Budget 2008 confirms that legislation will be introduced in the Finance Bill 2008 to amend the scheme reference number (SRN) system used in the tax disclosure regimes.

The government announced in the Pre-Budget Report 2007 that it would consult on proposed changes to the direct tax and NIC disclosure regimes aimed at remedying a number of perceived shortcomings in the operation of the SRN system (see Legal update, Pre-Budget Report 2007: Disclosure regime: options to improve scheme reference number system). On 20 November 2007, HMRC published a consultation paper (together with draft legislation) outlining the proposed changes (see Legal update, Tax avoidance disclosure regime: HMRC consultation document on proposed changes to the scheme reference number system). The consultation period ended on 12 February 2008. HMRC has yet to publish a summary of responses.

While no further draft legislation or any draft regulations have been published, Budget 2008 confirms that the following amendments will be introduced in the Finance Bill 2008 or, in the case of the NIC disclosure regime, in NIC Regulations:

These changes appear substantially to reflect the changes proposed in the consultation paper and draft legislation. However, until the Finance Bill is published it remains to be seen whether the changes go wider than expected.

Budget 2008 does not state when the changes will come into effect. However, the impact assessment included in the consultation paper indicated that the changes are likely to come into effect on 1 October 2008.

For more information about the direct tax and NIC disclosure regimes, see:

(See 2008 Budget - BN 67 - Tax avoidance disclosure regime: scheme reference number system.)

The Finance Bill 2008 is to contain provisions countering tax avoidance involving leased plant and machinery. The draft legislation has previously been published (some on 9 October 2007, as part of the 2007 Pre-Budget Report, and some on 13 December 2007), although the Budget announcement states that certain amendments (detailed below) are to be made to that draft legislation.

(For a general discussion of the UK tax treatment of leased plant and machinery, see Practice note, Equipment leasing: tax.)

The Finance Bill 2008 provisions announced in the 2008 Budget relate to the following:

(See 2008 Budget - BN 20 - Leased plant or machinery: anti-avoidance.)

Legislation will be introduced in the Finance Bill 2008, which will take effect from 12 March 2008, to counter arrangements that generate trading losses for individuals carrying on a trade, otherwise than in partnership, that would otherwise be available to set against their taxable income and chargeable gains.

The legislation will deny loss relief if the individual makes a loss in the trade in the tax year and:

Where there is no tax avoidance motive but the individual carries on the trade in a non-active capacity, loss relief will be restricted to £25,000 a year.

The draft legislation substantially mirrors the anti-avoidance legislation introduced in the Finance Act 2007 that applies to non-active partners.

For the draft legislation and draft explanatory notes, see Restrictions on trade loss relief for individuals: draft legislation and explanatory notes.

(See 2008 Budget - BN63 - Restrictions on trade loss relief for individuals.)

A progress report has been published on the simplification review of anti-avoidance legislation announced in the Pre-Budget Report 2007 (see Legal update, Pre-Budget Report 2007: Review of anti-avoidance legislation).

While legislation to introduce a principles-based approach to financial products tax avoidance has been postponed until the Finance Bill 2009 (see Financial products avoidance: disguised interest), the review has identified a number of specific anti-avoidance provisions that will be repealed by legislation brought forward in the Finance Bill 2008 (see Repeal of obsolete anti-avoidance provisions).

In addition, HMRC will conduct further reviews on the scope for simplification in each of the following areas:

HMRC is also considering the scope for aligning the various tax rules that prevent relief for transactions carried out for "unallowable purposes". Other reviews that cover the effectiveness of anti-avoidance legislation will be conducted with the goals of simplification in mind.

Informal consultation will take place over summer 2008 and beyond, with a further progress report due with the Pre-Budget Report 2008.

(See Simplifying anti-avoidance legislation: a progress report on the anti-avoidance simplification review.)

The Finance Bill 2008 is to include legislation counteracting schemes that seek to avoid a charge to UK tax under the controlled foreign companies (CFC) rules. This legislation is to take effect from (and including) 12 March 2008 (with accounting periods being split for these purposes where necessary).

Where a company is a CFC and does not satisfy one of a number of exemptions, the total income profits of the CFC (computed on the basis of UK corporation tax rules) and any creditable tax are apportioned among persons (whether resident in the UK or not) with an interest in the CFC. A self-assessment to tax must then be made by those persons that are UK tax resident companies with a 25% or greater interest in the CFC. (For a more detailed discussion of the UK CFC rules, see Practice note, Controlled foreign companies and attribution of gains: tax.)

Following disclosure to HMRC of several tax avoidance schemes (see Practice note, Direct tax disclosure regime), the Finance Act 2008 is to include anti-avoidance legislation in this area. The measures to be included in the Finance Bill 2008 are as follows:

The Budget announcement states that HMRC does not believe that the relevant anti-avoidance schemes work, but believes that the above measures will put the position beyond doubt. The Budget announcement also states that, although many foreign trusts and special purpose vehicles are used for wholly commercial purposes, these should not be caught by the changes as their profits should be exempt from tax under the CFC rules by virtue of the motive test (as to which, see Practice note, Controlled foreign companies and attribution of gains: tax: The CFC regime: attributing income to the UK). However, in order to be confident that the motive test applies, taxpayers may need to seek written clearance from HMRC (which they would not be required to do if the trust or company was not within the ambit of the CFC rules at all).

This raft of measures marks a disappointing increase in complexity of an already highly challenging area of the UK tax rules, and will no doubt cause concern to taxpayers that they will be more open to possibly unexpected UK tax on foreign investments. It can only be hoped that the current proposals for a wholesale reform of the UK taxation of foreign profits (as to which, see Practice note, Taxation of the foreign profits of companies: analysis of 21 June 2007 discussion document and Legal update, Taxation of foreign profits: current HM Treasury thinking on the consultation) will, through discussion between HMRC and taxpayers, give rise to greater simplicity and clarity in this area.

(See 2008 Budget - BN 22 - Controlled foreign companies: anti-avoidance and Controlled foreign companies: draft legislation and explanatory notes.)

Legislation will be introduced in the Finance Bill 2008 to prevent avoidance of corporation tax through schemes that use arrangements intended to crystallise a balancing allowance on plant or machinery used for the purposes of a trade to make it available to a profitable group not intending to carry on the trade for the long term. The measure will have effect where a company sells its trade, and so ceases to carry it on, on or after 12 March 2008.

Generally, when a company ceases to carry on a trade and the market value of the plant or machinery used in the trade is less than its tax written down value, the company becomes entitled to a balancing allowance equal to the difference between the market value of the plant or machinery and its tax written-down value. However, this general rule does not apply where all of the following apply:

(Section 343, ICTA 1988.)

Avoidance may arise where a trading company is acquired by a profitable group (at which point, capital allowances are unaffected) and, as part of the arrangements, the trading company sells its trade to an unconnected buyer a short time later. When the trade is sold, if the market value of the plant or machinery is substantially less than its tax written-down value, there may be a substantial balancing allowance available to the profitable group. This can accelerate the rate at which expenditure is written off for tax purposes. The overall effect is that, as well as allowing the capital allowances to be used by a profitable group that has no long-term interest in the trade, allowances are available sooner than they would have been had the trading company simply been sold by the original owner to the ultimate buyer.

As part of the 2008 Budget, legislation was published (for inclusion in the Finance Bill 2008) to counter such avoidance. The legislation is to apply where a trade (or part of a trade) ceases to be carried on by one company and begins to be carried on by another, and both of the following apply:

Where the legislation has effect, the transfer of the trade will be treated as falling within section 343(2) of the ICTA 1988. This will mean, for capital allowances purposes, that the trade is treated as if it had been continuously carried on. No balancing allowance will be generated and the capital allowances will become available to the person buying the trade for the long term.

(See 2008 Budget - BN 24 - Capital allowances buying and acceleration: anti-avoidance and Capital allowances buying and acceleration: draft Finance Bill legislation and draft explanatory note.)

The Finance Bill 2008 will clarify that the "related party" rules in the corporate intangible assets regime are unaffected by any administration, liquidation or other insolvency proceedings (or equivalent arrangements outside the UK). The relevant legislation will apply to transactions made (including royalties payable) on or after 12 March 2008.

The corporate intangible assets regime contains special rules for transactions between "related parties" (see Practice note, Intangible property: tax: Commencement of the Schedule 29 regime and Practice note, Intangible property: tax: Transactions between related parties). There are four tests as to whether parties are related (see Practice note, Intangible property: tax: Related parties: the four cases), all of which must be satisfied for parties to be related for these purposes. The legislation to be included in the Finance Bill 2008 will clarify that these tests are all to be applied with no regard to any insolvency proceedings (or equivalent non-UK arrangements) involving any company or partnership (regardless of whether that company or partnership is itself one of the potentially related parties).

This measure appears to be designed to prevent businesses from avoiding the effect of the related party rules by ensuring that one party to the transaction is in administration, liquidation or a similar procedure.

(See 2008 Budget - BN 23 - Corporate intangible asset regime: anti-avoidance.)

HMRC has published draft legislation to counter a tax avoidance scheme which seeks to divert income of UK residents to offshore trusts and offshore partnerships and, in reliance on certain provisions of double tax treaties, seeks to prevent the UK from taxing that income.

