars and mileage allowance payments.)

 

Compliance

Late payment of tax debts

HMRC has launched a Business Support Service for taxpayers who are anticipating problems paying their tax debts on time as a result of cashflow difficulties.

The new service is intended for new enquiries, and not those already being dealt with by local offices. Additional late payment surcharges will not apply to payments included in repayment arrangements made with the service. Late payment interest will still apply.

(See Pre-Budget Report 2008 HM Revenue & Customs: Business Payment Support Service.)

Compliance checks: the next stage

Following a consultation process, Finance Act 2008 contained new legislative provisions governing the powers of HMRC for checking compliance in relation to income tax, capital gains tax, corporation tax and VAT. Those provisions, which include the repeal of section 20 of the Taxes Management Act 1970 and the introduction of a new framework for investigation and compliance in relation to those taxes, are contained in Schedule 36 to FA 2008 and will come into force on a date to be appointed (expected to be 1 April 2009).

In conjunction with the 2008 Pre-Budget Report, HMRC has published a consultation paper, an impact assessment and some draft legislation in relation to its proposals for extending the new framework to the following taxes:

  • Environmental taxes.

  • Insurance premium tax.

  • Stamp duty land tax (SDLT) and stamp duty reserve tax (SDRT).

  • Inheritance tax.

  • Petroleum revenue tax.

We will cover these documents in more detail in a separate legal update.

(See HMRC Consultation Document, Impact assessment and draft legislation.)

Filing returns and paying tax on time: response paper

HMRC has published a response document, which includes further refinements on their earlier proposals, on penalties for late filing and late payment. An impact assessment is also published. The aim is to align penalties across the taxes and provide HMRC with modern and effective powers.

On 19 June 2008, HMRC published two consultation documents, which proposed harmonisation of the rules relating to:

  • Penalties for late filing of tax returns and late payment of tax.

  • Interest on underpaid and overpaid tax.

For brief details, see Legal update, HMRC proposes alignment of rules on interest and penalties for late filing of returns and late payment of tax (www.practicallaw.com/1-382-2410).

The 2008 Pre-Budget Report response document sets out the responses to the earlier consultation paper together with the outcomes of two workshops, meetings held with key interested parties and independent research commissioned by HMRC. The themes that emerge are discussed before HMRC's proposed penalty models (and the key modifications to its earlier proposals) are explained.

HMRC's preferred approach is to adopt a number of generic models that provide a penalty framework depending on whether the frequency of the filing or payment obligation is:

  • Annual or "one-off".

  • Quarterly.

  • Monthly.

In each case, it is proposed that the late filing and late payment penalties would be dealt with separately.

A separate model for dealing with late paid PAYE is also proposed. This new model involves changes to the current end of year reporting requirements, liability to interest on late paid PAYE and penalties based on the total amount of the late payments (excluding the first late payment) multiplied by a set percentage (based on the number of late payments).

HMRC proposes to use the penalty machinery provisions in Schedule 24 of the Finance Act 2007 for dealing with late filing and late payment penalties.

Responses are requested by 13 February 2009.

(See HMRC: Meeting the obligations to file returns and pay tax on time: consultation responses and refined models and Impact assessment .)

Interest on late paid tax: working towards a harmonised regime

HMRC has published a summary of responses to a consultation undertaken in June 2008 (see Legal update, HMRC proposes alignment of rules on interest and penalties for late filing of returns and late payment of tax (www.practicallaw.com/1-382-2410)), together with its proposals for implementing change and an impact assessment. Draft legislation will follow shortly.

The main conclusions reached were that simple interest should be charged and paid across all taxes, including in-year PAYE paid after the monthly due date, and that a higher rate for late payment than for repayment interest is justified as a disincentive to late payment.

We will consider the proposed changes in detail when the draft legislation is published.

(See HMRC: Consultation document and Impact assessment.)

Payments, repayments and debt: "next stage" paper published

HMRC has published a further consultation paper (including an impact assessment) on payments, repayments and debt as part of its ongoing programme of modernising its powers.

Following the merger of the Inland Revenue (www.practicallaw.com/7-107-7537) with HM Customs & Excise (www.practicallaw.com/5-107-7538), HMRC launched a review of its powers, deterrents and taxpayer safeguards. As part of the review, HMRC consulted on a package of measures dealing with:

  • Payments, repayments and debt.

  • Compliance checks.

  • Penalties reform.

For further detail, see Legal update, HMRC consults on new powers to check compliance, collect payment and impose penalties (www.practicallaw.com/5-380-2858) and Legal update, Modernising Powers, Deterrents and Safeguards: "next steps" paper published (www.practicallaw.com/2-381-2401).

