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BLACKSTONE FRANKS LLP
THE BUDGET 2011
CONTENTS
The New Tax Rates at a Glance
Income Tax
Income Tax Rates
Personal Allowances
Non-domiciled Taxpayers
Statutory Residence Test
Venture Capital Schemes
Individual Savings Accounts
Qualifying Time Deposits
Charities
Income tax supplements
Gift Aid
Income Tax and NICs Reform
Offshore Funds Amendments
Employee Taxation
Company Cars
Fuel Benefit
Charge
Mileage
Payments
Expenses paid
to MPs
Childcare
Relief
Subsistence
Allowances paid to experts seconded to
EU bodies in
the UK
Pensions
Pensions Annuitisation
Anti-Avoidance
– Disguised Remuneration
Tax Relief for
Protection of Vulnerable Groups Scheme
Fees paid or
Reimbursed by Employers
Corporation Tax
Rates
Reform of
Associated Company Rules as they
apply to the Small Profits Rate
Research &
Development (R&D)
Vaccine Research Relief
Oil and Gas
Taxation
Supplementary Charge
Intangible Assets
Minor Measures
Bank Levy
Review of IR 35
Tax Treatment
of Financing Costs and Expenses
Real Estate
Investment Trusts (REIT)
Modernisation
of Investment Trust Company Regime
UCITS IV: Management Company Passport
Tax Treatment
of Specified Investments
Interim CFC
Reform
Taxation of
Foreign Branches
Patent Box
Corporate
Capital Gains Simplification:
De-Grouping Charges
Modernisation
of the Tax Rules for Investment Trusts
Companies (ITC)
Loan
Relationships and Derivative Contracts (Disregard)
Regulations
OECD Transfer
Pricing Guidelines
Changes to Accounting
Standards for Leases
Life Insurance
Apportionment Rules
Consultation on
devolving corporate taxation to
Northern Ireland
Anti-Avoidance
Functional Currency
Sale of Lessor
Companies
Corporate Gains Degrouping
Charge
Derecognition
of Corporation Tax Loan Relationships
Loan Relationships and Derivative
Contracts: Group Mismatches
Business Tax
Capital Allowances
Annual Investment Allowance (AIA)
Short-Life Assets
Enhanced Capital Allowances (ECA)
Scheme for
Energy-Saving Technologies
Changes to the Capital Allowances
Anti-Avoidance Legislation
Furnished
Holiday Lettings
Business Premises
Renovation Allowance
Leasing Double
Allowances
Capital Gains Tax
Annual Exemption
Entrepreneurs’
Relief
Single Farm
Payment Scheme and CGT Roll-over Relief
VAT
Registration Threshold
Fuel Scale
Charge
Low Value
Consignments
VAT Incurred by
Academies
Treatment of
Business Samples
Splitting of
Supplies
Diplomatic
Privilege
VAT Grouping
VAT Status of
Public Bodies
VAT on Imported
Road Vehicles
Cost-sharing
Exemption
Mandation of Online
Filing
Other Taxes
Inheritance Tax
Nil-rate band threshold
Reduced rate
Stamp
Duty Land Tax
Anti-avoidance
Reform of Rules for Bulk Purchases
Landfill
Tax
Aggregates
Levy
National
Insurance
Tobacco
Products Duty
Fuel
Duty
Alcohol
Duties
Amusement
Machine Licence Duty
Gaming
Duty
Vehicle
Excise Duty
Climate
Change Levy (CCL)
Rates
Carbon price floor
Reduced rate for electricity suppliers
Exemption for certain forms of
transport and for
Recycling processes
Air
Passenger Duty
Miscellaneous
Repeal of Reliefs
Security for
PAYE and NIC
Indexation by
Reference to CPI
Provisional
Collection of Taxes Act 1968
Mutual Assistance
Recovery Directive
Index-Linked
Gilts
Enterprise Zone
Data-gathering
Disclosure of
Tax Avoidance Schemes
Tax Transparent
Fund Vehicle
Islamic Finance
Double Tax
Treaty Avoidance
WARNING
This memorandum is based on the proposals put forward by the Chancellor
in his Budget speech. These need to be approached with caution, as the
details are liable to change during the passage of the Finance Bill
through Parliament. Where these proposals are likely to affect a decision
that you need to make you should, if possible, delay at least until the
Finance Bill becomes available.
© Blackstone Franks 2011
Barbican House
26 -34 Old Street
London EC1V 9QR
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THE NEW TAX RATES AT A GLANCE
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Proposed
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Income
Tax
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2011/12
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2010/11
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Basic
Rate
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20%
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*
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20%
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- on income up to
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35,000
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37,400
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Higher
Rate
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40%
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40%
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- on income up to
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150,000
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150,000
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Additional
Rate on excess
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50%
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50%
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*The
starting rate, for savings income only, has a limit of £2,560. If an individual’s taxable
non-savings income is above this, the 10% savings rate will not be
applicable. There are no changes
to the 10% dividend ordinary rate or the 32.5% dividend upper rate. The
dividend upper rate applies when total income exceeds £35,000 but not
£150,000, when it increases to 42.5%
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£
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Personal
allowance (age under 65)
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7,475
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**
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6,475
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Age
allowance
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- if 65 or over by end of tax
year
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9,940
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9,490
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- if 75 or over by end of tax
year
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10,090
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9,640
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(The excess of age relief over
the personal
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allowance is reduced by half of
the excess
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of income over £24,000 in
2011/12 (£22,900
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in 2010/11)
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Blind
persons relief
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1,980
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1,890
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Maximum
Enterprise Investment Relief
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500,000
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500,000
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(income
tax relief of 30% (2010/11, 20%) restricted to income tax paid)
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**
This allowance reduces where the income is above £100,000 – by £1 for
every £2 of income above the £100,000 limit. This reduction applies irrespective
of age.
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Corporation
Tax Rates
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2011/12
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2010/11
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Small
company rate (£0 - £300,000)
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20%
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21%
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Main
rate (over £1,500,000)
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26%
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28%
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Effective
marginal rate (£300,000 - £1,500,000)
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27.50%
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29.75%
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Fraction
for marginal rate relief
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3/200
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7/400
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£
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Capital
Gains Tax
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Annual
Exemption for individuals
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10,600
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10,100
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Value
Added Tax
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VAT
Registration Threshold
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73,000
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70,000
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Inheritance
Tax
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Rate
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40%
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40%
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Nil
Rate Band
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325,000
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325,000
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Maximum
Personal Pension Contribution
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50,000
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225,000
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INCOME TAX
Income Tax Rates
The
Basic Rate income tax band for 2011/12 is reduced by £2,400, from £37,400
to £35,000:
Basic
Rate Up to
£35,000 20%
Higher
Rate £35,000 to £150,000 40%
Additional
Rate Over £150,000 50%
There
is a starting rate of £2,560 (an increase of £120 from the 2010/11 level
of £2,440) but this applies for savings income only. If an individual’s taxable non-savings
income exceeds the starting rate limit, it will not be available for
savings income.
There will be a further reduction in
the basic rate band from 6 April 2012 of £630 to £34,370.
A
special rate of 42.5% applies to dividends included in total income where
this exceeds £150,000. This gives
an effective rate of 36.11% on the net dividend, compared to 25% for
incomes between £35,000 and £150,000 and Nil for basic rate taxpayers.
Personal
Allowances
The
standard personal allowances are increased by £1,000 to £7,475, and the
aim is still to increase it eventually to £10,000, as promised last year.
2010/11 2011/12 Increase
Personal
allowance £6,475 £7,475 £1,000
Age
allowance – up to age 75 £9,490 £9,490 £ -
Age
allowance – 75 and over £9, 640 £10,090 £ 450
Blackstone
Franks’ Reaction:
Mr
Osborne says this means that in just 10 months the coalition has taken
1.1 million low paid people out of tax altogether. We are puzzled who these people
are. With the national minimum
wage at £5.93 an hour anyone working for more than 24 ¼ hours for a 52
week year will earn over £7,475.
And that is before the national minimum wage increases next
October, which presumably will bring many of that 1.1 million back into
the tax system.
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Non-domiciled Taxpayers
The government
intends to make changes to the system for taxing non-domiciled
individuals. It will issue a consultation
document in June 2011 with the aim of altering the law from 6 April
2012. The proposed changes are as
follows:
•
increase the existing £30,000 annual charge to £50,000 for non-domiciles
who have been UK resident for 12 or more years and who wish to retain
access to the beneficial tax regime (the remittance basis). The £30,000
charge will be retained for those who have been resident for at least
seven of the past nine years and fewer than 12 years;
•
remove the tax charge when non-domiciles remit foreign income or capital
gains to the UK for the purpose of commercial investment in UK businesses
and
• simplify some
aspects of the current tax rules for non-domiciles to remove undue
administrative burdens.
Blackstone
Franks’ Reaction:
For
a 50% taxpayer £50,000 is equivalent to tax on £100,000 of unremitted
income, so most wealthy non-doms are unlikely
to continue to pay it.