The draft legislation inserts a provision into the income tax, corporation tax and capital gains tax codes to put beyond doubt that members of a partnership include any person entitled to a share of the income or capital gains of the partnership. The legislation will form part of the Finance Bill 2008 but once enacted, will have effect retrospectively. Additionally, the draft legislation inserts a new section into the provisions dealing with double tax relief to ensure that the UK retains taxing rights over the income of persons resident in the UK. That provision will take effect from 12 March 2008.

(See Draft legislation and explanatory notes on UK residents and foreign partnerships.)

As part of the anti-avoidance simplification exercise, legislation will be introduced in the Finance Bill 2008 to repeal the following anti-avoidance legislation relating to shares and securities which no longer has any practical use.

(See 2008 Budget - BN 35 - Repeal of obsolete anti-avoidance provisions and Simplifying anti-avoidance legislation: a progress report on the anti-avoidance simplification review.)

The government will publish a further consultation document on this area before summer 2008. The objective of any reform in this area would be to enhance the competitiveness of the UK tax framework, whilst being broadly revenue neutral. HMRC and HM Treasury published a discussion paper in June 2007, proposing wide ranging reforms to the taxation of foreign profits, see Practice note, Taxation of the foreign profits of companies: analysis of 21 June 2007 discussion document and Legal update, Taxation of foreign profits: current HM Treasury thinking on the consultation.

(See paragraph 3.14 of HM Treasury: Budget 2008.)

As announced in last year's Budget, from 1 April 2008, the main rate of corporation tax will fall from 30% to 28%. The rate of 28% will also apply on and after 1 April 2009.

For small companies, the rate for all profits will be 21% from 1 April 2008. The marginal relief fraction will become 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.

For companies with profits from oil extraction and oil rights in the UK and the UK Continental Shelf ('ring fence profits') the main rate of corporation tax will remain at 30% and the small companies' rate at 19%.

(See Budget 2008- BN02- Corporation tax main rates and Budget 2008-BN03- Corporation tax small companies rates.)

The Finance Bill 2008 will introduce legislation to simplify the associated companies rules as they affect the calculation of the rate of corporation tax or marginal relief from corporation tax. If a company has an associated company, it starts paying the main rate of corporation tax at lower levels of profits.

The rights or powers held by business partners of directors or shareholders will no longer affect whether a company is "controlled" which in turn determines whether a company is associated. The change to the definition of "control" will only affect the associated companies rules as they apply to determining the rate of corporation tax and marginal relief.

The rights or powers of business partners of directors or shareholders will still be taken into account if "relevant tax planning arrangements" have been in place in respect of the tax paying company.

For background, see Practice note, Direct taxes: Rates.

(See Budget 2008 - BN04-Simplification of associated companies rules.)

The Finance Bill 2008 will increase the rate of tax relief available under the research and development (R&D) tax credit system as follows:

Although these developments were announced in the 2007 Budget, they (and the other changes mentioned below) will not come into effect until a date to be specified (by Treasury Order) since the R&D schemes which apply to small and medium companies (SME) and to the vaccine research relief (VRR) are awaiting EC State Aid approval.

New conditions will be added to the SME and VRR schemes to conform the schemes with EC State Aid requirements. The conditions, which will be included in the Finance Bill 2008, will:

To comply with State Aid approval, the rate of relief under the VRR scheme will be reduced (for all companies) from 50% to 40%.

For more information on the R&D tax credit system, see Practice note, Intangible property: tax: Research and development.

(See 2008 Budget - BN 05 - Amendments to the research & development and vaccine research relief schemes.)

The Finance Bill 2008 will introduce a 100% annual investment allowance (AIA) for the first £50,000 of a business’ expenditure on plant and machinery each year. This change is part of the business tax reform package announced in the 2007 Budget.

The new AIA will be available to:

Only expenditure incurred on or after 1 April 2008 (for businesses liable to corporation tax) or 6 April 2008 (for businesses subject to income tax) can qualify for the AIA.

Certain other 100% first year capital allowances will continue to be available. In particular, the availability of enhanced capital allowances, business renovation allowances, flat conversion allowances and research & development allowances will not be affected by the AIA. However, first year allowances for small and medium-sized enterprises will cease when AIA's come into effect. (For more detail on those other allowances and capital allowances generally, see Practice note, Capital allowances on property transactions.)

Draft legislation was published in December 2007, including anti-avoidance provisions which were aimed at preventing:

For more information on those draft anti-avoidance provisions, see Legal update, Implementing the proposed changes to the capital allowances regime: Anti-avoidance provisions.

The introduction of the AIA is good news for businesses because they will be allowed to allocate expenditure to the AIA in the way most tax efficient for them, but the anti-avoidance restrictions which only allow a single AIA for groups of businesses appears harsh to businesses that are fragmented for commercial rather than tax avoidance purposes.

For more information on AIAs, see Legal update, Implementing the proposed changes to the capital allowances regime: Annual investment allowance (AIA).

For information on capital allowances generally, see Practice note, Capital allowances on property transactions.

(See 2008 Budget - BN 12 - Capital allowances: plant and machinery: annual investment allowance.)

Legislation will be introduced in the Finance Bill 2008, to have effect on and from 12 March 2008, to introduce a statutory rule that, where business stock is disposed of other than by way of a trading transaction, the tax computation should reflect the appropriation from stock at market value (rather than following the accounting treatment).

The relevant Budget Note says that the change is being made to put the existing market value rule on a statutory footing. Presumably HMRC's view of the position has been challenged or tax planning activity in the area has come to light and HMRC has evidently decided to legislate with the intention of putting the position beyond doubt.

(See 2008 Budget - BN 19 - Trading stock and draft legislation and explanatory notes.)

Provisions in the Finance Bill 2008 will allow businesses to claim a plant and machinery writing down allowance (WDA) of up to £1,000 where the unrelieved expenditure in the main pool or the new special rate pool is £1,000 or less.

These changes mean that businesses can claim WDAs much sooner than under the current rules and they apply to chargeable periods beginning on or after 1 April 2008 for businesses within the charge to corporation tax and on or after 6 April 2008 for businesses within the charge to income tax. They are aimed at reducing the administrative burden of smaller businesses by eliminating the need to calculate WDAs on very small balances for many years, as would have been required under the current rules.

This is to be a permanent change to the capital allowances code applicable to both the main (20% rate) and the new special (10% rate) pools but not to single asset pools.

For information on capital allowances generally, see Practice note, Capital allowances on property transactions.

(See 2008 Budget - BN 15 - capital allowances: small plant and machinery pools.)

£5 stamp duty charges have been removed. This will affect the following instruments executed on or after 13 March 2008:

It will not normally be necessary to present documents which until now attracted £5 stamp duty to HMRC for stamping. However, duplicate, counterpart documents or substitute bearer instruments must still be presented to HMRC to be stamped to indicate that the original document was duly stamped with the correct amount of stamp duty.

The removal of the £5 stamp duty charge was announced in the PBR, see Pre-Budget Report 2007: Stamp duty: exemption from stamp duty for fixed duty and low value transfers.

(See 2008 Budget - BN55- reduction of Stamp Duty Administrative burden.)

See also:

Legislation will be introduced in the Finance Bill 2008, with effect from Royal Assent, to provide for existing HMRC concessions to be made statutory by Treasury Order.

No orders are expected to be made using the power until HMRC has completed its current review of its concessions in light of the decision in Wilkinson, which made it clear that the scope of HMRC's discretion to make concessions was not as wide as had been thought (R (on the application of Wilkinson) v Inland Revenue Commissioners [2005] UKHL 30 [2006] STC 270).

(See 2008 Budget - BN 95 - Power to give statutory effect to existing concessions.)

Legislation will be introduced in the Finance Bill 2008 to extend to all other taxes, levies and duties administered by HMRC the penalty regime for filing incorrect returns of income tax, capital gains tax, corporation tax, PAYE, NICs and VAT introduced by Schedule 24 to the Finance Act 2007, with effect from a date to be appointed (expected to be for periods commencing on or after 1 April 2009 where the return is due to be filed on or after 1 April 2010).

Schedule 24 will also be extended and adapted to cover penalties for failing to register or notify HMRC of a new taxable activity, expected to apply to obligations that arise on or after 1 April 2009.

The new provisions will provide for a single penalty regime for all taxes, levies and duties administered by HMRC based on the amount of tax understated or unpaid, the nature of the taxpayer's behaviour and the extent of disclosure by the taxpayer.

The changes are neither unexpected nor unwelcome, and are broadly in line with the proposals set out in HMRC's January 2008 consultation document (see Legal update, HMRC consults on new powers to check compliance, collect payment and impose penalties).

(See 2008 Budget - BN 96 - HMRC review of powers, deterrents and safeguards: penalties for incorrect returns & failure to notify a taxable activity.)

Legislation will be introduced in the Finance Bill 2008 to reform record-keeping requirements, inspection and information powers and time limits for assessments and claims in relation to income tax, capital gains tax, corporation tax, PAYE, NICs and VAT, with effect on and after 1 April 2009 (1 April 2010 in relation to time limits for making assessments and claims).

The main purpose of the changes is to conform the differing compliance arrangements across these taxes.