Legislation was subsequently introduced in the Finance Act 2008.

The next stage paper seeks further views on a number of proposals (some of which were included in the previous consultation papers) including:

  • Additional powers for enforcing payment of tax debts.

  • The introduction of schemes that allow payment by monthly instalments rather than annual or biannual lump sum payments.

  • Collecting small debts through the PAYE system.

  • Recovering costs when HMRC is the successful litigant in court proceedings.

  • Tracing missing debtors.

  • Ensuring payment by requiring financial security.

  • Encouraging compliance by introducing tax clearance certificates.

Comments are requested by 13 February 2009.

PLC Tax will write a full update on the consultation paper shortly.

(See HMRC: Payments, Repayments and Debt: The Next Stage and Impact assessment.)

 

Environment

Extension of land remediation relief

The government has published for comment, draft legislation, which will be introduced in the Finance Bill 2009, to extend land remediation relief to the remediation of long term derelict land and to Japanese knotweed.

Under the draft legislation, relief is available for specified expenditure on derelict land, which must have been derelict since 1 April 1998 (though this date may be changed via secondary legislation) and, which must have been derelict when acquired by the claimant.

Instead of extending the scope of existing land remediation legislation to include expenditure incurred on the clearing of Japanese knotweed, as previously proposed, the government is now to introduce powers to make secondary legislation in the Finance Bill 2009 to allow relief for a specified list of naturally occurring contaminants, which can cause market failure. That list will include Japanese knotweed, radon and arsenic.

The government states that its change of tack in relation to provisions on Japanese knotweed is aimed at providing greater certainty about the circumstances in which relief can be claimed.

The secondary legislation will exclude relief for "inappropriate" methods of remediation. One of those exclusions is the removal of Japanese knotweed to landfill sites.

For more detailed information on land remediation relief, see Practice note, Tax relief for remediation of contaminated land (www.practicallaw.com/5-204-8960).

(See

Pre-Budget Report - PBRN 21 - Land remediation relief and HMRC: Land remediation relief: Technical note (which contains the draft legislation at Annex A).)

For information about other environment tax announcements in the 2008 Pre-Budget Report, see PLC Environment, Legal update, 2008 Pre-Budget Report: environmental announcements (www.practicallaw.com/4-384-0926).

 

Miscellaneous

Charities

In the 2008 Pre-Budget Report, the government made two announcements concerning the taxation of charities:

  • In the field of higher education, the Charity Commission, following consultation with the university sector, the government and HMRC, will issue jointly-agreed guidance on the tax treatment of knowledge transfer activities in early 2009. The aim will be to provide greater clarity, in line with both the requirements of charity law and the government's aim of encouraging closer collaboration between higher education institutions and business.

  • The government is giving careful consideration to responses to a recent consultation on anti-avoidance rules concerning substantial donors to charity. The government intends to publish its detailed responses in early 2009. It is also continuing to explore certain suggestions arising from its 2007 consultation on gift aid.

(See paragraph 4.53 and paragraph 5.116, 2008 Pre-Budget Report.)

North Sea tax regime: tax changes to maximise recovery of oil and gas

HMRC proposes changes to the North Sea tax regime to be included in the Finance Bill 2009.

The overall aim of the proposals is to maximise the economic recovery of oil and gas from the UK continental shelf (UKCS). With this objective in mind, three strands are identified: incentives to provide stimulus to investment, facilitating the reuse of North Sea ring fence assets for alternative use and changes to petroleum revenue tax (PRT) and the chargeable gains regimes (particularly to promote trades in North Sea assets). For background on UK oil taxation, see Practice note, Oil taxation (www.practicallaw.com/2-200-9267).

The proposed changes include:

  • Promoting investment in the UKCS by introducing a "value allowance" which would result in a certain amount of adjusted corporation tax ring fence profits being taxed at a lower or zero rate of supplementary charge.

  • Clarification of the tax treatment of transactions involving the change in use of North Sea ring fence assets to other uses (such as gas storage). This would include how "change in use" should be defined, the tax consequences when assets move out of the corporation tax ring fence and PRT tax regimes and into the mainstream corporation tax regime in terms of capital allowance clawback, the treatment of future income and expenditure and relief for decommissioning costs.

  • Introducing a tax roll-over regime for "swaps" of North Sea licences and a tax exemption where a licence interest is sold and the proceeds are reinvested in acquiring one or more new ring fence licence interests.

  • Ensuring that companies have the potential for full PRT relief for decommissioning costs when licences are terminated prior to completion of decommisioning.

