Business Tax
On the whole, there were few surprises among
business taxes. The withdrawal of industrial building allowances
(IBAs) and the changes to capital allowances, announced last
year, are going ahead.
Detailed anti-avoidance rules are being introduced, aimed mainly
at schemes notified under the Disclosure Rules. The move to
principles-based legislation has been deferred to 2009.
The detailed consultation document on foreign profits has been
deferred and is now expected before the summer.
Corporation tax
Simplification of associated
companies rule
Appropriations
to trading stock
Changes to the research
and development (R&D) and Vaccine Research Relief (VRR)
schemes
Capital
allowances
Corporate intangible
asset regime
International
Land remedial
relief
Proposals to simplify
the tax calculations and returns for the small companies
Plastic bags
Anti-avoidance
Leased plant or
machinery
Financial products:
disguised interest and transferring rights to lease
rentals
Capital allowances
buying and acceleration
Repeal of obsolete
anti-avoidance provisions
Venture Capital
Schemes
Offshore funds
Timing of income tax
payments by unauthorised unit trusts
Funds of Alternative Investments
Funds
Property Authorised Investment
Funds
Charities and Gift Aid
Stamp Duty Land Tax (SDLT)
HMRC Powers
Incorrect returns
Compliance checks
Tax debt
Tribunal reform
Concessions after
Wilkinson
Corporation
tax
Simplification
of associated companies rule
The availability of the small companies' rate of corporation tax
is dependent on the number of associated companies that the
taxpaying company has. Legislation will be introduced to simplify
the definition of an associated company for these purposes.
Under the current legislation, business partners fall within the
definition of an associate. Consequently, one company may be
associated with another because the rights and powers of one
business partner are attributed to another business partner,
resulting in the companies being under common control. For many
years there have been concerns about the operation of the
associated company rules linking people and their businesses when
they have little real connection and may not even be that aware of
each other. A classic example might be a partnership set up to own
a racehorse. Under the existing rules all partners would become
associated thus potentially removing the ability of any companies
that they have invested in to claim the small companies' rate.
With effect from 1 April 2008, such companies will only be
treated as associated where relevant tax planning arrangements have
at any time had effect in respect of the taxpayer company with a
view to securing small companies' relief. The changes to the
legislation will impact on companies whose directors or
shareholders are also business partners in other businesses thereby
linking their company to other companies.
These changes should lead to greater certainty in the
applicability of the small companies' rate and should remove the
unfairness of companies being unable to qualify for the small
companies' rate owing to partners being treated as associates.
Appropriations to trading
stock
The Finance Bill 2008 will provide a statutory basis for a
long-standing rule whereby goods are appropriated into or from
trading stock, other than in the normal course of trade. In such
cases, the profits of the trade are adjusted for tax purposes to
reflect the market value of the stock, and the cost or actual
consideration is disregarded. In this case, tax law overrides any
different accounting treatment.
Existing transfer pricing rules requiring transactions to be
undertaken on an arms' length basis will continue to take
precedence over the market value rule, where such a transaction
falls within the transfer pricing regime.
The new legislation preserves the current tax treatment of
non-trade appropriations of goods to and from trading stock and
will have effect for all such transactions on or after 12 March
2008.
Changes to the research and development
(R&D) and Vaccine Research Relief (VRR) schemes
As announced in the Budget 2007, the rates of R&D tax relief
available to businesses are being increased. For small and medium
companies, the rate will increase from 150% to 175%, subject to
obtaining State Aid approval from the European Commission. Relief
for large companies will increase from 125% to 130% with effect
from 1 April 2008.
We welcome the availability of the more generous reliefs in
supporting UK companies to exploit valuable R&D
opportunities.
Certain restrictions will be made to the R&D scheme so that
it complies with the EC State Aid requirements. A cap will be
introduced to restrict the amount of relief available under the
small companies' R&D and VRR schemes to €7.5 million per
project. At present, no further details on the definition of a
project have been released. Large companies will be required to
declare the incentive effect of the relief they are claiming under
the VRR scheme.