While this might have been expected to result in HMRC's more draconian powers in relation to VAT and PAYE being extended across the other taxes, the final proposals do include some concessions, such as removing VAT and PAYE powers to undertake inspections at private homes without taxpayer consent.

The announcement follows consultation and a summary of responses to the consultation, together with an explanation of the resulting changes, is to follow shortly (see Legal update, HMRC consults on new powers to check compliance, collect payment and impose penalties: A new approach to compliance checks).

(See 2008 Budget - BN 97 - HMRC review of powers, deterrents and safeguards: compliance checks.)

Legislation will be introduced in the Finance Bill 2008, with effect for the most part from Royal Assent, to:

The announcement follows consultation and a summary of responses to the consultation, together with an explanation of the resulting changes, is to follow shortly (see Legal update, HMRC consults on new powers to check compliance, collect payment and impose penalties: Payments, repayments and debt).

Legislation will be introduced in the Finance Bill 2008, with effect from Royal Assent, to enable secondary legislation to be introduced to deal with how appeals against HMRC decisions are handled and, in particular, to provide more consistent arrangements for internal review before appeals are referred to a tribunal.

The announcement follows a consultation announced in the Pre-Budget Report 2007 (the PBR 2007 consultation), in relation to which responses were also published (see Legal update, Pre-Budget Report 2007: Consultation on tax appeals).

The purpose of the PBR 2007 consultation was to take advantage of the opportunity presented by reform of the tribunal system under the Tribunals, Courts and Enforcement Act 2007 to streamline and improve the "complex patchwork of legacy legislation and practice" in relation to appeals that HMRC inherited. The consultation did not cover rights of appeal or the new tribunal system itself, on which the Ministry of Justice has conducted a separate consultation (see Legal update, Consultation paper published on new structure of tax tribunals).

In response to the PBR 2007 consultation, there was general consensus that, where practicable, an aligned and streamlined process for appeals handling across the different taxes was a sensible aim. The vast majority of respondents were in favour of giving taxpayers a statutory right to request an internal review as a means of facilitating an inexpensive and accessible way of resolving disputes.

Therefore, the government proposes to use the power to be introduced in the Finance Bill 2008 to introduce a statutory entitlement to internal review for matters that will fall within the jurisdiction of the proposed Tax Chamber of the new tribunal, to apply from such time as jurisdiction for the relevant appeals is transferred to it (expected to be April 2009 for most matters).

The time limit for accepting an offer of an internal review will be 30 days from the date the review is offered and reviews will have to be completed within 45 days. A trial is to take place in Manchester.

(See 2008 Budget - BN 100 - Tribunal reform: simplifying HMRC's approach to appeals and Tax appeals against decisions made by HMRC: summary of responses and future direction.)

The government has accepted that a further period of consultation is required before these rules can be introduced.

It was announced in the 2007 Pre-Budget Report that legislation would be introduced from 2008-2009 to counter arrangements which divert income from one individual to another who is subject to a lower tax rate, to obtain a tax advantage (income shifting). Diverted income in the form of company dividends or partnership profits would be targeted, but employment income, savings interest and income of any other type would not be. (See Legal update, Pre-Budget Report 2007: Consultation on legislation to counter income shifting: HMRC's response to Arctic Systems. Draft legislation was published in December 2007, see Legal update, Income shifting: consultation on draft legislation and guidance.)

The government has considered responses to the December 2007 consultation and decided not to introduce legislation from 6 April 2008. Instead, it intends to introduce legislation to counter income shifting in Finance Bill 2009.

(See HM Treasury PN 03.)

Legislation is to be included in the Finance Bill 2008 specifying that the UK income tax credit allowed for any non-UK tax paid on trade or professional earnings cannot exceed the UK income tax due in respect of the same earnings. This measure, which will clarify section 796 of the ICTA 1988 (which defines the maximum credit available), is to have effect for income arising on or after 6 April 2008 and for foreign tax paid on or after that date. HMRC states that this will merely confirm existing practice.

(See 2008 Budget - BN 64 - Double taxation relief: income tax.)

As we reported previously, the "non-dom" tax reforms will adversely affect the taxation of share incentives granted to employees and officers who are not ordinarily resident, from 6 April 2008. From that date, such taxpayers' share incentives will be taxed on the same basis as incentives granted to individuals who are ordinarily resident, unless they elect for the remittance basis of taxation and have unremitted gains from share incentives relating to non-UK duties.

This has been confirmed in the 2008 Budget, but little further detail of the amendments has emerged as yet. PLC Share Schemes & Incentives has created a practice note on this topic, which they have now updated to reflect the Budget announcement. See PLC Share Schemes & Incentives Practice note, "Non-dom" tax reforms will change share incentive taxation from 6 April 2008.

HMRC have announced new, immediately effective anti-avoidance measures to make it clear that various deductions and reliefs for amounts that were, on a previous occasion, earnings in relation to a particular share incentive award cannot be claimed for earnings that were exempt from tax.

This development will only be relevant to advisers and taxpayers who noticed, and wanted to exploit, this unintentional change in the tax legislation.

(See 2008 Budget - BN 25 - Employment-related securities: deductible amounts and Employment-related securities etc: deductible amounts etc - Draft Regulations and Explanatory Notes.)

For more detail, see PLC Share Schemes & Incentives Legal update, Budget 2008: Anti-avoidance restrictions on deductible amounts for employee share and share option taxation.

The Chancellor has announced three key changes to the EMI option regime:

The EMI option grant limit increase will have effect in respect of options granted on or after 6 April 2008. The qualifying company changes will have effect in respect of options granted on or after Royal Assent to the Finance Bill 2008.

(See 2008 Budget - BN 18 - Enterprise Management Incentives.)

For more detail, see PLC Share Schemes & Incentives Legal update, Budget 2008: EMI option limit increased, but fewer companies will qualify.

The government is concerned by the growing use of structures, such as "umbrella companies" and overarching contracts of employment with employment businesses, which allow workers participating in such structures to obtain tax relief for ordinary commuting expenses that would not be available to other workers. The government may take action in relation to this issue in future (see paragraph 4.70 of the Budget Report.)

See also:

Provisions in the Finance Bill 2008 introduce a new regime which allows loss-making companies to surrender to HMRC tax losses, related to expenditure on certain environmentally-beneficial plant and machinery, in return for a payment of 19% of the losses surrendered. This payment will be capped at the higher of these two sums:

The new regime applies to qualifying expenditure incurred on or after 1 April 2008.

Losses may only be surrendered if they have not otherwise been relieved and there are clawback provisions, which will apply if the equipment is sold within four years and require companies to repay to HMRC part or all of any payment received.

For the draft legislation published in December 2007 and more information on the background to the introduction of payable enhanced capital allowances, see Legal update, Payable enhanced capital allowances: draft legislation published.

For information on enhanced capital allowances generally, see Practice note, Capital allowances on property transactions: Plant and machinery: enhanced capital allowances.

(See 2008 Budget - BN 14 - capital allowances: introduction of first-year tax credits.)

Provisions in the Finance Bill 2008 will extend and amend the current 100% first year allowances (FYAs) (enhanced capital allowances) scheme for expenditure by businesses on environmentally friendly cars as follows:

These changes will apply to qualifying expenditure incurred on or after 1 April 2008.

Businesses that purchase new, unused (but not second hand) low CO2 emission cars or lease low CO2 emission cars will be eligible to claim FYAs under the scheme.

(See 2008 Budget - BN 11 - 100 per cent first-year allowances for expenditure on cars with low carbon dioxide emissions.)

The Finance Act 2008 will extend 100% first year allowances (FYAs) on refuelling equipment expenditure (a form of enhanced capital allowances) which is incurred on or after 1 April 2008 as follows:

This means that the existing refuelling equipment FYAs regime, which only currently applies for natural gas and hydrogen refuelling equipment and is due to end on 31 March 2008, is effectively extended by five years.

Refuelling equipment refers to equipment required to refuel vehicles powered by these fuels.

For more information on enhanced capital allowances generally, see Practice note, Capital allowances on property transactions: Plant and machinery: enhanced capital allowances.

(See 2008 Budget - BN 10 - 100 per cent first-year capital allowances for natural gas, biogas and hydrogen refuelling equipment.)

The government has announced that it will make a Treasury Order to add to the list of environmentally-beneficial technologies which qualify for 100% first year allowances under the current enhanced capital allowances schemes for expenditure on certain energy-saving and water technologies.

The effective date of the additions has yet to be announced. The Order, which will be made prior to the summer 2008 Parliamentary recess, will:

These revisions will be incorporated in new Lists which will be published later in 2008 after which a Treasury Order will link them to the enhanced capital allowances schemes.

For more information on the enhanced capital allowances schemes for environmentally-beneficial technologies, see Practice note, Capital allowances on property transactions: Plant and machinery: enhanced capital allowances.

(See 2008 Budget - BN 13 - enhanced capital allowances for energy efficient and water saving (environmentally-beneficial) technologies.)

See Indirect tax returns: correction of errors.

Legislation is to be included in the Finance Bill 2008, with effect from Royal Assent to that Bill, extending the exemption from stamp duty for transfers of certain types of loan capital.