  • Further measures to simplify the PRT regime.

Comments on the proposals are invited by 13 February 2009.

(See Consultation on the North Sea fiscal regime.)

Review of offshore financial centres

The Chancellor has announced a review of the UK's crown dependencies (Jersey, Guernsey, the Isle of Man) and overseas territories (for example, Anguilla, British Virgin Islands, Cayman Islands) as offshore financial centres. The review will cover:

  • Financial supervision and transparency.

  • Fiscal arrangements.

  • Financial crisis management.

  • Resolution agreements.

  • International cooperation.

Interim conclusions will be produced in time for the Budget in 2009, with further conclusions later in 2009.

(See 2008 Pre Budget Report- PBRPN01- Revew of offshore financial centres (page 4).)

Taxpayers' charter

HMRC has published a formal response to the consultation paper HMRC and the taxpayer: a new charter for HMRC and its customers, which closed on 11 September 2008. Following the responses, HMRC will liaise with interested parties to produce the first draft of the charter, which it will publish for further consultation in early 2009. The broad principles HMRC will take forward when drafting the charter are that:

  • A single charter is appropriate.

  • The charter should contain high-level principles, with links to HMRC standards of service.

  • It must be short, simple to understand and easily accessible.

  • The charter should cover taxpayers' rights and obligations.

  • It should clearly signpost the complaints process.

  • There will be a short clause in Finance Bill 2009 to give the charter explicit legislative authority.

For background to the consultation, see Legal update, HMRC consults on new powers to check compliance, collect payment and impose penalties (www.practicallaw.com/5-380-2858).

(See Pre-Budget Report 2008: Consultation Responses Document 24 November 2008, A new charter for HMRC and its customers.)

 

Pensions

Pensions tax allowances to be frozen after 2010/11

The lifetime allowance (www.practicallaw.com/8-201-6477) and annual allowance (www.practicallaw.com/6-201-6478) will be frozen at their 2010/11 levels for the following five years. The lifetime allowance is currently £1.6 million. Further prospective annual increases have already been confirmed in secondary legislation, with the lifetime allowance due to increase to £1.8 million for the 2010/11 tax year. The Chancellor has announced that for the 2011/12 to 2015/16 tax years, the lifetime allowance will remain frozen at the £1.8 million level. Likewise, the annual allowance (currently £235,000) will increase to £255,000 for 2010/11 under existing regulations and will stay at this level up and including the 2015/16 tax year.

For the first time since the Finance Act 2004 was implemented, the report contained no proposed technical improvements to the pensions tax simplification measures.

See 2008 Pre-Budget Report - PBRN 14 - Pension schemes: the lifetime allowance and annual allowance from 6 April 2011.

Update on open market option review

The Chancellor announced that the government will in the near future publish an update on its ongoing review of the operation of the open market option.

In a bid to increase take-up of the option among members of pension schemes, a joint review was undertaken before the 2007 Pre-Budget Report by the Treasury and Department for Work and Pensions (see Legal update, 2007 Pre-Budget Report: Pensions (www.practicallaw.com/6-377-0376)). Various recommendations were made, primarily designed to improve members' awareness of the open market option, and in accepting the recommendations, the Chancellor undertook to report on progress in future pre-Budget reports.

See 2008 Pre-Budget Report - paragraph 5.90.

 

Personal tax and investment

Tax rates and allowances

The Chancellor announced that the rate of income tax for taxpayers with savings and earned income greater than £150,000 will increase from 40% to 45% from April 2011. Further, a new dividend tax rate of 37.5% will apply to taxpayers with taxable income above £150,000 from that date. Otherwise, the tax rates for basic rate and higher rate taxpayers will remain at current levels.

The Chancellor also announced a number of changes to the personal income tax allowance. In particular:

  • For persons aged under 65, the personal income tax allowance will increase to £6475 from April 2009. This represents an increase of £130 above indexation and means that the £600 temporary increase in the personal allowance announced in May 2008 (backdated to April 2008) will be made permanent. Additionally, the government has pledged to maintain the additional £130 of personal allowance in April 2010 when inflation is expected to be negative.

  • From April 2010, the personal income tax allowance for taxpayers with gross income (after deduction of trading losses) between £100,000 and £140,000 will be reduced by up to half (at the rate of £1 for every £2 of gross income over £100,000) and will be further reduced for taxpayers with gross income in excess of £140,000 (at a rate of £1 per £2 of income above £140,000 up to a maximum of the full amount of the personal allowance).