The
exemption of remittances where money is brought into the UK for
business investment sounds fascinating.
We look forward anxiously to the consultation document to see
what it means. It seems to say
that a non-dom can remit overseas income tax
free if he uses it to
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Blackstone
Franks’ Reaction (cont’d):
subscribe for shares
in a UK company. But what will
happen when the company is sold?
Will it remain tax free or will it be taxed at that stage?
The
good news is that the Chancellor made clear that he does not plan any
further changes to the taxation of non-doms
for the life of this parliament.
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Statutory
Residence Test
The current rules that determine tax residence
for individuals are unclear and complicated. The Government will be
consulting on the introduction of a statutory definition of residence to
provide greater certainty for taxpayers. It will issue a consultation
document in June and intends to implement the measure from April 2012.
Blackstone
Franks’ Reaction:
There is an old saying “Be careful of
what you ask for.” Practitioners
have been asking for a statutory residence test for years. HMRC are now convinced that we need
one. The only problem is HMRC's
view of what that test should be is out of line with that of others.
Most
practitioners would like a simple day-counting test as applies, for
example, in the USA and in Ireland.
However HMRC see that as providing great scope for avoidance.
The
real problem may well be the tax system. Practitioners want an easy definition
to give certainty; avoidance should be dealt with by amending the
operative provisions in which the definition is used. HMRC think it easier to deal with
avoidance through the definition.
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Venture
Capital Schemes
Relief
under the Enterprise Investment Scheme will be given at 30% (instead of
20%) from 6 April 2011, subject to EU approval.
Blackstone
Franks’ Reaction:
Note
that EU approval bit. It is
highly unlikely that this will be obtained by 6 April 2011 so anyone
making an EIS investment in the early part of the 2010/11 tax year will
not know what tax relief he will get on his investment. That seems designed to discourage
rather than encourage such investment.
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The
annual limit for investments qualifying for relief under the Enterprise
Investment Scheme will be increased from £500,000 to £1,000,000 from 6
April 2012. This also requires EU
approval.
From
6 April 2012 the eligibility criteria for both EIS and VCT will be
widened so that an eligible company can have up to 249 employees
(currently it is only 50) and gross assets of £15 million (currently it
is £7 million). A company will be
able to raise £10 million under EIS in any one year (currently it is £2
million).
Blackstone
Franks’ Reaction:
Mr Osborne says that the aim is to
help smaller, riskier companies to compete for finance. His perception of a small, risky
company is obviously different to ours.
These massive increases seem to refocus EIS away from helping
small businesses to grow (we believe that 99.5% of all UK businesses
have less than 100 employees) to encouraging the almost large business
to draw funds away from investment in real small businesses.
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Companies whose
trade consists wholly or substantially in the receipt of Feed-In Tariffs
(FIT’s) or similar subsidies will only be eligible for the EIS scheme and
the Venture Capital Trust (VCT) scheme where their commercial electricity
generation commences before 6 April 2012.
Shares issued before 23 March 2011 will not be affected.
The government will consult on
further changes to the schemes including proposals to give additional
support through the EIS for seed investment.
Individual
Savings Accounts
The annual
limit rises by £480 from £10,200 in 2010/11 to £10,680 in 2011/12. This is in line with inflation, but is
always rounded up to the nearest £120 so that it is divisible by 12, for
the benefit of those wishing to make contributions monthly. From April 2012 the indexation of the
ISA limit will be based on the Consumer Prices Index rather than the
Retail Prices Index.
A Junior ISA is
to be available, probably from autumn, for UK resident children under the
age of 18 who do not have a Child Trust Fund. No limit has been announced yet.
Blackstone
Franks’ Reaction:
This
is an interesting concept. A
Junior ISA can be opened only by a parent or guardian. HMRC say that based on the proportion
of Child Trust Fund accounts that receive parental contributions, over
time 20% of children might have a Junior ISA. A Junior ISA seems to allow both
parents to gift money to a child by putting it in the ISA without the
income being treated as that of the parent. Accordingly this looks like an
“every-family-who-can-afford-it-should-have-one-and-contribute-to-the-maximum”
type of thing.
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Qualifying Time Deposits
From 6 April
2012 tax will be deducted at source from these deposits. They are currently taxable but are paid
gross. The government will consult
informally with stakeholders in May 2011
Charities
Income tax supplements
The
2% supplement for charities to ease the pain caused by the reduction of
the basic rate from 22% to 20% from 6 April 2008 finishes on 5 April
2011, so that if net donations remain the same, the refund will fall.
Gift
aid
From 6 April
2011 the cap on the value of the benefit that can be provided by the
charity to the donor (both individuals and companies) will be increased
from £500 to £2,500. A donation
cannot qualify for gift aid if the donor obtains more than a minor
benefit in return from the charity.
Minor in this context is:
Gifts of up to £100 25% of the donation
Gifts of £100 - £1,000 £25
Gifts exceeding £1,000 5% of the donation but
capped
The change means
that the cap will in future apply to gifts of over £50,000 instead of the
current £5,000.
Blackstone Franks’ Reaction:
This
is a welcome change. It is
designed to encourage large donations.
George Osborne does not seem to expect it to have much effect as
the Impact Statement says, “No significant economic impact is
envisaged.” If Mr Osborne really
wants to encourage charitable giving he should question why there
should be a limitation on small donations. For example the writer is a Friend of
the V&A Museum. I used to
get free admission for myself and a guest to their exhibitions but they
told me a few years back that HMRC had told them that although they
could continue to offer free admission to me they could not extend it
to a guest. The result is that I
now rarely go to the V&A and am less inclined than previously to
support their appeals. I doubt
that I am unusual.
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“SA
Donate” will be withdrawn from 6 April 2012.
Blackstone Franks’ Reaction:
No,
we didn’t know what SA Donate was either! It is apparently the facility to
direct that any tax repayment shown as due on your tax return should be
paid to a charity instead of to you.
Apparently it has not been well used and is vulnerable to fraud. We are puzzled how a payment by HMRC
to a registered charity can be vulnerable to fraud, but if that is what
Mr Osborne thinks…
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From 6 April 2013 charities (and
community amateur sports clubs) that receive small donations of £10 or
less will be able to apply for “gift aid style repayments” without having
to obtain gift aid declarations. However, this will apply only up to
£5,000 of donations per year per charity. Furthermore the charity will
need to have been recognised by HMRC for gift aid purposes for at least
three years, have operated gift aid successfully throughout that period
and have a good tax compliance record.
Blackstone Franks’ Reaction:
“Once
we get to know that you’re honest we’ll trust you, but only a little
bit!” This looks likes a
headline-grabber rather than a real relief. It looks to be clearly aimed at
street and similar collections, but it is unlikely that a charity is
going to obtain the necessary licence and mobilise volunteers to
collect a meagre £5,000. It may
help sports clubs in particular though, as it will enable them to take
up a collection at their annual dinner or other event and get gift aid
relief.
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HMRC
will also publish revised guidance in April 2011 on gift aid benefits to
clarify a number of issues and misunderstandings that have become
apparent following discussions with stakeholders.
Blackstone Franks’ Reaction:
HMRC
seem to be very ready to refuse repayments to charities where they make
the slightest mistake in applying what can be very strict rules. This seems to us to mean no more than
that they will publish guidance to explain how restrictive the rules
are, so that charities don’t ask HMRC for money that HMRC will refuse
to give them.
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In
2012-13 HMRC will introduce an online system for charities to register
their details for gift aid and make gift aid claims.
Legislative effect will be given in
the 2012 Finance Bill to the extra-statutory concession that allows
charities to make interim repayment claims during the year.
The
government is considering introducing a tax reduction for taxpayers who
donate a work of art or a historical object of national importance to the
State. A consultation document
will be issued in the summer.
Income Tax and
NICs Reform
The government
has announced that it will consult on the options, stages and timing of
reforms to integrate the operation of income tax and National Insurance
contributions (NICs). In exploring the government’s aim is to remove
distortions created by the tax system, reduce burdens on business and
improve fairness for individuals. However, it recognises that any change
will be complex and involve a wide range of policy and implementation
issues. A consultation document will be published later this year setting
out the differences in the current income tax and National Insurance
systems, and options to address these. The government will maintain the
contributory principle and reflect this in any changes it brings forward.
The government will not extend NICs to individuals above State pension
age or to other forms of income such as pensions, savings and dividends.
Blackstone Franks’ Reaction:
Everyone
seems very excited about this but we ourselves are very sceptical that
it will produce a real simplification.
Most practitioners have been saying for years that the two
should be merged, but successive governments have refused to
contemplate this, probably because it is politically inconvenient to
tell people that they are taxed at only 20%, whereas they are really
taxed at 31%.
Our
scepticism is based on the starting point that the contributory
principle must be retained.
Nowadays the only benefit based on actual contributions (rather
than number of contributions) is the State second pension, and the
government want to scrap that.
