..::
blackstone franks - the budget 2007 :::........
BLACKSTONE
FRANKS LLP
THE BUDGET 2007
CONTENTS
The
New Tax Rates at a Glance
Income Tax
Income Tax Rates
Personal Allowances
Self Assessment Tax Returns
Alternative Finance Products
Pensions
Pre-Owned Assets
Purchased Life Annuities
Individual Savings Account
Taxation of Dividends from Non-UK Companies
Property Service Charges
Trust Modernisation
Gift Aid
Life Insurance Policies
Recognised Stock Exchange
Employee Taxation
Company Cars
Holiday Homes
Enterprise Management Incentives
Employee Benefit Trust
Managed Service Companies
Online Filing
Armed Forces Operational Allowance
Armed Forces Residuary Scheme
Corporation Tax
Rates
Research and Development Tax Relief
Loss-Buying of Lloyds Underwriters
Film Production Tax Relief
Sales of Lessor Companies
Securitisation Companies
Sale and Repurchase Agreements ("Repros")
Enterprise Investment Companies
Venture Capital Trusts
Corporate Venturing Scheme
Offshore Funds
Insurance Companies
Online Filing
Business Tax
Capital Allowances
Secondments to Charities and Educational Institutions
Carbon Trading for Non-Residents
Landlords Energy Saving Allowance
Capital Gains Tax
Annual Exemption
Capital Loss and Gain Buying by Companies
Targeted Anti-Avoidance Rule
VAT
Registration Threshold
Fuel Scale Charge
Mixed Business and Private Use of an Asset
Surrender of Interests in Land
VAT on Smoking Cessation Products
Transfer of a Going Concern
VAT: Gaming Act 2005
VAT: Joint and Several Liability
VAT and Academies
Housing Alterations for the Elderly
Stamp Duty Land Tax and Stamp Duty
Stamp Duty Land Tax Abolished on Zero Carbon Homes
Exchanges of Property Between Connected Persons
Payment and Administration
Surplus School Land
Anti-Avoidance
Shared Ownership Trusts
Reconstruction Relief
Stamp Duty and Stamp Duty Reserve Tax on Exchange
Intermediaries
Other Taxes
Inheritance Tax
Threshold
Alternatively Secured Pensions
Landfill Tax
Aggregates Levy
Climate Change Level
Fuel for Yachts and Private Planes
Alcohol Duties
Tobacco Products Duty
Remote Gaming Duty
Gaming Duty
Amusement Machine Licence Duty
Excise Duties on Small Non-Commercial Consignments
Vehicle Excise Duty
Fuel Duties
Miscellaneous
Review of Powers and Safeguards
Penalties for Tax Returns
Renewables Obligation Certificates
Rating: Empty Property Relief
Auction of Allowances for Carbon Dioxide Emissions
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.
-
additional if married and either spouse over 65 at 6
April 2000
6,285*
6,065*
-
if 75 or over by end of tax year
7,690
7,420
-
additional if married and either spouse over 75 at 6
April 2000
6,365*
6,135*
(The
excess of age relief over the personal allowance is
reduced by half of the excess of income over £21,700
in 2008/09 and £20,800 in 2007/08 (£20,100
in 2006/07))
.
.
Blind
persons relief
1,730
1,660
Maximum
Enterprise Investment Relief (restricted to 20%)
* Relief is restricted to 10%
400,000
200,000
Corporation
Tax Rates
2006/07
2005/06
Small
company rate (£0-£300,000)
20%
19%
Main
rate (over £1,500,000)
30%
30%
Effective
marginal rate (£10,000-£50,000)
n/a
23.75%
Effective
marginal rate (£300,000 -£1,500,000)
32.5%
32.75%
Fraction
for marginal rate relief
1/40
1/40
**
Subject to the new tax where dividends are paid to individuals
The income tax rates for 2007/08 are again increased
in line with inflation, i.e.
first
£
2,230
10%
£
223.00
next
£32,370
22%
£7,121.00
.