The Chancellor also announced that from April 2011, employer's and employees' national insurance contributions (NICs) (www.practicallaw.com/8-201-8297) will be increased by 0.5%. This means that employer's NICs on Class 1, Class 1A and Class 1B contributions will be 13.3% (and will remain uncapped). The rate of employees' NICs will be increased to 11.5% on earnings between the primary threshold (www.practicallaw.com/1-205-6589) and the upper earnings limit (www.practicallaw.com/2-205-6584) and to 1.5% on earnings above the upper earnings limit. Additionally, from April 2009, the upper earnings limit will be aligned with the higher rate tax threshold (£43,875) and from April 2011, the primary threshold will be aligned with the income tax basic rate personal allowance.

The dividend trust rate and the trust rate of tax will be increased to 37.5 per cent and 45 per cent respectively from 6 April 2011. These tax rates do not appear to be limited to income above £150,000 like the new, higher rates for individuals. This is likely to be a concern for many UK trusts, as well as offshore trusts that pay tax on UK source income.

The announcement of the increased rates of tax for taxpayers with savings and earned income above £150,000 together with the general increase in the rate of NICs and the announcement that the government is further postponing introducing "income shifting" legislation, will do little to discourage owner-managed businesses from paying dividends rather than salary. Although the dividend tax rate has increased to 37.5%, this nevertheless represents an effective tax rate of a little over 30%.

The increase in the NICs upper earnings limits will mean that more earnings will bear NICs at the current 11% rate (11.5% from April 2011).

(See 2008 Pre-Budget Report - PBRN 01 - Income Tax Rates, Allowances and Limits and National Insurance Contributions, Rates and Thresholds and PN02 - Value Added Tax, Income tax allowances, National Insurance Contributions, Child and Working Tax Credit rates 2009-10 and other rates; Avoidance of corporation tax.)

For more information on what these changes mean for employee incentives, see PLC Share Schemes & Incentives, "Ask the Team": Implications of the 2008 Pre-Budget Report for share incentives (www.practicallaw.com/4-384-2100).

Asset management

Four measures have been announced:

The government is also considering responses to recent consultations on tax elected funds, the tax regime for offshore funds and the proposal to adapt the tax rules for investment trust companies to enable tax-efficient investment in interest bearing assets (see Legal update, HM Treasury launches consultations on asset management taxation (www.practicallaw.com/3-382-7280)) and will hold further discussions with industry on options for reforming the stamp duty reserve tax (SDRT) (www.practicallaw.com/9-107-7305) rules which apply to unit trusts (Schedule 19, Finance Act 1999). It is aiming to introduce legislation in these areas in the Finance Bill 2009. For more information on SDRT and unit trusts, 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 (www.practicallaw.com/2-382-5451).

(See PBRN09: Avoidance using Authorised Investment Funds and 2008 Pre-Budget Report: paragraphs 4.31 and 4.32.

Offshore disclosure

HMRC will give offshore account holders a new opportunity to disclose, of their own accord, if they have unpaid tax and to settle debts. For details of the earlier amnesty, see Legal update, Income Tax: Offshore bank accounts: disclosure procedure for taxpayers (www.practicallaw.com/9-364-5994). A further announcement will be made early in 2009.

(See 2008 Pre-Budget Report: paragraph 5.98.)

Qualified Investor Schemes: abolition of "substantial holding rules"

The special tax rules imposing charges on substantial holdings in Qualified Investor Schemes (QIS) are to be replaced with a "genuine diversity of ownership" rule. This should reduce the compliance burden for QIS investors. The aim of the new rule, effective from 1 January 2009, is to ensure that QIS tax advantages are only available where a fund is widely held.

QIS are a type of authorised investment fund (AIF) open only to "sophisticated investors". Currently, under the Authorised Investment Funds (Tax) Regulations 2006 (SI 2006/964) (AIS Regulations), annual increases in the value of a QIS holding of an investor who owns (alone or with associates or connected persons) 10% or more of a QIS are charged to tax as income of the investor.

In the 2008 Budget, the government announced its intention to simplify the tax rules for QIS and in July 2008 it published a consultation document, together with draft legislation. See Legal update, HM Treasury launches consultations on asset management taxation (www.practicallaw.com/3-382-7280).

The AIF Regulations will be amended to remove the specific tax charge on substantial investors. It will be replaced by a "genuine diversity of ownership condition" for QIS. Broadly, a QIS will meet the condition if its units are widely available and not limited to specific persons or groups of connected persons. If a QIS meets the condition, all its investors, including those with holdings of 10% or more, will be subject to the tax rules applying to AIFs: see Practice note, Unit trusts and open-ended investment companies: tax (www.practicallaw.com/2-382-5451).