Companies whose most recent accounts have not been prepared on a
going concern basis will not be eligible to claim relief.
The amount of VRR available for all companies will reduce from
50% to 40%.
The effective date for these changes has yet to be announced, as
the government is currently in the process of seeking EC State Aid
approval for the proposed changes.
While we welcome the availability of the more generous reliefs in
supporting UK R&D companies, the reduction in the rate of
relief under the VRR scheme is disappointing.
Capital
allowances
This Budget confirmed a number of changes, referred to in last
year's Budget, to the capital allowances regime. After
consultation, these changes will apply from 1 April 2008 for
corporation taxpayers and 6 April 2008 for income taxpayers. They
include:
- the introduction of the Annual Investment Allowance giving 100%
relief on the first £50,000 of capital expenditure (with certain
exceptions including cars) each year
- introduction of the new ‘integral features’ regime reducing the
annual writing down allowance on certain features of a building or
structure from 25% to 10%
- the reduction in the annual writing down allowance on plant and
machinery from 25% to 20%
- an increase in the annual allowance for long life assets from
6% to 10%.
We are disappointed that the Government has not listened to
representations given during the consultation process. Those
representations argued that assets should only be treated as
integral features if they were not a necessary requirement for the
operation of the trade from the property. Legislation dealing with
elections on the transfer of property including fixtures/features
was also promised, but it too has not been published.
It is also extremely disappointing that the integral features
legislation has been widened, without its inclusion in the earlier
consultation, to include a concept of 'replacement expenditure'.
This operates such that where more than 50% of an asset (by
reference to replacement cost) is replaced in a 12-month period,
then an immediate tax deduction will not be available for the
expenditure incurred. As such, expenditure that may previously have
been treated as a repair will now only be entitled to an allowance
at 10% per annum.
Other changes and legislation in relation to the capital
allowances include:
- publication of the legislation phasing out industrial buildings
allowances
- extension of capital allowances for the thermal insulation of
all buildings (except residential) used for a qualifying business
purpose at a rate of 10%. Whilst this is good news for many
business, industrial buildings used to benefit from allowances at a
rate of 25%
- introduction of payable tax credits for loss-making companies
investing in designated energy saving/environmentally beneficial
plant and machinery
- extension of 100% first-year allowances on cars with low carbon
dioxide (CO2) emissions until 31 March 2013 but with a maximum CO2
level of 110g/km (reduced from 120g/km)
Corporate intangible asset regime
The Finance Bill 2008 will clarify that the 'related party'
rules are unaffected by any administration, liquidation or other
insolvency proceedings.
International
Legislation will be introduced to prevent tax avoidance by UK
residents through the 'misuse' of a clause common in Double
Taxation Treaties, which is designed to limit the tax on business
profits of non-UK residents. The new legislation will affect income
arising on or after 12 March 2008.
Changes in the Finance Bill applying from 12 March 2008 will
prevent avoidance of the Controlled Foreign Companies (CFC)
legislation. CFCs are foreign companies, controlled by UK
residents, which must pay their profits as a dividend to UK
shareholders to prevent their profits being apportioned and taxed
on the shareholders. Previously, residents were able to use a
partnership or a trust to qualify for one of the CFC exemptions or
ensure that profits fell outside the CFC rules.
There were no further details of the reform of taxation of
foreign profits of companies, which continues to be the subject of
consultation by HM Revenue & Customs. We are expecting a
detailed consultation document before the summer.
Land
remedial relief
Tax relief for land remediation costs is to be extended to cover
the removal of pernicious Japanese Knotweed from 1 April 2009.
Proposals to simplify the tax
calculations and returns for the small companies
A review of the tax compliance system for smaller companies has
been announced, incorporating proposals to simplify tax
calculations and returns.
The proposals include examining whether the number of
adjustments that companies are required to make in calculating
taxable profits could be reduced in order to more closely align
accounting and taxable profits.
The proposals are aimed at companies with fewer than 10
employees and turnover of less than £750,000.