Retaining that principle seems to us to prevent a merger of the
two taxes – OK if you are a politician you can pretend that NI is an
insurance premium not a tax but the reality is that NI contributions go
nowhere near funding State pensions plus the NHS. As employers have to deduct both PAYE
and NIC the “operation” of the taxes has already
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Blackstone Franks’ Reaction
(cont’d):
been
integrated. All that remains is
for the two taxes to be calculated under identical rules. The previous government has already
done most of that so there does not seem to be a lot of scope for
further changes.
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Offshore Funds Amendments
The government
has consulted on amendments to
the Offshore Funds (Tax) Regulations 2009 and published draft amending
Regulations on 28 February 2011.
The amendments are to be introduced as from 6 April 2012.
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EMPLOYEE TAXATION
Company
Cars
The
appropriate percentages starting threshold for calculating car benefits
will be reduced by1% from April 2013 for all cars with carbon emissions
between 95g and 220g.
The percentage
for zero emissions cars will remain at zero and that for ultra low
emissions cars with emissions up to 75g will remain at five per cent.
Fuel Benefit
Charge
Employees and
directors who are provided with a company car and who also receive free
fuel from their employers are subject to this charge. The cash equivalent
of the taxable benefit is determined by multiplying a set figure
(currently £18,000) by the appropriate percentage for the car, based on
its CO2 emissions (grams per kilometre).
With effect from 6 April 2011 the multiplier will increase to
£18,800.
Mileage
Payments
The maximum
permitted tax-free payments to employees who use their own cars or vans
for business is increased from 6 April 2011 from 40p to 45p for the first
10,000 miles during the tax. The rate after 10,000 miles remains at 25p
per mile.
The 5p per mile per passenger
allowance is extended from 6 April 2011 to include volunteers as well as
employees.
Expenses Paid to MPs
Legislation to
address the income tax consequences of the new MPs’ Expenses Scheme
introduced by the Independent Parliamentary Standards Authority (IPSA) at
the start of the current Parliament was introduced in Finance (No.2) Act
2010. Since then IPSA has introduced a minor simplification with respect
to accommodation expenses and legislation will be introduced in Finance
Bill 2011 to address this simplification.
The changes will be backdated to 1 November 2010, when IPSA
changed the way they pay MPs’ accommodation expenses in respect of rental
charges on constituency and residential properties. From that date IPSA
will make payments in respect of MPs’ rental charges direct to landlords
where authorised to do so by the claimant MP. The existing exemption from
tax for residential accommodation expenses payments only applies to
payments made by IPSA directly to the MP. The measure will ensure that
the income tax exemption for accommodation expenses applies to rental
charges in all circumstances in which they are currently paid by IPSA.
Childcare Relief
The tax relief
for higher and additional rate taxpayers will be restricted for those who
join their employer supported childcare schemes (which can provide either
childcare vouchers or directly-contracted childcare on or after 6 April
2011 so that the benefit they receive matches the amount available to
basic rate taxpayers. This will be
achieved by reducing the tax-exempt limit of £55pw to £28 for higher rate
taxpayers and £22 for additional ratepayers. This will mean that no one
can get more than £11 a week tax relief.
The National Insurance relief will similarly be restricted.
Blackstone Franks’ Reaction:
This seems
likely to discourage the use of such schemes as it complicates the
administration, particularly as, when someone gets a pay rise that
brings him into the higher tax rate, the payment that can be made to
him tax-free will remain at £55pw if he joined the scheme before 6
April 2011 but reduced to £28 if he joined later, so a record of the
joining date is needed.
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Legislation
will also be introduced in Finance Bill 2011 to make a change to the
qualifying conditions for employer-supported childcare (ESC) schemes in
respect of childcare vouchers (CCVs) and directly-contracted childcare.
The tax exemption and national insurance contributions (NICs) disregard
(for CCVs) for ESC schemes only apply if a number of conditions are met.
One of these conditions is that the scheme must be open generally to
employees (i.e. available to all). Many employers use salary
sacrifice or flexible
remuneration arrangements to provide access to schemes. These arrangements
cannot be applied to workers earning at or near the NMW because of
legislation in that area, which means that the schemes strictly fall
outside the conditions for the relief.
The legislation will amend the conditions to allow employers to
make their ESC schemes unavailable to those employees earning at or near
NMW levels, where the schemes are delivered through salary sacrifice or
flexible remuneration arrangements. This does not prevent employers from
offering ESC schemes to these employees that do not rely on salary
sacrifice arrangements.
Subsistence
Allowances Paid to Experts Seconded to EU Bodies in the UK
A new exemption from income tax for
subsistence allowances paid by a body of the EU located in the UK to
experts who are seconded by their employers to work for the EU body will
take effect from 1 January 2011.
This was announced on 16 December 2010. There are currently three EU bodies
located in the UK: The European Medicines Agency (EMA), the European
Police College (CEPOL) and the European Banking Authority (EBA).
Pensions
The current pensions annual allowance is being reduced from
£255,000 to £50,000 from 6 April 2011, and the lifetime allowance will be
reduced from £1.8m to £1.5m. To
the extent that contributions in the previous years were less than
£50,000 the unused relief from 6 April 2008 can be carried forward and
added to the allowance for the year.
This will allow unused relief for 2008/09, 2009/10 and 2010/11 to
be utilised in 2011/12. However
the rate restriction has been scrapped for 2011/12 and relief for
contributions (including any carry forward amount) is at the taxpayers marginal rate.
Blackstone
Franks’ Reaction:
As the carry forward from 2010/11 is
restricted to £50,000 it may be sensible to make contributions in
2010/11 up to the £255,000 level albeit that tax relief for such
contributions is restricted to basic rate for higher earners.
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Pensions Annuitisation
From 6 April 2011, legislation will
be introduced to remove the effective requirement to annuitise
by age 75. This will include changes to the annuitisation
requirements, income drawdown pension arrangements and the related
inheritance tax rules. During the consultation on draft clauses some
unintended differences in the pensions and lump sums payable before and
after age 75 were identified. Changes will be made to remove these
differences. Savers who have reached age 75 will also be allowed to align
multiple drawdown pension funds under the same scheme so the funds can
all be valued annually on the same date.
Anti-Avoidance
- Disguised Remuneration
Legislation will be
enacted under the 2011 Finance Bill to charge rewards made available to
employees through third party arrangements to PAYE and National
Insurance.
This
new aggressive legislation will bring into immediate charge to PAYE and
NI the following:
-
sums or assets that are
earmarked for employees by trusts or other intermediaries – They will be
treated as though the amount of the sum or the value of the asset
concerned is a payment of PAYE income provided by the employee’s employer
to the employee;
-
loans provided to employees
by trusts and other intermediaries – They will be treated as though the
value of the loan provided is a payment of PAYE income provided by the
employee’s employer to the employee;
-
assets provided to
employees by trusts and other intermediaries – They will be regarded for
tax purposes as a payment of PAYE income by the employer where certain
conditions specified in new Part 7A are met; and
-
sums or assets that are earmarked
by the employer with a view to a trust or other intermediary providing
retirement benefits to the employee – They will be treated as though the
amount of the sum or value of the asset concerned is a payment of PAYE
income provided by the employee’s employer to the employee.
Importantly,
the new legislation will not apply to payments chargeable to tax, such as
pension income so bone fide retirement benefit employee trusts and
other such arrangements will not necessarily be affected.
This measure was
initially announced on 9 December 2010 with anti-forestalling measures
introduced for transactions from that date. Interestingly, tax arising on
transactions caught by these anti-forestalling will not be due until
April 2012.
HMRC
have also stated that where they consider transactions in breach of the
old rules they will continue to challenge transactions entered into prior
to this date under that legislation.
Blackstone
Franks’ Reaction:
This
hits all third party payments, not simply payments through employee
benefit trusts and EFURBS.
The
draft legislation issued in December was very poorly drafted. Out of 33 questions in HMRC's
published Frequently Asked Questions, the answers to 14 say “No, we
didn’t mean to catch that, the legislation will be amended”, and a
further two say that HMRC is considering whether an amendment is
needed.
Take
particular care with loans. For
example under the draft legislation if an employee of X ltd is lent
£100,000 for a week by X Holdings Ltd, its parent company, to tide him
over moving house, the employee will be deemed to have £100,000 of
earnings even though the loan was repaid a week later!
|
Tax Relief for
Protection of Vulnerable Groups Scheme Fees Paid or Reimbursed by
Employers
Employees involved in regulated work
in Scotland who apply for registration under the Protection of Vulnerable
Groups Scheme (PVGS), and where the joining fee is paid or reimbursed by
their employer, would normally be liable to a taxable benefit.
Regulated work
has to include a particular type of activity, such as:
• caring for or
teaching a child or protected adult; or
• work in a
particular establishment, such as a school or care home, which involves
contact with children or protected adults; or
• holding one
of the specified positions, such as a member of a children’s panel or
chief social worker.