(See 2008 Pre-Budget Report - PBRN07 - Qualified Investor Schemes.)

Qualifying ISA investments to include multilateral institution bonds

The Chancellor has announced that the range of investments eligible for an individual savings account (ISA) (www.practicallaw.com/7-107-6260) will include bonds issued by Multilateral Institutions, as defined by the Organisation for Economic Cooperation and Development (OECD) (www.practicallaw.com/0-107-6942) (see OECD: Annex 2: List of International Organisations).

The ISA Regulations 1998 detail the type of investments which may be made under a savings scheme. Regulations 3 and 4 will be amended to provide for bonds issued by Multilateral Institutions to be qualifying investments for ISAs in stocks and shares.

The provision will take effect on and after 16 December 2008.

The announcement follows an informal consultation referred to in HM Revenue & Customs: ISA Bulletin 4 on 9 October 2008.

(See 2008 Pre-Budget Report - PBRN 16 - Individual Savings Accounts and Multilateral Institutions.)

For more information on tax changes for individuals, trusts and charities, see PLC Private Client, Legal update, Pre-Budget Report 2008 (www.practicallaw.com/6-384-2104).

 

Property

Real Estate Investment Trusts regime: anti-avoidance

Legislation will be introduced in the Finance Bill 2009 to amend the conditions to be met by a company or group in the UK Real Estate Investment Trusts (REIT) regime. The changes are to ensure that those conditions cannot be circumvented by the artificial creation of new group structures.

The changes mean that the conditions and tests to qualify as a REIT are applied more widely, to the whole economic group, so that all owner occupied property is excluded from the tax exempt business. The amended conditions and tests will apply to accounting periods beginning on and after 1 April 2009.

The balance of business conditions are two of the conditions that the company or group has to meet to be a REIT. Those conditions are that 75% or more of:

  • The value of its assets must consist of property involved in a property rental business.

  • Its profits must arise from property rental business.

Property that is owned and occupied by the company or group is excluded from the property rental part of the business. The exclusion also applies to rental of property by one member of a group to another.

However, some groups have looked into splitting their activities into more than one group as defined for REIT purposes, although both groups would remain under the same economic ownership. This has allowed members of an economic group to rent property to other members of the same economic group, with that income then being treated as income of the property rental business. As a result, previously non-qualifying groups could become groups that comply with the REIT legislation.

For more detailed information on UK REITs, see Practice note, UK REITs: questions and answers (www.practicallaw.com/7-201-8033).

(See Pre-Budget Report - PBRN 16 - UK Real Estate Investment Trusts.)

VAT on property

The government has announced that, from early 2009, it will be making it easier for VAT to apply to supplies of land and property which would otherwise be VAT exempt supplies. There is no further detail at this stage, but this announcement seems to indicate a simplification of the VAT option to tax rules, see Practice note, VAT and property: the option to tax (www.practicallaw.com/4-107-4229).

(See 2008 Pre-Budget Report 2008: paragraph 4.26.)

SDLT disclosure regime and residential property: identification of scheme users

The government announced in April 2008 that the stamp duty land tax (SDLT) disclosure rules will be extended to residential property where the value of the property is greater than £1 million (see Practice note, SDLT disclosure regime: Extending the SDLT disclosure regime for high value residential properties (www.practicallaw.com/6-201-2437)). It has now been announced in the 2008 Pre-Budget Report that this will include a mechanism for identifying users of schemes which are disclosed.

Under current rules, certain SDLT arrangements must be disclosed to HMRC, generally by the promoter of the scheme. This gives HMRC information on the types of schemes used to gain a tax advantage and enables HMRC to block certain schemes that avoid SDLT. The current SDLT disclosure regime applies where at least some non-residential property is involved and the value of that property is at least £5 million (see Practice note, SDLT disclosure regime (www.practicallaw.com/6-201-2437)). The current rules do not require the user of a SDLT scheme to be identified to HMRC. This change will align the SDLT disclosure rules with the direct tax disclosure rules in this respect, see Practice note, Direct tax disclosure regime: User's duty to include reference number in tax return (www.practicallaw.com/1-107-4933).

(See 2008 Pre-Budget Report: paragraph 5.109).

First time buyers: tax relieved savings

HM Treasury has invited views from industry and individuals on the merits of introducing a new tax-relieved savings scheme targeted at first time buyers.

(See 2008 Pre-Budget Report; paragraph 5.78.)

Property Authorised Investment Funds: relieving provisions announced

HMRC proposes three amendments to the property authorised investment fund (PAIF) rules. For a background to PAIFs, see Practice Note, Property authorised investment funds: tax (www.practicallaw.com/0-380-3898)).