An update on the status of the review will be provided in the
Pre-Budget Report in the autumn.
Plastic bags
The Government is calling on retailers to voluntarily move away
from providing single-use carrier bags. If there is insufficient
voluntary progress by the end of 2008, the Climate Change Bill will
include powers to enable the Government to impose a charge on these
bags. The Government will consult on the operation of the charge
and how to ensure that any money raised goes to environmental
charities. Tax relief will be available on donations to charities
by businesses from money they raise.
Anti-avoidance
Leased plant or machinery
Legislation will be introduced retrospectively, in respect of
transactions entered into on or after 13 December 2007, to counter
tax avoidance by businesses that lease in and lease out the same
plant or machinery. These arrangements were used to exploit
differences in the way in which lease rentals paid and received are
taxed, in order to generate a tax loss where there is no commercial
loss.
Also measures will be introduced to counter avoidance where
premiums and capital payments escape taxation.
In addition, the new rules will ensure that lease and finance
leaseback arrangements are treated in a similar way to a sale and
finance leaseback arrangements. Finance leases in the leaseback
will not be treated as short leases, so the lessor is not entitled
to capital allowances.
Financial products: disguised interest and
transferring rights to lease rentals
New legislation is to be introduced to counter complex
arrangements that include:
- large companies in arrangements to avoid tax from investment
returns that are economically equivalent to interest
- companies leasing plant or machinery that sell the right to
lease rental income
- arrangements to avoid corporation tax by receiving interest in
the form of non-taxable distributions
- arrangements as a result of which the charge to tax on interest
is reduced or eliminated by credits for overseas tax in
circumstances where no tax is ever suffered
- avoidance of corporation tax by the adoption of differing
accounting treatments within a group for convertible debt
- schemes where attempts are made to exclude from the derivative
contracts legislation transactions that are designed to produce
disguised interest.
Legislation will also be introduced to stop schemes that are
intended to avoid or exploit the 2005 'shares as debt' rules for
example by means of:
- depreciatory transactions intended to create artificial
losses
- rates of interest said to be 'uncommercial'
- spreading disguised interest between two or more companies
- use of exit strategies that do not amount to exit arrangements
for the purpose of the shares as debt rules.
These are interim measures as work will continue to develop a
'principles-based', or generic, approach to ensuring that all such
arrangements are taxed in the same way as interest, with the
intention of legislating in Finance Bill 2009.
Legislation is to be introduced which affects companies selling
trades where the market value of the plant or machinery is
substantially less than its tax written down value. The measure
will prevent avoidance of corporation tax through schemes that use
arrangements intended to crystallise a balancing allowance to make
it available to a profitable group not intending to carry on the
trade for the long term. This will apply to disposals on or after
12 March 2008.
For example, a loss-making company may be sold to an unconnected
profitable group before being sold to a third party a short time
later. The measure will mean that the sale of the trade does not
lead to a balancing allowance in the hands of the profitable
group.
Repeal of obsolete anti-avoidance provisions
Legislation will be introduced in Finance Bill 2008 to repeal
anti-avoidance relating to shares and securities which is no longer
of any practical use. This will affect exempt bodies such as
charities and pension schemes, from 6 April 2008, and for companies
for accounting periods beginning on or after 1 April 2008.
Venture Capital Schemes
Shipbuilding, coal production and steel production are to be
added to the excluded activities list for Venture Capital Schemes
(VCS). Stand-alone companies and parent companies of groups whose
trade consists to a substantial extent of such activities will no
longer be qualifying companies. This will apply for the purposes of
the Enterprise Investment Scheme (EIS), the Corporate Venturing
Scheme (CVS) and the Venture Capital Trust(VCT) scheme. For EIS and
CVS, the change will take effect for shares issued on or after 6
April 2008. For VCT, the change will take effect for money raised
on or after 6 April 2008.
The annual limit for individuals on the amount of investment
that can qualify for EIS income tax relief will be increased from
£400,000 to £500,000. This amounts to additional income tax relief
of up to £20,000 per annum. The change is subject to European
Commission State aid approval and will have effect on or after 6
April 2008.