Legislation
will be introduced in Finance Bill 2011 to create an income tax exemption
when the fee is paid by the employer of the person concerned. An
associated disregard for national insurance contributions will be
introduced by regulations. It will
have effect from the 2010/11 tax year, and will be capable of being
extended to England, Wales and Northern Ireland if similar schemes are
introduced in those countries.
back to top
CORPORATION TAX
Rates
The previously
announced reduction of 1% in the main rate of corporation tax to 27% has
been increased to a reduction of 2%.
This means that the main rate of corporation tax applicable to
profits arsing after 1 April 2011 will be 26%.
The annual 1%
reduction of the main announced at the Chancellors emergency budget in
June 2010 will also go ahead as planned, with the rate falling to 25% for
2012/13, and then reducing to 23% by 2014/15.
The
previously announced reduction of the small profits rate (previously the
small companies rate) to 20% for profits arising
after 1 April 2011 has been confirmed.
The government did not announce the proposed rates for 2012/13 and
beyond.
|
Year Ended
|
Small
Companies Rate
|
Main Rate
|
Effective
Marginal Rate
|
|
|
|
|
|
|
31
March 2011
|
21.00%
|
28.00%
|
29.75%
|
|
|
|
|
|
|
31
March 2012
|
20.00%
|
26.00%
|
27.50%
|
|
|
|
|
|
|
31
March 2013
|
20.00%
|
25.00%
|
26.25%
|
|
|
|
|
|
|
31
March 2014
|
20.00%
|
24.00%
|
25.00%
|
|
|
|
|
|
|
31
March 2015
|
20.00%
|
23.00%
|
23.75%
|
|
Blackstone Franks’ Reaction:
Does anyone want to bet on when the
tax system will be “simplified” by eliminating the small companies rate?
The difference between 23% and 20% is only 15%.
|
Reform of Associated
Company Rules as they Apply to the Small Profits Rate
Finance Bill 2011 will enact and
broaden the long standing provision of ESC C9 that a company will not be
held to be an associate of another by mere accident but only where the
level of commercial interdependence between the two companies makes it
appropriate.
Blackstone Franks’ Reaction:
This
is good news. It creates
fairness. It has always been
unreasonable that a persons
tax relief should depend upon what a relative does in an entirely
different business so the extension to this rule is long overdue.
|
Research
& Development (R&D)
The
percentage uplift for qualifying R&D expenditure incurred by a small or medium sized enterprises (SME) is
increased from 75% to 100%, effectively providing a deduction of £2 for
every £1 spent on qualifying R&D.
This increased uplift applies to qualifying expenditure incurred
after 1 April 2011.
The
2012 Finance Bill will increase the rate of relief for qualifying R&D
expenditure incurred by SME’s by a further 25% to 225%. In addition, and subject to further
consultation, the following changes will also be made to the relief in
the 2012 Finance Bill:
-
the rule
limiting a SME company’s R&D tax credit to the amount of PAYE and national insurance
contributions (NICs) it pays will abolished;
-
the £10,000 minimum expenditure condition will
be abolished for all companies; and,
-
changes will also be
made to the rules governing the provision of relief for work done by
subcontractors under the large company scheme.
These changes are all
subject to EU approval.
Vaccine
Research Relief
To ensure that the
above measures fall within the state aid intensity thresholds, the
percentage uplift on qualifying expenditure by SME’s on vaccine research
is to be reduced to 20% from 40% effective for expenditure incurred after
1 April 2011 and SME’s will be excluded from claiming the relief for
2012/13 onwards.
Oil and Gas
Taxation
Supplementary
charge
The 2011 Finance Bill
will introduce legislation, effective as of 24 March 2011, to increase
the supplementary charge payable in respect of oil and gas production in
the UK and UKCS from 20% to 32%.
The legislation will also include provisions, which will reduce
the supplementary charge back towards 20% when a trigger price is
met. The government have suggested
a trigger price of $75 per barrel, but will set the final price after
consulting with interested parties and motoring groups.
|
Blackstone Franks’ Reaction:
This is intended to pay for the
reduction in fuel duty. It
remains to be seen whether it will actually cancel it out. Mr Osborne is assuming that an oil
company faced with an extra 12% tax will absorb it out of its profits,
not increase the price of fuel to recoup it. As this goes against basic commercial
and, indeed human, instincts to change the price that the market will
bear, that seems to us a fairly dangerous presumption. Or perhaps not. If a generous government reduces fuel
duty and the price of petrol rises because a “greedy” oil company wants
more money, the Chancellor will still get the credit for trying to help
people.
|
The Chancellor also
announced that the 2012 Finance Bill would introduce a restriction on tax
relief for decommissioning expenses to the 20% rate of the supplementary
charge.
Intangible
assets
Legislation will be
introduced to ensure that the corporate intangible asset regime excludes
all goodwill and any intangible asset which relates to, derives from or
is connected with, an oil license or an interest in an oil license, to
prevent a tax write off in respect of such licences. This measure deems a new accounting
period to start on 23 March 2011 thus preventing further relief for these
assets.
|
Blackstone Franks’ Reaction:
The intangible asset regime adopts the
accounting meaning of goodwill.
This requires identifiable assets such as brands, or licences to
be identified as far as possible so that the residual goodwill value is
limited to unidentifiable attributes.
HMRC regard a licence as an identifiable asset, but apparently
some oil companies have been contending when a licence is purchased
that they are acquiring not merely the licence but a bundle of assets,
which include the licence, and the GAAP requires them to break this
bundle down into its constituent parts.
|
Minor measures
Minor changes to
legislation for oil and gas companies operating in the UK and UKCS will
extend the scope of the chargeable gains ring fence reinvestment relief
for disposals made on or after 24 March 2010 and make clear that the
relief applies when proceeds of disposals are reinvested in exploration,
appraisal and development.
Bank Levy
Following a detailed
consultation period, the Bank Levy announced in the June 2010 Budget has
been confirmed and will take effect in relation to periods of account
ending on or after 1 January 2011.
It will be levied on the total liabilities as shown on the
consolidated balance sheet of the bank or building society excluding:
-
Tier 1 capital;
-
insured retail deposits;
-
repos secured on sovereign debt;
-
policyholder liabilities of retail insurance
businesses within banking groups; and
-
derivative liabilities to
the extent that there is a net derivative position.
The rates are:
1 January 2011 – 28 February 2011: 0.05 per cent
for short-term chargeable liabilities and 0.025 per cent for long-term
chargeable equity and liabilities.
1 March 2011 – 30 April 2011: 0.1 per cent for
short-term chargeable liabilities and 0.05 per cent for long-term
chargeable equity and liabilities.
1 May 2011 – 31 December 2011: 0.075 per cent
for short-term chargeable liabilities and 0.0375 per cent for long-term
chargeable equity and liabilities.
1 January 2012 onwards: 0.078 per cent for
short-term chargeable liabilities and 0.039 per cent for long-term
chargeable equity and liabilities.
|
Blackstone Franks’ Reaction:
This is an interesting levy. It is effectively levied on a bank’s
risk assets, so the more it puts its reserves into cautious
investments, the lower its tax liability will be.
|
Review
of IR 35
The government
intends to retain the IR35 regime but to make improvements in the way it
is administered to:
-
provide greater pre-transaction certainty,
including a dedicated Helpline staffed by specialists,
-
provide greater clarity by publishing guidance on
those types of cases that HMRC consider fall outside IR35,
-
restrict reviews to high risk cases carried out
only by specialist teams, and
-
promote more effective
engagement with interested parties through an IR35 Forum.
|
Blackstone Franks’ Reaction:
We do not think it surprising that the
Office of Tax Simplification could not come up with a new system in the
ridiculous short period they were allowed in which to do so. We hope however that this does not
mean that the government has abandoned the quest for a sensible way of
taxing micro-businesses.
The above changes are unlikely to have
any significant practical effect.
|
Tax
Treatment of Financing Costs and Expenses
Changes
are to be made to the debt cap rules that apply to large groups of
companies. A consultation document
will be issued in the Autumn.
Real Estate Investment Trusts (REIT)
A number of changes
are being contemplated to reduce the barriers to entry and investment and
to reduce the regularly burdens.
The main ones are –
-
making it easier for institutional investors to set
up REITs
-
allowing cash to be regarded as a REIT asset
instead of a non-REIT one so that tax does not inhibit commercial
decisions
-
extending the time-limit for making distributions
-
redefining financing costs for the interest cover
test
-
abolishing the entry charge to join the REIT regime
-
relaxing the
requirement for a REIT to be listed on a recognised stock exchange.
A
consultation document will be issued later in 2011.
|
Blackstone Franks’ Reaction:
This is welcome news. REITs have never really taken
off. Those that exist largely
derive from the conversion of listed property investment
companies. Few, if any, REITs
have been set up from scratch.
Now that REITs have been around for a
few years (they were introduced from 1 January 2007) HMRC should be
able to identify which of the numerous restrictions and reporting
requirements are really needed and which were introduced purely because
of HMRC’s institutional reaction that anything new that people actually
want must surely create massive opportunities for avoidance.
|
Modernisation of
Investment Trust Company Regime
A new definition of
an investment trust will be introduced.