  • A PAIF is an open ended investment company (OEIC) (www.practicallaw.com/5-107-6416) that meets certain conditions. One of the conditions is the "genuine diversity of ownership" condition of the OEIC. This condition can be met by the PAIF being owned by a unit trust scheme (a feeder fund) (regulation 69J of The Authorised Investment Funds (Tax) Regulations 2006). If a feeder fund is used, however, SDRT (www.practicallaw.com/4-107-7204) is payable under schedule 19 to the Finance Act 1999 in relation to both transactions in the feeder fund and in the PAIF, even though there is, economically, only one investment by the ultimate investors. The proposed change will exempt the feeder fund from the double charge to SDRT.

  • At present, PAIFs making property income and interest distributions are required to pay distributions to authorised investment funds gross of tax. It is proposed to allow PAIFs to make distributions to feeder funds net of tax to ease the feeder fund's administration.

  • At present, there are no rules dealing with the tax treatment of manufactured payments in respect of a holding in a PAIF (in contrast, for example to real estate investment trusts (see section 139, Finance Act 2006). The new measure will clarify the position.

The above changes to the PAIF regime will have effect from 1 January 2009. The proposals in relation to feeder funds are welcome and should help to encourage investment in PAIFs through the medium of a unit trust scheme.

(See 2008 Pre-Budget Report - PBRN8 - Property Authorised Investment Funds.)

False self-employment in construction

The government continues to be concerned about false self-employment within the construction industry, as this may lead to unfair commercial advantage and exploitation of vulnerable workers. It will continue to work with the construction industry to tackle this issue.

(See 2008 Pre-Budget Report: paragraph 5.105.)

For information about other property announcements in the 2008 Pre-Budget Report, see Legal update, 2008 Pre-Budget Report: implications for property (www.practicallaw.com/5-384-1845).

 

Small and medium-sized businesses

Corporation tax: small companies’ rates

The planned increase in the small companies' rate (SCR) of corporation tax from 21% to 22% from 1 April 2009 has been deferred until 1 April 2010. The marginal relief fraction will be unchanged at 7/400. Profit limits will remain the same as at present, that is with the upper profit limit at £300,000 and the marginal relief upper profit limit at £1.5 million.

The SCR for profits from oil extraction and oil rights in the UK and the UK Continental Shelf ("ring fence profits") will remain at 19%.

(See 2008 Pre-Budget Report - PBRN02.)

Income shifting: nothing in Finance Bill 2009

The Chancellor has announced that the government will not be introducing income shifting legislation in the Finance Bill 2009 to counter arrangements which divert income from one individual to another who is subject to a lower tax rate, to obtain a tax advantage. In light of the current economic climate, this issue will be kept under review for future budgets. The government stated in the 2008 Budget that legislation would be introduced in Finance Bill 2008, see Legal update, Budget 2008: Income shifting rules postponed (www.practicallaw.com/8-380-9405).

(See 2008 Pre-Budget Report - PN01.)

Enterprise Investment Scheme: making it more attractive

HMRC has issued a summary of responses to a consultation which ran from 12 March to 20 June 2008, see Legal update, Budget 2008: EIS consultation (www.practicallaw.com/8-380-9405). Subject to approval from the European Commission that expansion of the scheme would not breach state aid regulations, the government is exploring possibilities for making the scheme more attractive to investors. For background about the Enterprise Investment Scheme (EIS), see Practice note, Enterprise Investment Scheme (www.practicallaw.com/2-375-9154).

Measures under consideration include:

  • Relaxation of the exclusion of leasing from the qualifying activities of an investee company where the company develops and leases a product, if that product represents or embodies intangible property.

  • Amending the rules to facilitate mergers and takeovers where the companies involved are all EIS-qualifying.

It is proposed that changes to be included in Finance Bill 2009 will:

  • Simplify the expenditure requirement such that 100% of the money subscribed must be employed within two years.

  • Amend the rules so that relief for 100% of the investment can be carried back against income of the preceding tax year (subject to the annual investment limit).

  • Rectify an anomaly between the EIS and capital gains tax rules when there is a share-for-share exchange and a gain arises on a deferred gain and on the disposal of the shares.

The government does not plan to ease the 30% restriction on the financial interest of an investor or introduce any flexibility in relation to accidental breaches of the three-year qualifying period.

(See 2008 Pre-Budget Report - The enterprise investment scheme: summary of responses.)

Company tax simplification review

A new review considers whether, in the light of mandatory on-line filing for company tax returns from 2011, it is possible to simplify corporation tax calculations and returns for smaller companies.