Transfers of most bonds and other financial instruments are exempt from stamp duty under the "loan capital" exemption found in section 79(4) of the Finance Act 1986. However, exemption is denied where, among other things, the interest on the loan capital in question is to any extent dependent on the results of, or any part of, a business or the value of any property (subject to certain exceptions). (See Practice note, Bond issues: tax: Exempt loan capital for further details.)

As part of the 2008 Budget, it was announced that, from Royal Assent to the Finance Bill 2008, the loan capital exemption will not be denied solely because the loan capital in question is results dependent, provided that "it is also party to a capital market arrangement" and the right to interest under that loan capital is also on limited recourse terms.

Presumably, it is the issuer of the loan capital that must be party to a capital market arrangement, and the term "capital market arrangement" will have the same, or a similar, meaning as it has in relation to the securitisation tax regime (see Practice note, Securitisation: tax: Securitisation companies), but this is not clear from the relevant press release. Also, from the wording of the press release, it is not clear whether the new rule applies only to loan capital carrying interest that is results dependent solely because it is limited recourse, or to loan capital the interest on which is results dependent in any way (for example, bearing a fixed relationship to the profits of the issuing company in any given year) provided that it is also limited recourse. Also, although the press release states that the new rule will apply to transfers on or after Royal Assent, it would be prudent to wait and see whether the changes will apply to instruments issued before that date or only to new issues. These considerations will, presumably, be clarified in the draft legislation that will form part of the Finance Bill 2008.

However, in any event, the widening of the loan capital exemption in this way (whatever the extent) will be a welcome development for those issuing bonds and other forms of loan capital into the debt capital markets, as the need to structure around the restrictions on the loan capital exemption (and the decreased marketability of instruments in relation to which such structuring is not possible) will be diminished.

(See 2008 Budget - BN 54 - Stamp duty: changes to loan capital exemption.)

Legislation is to be introduced as part of the Finance Bill 2008 to counteract tax avoidance involving arrangements that give rise to amounts that in substance are interest but that are designed not to be taxable as such ("disguised interest"). The measures are intended to have effect from, or in relation to arrangements effected on or after, 12 March 2008.

HMRC is currently consulting on a new "principles-based" approach to tax avoidance involving financial products, including draft legislation to replace the "shares as debt" legislation found in sections 91A to 91G of the Finance Act 1996 (as to which, see Practice note, Taxation of investments: shares as debt legislation and Legal update, HMRC publishes revised draft legislation on disguised interest). As part of the 2008 Budget, it was announced that the enactment of this legislation, originally planned to form part of the Finance Bill 2008, will now be deferred until the Finance Bill 2009. In the meantime, the government has announced a series of new targeted anti-avoidance rules in the area of tax avoidance involving financial products, accompanied by draft legislation and explanatory notes.

The draft legislation addresses the following issues:

The measures are intended to have effect, broadly, from 12 March 2008.

(See 2008 Budget - BN 21 - Financial products avoidance: disguised interest and transferring rights to lease rentals and Financial products avoidance: disguised interest and transferring rights to lease rentals: draft legislation and explanatory statement.)

The government has published draft legislation (together with explanatory notes) to counter schemes, notified to HMRC under the disclosure regime (as to which, see Practice note, Direct tax disclosure regime), that are intended to allow lessors of plant or machinery to dispose of the right to taxable income in exchange for a tax-free sum. The changes will ensure that, where the right to receive rentals is transferred, the value receivable will be taxed as income. The legislation is intended to be included in the Finance Bill 2008 and this measure is intended to have effect where the arrangements to transfer are entered into on or after 12 March 2008.

Section 785A of the Income and Corporation Taxes Acts 1988 aims to ensure that, where the right to receive rental under a lease of plant or machinery is transferred to another person, the transferee is taxable on the consideration that is "receivable". Arrangements have been entered into that attempt to avoid that section by arranging for the transfer to take place either:

The draft legislation is designed to ensure that section 785A applies:

(See 2008 Budget - BN 21 - Financial products avoidance: disguised interest and transferring rights to lease rentals and Financial products avoidance: disguised interest and transferring rights to lease rentals: draft legislation and explanatory statement.)

Legislation is to be introduced in the Finance Bill 2008 enabling sharia-compliant investment bonds (sukuk) to fall within the ambit of the "loan capital" exemption from stamp duty. This measure is intended to have effect for transfers on or after the date of Royal Assent to the Finance Bill 2008. In addition, from that date, legislation to be included in the Finance Bill 2008 is to grant HMRC greater powers to make provision for sharia-compliant structures by secondary legislation.

Transfers of most bonds and other financial instruments are exempt from stamp duty under the "loan capital" exemption in section 79(4) of the Finance Act 1986. However, exemption is denied where, among other things, the interest on the loan capital in question is to any extent dependent on the results of, or any part of, a business or the value of any property (subject to certain exceptions). (See Practice note, Bond issues: tax: Exempt loan capital for further details.)

A specific UK tax regime applies to sharia-compliant transactions, which is intended to ensure that such transactions are taxed in the same way as their "conventional" counterparts (although the UK tax regime refers to "alternative finance" arrangements, rather than "sharia-compliant" transactions, so that compliance with sharia law is not a requirement for the application of the rules). Under the current UK alternative finance rules (as to which, see Practice note, Sharia-compliant transactions: tax), sukuk are specifically catered for in relation to direct tax (see Practice note, Sharia-compliant transactions: tax: Extension of regime: sukuk) but not in relation to stamp duty. Under the new legislation, sukuk will be treated as loan capital, and returns on sukuk will be treated as interest, for the purposes of the loan capital exemption from stamp duty.

In relation to direct tax, section 98 of the Finance Act 2006 permits HMRC to introduce secondary legislation making provision for new alternative finance arrangements, but does not allow for HMRC to amend the rules on existing arrangements in this way. Under the Finance Bill 2008, HMRC will be permitted to amend existing tax rules on alternative finance arrangements by secondary legislation.

These moves are a welcome expansion (or will facilitate such expansion) of the UK tax rules for alternative finance arrangements, which enable an increasingly wide variety of sharia-compliant finance structures to benefit from the same UK tax treatment as their "conventional" counterparts. This should, in turn, enable and promote the use of such financing techniques in the UK, giving greater freedom of choice to investors and those seeking investment alike.

(See 2008 Budget - BN 39 - Stamp duty: alternative finance - sukuk and 2008 Budget - BN 40 - Alternative finance arrangements.)

The Finance Bill 2008 is to include legislation permitting HMRC to satisfy repayment claims using funding bonds where the tax to which the repayment relates was originally paid using funding bonds. This measure is intended to take effect for funding bonds issued on or after 12 March 2008.

Where a borrower owes interest, it may (in certain circumstances) satisfy that obligation by issuing funding bonds. If the payment of interest would otherwise suffer withholding tax (see Practice note, Withholding tax), the borrower may be obliged to fulfil the withholding obligation by withholding the relevant proportion of the funding bonds and paying them to HMRC (see Practice note, Lending activities: tax: Funding bonds and Practice note, Private equity and tax: management buyouts: tax issues for the investee group).

The current law does not address how a repayment claim in respect of tax treated as paid to HMRC by a funding bond should be handled. Under the proposed new legislation, new sections 939(4) and 940A of the Income Tax Act 2007 will provide that, where tax is paid to HMRC using funding bonds and a repayment claim for the tax is subsequently made, HMRC may give the claimant funding bonds in satisfaction of the claim. If HMRC does not hold funding bonds in suitable denominations, it may ask the funding bond issuer to divide them as necessary to satisfy the repayment claim.

(See 2008 Budget - BN 30 - Funding bonds.)

Legislation will be introduced in the Finance Bill 2008 empowering HMRC to make secondary legislation stipulating that:

These powers will have effect from the date of Royal Assent to the Finance Bill 2008.

In addition, the Finance Bill 2008 will include provisions specifying that a disposal of a dormant account that remains dormant after the transfer will not be a disposal for capital gains tax purposes, with a disposal only occurring (if at all) when the customer reclaims the account balance.

For these purposes, an account is "dormant" if (subject to certain exceptions) the customer has not made contact for 15 years.

(See 2008 Budget - BN 27 - Unclaimed assets scheme: tax changes.)

Legislation will be contained in the Finance Bill 2008 abolishing the requirement for overseas insurers to appoint a UK tax representative for the purposes of insurance premium tax (IPT) and restricting the ability of HMRC to pursue the insured party for IPT due from an overseas insurer. These measures are to take effect from the date of Royal Assent to the Finance Bill 2008.

(For a general discussion of IPT, see Practice note, Insurance premium tax.)

If an insurer or taxable intermediary is registered (or liable to be registered) for IPT (see Practice note, Insurance premium tax: Registration of insurers and taxable intermediaries) but does not have any business establishment or other fixed establishment in the UK, the insurer or taxable intermediary is required to appoint a UK tax representative (see Practice note, Insurance premium tax: Tax representatives). That tax representative is jointly and severally liable for the discharge of the insurer’s obligations and liabilities in the event of failure to comply by the insurer. Section 65 of the Finance Act 1994 states that, where an overseas insurer does not have any business or other fixed establishment in the UK, and does not have a tax representative, the insured party may be assessed for the tax due from the insurer.