Draft regulations for a new investment trust tax regime will be
published in April.
UCITS IV:
Management Company Passport
Legislation,
effective from the date of Royal Assent to the Finance Act, will be
introduced to provide that a UCITS fund that is established and regulated
in another EEA state but has a UK resident fund manager will be treated
as not resident in the UK for tax purposes.
Tax Treatment of
Specified Investments
Legislation will be
introduced to reverse an unintended consequence of an order made in
February 2010 under the Financial Services and Markets Act 2000, which
disqualified certain debt securities from qualifying from the loan
capital exemption from stamp duty.
This legislation will have effect for instruments executed on or
after 24 February 2010.
Interim CFC Reform
In a first step
towards a full reform of the system in 2012, the 2011 Finance Bill will
introduce an interim package of improvements to the controlled foreign
companies (CFC) rules. The
proposed changes will:
-
introduce an
exemption for certain intra group trading transactions where there is
little connection with the UK and therefore it is unlikely that UK
profits have been artificially diverted;
-
introduce an
exemption for CFCs with a main business of intellectual property (IP)
exploitation where the IP and the CFC have minimal connection with the
UK, i.e. the invention is not developed here in whole or in part;
-
introduce a
statutory exemption for the first
three years for foreign subsidiaries that, as a consequence of a reorganisation or change come within the scope of the
CFC regime to UK ownership, including those that are not currently CFCs
but have previously been so, making the exemption available to previously
UK-headed groups if they return to the UK;
-
introduce an
alternative to the current de minimis
exemption, which will increase the limit to £200,000 profits per annum,
and replace the need to calculate chargeable tax profits with an accounts
based measure; and
-
extend the
transitional rules for superior and non-local holding companies until
July 2012.
|
Blackstone Franks’ Reaction:
These are interim measures. The CFC legislation is under review
and a completely new system for taxing profits of UK based groups that
HMRC perceive as having been diverted from the UK will be introduced
in, hopefully, 2012.
|
Taxation of
Foreign Branches
A significant
change to the taxation of foreign branches of UK companies will be
introduced in the 2011 Finance Bill.
Under current
law, profits of a foreign branch of a UK company are chargeable to UK
corporation tax with double taxation relief applied accordingly. Under the proposed changes, the company
will be able to make an irrevocable election for all of its branches to
be exempt from UK corporation tax on both income and capital gains.
Certain
restrictions will be included to prevent abuse whereby profits that
should be charged to UK corporation tax are diverted to an exempt foreign
branch.
The exemption
will not be available to international air transport and shipping to the
extent that these activities are not taxed by the foreign jurisdiction
due to a specific treaty restriction.
|
Blackstone Franks’ Reaction:
Making the election will of course
mean that UK tax relief will cease to be available for losses of an
overseas branch. As the election
is irrecoverable and applies to all of a company’s foreign branches, a
company needs to think hard before making the election.
|
Patent
Box
In order to
strengthen the incentives to invest in innovative industries and ensure
the UK remains an attractive location for innovation, the Government will
introduce a Patent Box, a reduced rate of Corporation Tax applying to
income from patents, from April 2013. There will be consultation with
business in time for Finance Bill 2011 on the detailed design of the
patent box, which will apply to patents granted after the legislation is
passed.
The Government will continue to consult on this
measure. It will issue a consultation document in May 2011, with
legislation proposed for Finance Bill 2012.
Corporate
Capital Gains Simplification: De-Grouping Charges
The 2011 Finance Bill will simplify the
rules for calculating chargeable gains when a company (or group of
companies) leave a Group. There
will also be minor alterations to the published December 2010 draft of
this legislation to address unintended consequences for a few REIT where
charges may arise when there are minority investors in a company that
leaves an REIT Group.
Modernisation
of the Tax Rules for Investment Trust Companies (ITC)
The 2011
Finance Bill will amend current legislation governing ITCs so that HM
Treasury will grant advance once-only approval of an ITC replacing the
current annual requirement for the ITC to seek approval from HMRC. There will also be a relaxation and
tightening of the investment criteria used to determine the qualification
of the Fund as an ITC.
Loan Relationships
and Derivative Contracts (Disregard) Regulations
The rules on
‘matching’ in respect of foreign exchange gains and losses on loan
relationships and derivative contracts will be amended so that:
-
Companies can ignore exchange gains and losses where
the loan relationships or derivative reduces the company’s foreign
exchange exposure in relation to preference shares held in unconnected
non-UK entities. This change is
effective for accounting periods beginning on or after 1 July 2011.
-
Gains and losses on loan relationships and
derivative contracts produced by underlying foreign assets held in a
partnership can be deferred until either the partnership disposes of the
asset or the company disposes of its interest in the partnership. This amendment will apply for
accounting periods beginning on or after 1 January 2012.
-
The company can defer gains or losses resulting
from the sale of foreign currency shares until the company receives the
disposal proceeds. This change
will apply for accounting periods beginning on or after 1 January 2012.
OECD
Transfer Pricing Guidelines
Under current laws, when determining
the accuracy of a transfer pricing policy, any version of the OECD
guidelines may be referred to. To
reflect the fact that economic conditions have changed dramatically since
the initial report by the OECD on 1 May 1998, legislation will be amended
so that for accounting periods ending on our after 1 April 2011 for
corporation tax (and, for income tax, for the year ended 5 April 2012 and
thereafter) the only approved version of the OECD report that can be used
is the one published in July 2010.
In addition, the legislation will include a provision allowing the
definition ‘transfer pricing guidelines’ to reflect new publications of
the OECD report.
Changes
to Accounting Standards for Leases
Legislation
will be enacted in the 2011 Finance Bill to ensure that the way profits
and losses are calculated for tax purposes does not change as a result of
a change in the way leases are recognised under new International
Accounting Standards.
Life
Insurance Apportionment Rules
To
tackle unintended tax charges arising because of a method of calculation
of the ‘relevant fraction’, the 2011 Finance Bill will amend section 432C(9) ICTA 1988 to change the definition of the
‘relevant fraction’ so that the mean liabilities of a category of
business are reduced (but not below zero) by the mean value of assets
linked to that category of business.
Consultation
on Devolving Corporate Taxation to Northern Ireland
The Government is working with the Northern
Ireland Executive to rebalance the Northern Ireland economy and will
shortly publish a consultation paper which will look at
mechanisms for devolving responsibility for the rate of Corporation Tax
to the Northern Ireland Executive.
Anti-Avoidance
Functional
currency
To counter
avoidance schemes involving changes in the functional currency (i.e. the
currency in which it prepares its accounts) of an investment company,
legislation will be introduced to make it clear that the ability to elect
for a functional currency is limited to companies whose main purpose is
to make investments. Provisions
will also be included for newly incorporated companies.
Sale of lessor companies
Legislation
will be introduced to prevent the avoidance of tax arising on the sale of
lessor companies. To achieve this the
Government are withdrawing the option to elect out of the sale of lessor company charge introduced by the previous
Government in December 2009. The
withdrawal of the election brings profits from the sale of the lessor company into charge at the time of sale rather
than having them deferred, perhaps never to be collected. Further changes will also ensure that
the full value of the company’s interest in leased plant or machinery is
taken into account and that the right plant or machinery assets are
reflected in the calculation.
|
Blackstone Franks’ Reaction:
The Treasury seem to be having trouble
in achieving the fairly simple objective that where a leasing company
is sold, the purchaser should be able to utilise its capital allowances
only against the lease rentals from the same assets. It is a shame that Mr Osborne has
said, “OK, let’s tinker yet again with the system that was created in
2006”, rather than, “It’s obvious that the system is flawed, let’s
start again”.
|
Corporate
gains degrouping charge
Where
a company leaves a group holding assets acquired intra-group within the
previous six years, a degrouping charge arises
to tax the capital gain on the acquisition of the assets. No charge applies where both the vendor
and purchaser on the intra-group transaction leave together as a
mini-group (as the exemption for intra-group transfers ought to continue
to apply in such a case).
Apparently some people have been seeking to avoid this charge by
the use of complex arrangements, which seek to use this mini-group
exception by transferring the two together artificially and subsequently
breaking the mini-group. The
Finance Bill will amend the rules to ensure that the degrouping
charge is not excluded by this exception and that the degrouping
charge will apply even if subsequent to the degrouping
the connection between the two groups is broken.
The
changes are effective where companies leave a Group on or after 24 March 2011.
Derecognition of corporation
tax loan relationships
Legislation will be introduced in Finance Bill
2011 to amend existing CT rules that address avoidance schemes under
which profits are claimed to fall out of account, or losses are claimed, for
tax purposes, as a result of the adoption of different accounting
treatment of a loan relationship or derivative contract by each
party.