A number of simplification options are under consideration although some ideas have already been rejected as unworkable. These include:

  • Using statutory accounting profits to be used as taxable profits, with no requirement to make adjustments for tax purposes.

  • A system of flat rate allowances.

Both of these represent a "one size fits all" approach which does not sit well with the government's specially targeted tax reliefs and incentives for smaller companies in capital allowances and R & D tax credits.

Ideas which the government considers to have the potential for further exploration include:

  • A new accounting standard incorporating tax obligations.

  • Calculating tax on a cash flow basis, and abandoning the accruals basis.

Work will only be taken forward on simplification if there is genuine support from business and professionals for the ideas outlined. The review also takes into account recent EU proposals which allow member states to vary accounting requirements for "micro" companies from current accounting directives.

(See Pre-Budget Report 2008, Simplification review: corporation tax calculations and returns for smaller companies - discussion document.)

Tax relief for travel expenses

Following the consultation earlier this year (see Legal update, Consultation on avoidance involving tax relief claims for travel expenses of temporary and contract workers (www.practicallaw.com/7-382-7117)), the government has decided to leave the current rules unchanged and will instead focus on ensuring that the current regime is properly applied. If compliance does not improve, the government may return to this issue at a later stage.

(See 2008 Pre-Budget Report: paragraph 5.104.)

Other measures of interest to SMEs

 

VAT

Temporary reduction to the standard rate of VAT

Scope

The standard-rate (www.practicallaw.com/7-107-7306) of VAT (www.practicallaw.com/5-107-7468) will be reduced from 17.5% to 15% for a 13-month period which starts on 1 December 2008. The 15% rate will be apply until 31 December 2009. Therefore, from 1 January 2010 the standard-rate of VAT will revert to 17.5%.

The measure will be implemented by secondary legislation, which gives it effect for 12 months. Provisions to be introduced in the Finance Bill 2009 will extend the effect of the measure by one month to 31 December 2009.

Only standard-rated supplies (including imports and acquisitions from other member states) made between 1 December 2008 and 31 December 2009 are affected by the measure. Standard-rated supplies include supplies of opted property (see Practice note, VAT and property: the option to tax (www.practicallaw.com/4-107-4229) ). The measure does not affect supplies that are exempt (www.practicallaw.com/1-107-6588), zero-rated (www.practicallaw.com/2-107-7530) or reduced-rated for VAT.

Certain supplies are not standard-rated so they are unaffected by the measure. These include:

  • Zero-rated goods and services, including basic foodstuffs, children's clothing and books.

  • Exempt goods and services, such as financial services, education and health.

  • Reduced-rated goods and services, subject to VAT at 5%, such as domestic fuel and power.

This may mean that lower income consumers will see less of a benefit from the measure than those on higher incomes who typically spend more on standard-rated goods and services such as adults clothing, cars, TVs and fridges.

VAT registered businesses must charge output tax (www.practicallaw.com/3-107-6950) at the new 15% rate on all standard-rated supplies, goods and services they make on and between 1 December 2008 and 31 December 2009. If a VAT registered business does not make any standard-rated services (for example, it makes only zero- or reduced-rate supplies) then the measure will not affect the output tax it charges. However, the business will be affected by the measure in relation to any input tax (www.practicallaw.com/8-107-6716) it suffers on standard-rated goods or services that it receives.

To ensure that the new rate is applied correctly, care needs to be taken in establishing the "time of supply" (see further, Practice note, Value added tax: Time of supply (www.practicallaw.com/2-107-3725)).

The measure causes two consequential changes which are also effective from 1 December 2008:

  • An amendment to the percentages used in the flat-rate VAT scheme.

  • The timing of credit notes issued following the cut will be affected.

The government also proposes to introduce "anti-forestalling legislation" in the Finance Bill 2009 to prevent businesses from using artificial arrangements, entered into on or after 25 November 2008, where there is no current economic activity, to reduce VAT on goods or services to be provided on or after 1 January 2010, when the rate reverts to 17.5%. Details of that proposal will be announced on Tuesday 25 November 2008 in a written statement by the Financial Secretary to the Treasury.

For more detailed information on VAT, see Practice note, Value added tax (www.practicallaw.com/2-107-3725).

Implications

The government's aim is to make goods and services cheaper to encourage spending and therefore provide a much-needed boost to the economy. However, this measure will only achieve that aim if suppliers (such as retailers and service providers) pass on the full tax cut to customers. However, it is not mandatory for suppliers to do so.

  • The short time scale before implementing the measure is likely to result in hardship for businesses that have to implement the measure in a week's time. All businesses affected by the measure will need to ensure that their accounting systems, tills, price lists and price tags reflect the change from next Monday.