These provisions were the subject of a consultation paper issued by the government on 25 July 2007 (see Practice note, Insurance premium tax: Tax representatives). As part of the 2008 Budget, the results of that consultation were published and, as a result, it was announced that:

These changes will represent a welcome reduction of the burden (or potential burden) on both insurers and insured parties where the former is located overseas.

(See 2008 Budget - BN 38 - Insurance premium tax (IPT): changes relating to overseas insurers and HM Revenue and Customs and Business: Tax Representative Requirements for Overseas Insurers: Responses to the 26 July 2007 Consultation Document.)

Charities will, from 6 April 2008, be entitled to transitional relief, paid by HMRC, to compensate for the reduced amount of tax they will be able to reclaim on Gift Aid donations as a result of the reduction in the basic rate of income tax from 22% to 20%. Community Amateur Sports Clubs (CASCs) will also be entitled to the relief.

When a UK taxpayer makes a Gift Aid donation to charity, the charity can claim from HMRC an amount equal to basic rate income tax on the donation. Since the announcement in the 2007 Pre-Budget Report that the basic rate was to be reduced, charities have been concerned about the corresponding reduction in their income from tax repayments. Now a measure has been announced in the 2008 Budget to compensate charities from public funds for this reduction in their income.

Charities receiving Gift Aid donations in the three tax years between 6 April 2008 and 5 April 2011 will be able to claim repayment not only of an amount equal to the 20% basic rate tax paid on the donations (the Gift Aid repayment) but also of a "transitional relief supplement" of 2% paid by HMRC.

The relief will be calculated by grossing up the donation by 22% (the sum of the basic rate and the supplement rate). The relief will be the difference between the grossed up figure and the amount of the donation grossed up at the basic rate.

The process for claiming Gift Aid repayments will not change. For claims allowed before the date of Royal Assent for the Finance Bill 2008 and the Appropriation Bill 2008 (which authorises payments from public funds) the Gift Aid repayment will be made as usual, with the payment of transitional relief being made after Royal Assent. For claims allowed from the date of Royal Assent, the transitional relief will be paid at the same time as the related Gift Aid repayment.

The transitional relief will be paid on claims made up to two years from the end of the tax year (for charitable trusts) or accounting period (for charitable companies and CASCs) in which the relevant donations are made.

The government also announced that it will be consulting with charities on the Gift Aid anti-avoidance legislation relating to substantial donors (see Box 3.5 of the 2008 Budget Report).

(See 2008 Budget - BN 52 - Gift Aid: transitional relief.)

The government has reported on its progress to date in the tax simplification reviews launched in the 2007 Pre-Budget Report relating to VAT, related companies and anti-avoidance legislation. In addition, the 2008 Budget sees the launch of a further simplification review relating to tax calculations and returns for smaller companies.

A further progress report will be published at the time of the 2008 Pre-Budget Report.

Businesses and practitioners wishing to submit comments to these reviews should e-mail the HM Treasury contacts named in the documents below.

Legislation will be included in Finance Bill 2008 to give companies greater access to corporation tax and petroleum revenue tax (PRT) relief for the costs of decommissioning North Sea infrastructure. This will be achieved by extending:

Fields that are never going to be liable for PRT will be able to elect to come out of the PRT regime (although the final decision will rest with HMRC). Elections will be able to be submitted on or after the date on which the Finance Bill 2008 receives Royal Assent.

There will also be a simplification of the PRT returns regime to reduce the level of information companies have to provide. This will have effect for chargeable periods ending on or after 30 June 2008.

Capital allowances rules will change to provide 100% first-year allowances for new expenditure on long-life assets and mid-life decommissioning. Existing long-life assets will get a 10% writing-down allowance (increased from the current 6%). This will have effect for expenditure incurred on or after 12 March 2008.

HMRC has consulted extensively in this area with industry, see HM Treasury/HMRC: Securing a sustainable future: a consultation on the North Sea Fiscal Regime, December 2007. For more information on the taxation of oil and gas companies, see Practice note, Oil taxation.

(See 2008 Budget - BN 09 - North Sea Fiscal regime.)

The Finance Bill 2008 will include legislation disallowing expenses of managing an investment business as a deduction against a company’s ring fence oil and gas profits. This will have effect from 12 March 2008.

(For a general discussion of oil taxation, see Practice note, Oil taxation.)

A ring fence operates around the profits of a company’s oil and gas production in the UK (including the UK continental shelf) for UK corporation tax purposes. The profits are set apart from any other activities of the company and losses arising outside the ring fence cannot be used to reduce ring fence profits. In 2004, the rules regarding expenses of managing an investment business were relaxed to allow such expenses to be relievable against a company’s total profits from all activities. According to the government, some oil and gas companies have arranged their affairs specifically in order to offset expenses of managing an investment business against their ring fence profits. As a result, to preserve the integrity of the ring fence, no deduction for expenses of management of investment business will be allowed against ring fence profits from 12 March 2008. Draft legislation effecting this change, to be included in the Finance Bill 2008, has been published as part of the 2008 Budget. Under that legislation, time-apportionment of relevant expenses will apply to accounting periods straddling the commencement date.

(See 2008 Budget - BN 26 - North Sea management expenses and Ring fence trade: no deduction for expenses of investment management: draft Finance Bill legislation and draft explanatory note.)

The threshold below which errors on indirect tax returns may be corrected on subsequent returns is to be increased by statutory instrument with effect for accounting periods beginning on or after 1 July 2008.

At present:

On 1 August 2007, HMRC launched a consultation on these limits, a summary of responses to which was published as part of the 2008 Budget. As a result of this, it has been announced that the £2,000 limit will be increased to the greater of £10,000 and 1% of turnover (or 1% of duty due in the case of APD), subject to an upper limit of £50,000. For LFT, CCL and AGL taxpayers who are not required to be registered for VAT purposes, there will instead be a single limit of £10,000.

The increase of the limits should be good news for business, as this means that errors will be able to be dealt with on a simple, voluntary basis in a wider range of circumstances.

(See 2008 Budget - BN 75 - Indirect tax returns: correction of errors and HM Revenue and Customs & and the taxpayer: tax appeals against decisions made by HMRC: summary of responses and future direction (March 2008).)

The lifetime allowance for the tax year 2008/2009 will increase by £50,000 to £1.65 million.

The annual allowance for the tax year 2008/2009 will increase by £10,000 to £235,000.

These levels are set by the Registered Pension Schemes (Standard Lifetime and Annual Allowances) Order 2007 (SI 2005/494) which set the lifetime and annual allowances for tax years up to 5 April 2011. For further information, see PLC Pensions, Legal update: Treasury sets lifetime allowance and annual allowance for years to 2011.

(See 2008 Budget - PN02 - Income tax allowances, National Insurance Contributions, Child and Working Tax Credit rates 2008-09 and other rates.)

The lifetime allowance test will be amended in three respects. Currently, a member's pension entitlement must be tested against the lifetime allowance if the member becomes entitled to an annual pension increase exceeding a specified level, the so-called "benefit crystallisation event 3" (BCE3). The changes will be as follows:

The Finance Bill 2008 will include legislation giving effect to the changes. The amendments for small annual increases in pensions and rounding will be backdated to have effect from 6 April 2006. Change to the RPI reference month will have effect from 6 April 2008.

(See Budget 2008 - BN 43 - Pensions: Technical Improvements.)

The Finance Bill 2008 will introduce legislation to enable a widening of regulation making powers. These powers will be used to make changes to the rules on trivial commutation to allow very small benefits from occupational pension schemes to be taken as a lump sum. It will be possible to commute what the 2008 Budget notes refer to as "stranded pots" and pension savings that are below £2,000. These will have effect in addition to the current rule that restricts the aggregate of an individual's pension savings to £16,000 for trivial commutation.

(See 2008 Budget - BN 42 - Pensions: regulation making powers.)

The government confirmed that a number of measures, announced in the 2007 Pre-Budget Report, to reform capital gains tax (CGT), including the abolition of taper relief and indexation allowance and the introduction of a single rate of CGT of 18% will be introduced from 6 April 2008. (For more information, see Legal update, Capital gains tax reform: PBR draft legislation published.) Following intensive lobbying, on 24 January 2008, the Chancellor announced the introduction of a new relief for entrepreneurs. Gains that qualify for entrepreneurs' relief will be charged to CGT at an effective rate of 10% subject to a lifetime cap of £1 million. On 28 February 2008, HMRC published draft legislation (together with explanatory notes and frequently asked questions) intended to give effect to the new relief. For an analysis of the draft legislation, see Legal update, Draft legislation on entrepreneurs' relief published.

Budget 2008 also confirms that entrepreneurs' relief will be introduced in the Finance Bill 2008 and will be effective from 6 April 2008.

No changes to the draft legislation published on 28 February 2008 were announced in Budget 2008. However, HMRC published examples of how the relief will work in practice (see, Capital gains tax: relief on disposals of a business (entrepreneurs' relief) examples). The examples are straightforward and are not controversial.

The government sees no need at this time to change the CGT treatment of life insurance bonds (see paragraph 4.42 of the 2008 Budget Report).

(See 2008 Budget - BN 48 - Capital gains tax: relief on disposal of a business (entrepreneurs' relief).)

Despite intensive lobbying from business and tax practitioners, the Chancellor confirmed that the proposed tax changes relating to residence and domicile will come into effect on 6 April 2008. However, he also confirmed that no further changes will be made in this area during the current or next Parliament (Box 4.3 of the 2008 Budget Report).