This measure was originally announced on 6
December 2010 and was brought into effect for debits and credits arising
on or after that date. Following
consultation a number of changes were made to the draft legislation to
tighten up the regulations. As we
do not expect that this affects a large number of our clients, we have
not commented on this matter here further. Please contact us if you would like
further details.
Loan relationships and derivative
contracts: Group mismatches
Legislation will be introduced in 2011 Finance
Bill to prevent tax losses through the asymmetrical tax treatment of
loans and derivatives (group mismatch schemes). The measures are part of a continuing
battle between HMRC and the anti-avoidance industry to ensure that
symmetry of tax treatment is applied within Groups. We do not believe that our clients are
involved in such schemes and so have not included any further information
here. Please contact us if you
would like further information.
BUSINESS TAX
Capital
Allowances
The
Chancellor confirmed the previously announced reduction in the rate of
WDA.
-
from 20% to 19% for expenditure allocated to the
main pool; and
-
from 10% to 8% for expenditure allocated to the
special rate pool (mainly long-life assets and certain fixed plant in
buildings)
The
changes in rates will be effective for business within the charge to
corporation tax from 1 April 2012 and from 6 April 2012 for those within
the charge to income tax. Hybrid
rates will apply in circumstances where chargeable periods span these two
dates.
Blackstone Franks’ Reaction:
Hybrid
rates are a new concept.
Previous Chancellors used to require the expenditure in the
accounting year to be identified and split between that falling before
the date of a change (which attracted the old rate) and that falling
after the change (which attracted the new). A hybrid rate gives relief for all of
the expenditure in the accounting year at the average rate applying to
the business for the year.
Where
heavy expenditure (in excess of the annual investment allowance) is
incurred in the part of a current accounting year ended before 1 April
2012, it might be worth considering changing the accounting date to 31
March to secure the 20% rate.
However this would be a one-off saving only, so it will not be
worthwhile in most cases.
|
Annual
Investment Allowance (AIA)
The
Chancellor confirmed that the reduction in the annual limit for AIA
announced in his June 2010 budget from £100,000 to £25,000 will go ahead. This measure is effective from 1 (or 6)
April 2012.
Blackstone Franks’ Reaction:
In
the last few years the AIA has given a 100% write off for capital
expenditure in the year that it was incurred for most small
businesses. The reduction to
£25,000 will put a lot of expenditure back into phased writing down
allowances. This suggests that
for small businesses the planning of capital expenditure, particularly
near to year-end, becomes important.
Delaying the expenditure into the next year can increase the
initial tax relief from 18% to 100%.
|
Short-Life
Assets
The government has
announced an extension to the current four-year ‘cut off’ period to eight
years for expenditure on qualifying short-life assets allocated to a
‘single asset pool’.
Briefly
a business can elect for certain qualifying assets, broadly assets that
will have a useful economic life in the business of less than 4 years
(excluding cars and other assets covered by section 84 CAA 2001) to be
dealt with separately in the business’ capital allowances
computation. This allows the full
cost to be written off over the period of ownership, whereas if the asset
were left in the main pool, relief would be spread over a very long
period continuing even after the asset is sold or scrapped. If it is not sold within the 8-year
period, the asset has to be transferred (at the tax written down value)
into the main pool.
This
measure applies to expenditure incurred after 1 April 2011 for companies
within the charge to corporation tax and 6 April 2011 for business
outside the charge to corporation tax.
Blackstone
Franks’ Reaction:
The
four-year period was originally intended to cover things such as
computer equipment, which becomes obsolete very quickly. The extension to eight years brings
in a lot more assets. It is
usually sensible to treat an asset as a short life asset unless it is
fairly obvious that it will not be sold within the eight-year
period. However
|
|
Blackstone Franks’ Reaction (cont’d):
it needs to be
borne in mind that if a short life asset is sold for more than its tax
written down value, the sale will trigger a balancing charge, whereas
leaving it in the main pool does not do so. Accordingly if the value of the asset
is likely to depreciate at a slower rate than 18%, it may be better to
leave it in the main pool.
|
Enhanced Capital Allowances (ECA)
Scheme for Energy-Saving Technologies
The
lists of technologies and products covered by the energy-saving ECA
scheme will be updated prior to the summer. Expenditure on ECA qualifying assets
attracts a 100% first year allowance with no annual limit. A list of the qualifying technologies
and products are published in the Energy Technology Criteria list which
is published on the DEFRA website.
Changes
to the capital allowances anti-avoidance legislation
The
government intend to make this legislation more effective by replacing
the current “sole or pair benefit” test with “a new rule that is in line
with effective anti-avoidance tax elsewhere in the Taxes Acts”. A discussion document will be issued in
May.
Furnished Holiday Lettings
Legislation will be introduced in Finance Bill 2011 to revise the
tax rules for furnished holiday lettings (FHL) and to extend the regime
to the European Economic Area (EEA). From April 2011 loss relief may only
be offset against income from the same FHL business. UK losses can
relieve UK FHL income only and similarly with the EEA losses against EEA
FHL income only. From April 2012 to qualify in a year, a property must be
available to let for at least 210 days and actually let for 105 days.
Businesses meeting the actually let threshold in one year may elect to be
treated as having met it in the two following years (“period of grace”),
providing certain criteria are met. Minor amendments will be made to the
draft legislation to ensure that the period of grace provisions apply
from 2010-11.
Business
Premises Renovation Allowance
This relief will be extended for a
further five years from 2012.
Leasing Double
Allowances
An
anti-avoidance provision will be introduced to counter a scheme which
involves arrangements which are claimed to have the effect of
guaranteeing the value of a leased asset at the end of the lease and
which also enables the asset guaranteed to be taken into account for
relief a second time when paid.
HMRC do not think the arrangements work in any event.
back to top
CAPITAL
GAINS TAX
Annual
Exemption
The
CGT annual exemption for 2011/12 has increased to £10,600. The exemption
for most trusts has increased to £5,300.
From 6 April 2012,
the CGT annual exempt amount will be increased in line with rises in the
CPI instead of the Retail Prices Index.
Parliament will still be entitled to override automatic indexation
and set a different figure.
Entrepreneurs’
Relief
The
rate of CGT on gains qualifying for entrepreneurs’’ relief remains at
10%. From 6 April 2011 it applies
to the first £10 million of gains (increased from £2m up to 22 June 2010
and £5m from that date).
Blackstone
Franks’ Reaction:
This increase is likely to mean that
most sales of shares in trading companies will be covered by
entrepreneurs’ relief. It is
accordingly important to ensure that the qualifying conditions are
met. It might therefore be worth
reminding readers that –
a)
the shareholder needs to personally own at least 5% of the
voting shares in the company
b)
the shareholder needs to be an employee or director of the
company (part-time employment or a non-executive directorship will
qualify)
c)
shares held in discretionary trusts cannot qualify for the
relief
d)
shares held in an interest in possession
trust can qualify only if the life tenant personally owns 5% (and the
trust can only utilise unused relief of the life tenant).
The conditions
must be met for at least 12 months prior to a sale.
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Single
Farm Payment Scheme and CGT Roll-over Relief
Business asset
roll-over relief defers CGT when proceeds from disposing of old
qualifying assets are reinvested in new qualifying assets. From 6 April 2012 the list of
qualifying assets will be revised in order to ensure that entitlements to
payments under the EU’s single farm payments scheme continue to be
eligible for roll-over relief. The Government will informally consult
with key stakeholders in June/July2011.
Blackstone
Franks’ Reaction:
The legislation refers to payment
entitlements under EU Council Directive 1782/2003. Someone seems to have just noticed
that this was replaced by a new Directive in January 2009, so single
farm payments accidentally ceased to qualify for roll-over relief from
that date. Hopefully this HMRC
error will be corrected retrospectively, although this is not clear
from the budget documents.
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VAT
Registration Threshold
The VAT
registration threshold is again increased by £3,000 to £73,000 from 1
April 2011. The deregistration threshold similarly increases by £3,000 to
£71,000 and the registration and deregistration thresholds for
acquisitions from other EU countries are increased by £3,000 to £73,000
from the same date.
Fuel Scale
Charge
The scale charge is
based on carbon emissions. A new
scale will apply from 1 May 2011.
Like the current one, the new scale starts at 120g/km or less but
rises to a maximum of 225g/km (currently 230). The quarterly figures at the top and
bottom of the scale are:
120 or less £26.17 (on £130.83)
i.e. a reduction of £5.17
125 or less £39.33 (on £196.67)
i.e. an increase of £4.63
225 or more £91.83 (on £459.17) i.e. an increase
of £20.04
230 or more £91.83 (on £459.17) i.e. an increase
of £17.96
Blackstone
Franks’ Reaction:
We
think that these are odd figures too!
In the past the figures have been fixed on a quarterly basis as
most businesses make quarterly returns.
Mr Osborne seems to have chosen to use an annual basis
instead. In his quest for
simplification he clearly believes that it is easier to start with a
bigger figure and divide by four than to start from the actual
figure. This must be some
special system of maths that is taught only at Eton.