  • For those businesses with VAT periods which straddle 1 December 2008, care should also be taken in completing returns to ensure that the correct amounts of VAT are recorded.

  • Businesses have the option of applying the special change of rate rules to pass on the benefit of the measure to recipients of their supplies where tax points straddle 1 December 2008 or pre-payments or deposits are received before 1 December 2008, for supplies made on or after that date.

  • Where a landlord has collected rent (typically quarterly) in advance for a period straddling 1 December 2008 (for example, rent collected on the 29 September 2008 quarter day for the period from 29 September 2008 to 24 December 2008) and it chooses to make an apportionment under the special rules, in addition to credit for, or a refund of, VAT, the landlord must issue a VAT credit note. As this will be administratively costly for affected landlords to implement, it will not be surprising if landlords opt not to make the adjustment under the special rules. Where no adjustment is made, the tenant will not benefit from the measure until its first rent payment after 1 December 2008.

  • The government states that it will adopt a "light touch" for errors and mistakes in the first VAT returns following 1 December 2008.

  • For businesses that are either not VAT-registered or unable to make any or full VAT recovery (such as insurance companies and banks) the measure is expected to be much welcomed since the amount of irrecoverable input tax should be reduced. Unless prices for standard-rated goods and services are quoted as VAT-inclusive, in which case it is up to the supplier whether it passes on the reduction in rate, so businesses should see a cash flow benefit from the measure because the amount of input tax incurred is reduced.

  • For supplies of goods or services taking place on or between 1 December 2008 and 31 December 2009, under contracts entered into before 1 December 2008, section 89 of the Value Added Tax Act 1994 (www.practicallaw.com/3-107-7469) means that prices will be adjusted for the measure unless the contract provides otherwise.

  • Where a retailer passes on the VAT cut, for example, on a TV previously priced at £1,175 inclusive of VAT, this will be re-priced at £1,150. This represents a consumer saving of £25. On a £11,750 car, re-pricing will mean a £250 saving. Whether these savings are significant are subjective to the recipient of the standard-rated supply.

Sources

Property

See VAT on property.

Retail schemes: threshold for bespoke schemes increased

Retailers with an annual turnover below a certain threshold are subject to one of five published special VAT accounting schemes. Retailers with an annual turnover equal to or over that threshold must either agree a bespoke scheme with HMRC (which scheme is usually based on one of the published schemes) or apply the normal accounting rules (as to which, see Practice note, Value added tax: Accounting for VAT (www.practicallaw.com/2-107-3725)).

The current threshold is £100 million. As part of the 2008 Pre-Budget Report, HMRC announced that the threshold is to increase to £130 million. This change is to take effect from 1 April 2009, although retailers with an annual turnover between £100 million and £130 million will continue to operate their bespoke schemes until they end.

(See 2008 Pre-Budget Report - PBRN 24 - VAT: bespoke retail schemes threshold.)

Flat rate scheme: simplification

The VAT flat rate scheme allows businesses with turnover up to £150,000 to pay VAT as a flat percentage of turnover, with rates set according to business sector and intended to reflect effective rates of VAT across that sector.

As part of the 2008 Pre-Budget Report, HMRC has made two announcements aimed at simplifying the flat rate scheme:

  • To enter the scheme, a business must currently check that both:

    • its taxable turnover is less than £150,000; and

    • its total income is less than £187,500.

    The second of these requirements is to be removed, meaning that entry to the scheme will depend solely on taxable turnover.

  • At present, a business must check every year whether its annual income exceeds £225,000. If so, it must leave the scheme. "Income" is not defined for these purposes.

    This test is to be amended so that income is calculated in accordance with the method used by the business to calculate its VAT liability while it is in the scheme. This means that, for example:

    • if a business calculates its VAT liability on the basis of cash received, the leaving test will also be based on cash received; and

    • if a business calculates its VAT liability on the basis of invoices issued, the leaving test will also be based on invoices issued.

These changes are to have effect from 1 April 2009. Legislation enacting them is to be introduced in early 2009 in the form of amendments to the Value Added Tax Regulations 1995 (SI 1995/2518).

(See 2008 Pre-Budget Report - PBRN 25 - Simplifying the entry and leaving rules for the VAT flat rate scheme.)

Missing trader intra-community fraud: mobile phones and CPUs

The government has applied to the European Commission for permission to renew the reverse charge introduced in 2007 on supplies of mobile phones and computer processing units and other accessories, see Article, Carousel fraud: all the fun of the (un)fair (www.practicallaw.com/9-204-7987).

 
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