Changes to the way the day counting rules will operate were announced in Budget 2008.

The day counting rules, which are to be introduced in the Finance Bill 2008, will determine whether an individual is present in the UK for 183 days or more for the purposes of determining whether the individual is in the UK for a temporary purpose (sections 831 and 832 of the Income Tax Act 2007 and section 9 of the Taxation of Chargeable Gains Act 1992). However, instead of counting days (including days of arrival and departure) as was originally envisaged, the Finance Bill 2008 will provide that any day when an individual is present in the UK at midnight, will be counted as a day of presence in the UK.

The introduction of a statutory day counting rule for the purposes of the 183 days test was announced in the 2007 Pre-Budget Report (see Legal update, Pre-Budget Report 2007: Changes to taxation of non-domiciled individuals and draft legislation intended to implement the rules was published on 18 January 2008 (see, Legal update, Draft legislation on residence and domicile published: Day counting).

As mentioned above, the day counting rule relates to specific statutory provisions. HMRC will additionally treat a person as resident in the UK if, broadly, the person is present in the UK for 183 days or more, or regularly visits the UK and after four tax years, his visits average 91 days or more. HMRC previously confirmed that it would apply the day counting rules, as originally envisaged, to these non-statutory tests. It is therefore likely that HMRC will make a similar announcement about the revised day counting rules.

It was also announced that days spent in transit (even if that involves being in the UK at midnight) will not be counted provided that during transit the individual does not engage in activities (such as attending business meetings) that are, to a substantial extent, unrelated to transit.

(See 2008 Budget - BN 102 - Residence and domicile: the residence test and day counting rules.)

The £1,000 unremitted foreign income de minimis limit, below which individuals taxed on the remittance basis will be able to retain entitlement to personal allowances and the capital gains annual allowance, will be increased to £2,000.

Changes to the remittance basis of taxation, including the withdrawal of personal allowances and the annual capital gains exemption for individuals taxed on the remittance basis unless their unremitted foreign income is less than £1,000, were announced in the 2007 Pre-Budget Report (see Legal update, Pre-Budget Report 2007: Changes to taxation of non-domiciled individuals). The announcement confirms that the de minimis limit will increase to £2,000.

(See 2008 Budget - BN 103 - Residence and domicile: personal allowances and the remittance basis.)

A number of significant amendments are announced to the proposed reforms to the residence and domicile rules. For the draft legislation originally intended to implement the reforms, see Legal update, Draft legislation on residence and domicile published.

Many of these changes are the result of comments made during the consultation process. However, the Chancellor has not bowed to pressure to delay implementing the reforms and made it clear in his Budget speech that the changes will take effect from 6 April 2008. Draft legislation, reflecting the new changes, has yet to be published and so the precise extent of the changes is unclear. The most significant changes are outlined below.

The proposals to extend the remittance basis of taxation to catch non-UK domiciled (or non-ordinarily resident) individuals who bring chattels to the UK (which have been purchased from untaxed foreign income) caused an outcry, particularly in the art world.

Following these concerns, the government announced that it would introduce a new scheme that will exempt works of art brought into the UK for public display. The Budget Notes contain further details:

(See 2008 Budget - BN 105 - Residence and domicile: remittance basis and art for public display.)

Budget 2008 announces significant changes to the £30,000 remittance user charge originally announced by the Chancellor in the 2007 Pre-Budget Report. In particular:

(See 2008 Budget - BN 107 - Residence and domicile: annual £30,000 charge for some users of the remittance basis.)

Budget 2008 confirms the changes to tax rates and allowances announced at Budget 2007. In summary, with effect from 6 April 2008:

(See 2008 Budget - BN 01 - Modernising the personal tax system and 2008 Budget - PN 02 - Income tax allowances, national insurance contributions, child and working tax credit rates 2008-09 and other rates.)

The Finance Bill 2008 will contain legislation:

The IME enables non-resident investors to appoint UK-based investment managers without the risk of exposing themselves to UK taxation provided that certain conditions are met. Investors may be funds or individuals. For more detailed information on the IME, see Legal update, Investment manager exemption: HMRC updated statement of practice and Practice note, Investment funds: tax: Offshore company.

The IME only has effect for "investment transactions". The types of "investment transaction" are currently listed in various different parts of the tax legislation. The proposed change will instead allow HMRC to make an order designating transactions as "investment transactions". There will then be a single list of such transactions, which is to be accessible on the HMRC website. This measure will have effect from the date of Royal Assent to the Finance Bill 2008, but with a saving provision to ensure that the existing definition has effect until replaced by a relevant order (to be made after that date).

At present, where an investment manager carries out, on behalf of a non-resident, a transaction that does not qualify for the IME, no other transactions carried out by that investment manager for that non-resident are capable of qualifying for the IME, even where those other transactions would themselves meet the qualifying conditions. This can result in the non-resident being exposed to UK tax on all of the transactions carried out through the investment manager. The legislation to be included in the Finance Bill 2008 will remove the relevant condition for application of the IME, with the aim of producing a more proportionate outcome. All transactions that meet the qualifying conditions will qualify for the IME: if there are any non-qualifying transactions, it will only be those transactions that will be exposed to UK tax. This measure will have effect for the tax year 2008-09 and subsequent tax years, and accounting periods ending on or after the date on which the Finance Bill 2008 receives Royal Assent.

Investment managers and their clients will welcome these changes, which will simplify the process of deciding whether the IME applies and remove a grossly taxpayer-unfriendly aspect of the IME.

(See 2008 Budget - BN 28 - Investment manager exemption.)

As part of the 2008 Budget, the government confirmed that the Finance Bill 2008 will include legislation to prevent individuals from avoiding income tax by making manufactured payments. The draft legislation on this issue was published earlier this year: for a discussion of the issue and the draft legislation, see Legal update, Anti-avoidance rule for manufactured payments. The legislation is to have effect for payments made on or after 31 January 2008.

(See 2008 Budget - BN 65 - Avoidance of income tax using manufactured payments.)

Legislation will be introduced in the Finance Bill 2008, with effect from a date to be appointed, to provide power to make regulations dealing with the taxation of investors in offshore funds and rules allowing certain funds to be classed as "reporting funds".

Reporting funds will be able to preserve capital gains tax treatment for their investors on a disposal of their interest in the fund by reporting income to investors (who will then be subject to tax on it) rather than having to make an actual distribution.

The announcement follows the consultation on offshore funds announced in the 2007 Pre-Budget Report (see Legal update, Pre-Budget Report 2007: Consultation on reforming the offshore funds regime). Discussions regarding a new definition of "offshore fund" will continue, with a view to legislation in Finance Bill 2009.

Draft regulations will follow shortly after the Finance Bill 2008.

Regulations will be laid before Parliament to provide for a new tax regime for authorised investment funds (AIFs) that invest in non-distributing offshore funds, with effect from a date to be appointed.

The new regime aims to move the point of taxation from the AIF to its investors and to ensure that investors in the AIF are subject to broadly the same tax treatment as if they had invested directly in the underlying offshore fund (for background, see Legal update, Authorised investment funds investing in offshore funds: framework for new tax regime).

Draft regulations, giving effect to the tax framework published on 22 February 2008, have also been published.

(See 2008 Budget - BN 33 - Funds of alternative investment funds and draft legislation.)

Legislation is to be included in the Finance Bill 2008 and the Finance Bill 2009 to amend the tax treatment of individuals owning foreign shares.

Individual UK taxpayers receive a tax credit to apply against their income tax liability on dividends paid to them by UK resident companies. This tax credit equals one ninth of the dividend they receive. However, this tax credit is not available for dividends paid by non-UK resident companies. (See Practice note, Cross-border dividend payments: tax: Repayment of tax credits on dividends.)

In the 2007 Pre-Budget Report, the Chancellor announced that, from 6 April 2008, individual taxpayers would get the same tax credits on dividends from non-UK resident companies as they did on dividends from UK resident companies, if both of the following applied:

As part of the 2008 Budget, the government confirmed that a modified version of the above extension will apply with effect from 6 April 2008, under legislation to be included in the Finance Bill 2008. The extension will apply to UK resident individuals and other EEA nationals that own less than 10% of the non-resident company. The proposed requirement that the taxpayer receive less than £5,000 in dividends from the company in the tax year, referred to above, has been dropped.

It was also announced as part of the 2008 Budget that the availability of the tax credit will be further extended under the Finance Bill 2009, with effect from 6 April 2009. Under this further extension, individuals owning a 10% or greater interest in a non-resident company will be entitled to the credit provided that the source country levies a tax on corporate profits similar to UK corporation tax. Anti-avoidance measures will apply to the new rules.

The extension of the tax credit will be good news to investors, although it remains to be seen what restrictions (in the form of anti-avoidance provisions) will apply to the provisions to be included in the Finance Bill 2009.

(See 2008 Budget - BN 29 - Taxation of personal dividends.)

Legislation will be introduced in the Finance Bill 2008 so that from 6 April 2008, individuals who elect for the remittance basis of taxation (namely non-UK domiciled individuals or individuals who were not ordinarily resident in the UK), will pay tax on their foreign dividend income at 40%.