£34,600
.
£7,344.40
excess
over
£34,600
40%
.
However the rates are to be restructured
from 2008/09 by abolishing the 10% band and reducing the 22%
basic rate to 20%. But that would be too simple. The 10% band
will still apply to savings income and capital gains, the
starting rate only being removed in respect of earnings and
pensions.
Blackstone
Franks' Reaction:
Everyone will undoubtedly welcome the proposed reduction
in the basic rate of income tax. It should however be
noted that it is a year away - by which time of course
Gordon Brown no longer expects to be Chancellor, and
indeed the Labour party may not even be in office. This
is accordingly a future promise on which someone else
will have to deliver.
We would have welcomed scrapping the 10% band which
causes more work than it is worth. However it is not
clear what happens where a person has both earnings
and investment income, a not uncommon occurrence, or
whether rental income is savings income or earnings
for this purpose. The new system could accordingly be
more burdensome than the current one, so we are not
cheering yet.
Personal Allowances
The personal allowances are also increased in line with inflation,
i.e.
2007/08
2006/07
increase
Personal
allowance
£5,225
£5,035
£190
Age
allowance - up to age 75
£7,550
£7,280
£270
Age
allowance - 75 and over
£7,690
£7,420
£270
Blackstone
Franks' Reaction:
A person earning £39,825 will accordingly be £319.60
pa better off after 5 April 2007, an increase of 8%,
which is well ahead of inflation.
Those
over 65 are promised an increase of £1,180 over inflation
from 2008/09 and those over 75 an increase to £10,000
in 2010/11 (or perhaps 2011/12 - the HMRC Budget Note says
2010/11 in one place but later on says 2011/12).
Blackstone
Franks' Reaction:
It
seems a little cruel to promise those over 75 a substantially
increased pension but only if they survive for another
three years first. The Chancellor also did not point
out that if inflation continues at the current levels
the pension would have reached around £9,700,
so he
is actually not promising very much extra even for those
who survive his three year qualifying period.
There is also a promise for 2009/10 of an £800 rise
in the basic rate band above inflation. This will be partly
offset by an increase in the NIC upper earnings limit for
employee's contributions (and the self employed Class 4 limit)
by £75 pw or £3,900 pa above inflation.
Blackstone
Franks' Reaction:
Well
at least (or at last?) Gordon Brown has done something
that reflects commonsense.
Self Assessment
Tax Returns
From 2007/08 paper self-assessment tax returns will
have to be filed by 31 October 2008, although the current
31 January 2009 date will still apply to those filed electronically.
Blackstone
Franks' Reaction:
This was a partial retreat by Lord Carter following
representations by the ICAEW and other professional
bodies. Lord Carter did also recommend that this should
only happen if the HMRC systems are robust by then,
but that reservation seems to have been lost along the
way. See Robert's blog for his own unsuccessful attempt
to file his own tax return electronically - but don't
get too worried. By 2008 we will have the necessary
software in place to allow us to file clients' returns
electronically without relying on the HMRC forms.
As previously announced the enquiry window for such returns
will be reduced to a year (or rather up to 15 months) from
the date the return is filed, instead of a year from the statutory
31 January filing date.
Alternative Finance Products
New rules are to be introduced for the taxation of certain
types of investment bonds, known as "sukuk", which
satisfy the Sharia law prohibition on paying or receiving
interest. Some of the current rules are uncertain and others
produce anomalous results.
Blackstone
Franks' Reaction:
We are getting used to Gordon Brown bulldozing ill considered
legislation through parliament with the Opposition parties
simply nodding it through, and then having to correct
it a year or two later.
Pensions
There will be a number of "technical improvements".
Some are minor improvements for taxpayers, but some are major
improvements for the government. One will ensure that the
payment of unauthorised member and employer payments cannot
be structured to reduce the overall tax charge on the scheme
and the member or employer. A second will ensure that the
flexibilities on pensions paid early on retirement on ill-health
grounds "do not prevent the existing anti-avoidance arrangements
from applying".