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Low Value
Consignments
The low value
consignment relief threshold below which goods imported from outside the
EU are VAT-free reduces from 1 November 2011 from £18 to £15. The government will also explore with
the European Commission whether they can scrap the relief entirely.
Blackstone
Franks’ Reaction:
When you buy DVDs,
etc online from a UK supplier you are likely to find that they are sent
to you from Guernsey. This is
because the low value consignment relief exempts an import of goods
from Guernsey from VAT. UK
companies such as HMV are understandably unhappy as they have to add
VAT if you buy the DVD in their shop.
The relief is an EU simplification measure, so all that Mr
Osborne can do is reduce it to the EU limit. Whether this makes HMV happy remains
to be seen. Most DVDs cost under
£15 in any event so it is unlikely to have any real effect.
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VAT Incurred by
Academies
A refund scheme
similar to that which applies to local authorities will be introduced to
enable Academies to recover VAT on their purchases.
Blackstone
Franks’ Reaction:
About time
too. Academies are free schools
but they are required to engage with the local communities. They are usually formed as charities,
which enables them to recover VAT on building costs but only to the
extent that the building is used for charity purposes. If it is used also for community
purposes the VAT becomes irrecoverable.
Academies have been
asking for years to be allowed to recover VAT in full in the same way
as local authority schools. It
is hardly joined up government to create new ways of delivering
education and then handicap them by the tax system! HMRC have consistently said (even to
the Department for Education) that was impossible. It is good that at last someone has
seen sense.
Our only question
mark is over the new Free Schools.
HMRC say there is not a problem as free schools enter into the
Academies agreement with the DfE. Our concern is that the version of
the agreement on the DfE website requires an
Academy to be a secondary school and some free schools are primary
schools.
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Treatment of
Business Samples
In response to the
ECJ decision in the EMI case, legislation will be introduced to ensure
that VAT is not chargeable on any number free samples provided by a
business to an individual for marketing purposes. This measure will be effective from the
date of Royal Assent but taxpayers can rely on the ECJ directive as
clarified in the EMI case.
Blackstone
Franks’ Reaction:
This is not Mr
Osborne being generous. EMI plc
had to take HMRC to the European Court which held that business samples
are not gifts and the UK has to amend our rules to give effect to that
judgement.
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Splitting
of Supplies
The UK courts have
held that if a person buys a service from one person and associated
printed material from another the two cannot be merged into a single
supply. Accordingly the supply of
the printed material is a zero-rated supply. HMRC do not like this because the
courts have also held that where a cable TV company provided TV services
and separately sold the subscriber a listings magazine, the magazine was
an integral part of the supply of the TV service.
HMRC
are bad losers. The law will be
amended to allow supplies by associated persons to be treated as a single
supply if one of the supplies is of printed matter and the two supplies
would be a single supply if they were both supplied by the same person.
Diplomatic
Privilege
The extra-statutory
concessions which grant relief from VAT for diplomatic missions,
international bodies and visiting NATO forces will be given statutory
effect – but not until next year.
VAT relief will similarly be given for European research
infrastructure consortiums (ERICs) (which the relevant EU treaty
requires).
VAT
Grouping
ESC 3.22, which
allows the value of an anti-avoidance charge within a group to be capped
at the value of the services purchased by an overseas VAT group member
and recharged to the UK, will also be given statutory effect in 2012.
VAT Status
of Public Bodies
Legislation will be
introduced in 2012 to amend the law “to ensure that there is a clear
transposition of EU agreements relating to the VAT treatment of public
bodies carrying out their statutory duties in competition with the
private sector”.
Blackstone
Franks’ Reaction:
We
will have to wait until draft legislation issued in the Autumn to find
out precisely what the changes are.
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VAT on
Imported Road Vehicles
To
help prevent VAT fraud, from 2013 HMRC will have to be notified online
that it is proposed to bring a vehicle into the UK for permanent use on
UK roads. The DVLA will not
register the vehicle until HMRC confirm to them that this has been done
and that HMRC has received the VAT or security for the VAT. A consultation document will be issued
in May.
Cost-sharing
Exemption
There will be
consultation on the options for implementing the EU VAT cost-sharing
exemption. It seems likely that
this will be limited to charities, universities, housing associations and
similar public bodies though.
Mandation of Online Filing
From 1 August 2012 it
will become compulsory for VAT registration, deregistration and
notification of charges to be done online.
Currently
VAT returns must be filed online unless the taxpayer was registered
before 1 April 2010 and has a turnover of under £100,000. Such people will also have to file
online and pay their tax electronically from 1 April 2012.
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OTHER TAXES
Inheritance Tax
Nil-rate band threshold
The nil-rate
band threshold remains at £325,000 up to 5 April 2015. After that it will be indexed in line
with the consumer prices index.
Reduced rate
The government proposes that where a decedent
leaves 10% or more of his net estate (after deducting IHT exemptions,
reliefs and the nil-rate band) to charity, the IHT rate on the remainder
of the estate will be reduced by 10% to 36% - but only for deaths after 5
April 2012.
Blackstone Franks’ Reaction:
This
sounds too good to be
true. If a person leaves nothing
to charity, IHT is 40% on the value of his estate, leaving 60% for his
heirs. If he leaves 10% to
charity there is no IHT on the 10% and that on the remaining 90% is at
36% (equivalent to 32.4% on the net estate). This leaves the heirs with 57.6% of
the estate, i.e. it has cost only 2.4% to donate the 10% to
charity. If the deceased
intended to make charitable gifts in any event but these were under 10%
of the estate, increasing the gifts to 10% might well increase what is
left for the heirs.
e.g. Tom has a
net estate (after the nil-rate band etc) of £1m. He has left £80,000 to charity. The tax is 40% of £1m less £80,000 =
£920,000, which is £368,000. Tom
redoes his Will to increase the charitable gifts to 10% of his
estate. The tax is now 36% of
£1m, less £100,000 = £900,000, which is £324,000. Accordingly by gifting a further
£20,000 to charity, Tom has reduced the IHT by £44,000 thus increasing
the amount that goes to his heirs by £24,000.
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There
will be a consultation document “before the summer”.
Stamp
Duty Land Tax
Anti-avoidance
Finance Bill 2011
will make three changes to ensure or put beyond doubt that certain SDLT
avoidance schemes are ineffective.
These relate to –
-
the
relationship between the rules on sub-sales and the Alternative Finance
reliefs (the exception in FA 2003, s 45(3) will be extended to all such
reliefs);
-
the
definition of a financial institution for the purposes of the SDLT
Alternative Finance reliefs (it will be amended to remove companies that
merely hold a Consumer Credit Licence); and
-
the way the
consideration is determined where land is exchanged (it will be changed
to the greater of the market value of the interest acquired and what
would be the chargeable consideration under the normal rules.
Blackstone Franks’ Reaction:
HMRC
put out a press release earlier this year which said that they were
aware of lots of SDLT schemes and do not believe that any of them
work. Accordingly these are
probably “just-in-case” changes and HMRC will continue to attack past
users of the schemes.
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Reform of rules
for bulk purchases
Where
a purchaser of residential property acquires more than one dwelling from
the same vendor (or a connected person) the rate of SDLT is normally
determined by the total consideration.
This deters investment in residential property as the purchase of
a block of low value flats will attract 4% duty whereas the purchase of
each of the flats separately might attract only 1% duty. Accordingly an option will be
introduced to calculate the SDLT on the aggregate consideration
attributable to dwelling divided by the number of dwellings. However if this eliminates the tax
because such average consideration is under £125,000 duty will be payable
at 1% instead.
Landfill
Tax
As previously
announced, the rate of landfill tax increases by £8 to £64 per tonne for
disposals from 1 April 2012. The
£2.50 reduced rate is frozen up to 31 March 2013.
The
Chancellor has confirmed that it will rise by a further £8 each year up
to 2014 and has said that it will be at least £80 per tonne for the
following five years.
The
tax credit that landfill site operators can claim for donations to the
Landfill Communities Fund will increase from 5.5% to 6.2% from 1 April
2011.
Aggregates
Levy
The increase in rate
from £2.00 to £2.10 per tonne that was due to take place from 1 April
2011 has been deferred until 1 April 2012.
The
government are still in discussion with the EU as to whether they can
introduce a levy credit scheme in Northern Ireland. The old 80% credit ceased from
September 2011 when it was held to be illegal by the European Court.
National Insurance
From the 2012 –13 tax year the
Consumer Prices Index (CPI) is to replace the Retail Prices Index (RPI)
as the default indexation for all National Insurance contributions rates,
limits and thresholds:
• Class 1 lower
earnings limit and primary threshold;
• Class 2 small
earnings exception;
• Class 4 lower
profits limit; and
• Rates of
Class 2 and 3.
The
secondary threshold will be over-indexed when compared to CPI and will
continue to rise by the equivalent of RPI from April 2012 until 2015-16.
Tobacco
Products Duty
The rates of duty
have been increased beyond inflation from 23 March 2011 and the quantity
based duty on cigarettes re-aligned.