This corrects an error introduced by the Income Tax (Trading and Other Income) Act 2005 which mistakenly reduced the rate from 40% to 32.5%.

(See 2008 Budget - BN 101 - Tax Law Rewrite: Remittance basis and foreign dividend income.)

The Budget announced a number of proposals in this area:

(See box 3.2 of HM Treasury: Budget 2008.)

See also:

The Finance Bill 2008 will provide for:

These changes apply for chargeable periods ending on or after:

Transitional rules mean that for businesses whose chargeable periods span those dates, hybrid rates of WDAs will apply. HMRC will make available a ready reckoner to assist in calculation of the hybrid rates.

The government announced these changes in the 2007 Budget. For more information on that development, see Practice note, Capital allowances on property transactions: Changes to capital allowances on plant and machinery from 2008/09.

For more information on capital allowances on plant and machinery generally and long life assets in particular, see Practice note, Capital allowances on property transactions: Plant and machinery allowances (PMAs) and Practice note, Capital allowances on property transactions: Long life assets respectively.

(See 2008 Budget - BN 08 - Capital allowances: plant and machinery: rate changes & new special rate pool.)

The Finance Bill 2008 will introduce a new category of expenditure, integral features, which qualify for 10% special rate pool writing down allowances (WDAs). The new category applies to expenditure incurred on or after 1 April 2008 (for corporation tax) or 6 April 2008 (for income tax).

Integral fixtures are defined by way of a short list, which currently lists the following expenditure:

Additionally, the Finance Bill 2008 will provide that if the whole or the majority of an integral feature is replaced in a 12 month period, that expenditure will also be allocated to the special rate pool.

For more details on integral features, see Legal update, Implementing the proposed changes to the capital allowances regime: Integral features. Existing assets in the main capital allowances pool which fall within the defined list of integral features will stay in the main pool and attract the main rate of capital allowances (20% from April 2008).

In addition, the Finance Bill 2008 also extends the availability of capital allowances for expenditure on thermal insulation for all buildings, except residential buildings. However, as thermal insulation expenditure will also fall within the special rate pool, this means that qualifying expenditure will attract 10% WDAs. It is not clear at this stage whether this rule will apply only to expenditure incurred on or after the start date.

Previously only thermal insulation expenditure relating to industrial buildings qualified for WDAs, at a 25% rate.

For more details on this development, see Legal update, Implementing the proposed changes to the capital allowances regime: Withdrawal of IBAs and ABAs.

For general information on capital allowances, see Practice note, Capital allowances on property transactions.

(See 2008 Budget - BN 07 - Capital allowances: plant and machinery allowances: integral features and thermal insulation.)

Clause 3 of the draft Finance Bill 2008, which gives effect to the withdrawal of enterprise zone allowances (EZAs), has been published today. The withdrawal of EZAs with effect from April 2011 was announced in December 2007. For more details on the December 2007 announcement, (see Legal update, Implementing the proposed changes to the capital allowances regime: Enterprise zone allowances (EZAs).

The new legislation preserves balancing charges in respect of EZAs for a limited period of seven years from first use. This development was included in the December announcement.

Until April 2011, 100% EZAs will continue to be available where their availability has been extended beyond the designation of an enterprise zone by the exchange of construction contracts.

EZA expenditure attracts an initial allowance of 100%, or where the full initial allowance has not been claimed, a WDA of 25% in respect of any unrelieved expenditure. If businesses have not claimed the 100% initial allowance in full, but have instead claimed a 25 per cent writing down allowance that spans the relevant date for abolition, clause 3 provides for the time-apportionment of that WDA. The relevant dates are 1 April 2011 for corporation tax purposes and 6 April 2011 for income tax purposes.

For more general information on EZAs, see Practice note, Capital allowances on property transactions: Enterprise zones.

(See 2008 Budget - BN 06 - capital allowances: industrial buildings allowances, enterprise zone allowances and agricultural buildings allowances.)

In addition, draft clauses 1, 2 and 4 of the Finance Bill 2008 show how the phasing out of industrial buildings allowances (IBAs) and agricultural buildings allowances (ABAs) will be effected. The withdrawal of these allowances was announced in the 2007 Budget. For more information on that announcement, see Legal update, Implementing the proposed changes to the capital allowances regime: Background.

(For the draft legislation, see clauses 1-4 of the draft Finance Bill 2008.)

Regulations were laid before Parliament on 12 March 2008 to provide for a new tax regime for authorised investment funds (AIFs) that invest mainly in property and shares in UK Real Estate Investment Funds (UK-REITs) and similar foreign companies (PAIFs), with effect on and after 6 April 2008.

The regulations fulfil the government's commitment to deliver a new tax regime for PAIFs to make them more attractive to exempt investors, and are based on draft regulations published in December (for background, see Practice note, Property authorised investment funds: tax).

The new regime is an elective one similar to that applicable to UK-REITs, adapted so as to be appropriate for PAIFs.

Only AIFs that are constituted as open ended investment companies can elect to join the regime, and the promised regulations giving 100% relief from stamp duty land tax for authorised unit trusts that convert to open ended investment companies in order to do so also appear to have been laid, though no mention of them is made in the relevant Budget Note (they appear with their own explanatory memorandum after the explanatory memorandum to the main regulations linked below).

(See 2008 Budget - BN 34 - Property Authorised Investment Funds and draft legislation and explanatory memoranda.)

The Finance Bill 2008 will contain provisions which reverse out the anti-avoidance provisions introduced by the Finance Act 2007 (the FA 2007). This change takes effect retrospectively so that it applies to transactions from 19 July 2007 and will mean that there will be no SDLT on transfers of interests in property within a property-investment partnership.

The FA 2007 provisions amended schedule 15 to the Finance Act 2003 so that an SDLT charge arose even where there was no consideration for the change in partnership shares or the parties are unconnected. The Finance Bill 2008 provisions are to be made in response to complaints by some property-investment partnerships that the FA 2007 changes went too far.

This development was announced in the 2007 Pre-Budget Report. For more information on that announcement, see Practice note, SDLT and partnerships: 2007 Pre-Budget Report.

For further information on SDLT and partnerships generally, see Practice note, SDLT and partnerships.

(See 2008 Budget - BN 57 - Stamp duty land tax (SDLT): anti-avoidance legislation affecting partnerships.)

New provisions in the Finance Bill 2008 will prevent groups of companies avoiding SDLT by transferring property to a company within a group, and then selling that company to a third party without incurring SDLT claw back. The provisions apply if the vendor leaves the group and there is a subsequent change in the control of the purchaser within a period of three years of the property having been transferred. The provision allows HMRC to link these two events and treat the purchaser as having left the group first so that it can claw back group relief previously claimed by the purchaser.

The changes will apply to any transaction where the effective date falls:

The effective date is normally the date of completion rather than the date of exchange of contracts. However, the effective date may be earlier than the date of completion if the contract is substantially performed, for example, if the purchaser takes possession or pays the purchase price in advance of completion. For more information on substantial performance, see Practice note, SDLT and contracts for the transfer of land: What is "substantial performance"?.

Currently, companies may claim group relief on transfers of property between group companies under Schedule 7 to the Finance Act 2003. For more detail on SDLT group relief, see Practice note, Stamp duty land tax: Group relief . However, HMRC can claw back the relief if a property is transferred to a group company and then the purchaser company ceases to be in the same group as the vendor company because it leaves the group. Companies have responded by using various avoidance schemes to circumvent the claw back provisions. For example, if the vendor company leaves the group first, the purchasing company can leave without claw back occurring.

This is a surprising new anti-avoidance development. Purchasers of companies which have previously claimed group relief should insist on appropriate warranties and indemnities to cover any extended claw back charge that will be triggered on the share purchase. The claw back provisions do not include a motive test so seemingly "innocent" transactions involving corporate group restructuring may trigger the claw back charge.

For more information about SDLT generally, see Practice note, Stamp duty land tax.

(See 2008 Budget - BN 59 - Stamp duty land tax (SDLT): group relief: anti-avoidance and Withdrawal of group relief - Draft clause and Explanatory Note .)

To prevent the abuse of alternative property finance arrangements (commonly known as Islamic finance structures), which results in the avoidance of SDLT, the Finance Bill 2008 will include anti-avoidance legislation.

The anti-avoidance provisions apply to alternative finance arrangements for which the effective date is on or after 12 March 2008.

In 2005, amendments were made to the Finance Act 2003 to encourage the use of "alternative finance structures" that do not use conventional mortgage schemes to buy property. For more details on these structures, see Practice note, Sharia-compliant transactions: tax.

SDLT relief is available in respect of certain sharia-compliant structures where a financial institution acquires an interest in land and then transfers it, or grants a lease out of it, to a customer. Such structures include:

Some financial institutions have used these exemptions from SDLT by arranging with sellers that ownership of a property is placed in a subsidiary company of the financial institution. The subsidiary then claims that the transaction is intended for the purposes of allowing the equivalent of mortgaging on a mortgage free property or re-mortgaging. Once ownership of the property has passed from the seller to the subsidiary, the financial institution can sell the property without incurring any SDLT by selling the shares in the subsidiary company.

The new provisions will ensure that alternative finance relief will not be available if there are arrangements in place for a person to acquire control of the financial institution. Draft legislation has been published which amends the Finance Act 2003 by adding a new section 73AB.