Blackstone
Franks' Reaction:
Apparently people are becoming too ill to work as part
of "avoidance arrangements", so in future
anyone who becomes seriously ill in order to avoid tax
will end up with his serious illness but no tax relief!
We ourselves have yet to meet a client who would go
to such lengths to avoid tax.
.
Tax
relief on term assurance paid through a pension scheme is
to be removed for new schemes (except in relation to contributions
by employers). For registered occupational pension schemes
the removal applies from 1 August 2007 in respect of personal
term assurance policies (other than those applied for before
29 March 2007) and for other schemes it applies from 6 April
2007 (unless the application was made before 14 December 2006
and the policy is taken out by 5 April 2007).
The previously announced legislation to require a minimum
pension to be drawn from age 75 under alternatively secured
pension arrangements is confirmed. The minimum will be 55%
of a comparable annuity. There will also be rules covering
the position where a scheme provider is unable to trace a
member. The funds will have to be held in suspense.
Pre-Owned Assets
The Finance Act 2004 introduced a pre-owned asset annual income
tax charge (colloquially known as POAT) on those who had avoided
IHT on gifts of their houses, works of art and other chattels
but continued to enjoy the asset. The legislation allows a
taxpayer to avoid the charge by electing to treat the assets
as subject to a reservation of benefit for IHT purposes. For
individuals who enjoyed the asset in 2005/06 the election
had to be made by 31 January 2007. The Finance Bill will give
HMRC power to accept late elections.
Purchased Life Annuities
The rules are to be recast - but, it appears, solely to shift
responsibilities for calculating the taxable element from
HMRC to the insurance companies.
Individual Savings Account
From 2008/09 the amount that can be put into ISA's will be
increased to £7,200 with the cash element that can be
put into a cash mini ISA or maxi ISA being increased from
£3,000 to £3,600.
Blackstone
Franks' Reaction:
Is it too much to ask for the distinction between an
ordinary ISA (which must be invested in stocks and shares)
and a maxi ISA (which is invested partly in stocks and
shares with £3,000 being allowed to be held in
cash) to be scrapped?
Taxation of dividends from non-UK
companies
Currently dividends from non-UK companies are taxed at the
dividend rate but do not attract the 10% tax credit, so some
UK tax is payable by a basic rate taxpayer. From 2008/09 such
dividends will attract the tax credit, but only if the individual
receives less than £5,000 of such dividends in the tax
year and owns less than 10% of the company concerned. Consideration
is being given to whether these restrictions are needed.
.
Blackstone
Franks' Reaction:
This is a welcome change. It is probably a necessary
one under EU law where the company is an EU one. It
should avoid a lot of very small double tax relief claims.
Property Service Charges
From 2007/08 onwards property service charges and sinking
fund monies held on trust will be taxed at 20% instead of
40%.
Blackstone
Franks' Reaction:
It is a bit mean not to backdate this charge to 2006/07,
which is the first (and now only) year in which the
40% rate applies.
Trust modernisation
Where a company purchases its own shares in such a way as
to create deemed income, trustees will be chargeable to higher
rate tax on the gain element only. This corrects an error
in last year's Finance Act so applies for 2006/07 as well
as subsequent years.
For 2007/08 onwards where chargeable event gains on
insurance policies are received by trustees the notional 20%
tax credit can no longer be brought into the trust's tax pool.
This also corrects an error, but it would take a brave Chancellor
to correct retrospectively, errors in taxpayers' favour.
Gift Aid
There is a restriction on the benefit that can be obtained
from a charity (or a community amateur sports club) by a donor
before forfeiting gift aid relief. For 2006/07 onwards the
maximum benefit that can be obtained on donations of over
£1,000 will be doubled to 5% of the donation, subject
to an overriding limit of £500.