The changes together will add:
33p to a packet of premium
cigarettes
50p to a packet of economy
cigarettes
67p to a packet of
hand-rolling tobacco
10p to a packet of 5 small
cigars
17p to a packet of pipe tobacco.
Fuel
Duty
There are a number of
changes to fuel duty.
a)
the fuel duty escalator that was introduced in 2009
is scrapped from 23 March 2011
b)
the main fuel duty rates (i.e. those on petrol,
diesel, biodiesel and bioethanol) will be cut
by 1p a litre from the same date
c)
but it will increase by 3.02p a litre from 1
January 2012
d)
and further increased from 1 August 2012
e)
in future fuel prices will increase in line with
RPI
f)
unless the price of
crude oil falls below $75 a barrel, when it will be increased by RPI plus
1p per litre each year.
The
duty rate for rebated oil will rise in proportion to the main rates. There are similar changes to the other
rates.
Alcohol
Duties
As previously
announced, a new High Strength Beer Duty (HSBD) will be introduced for beer
with a strength of over 7.5%abv. This will be 25% of the general beer
duty and will be payable in addition to the general beer duty. It should add 25p to the price of a
500ml can of beer at 9%abv. Small
Brewery relief will not apply to HSBD, although it will continue to apply
to the general beer duty.
There
will also be a 5% reduction in the rate of general beer duty for beer
with an abv below 2.8%.
The
duty increases previously announced in March 2008 will apply from 28
March 2011. These are expected to
add –
4p to a pint of beer
15p to a bottle of wine
54p to a bottle of spirit
Amusement
Machine Licence Duty
The duty will
increase from 25 March 2011 in line with inflation. The government intends to reform the
taxation of gaming machines and replace the AMLD with a new Machine Games
Duty (MGD). Supplies in relation
to the playing of games on machines which are liable to MGD will be
exempt from VAT. A consultation
document on the design of MGD will be issued in May.
Gaming
Duty
The gross gaming
yield bandings will be increased in line with inflation.
Vehicle
Excise Duty
The duty on cars
registered after March 2001 (for which the duty is graduated), is
increased in line with inflation from 1 April 2011. There will be no duty in the first year
for cars with CO2 emissions below 130g/km. The rate for cars under 120g/km in
later years is unchanged. That for
cars up to 130kg increases from £90 to £95. For cars over 255g/km, the duty
increases from the current £435 to £1,000 in the first year and £460 in
subsequent years. The rate for
cars first registered before March 2011 increases from £125 to £130 for
cars up to 1,549cc and from £205 to £215 for others.
There
will be no increase in VED rates for heavy goods vehicles. The discounts for Euro V1 reduced
pollution certificates (RCPs) will remain the same but such discounts
will not be available for vehicles purchased after 31 December 2016 when
that standard becomes mandatory, and the discounts for vehicles purchased
earlier will expire when the tax disc current at that date expires.
Climate
Change Levy (CCL)
Rates
The
rates of CCL will be increased in line with the RPI (curiously not the
CPI) from 1 April 2012.
Carbon
price floor
A
carbon price floor will come into effect on 1 April 2013. This will impose CCL on fossil fuels
used in electricity generation (and impose oil fuel duty on oils). The charge will be based on the carbon
price support rate.
Reduced
rate for electricity suppliers
The
current 35% rate will be reduced to 20% to help mitigate
the impact of the carbon floor price.
Exemption
for certain forms of transport and for recycling processes
Currently there is an
EU approved exemption for supplies of electricity for use in rail freight
and some public passenger rail services.
There is a similar exemption for taxable commodities used in
certain processes relating to the recycling of steel and aluminium. The EU approval for both lapses on 1
April 2011. The government has
applied for re-approval, but if this is not obtained by 1 April, both
reliefs will have to be suspended.
Air Passenger Duty
The planned increases
from 1 April 2011 have been deferred for a year.
The new contracted-out rebate
percentage rates announced in February 2011 will mean that from 6 April
2012 if an individual is contracted out of the State second pension, the
employer and the employee will pay more National Insurance contributions.
This is because the employer’s rebate will reduce from 3.7 per cent to
3.4 per cent and the employee’s rebate will reduce from 1.6 per cent to
1.4 per cent.
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MISCELLANEOUS
Repeal
of Reliefs
Mr
Osborn intends to simplify the tax system by repealing 43 reliefs, thus
removing 100 pages of tax legislation.
Blackstone Franks’ Reaction:
Many
of these reliefs expired years ago and should have been removed when they
expired. However others are not
redundant. These include:
-
the relief for mineral royalties
which treats half of the receipt as income and half as capital gain;
-
the exemption for grants for giving
up agricultural land;
-
the exemption from a benefit in kind
charge for certain benefits provided for family members;
-
the exemption for meals provided on
cycle to work days;
-
the exemption for late night taxis
for employees who occasionally work late;
-
the exemption for luncheon vouchers;
-
NIC Class 4 relief for past losses;
-
flat conversion allowance;
-
capital allowances for expenditure on
safety at sports grounds;
-
land remediation relief;
-
exemption of
compensation for mis-sold pensions.
These
reliefs will not be withdrawn until 2012 at the earliest, so this coming
year may provide the last chance to benefit from them.
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Security
for PAYE and NIC
The
proposed legislation to require employers to provide security for PAYE
and NIC will go ahead. This will
enable HMRC to amend the PAYE regulations. It is unlikely that the changes will
come into effect immediately this is done.
Blackstone Franks’ Reaction:
We
await the Regulations with trepidation.
The draft Regulations contained a number of horrors. For example they provided that if
HMRC demand security for PAYE it would be a criminal offence not to
provide it. It is irrelevant
that the employer may have no money and no method of providing
security. The criminal record
could not be avoided even by immediately ceasing the business. Unlike VAT, the criminality was not
in trading without having provided the security. It was simply not providing the
security.
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Indexation
by Reference to CPI
In
future indexation for tax purposes will normally be done by reference to
the Consumer Price Index (CPI) instead of the Retail Price Index (RPI)
which has been used in the past.
CPI
and RPI are both economic measures to calculate inflation. They are different in many aspects.
CPI
is a measure of inflation estimated on the basis of average price of
goods and services purchased by consumers. It calculates the change in price for a
constant market basket of goods and services from a specific period to
the next period. On the other
hand, the Retail Price Index or RPI is a measure of the change in cost of
the market basket of retail goods and services. Furthermore, the CPI does not take into
account certain items that are included in the RPI. The Retail Price Index includes council
tax, mortgage interest payments, buildings insurance and house
depreciation.
CPI
weightings are base d on household spending in the National
Accounts. The RPI weightings are
based on Food Survey and ONS Expenditure.
Historically,
the CPI shows comparatively lower increases than the RPI which is
presumably why the change is being made.
Provisional
Collection of Taxes Act 1968
The
Provisional Collection of Taxes Act 1968 needs to be amended to take
account of the fact that the parliamentary year has been altered to end
in the spring. The PCTA gives
legal effect to the budget resolutions until the beginning of August
(which is why the Finance Bill needs to be passed by that date). The changes are purely technical.
Mutual
Assistance Recovery Directive
There
is an updated EU Directive to broaden the degree of cooperation between
EU tax authorities. The UK
legislation needs to be updated to reflect this. The changes extend
the scope of the Directive to cover all taxes and allows
information to be exchanged more readily between European tax
authorities.
Index-linked
Gilts
The
government think that pension funds may want to hold gilts linked to CPI
if pensions are to be linked to CPI or other price indices. The government will therefore take
power to issue such securities - although they have not yet decided
whether or not to do so.
Enterprise
Zones
The
government is to introduce 21 new enterprise zones. However it is not clear if, or to what
extent, they will mirror the tax benefit of the previous ones.
The
government have said that they will attract 100% business rate discount
for five years. They will also
consider in a limited number of cases the scope for introducing enhanced
capital allowances where there is a strong focus on high value
manufacturing.
Data-gathering
The
HMRC information powers are to be widened to enable HMRC to collect data
for risk assessment.
Disclosure
of Tax Avoidance Schemes
Further hallmarks are
to be added to the DOTAS rules during 2011/12. These will relate to:
-
schemes that seek to avoid income tax and NICs on
employment income;
-
schemes that incorporate offshore transactions to
avoid corporation tax; and
-
artificial loss schemes.
Tax
Transparent Fund Vehicle
The
government propose to establish a tax transparent fund vehicle to support
the competitiveness of the UK fund industry. A consultation paper will be issued in
June.
Islamic
Finance
The
government intends to make regulations to introduce direct tax rules for sharia-compliant variable loan arrangements and
derivatives.
Double
Tax Treaty Avoidance
An
anti-avoidance provision is planned for 2012 to ensure that relief or
exemption from UK tax is not given under a double tax treaty as part of a
UK tax avoidance scheme. It will
be aimed both at UK residents and at overseas residents who enter into
arrangements to obtain a benefit under the UK’s tax treaties to which
they are not entitled.
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