(See 2008 Budget - BN 60 - Stamp Duty Land Tax (SDLT): Alternative Finance: Anti-Avoidance and Alternative property finance: anti-avoidance - Draft clause and Explanatory Note.)

First, the Finance Bill 2008 will include new provisions which mean that the following land transactions, with effective dates falling on or after 12 March 2008, will not require a land transaction return:

For more information about notifiable transactions for before this change, see Practice note, Stamp duty land tax: Notifiable transactions.

Second, the Finance Bill 2008 will include new provisions, which apply to leasehold acquisitions effected on or after 12 March 2008 and mean that the rates of SDLT applicable where a mixture of rent and non-rent consideration are:

For more information about leasehold SDLT rates before this change, see Practice note, SDLT and stamp duty rates (for land).

For more information about SDLT generally, see Practice note, Stamp duty land tax.

(See 2008 Budget - BN 57 - Stamp duty land tax (SDLT): notification thresholds for land transactions and rate thresholds for leasehold property, Notification and registration of transaction - Draft clause and Explanatory Note and Charge where consideration includes rent: 0% band - Draft clause and Explanatory Note .)

New provisions in the Finance Bill 2008 will allow the SDLT relief for zero-carbon homes to be extended to flats. This change is to apply retrospectively to acquisitions from 1 October 2007 and will expire on 30 September 2012.

The relief means that no SDLT is due on all new zero-carbon flats where consideration is up to £500,000. Where consideration exceeds £500,00, the relief will mean a reduction of the SDLT liability by £15,000.

To qualify for the relief, the flat must meet the criteria in the The Stamp Duty Land Tax (Zero-Carbon Homes Relief) Regulations 2007.

The government will also make regulations after the Finance Bill 2008 receives Royal Assent to allow government departments to charge a fee for assessing whether a dwelling meets the zero-carbon criteria.

For more general information on SDLT and residential property reliefs, see Practice note, SDLT reliefs for residential property.

(See 2008 Budget - BN 56 - Stamp duty land tax (SDLT): relief for new zero-carbon flats.)

HM Treasury and the Chancellor, in his Budget speech, have confirmed that from 12 March 2008, changes to SDLT rules ensure that most buyers of shared equity ownership properties will only trigger SDLT when they acquire the final 20% of the property. Buyers are, however, free to choose to pay SDLT when they purchase their first share. Taking that choice may be advantageous if market values, which impact upon later tranches of consideration for additional shares, are rising.

No further details of the new rules were contained in the 2008 Budget documentation.

The government announced today that, following consultation, it will extend the SDLT disclosure rules to residential property worth at least £1 million. This will be enacted by secondary legislation later this year, following consultation on the detail.

There is evidence that some high value residential property transactions are being taken outside the scope of SDLT by the use of special purpose vehicles (SPVs). A typical SPV is a company created for a specific purpose, such as a holding company in place of the beneficial owner.

If a buyer acquires an SPV that holds land, rather than directly acquiring the land itself, the buyer will only pay stamp duty at a rate of 0.5% on the transfer of ownership of the SPV, rather than SDLT at a rate of 4%.

Since 1 August 2005, certain SDLT arrangements must be disclosed to HMRC, to give HMRC information on the types of schemes used to gain a tax advantage and to enable 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. For more information on the SDLT disclosure regime, see Practice note, SDLT disclosure regime.

In the 2007 Pre-Budget Report, the government announced its intention to consult on addressing the use of SPVs to reduce SDLT avoidance for high value properties and on extending the disclosure regime to such properties. In December 2007, HM Treasury published a consultation paper, "Stamp duty land tax: ensuring fairness for all: a consultation document". That document included a proposal to impose an "indirect charge" on the sale of entities deriving a significant part of their value from residential property (and satisfying various other tests). For more information, see Legal update, SDLT anti-avoidance and disclosure: HMRC consultation relating to high value residential property. No announcement was made in the 2008 Budget about the proposed indirect charge.

(See 2008 Budget Press Notice - PN03 - Ensuring fairness for all taxpayers.)

A Treasury Order will be made after the 2008 Budget which will simplify the option to tax legislation with effect from 1 June 2008. The Order will also introduce a facility to revoke an option to tax after 20 years. The earliest date for revocations to take effect will be 1 August 2009.

Most supplies of land and buildings are exempt from VAT unless the supplier has elected to waive the exemption (known as "opting to tax") under Schedule 10 to the Value Added Tax Act 1994. (For more detail, see Practice note, VAT and property: the election to waive exemption.)

It is not stated in the press release but it is possible that the Order may be based on the draft rewritten Schedule 10 published in 2006, see Legal update, Budget 2006: implications for property: Rewrite of Schedule 10.

A number changes to improve administration of the option to tax and its revocation will also be made relating to:

(See BN 79 VAT: option to tax land and buildings.)

The government will consult this summer on possibilities for simplifying and clarifying the tax treatment of dividends paid by UK Real Estate Investment Trusts (REITs) to Share Incentive Plans (SIPs) (see Box 3.5 on page 54 of chapter 3 of the 2008 Budget Report).

For background about UK REITs, see Practice note, UK REITs: questions and answers.

From 1 April 2009, the three-year time limit will apply to VAT registered businesses making VAT repayment claims for the following periods:

This means that eligible businesses have until 31 March 2009 to make VAT repayment claims for rights that accrued before the introduction in 1996 and 1997 of the three-year time limit for claims. The three-year limit for claims for those periods will apply from 1 April 2009, effectively time-barring any claims made after that date.

Corresponding amendments to HMRC's powers of assessment are also to be introduced to ensure that assessments may be made to recover any repaid VAT, which is subsequently found to have been incorrectly claimed by a business.

Both measures are to be introduced in Finance Bill 2008. Although indications of the proposed revisions to the current VAT law are referred to in the Budget note, the draft legislation has yet to be published.

For more detail on the background on transitional periods for VAT claims relating to the introduction of the three year cap, see Legal update, Transitional periods announced for three year cap on VAT claims and Legal update, Fleming/Conde Nast: court cannot impose transitional period for three year cap on input VAT recovery.

For more general information on VAT, see Practice note, Value added tax.

(See 2008 Budget - BN 78 - Transitional period for VAT claims.)

The following increases in the VAT registration thresholds were announced in Budget 2008:

Otherwise the existing conditions for VAT registration and deregistration are unchanged (see Practice note, Value added tax: Taxable persons and VAT registration).

The increases will be implemented by statutory instrument and will take effect from 1 April 2008.

(See Budget 2008 - BN 73 - VAT: increased turnover thresholds for registration and deregistration.)

See VAT: simplification of the option to tax.

The VAT exemption for fund management is to be extended to cover UK-listed investment entities (including investment trusts and venture capital trusts). This will have effect for supplies of services made on or after 1 October 2008.

Exemption from VAT is currently granted to the management of authorised unit trusts, trust-based schemes and open-ended investment companies under items 9 and 10 of Group 5 of Schedule 9 to the Value Added Tax Act 1994 (see Practice note, Investment funds: tax: The impact of VAT on unit trusts, open-ended investment companies and investment trusts). The range of funds to which the exemption applies will be extended by making the following amendments to those legislative provisions:

This announcement follows HMRC's defeat before the ECJ in relation to investment trusts (see Legal update, ECJ says investment trusts entitled to VAT exemption for management fees and Legal update, HMRC concedes favourable VAT treatment for investment trusts). However, it marks a departure from its previously-held view that although the exemption must be extended to investment trusts, it need not be extended to venture capital trusts (see Legal update, HMRC revises policy on VAT paid by investment trusts). This will be a welcome development for funds (see Legal update, ECJ says investment trusts entitled to VAT exemption for management fees: Implications for ITCs), although it may have an adverse impact on the input VAT recovery position of businesses that supply management services to funds (see Legal update, ECJ says investment trusts entitled to VAT exemption for management fees: Impact on providers of management services to ITCs).

The measures will be enacted in secondary legislation intended to be laid before Parliament around the beginning of June 2008. Draft legislation and guidance is due to be published in April 2008.

(See 2008 Budget - BN 74 - VAT: Amendment to the exemption for fund management.)

From 1 April 2009, the current concessionary VAT arrangements in respect of supplies of temporary workers by employment businesses will be withdrawn.

Currently such businesses are allowed to exclude the wages element from the supplies they make, and to account for VAT solely on their margin.

The withdrawal will impact on employment bureaux who use the existing concessionary arrangements and any of their customers who are not able to fully recover the VAT charged to them, for example the finance sector, health and care sector, education sector, charities and some parts of the public sector.

For more details on the concession, see PLC Employment Practice note, Agency workers: overview of law and practice: VAT staff hire concession.

Following the implementation of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 in 2004 and now that the regulatory framework for this sector has been amended to ensure equal treatment for those operating on the same commercial basis, HMRC considers that this tax concession is no longer necessary. Furthermore, the concession has no basis in UK or EU VAT law and must therefore be withdrawn. Accordingly, from 1 April 2009 VAT will be applied to all of the consideration which employment businesses receive, including the wages element, in respect of the supplies they make.

(See HM Revenue & Customs Technical note: VAT: Withdrawal of the Staff Hire Concession.)