A consultation document has also been issued, seeking input on
how the scheme could be simplified, how the administrative and
regulatory burden could be reduced and how awareness of the scheme
could be raised.
While we welcome the increase in the amount of annual investment
that can qualify for EIS income tax relief, we are disappointed
with the addition to the excluded activities list. This and other
changes over the last two years – such as the introduction of the
employee limit – will reduce the number of companies that qualify
under the VCS. Consequently, it will reduce the schemes'
availability to the taxpayer.
Offshore funds
The rules governing the certification of offshore funds as
qualifying funds, so as to retain the capital gains tax treatment
for the investor, are to be relaxed. Such funds will no longer be
required to make an annual distribution, but instead will be able
to report income to investors who will then be subject to tax on
the reported income. In addition, it is intended that the
conditions for an offshore fund to be certified as a qualifying
fund will be less onerous and the requirements will only be applied
at the outset rather than, as now, annually.
Timing of income tax payments by unauthorised unit trusts
The requirement for trustees of unauthorised unit trusts to make
payments on account of the tax due in respect of the income tax
they deduct from their unit holders has been reinstated with effect
for the tax year 2008/09. Hence, the first such payment would be
due on 31 January 2009, with a second payment on account on 31 July
2009, and a balancing payment on 31 January 2010.
Funds of Alternative Investments Funds
New regulations relating to Authorised Investment Funds (AIFs)
that invest mainly in non-distributing offshore funds are to be
introduced. AIFs will be able to elect for the proposed new tax
treatment. Such an election will have the effect of moving the
taxation on offshore income gains from the fund to its
investors.
Property Authorised Investment Funds
New regulations relating to AIFs that invest in property, UK
Real Estate Investment Trusts (UK REITs) or similar foreign
companies are to be introduced. AIFs will be able to elect, subject
to meeting certain conditions, for the proposed new tax treatment.
The effect of making such an election is to move the charge to tax
from the fund to its investors. The broad aim of the changes is to
provide a tax transparent option for investors as alternative to
investing in property directly or via a UK REIT.
Charities & Gift Aid
Every £1 donated under Gift Aid enables the receiving charity to
reclaim tax at the basic rate of income tax, currently 22%.
Following the announcement of the reduction in the basic rate of
income tax to 20%, this benefit was set to reduce in the 2008/09
tax year. However, there will be an additional transitional relief
of 2% payable to the charity, relating to qualifying Gift Aid
donations made on and after 6 April 2008 until 5 April 2011.
The legislation also introduces a number of administrative
changes to the Gift Aid scheme including with immediate effect:
- a de minimis error level of 4% below which charities who claim
a total of less than £2,500 in Gift Aid repayments each year and
the amount of tax at stake is less than £100, will not be penalised
for errors in their claims
- an adjustment is being made to the Gift Aid claim process to
allow smaller donations of no more than £10 to be aggregated up to
a total of £500, within claims.
HM Revenue & Customs are continuing to discuss other
administrative savings with charities.
Stamp Duty Land Tax (SDLT)
Rate thresholds
For transactions on or after 12 March 2008 in respect of
residential property, where a lease is granted at a premium of not
more than £125,000 and at any annual rent, there is no SDLT on the
premium.
In the case of non-residential property, the rental threshold
before SDLT is payable on the premium has been increased from £600
to £1,000 per annum.
Under regulations to be introduced later in the year, the
certificate that no SDLT is due will be amended, so that tax
advisers and other agents will be able to sign the declaration on
behalf of their clients.
Relief for zero-carbon flats
The relief from SDLT on the first acquisition of zero-carbon
individual dwellings is to be extended to the first acquisition of
zero-carbon flats up to a purchase price of £500,000. Where the
purchase price is higher, the SDLT liability will be reduced by
£15,000, but will be due in the normal way. The relief has effect
on and after 1 October 2007 and will expire on 30 September
2012.
Anti-avoidance legislation affecting partnerships
Legislation will be introduced in the Finance Bill 2008 to
ensure that where there is a transfer of an interest in a property
within a property investment partnership, there will be no charge
to SDLT, provided the correct amount has been paid on transfers
into the partnership. The new provisions will apply to all
transactions that occurred on, or after 19 July 2007. This relaxes
provisions introduced in Finance Act 2007.
Avoidance and group relief
New legislation will widen the occasions when a clawback of SDLT
group relief arises where there is a change of control within three
years of a transfer of property. This anti-avoidance legislation
will apply to any property transaction where the effective date of
the transaction is on or after 13 March 2008. It remains to be seen
whether this measure will be too wide, for example, it may catch
demergers. Therefore, we may see some back tracking in a similar
way to the changes to Property Investment Partnerships in 2007.
Avoidance and alternative finance
In a restriction of the SDLT exemption for alternative finance
structures, the exemption will not be available on an acquisition
by a Special Purpose Vehicle (SPV) if, when the property is
acquired by the SPV, there are arrangements in place for another
person to acquire the SPV. This measure applies with effect from 12
March 2008.
HMRC Powers
HMRC is pushing ahead with a review of all its existing powers.
This covers enquiries, investigations, penalties and all forms of
checking tax returns. The review will last a few more years but we
have some further details on what the Finance Bill will
include.
Incorrect
returns
The Finance Act 2007 included a new framework for assessing
penalties on incorrect returns covering all the major taxes eg
income and corporation tax and VAT. This new regime takes effect
for returns filed after April 2009. This will see penalties imposed
based on taxpayer behaviour and the key to reducing penalties for
errors will depend on whether they took 'reasonable care'.
The Budget extends this framework to almost all other taxes bar
tax credits. The Finance Bill 2008 will include provisions to bring
in the same type of regime for penalties for inheritance tax,
environmental taxes, stamp duties and excise duties. This will
affect returns filed on or after April 2010.
Compliance
checks
The new terminology for HMRC to check that businesses and
individuals are paying the famous 'right amount of tax' is
'compliance checks'. For income tax, corporation tax, capital gains
tax, VAT and PAYE new rules will apply from 1 April 2009. This will
include more stringent record keeping requirements and a power to
look at those records in 'real time'. There will also be a power to
visit business premises but not people's homes. There will be a lot
of concern about how this will all work in practice.
In addition there will be new powers relating to the ability to
search goods and baggage at airports and other places of transit.
Primarily this will allow Customs to open and unpack containers
rather than insisting this is undertaken by the proprietor of the
goods.
Tax debt
Changes are also being made to the way HMRC manage tax debt. For
example, by the autumn of 2008 it will be accepting payment by
credit card. Other changes include giving HMRC the ability to
offset repayments against tax liabilities and greater debt
enforcement powers.
Tribunal
reform
The Ministry of Justice is overseeing major changes to the way
tribunals operate in the UK. The Tribunals, Courts and Enforcement
Act 2007 brought in the idea of a new first-tier tribunal which
will see the end of the General and Special Commissioners as we
know them, from 2009. The Budget confirmed that the Finance Bill
2008 will include a power to introduce secondary legislation to
change the way appeals against HMRC are handled in light of those
changes.
Concessions after Wilkinson
A few years ago the House of Lords decision in Wilkinson [2006]
STC 270 raised concerns about whether HMRC was able to make
extra-statutory concessions. The upshot has been that there have
been no significant concessions since that case and a fear from
HMRC of changing existing ones. The Budget confirmed that after
taking legal advice, HMRC believes its existing concessions are
within its 'collection and management' discretion and therefore
should survive. It is intending to legislate a significant
proportion of them by Treasury Order and will do this via a power
introduced in the Finance Bill 2008.
We will also be seeing discussions begin on the introduction of
a new Taxpayer's Charter. Such a document existed in the 1980's and
then gradually fell into disuse before being removed. The intention
is for it to set out taxpayer rights and obligations. A Charter
will bring the UK into line with most other developed
countries.