.
Blackstone
Franks' Reaction:
This is clearly welcome. It would be even more welcome
had it been thought through properly. For donations
of up to £100 the limit is 25%. It is then £25
where the donation is between £101 and £1,000.
The change will therefore result in the limit being
below 5% for donations of between £501 and £1,000.
Indeed the current 2.5% limit will apply to a donation
of £1,000. Hopefully the Chancellor will be persuaded
to rethink this, as such a system is virtually unworkable
for charities!
. Life insurance policies
For policies taken out from 21 March 2007 the chargeable event
rules on non-qualifying life insurance policies will be modified.
If the premiums paid in any one year on a policy exceed £100,000
and all or part of the commission on the policy has been passed
on to the policyholder, or a connected person of his, by an
intermediary such as a financial advisor, that rebated commission
will have to be deducted from the premium in calculating the
chargeable gain.
Because the insurer will not know whether commission has been
rebated it need only report to the policyholder what the gain
would have been in the absence of this provision.
Blackstone
Franks' Reaction:
This is going to be fun. An insurance company tells
a taxpayer what amount he needs to show as income on
his tax return. The taxpayer then has to realise that
this is wrong and add onto the insurance company's figure
the rebated commissions since he took out the policy.
HMRC will then look at the return and see that the figure
returned differs from that provided to them by the insurer.
They will then presumably open an enquiry. Clearly anyone
caught by this legislation needs to add a note to his
tax return explaining what he has done.
.
It
is not clear what happens where the whole of the commission
is passed to the policyholder but the intermediary charges
him a fee for arranging the policy. Commission is defined
as being rebated if value passes directly or indirectly from
the intermediary to the policyholder, but is the value that
passes the commission or the excess of the commission over
the fee?
Recognised Stock Exchange
A number of income tax and CGT provisions operate differently
depending on whether or not a share is listed or dealt in
on a recognised stock exchange. The Finance Bill will allow
HMRC to designate as a recognised stock exchange not only
a stock exchange but also any investment exchange designated
as a recognised investment exchange by the FSA.
The company
car fuel figure for 2007/08 will be the same as for the current
year. However from 6 April 2008 there will be a 2% discount
from the appropriate percentage rate for cars that have been
manufactured to run on E85 fuel.
Blackstone
Franks' Reaction:
E85 company cars run on high blends of biofuel. We have
not noticed any garages selling E85 fuels but presumably
the hope is that the discount will induce them to do
so. Buying a car to reduce the benefit in kind is clearly
unattractive if one has to drive for miles to find somewhere
to fill up. However that seems to be an integral part
of the Gordon Brown "green" concept. Perhaps
he doesn't understand what the word means.
.
From
6 April 2007 Extra Statutory Concession A 104 (which removes
a double charge where an employee earns at a rate of less
than £8,500 pa uses a company credit card to obtain
car repairs or fuel) is to be given statutory effect.
Blackstone
Franks' Reaction:
We wonder if there are really enough people earning
at a rate of less than £8,500 pa, who are not
directors, and who are provided with a company car to
justify enacting this concession. Nevertheless we should
not complain on those rare occasions when Gordon Brown
actually tries to get legislation to operate properly.
Holiday Homes
We
couldn't make up our mind whether to put this under income
tax or employee taxation. It applies to people who buy holiday
homes abroad and for non-UK tax reasons (normally to avoid
heavy transfer costs) put them into an offshore company or
buy them via an existing offshore company. Finance Bill 2008
(not this year's Bill) will introduce legislation to ensure
that such people are not faced with a benefit in kind charge
for their private use of the property on the basis that they
are a director or "shadow director" of the offshore
company.
In
the interim HMRC will not seek tax on a benefit in kind where:
(a)
the property is owned by a company owned by individuals,
(b) the company's only activities are incidental to the ownership
of the property (which will include letting it),
(c) the property is the company's only or main asset, and
(d) the property is not funded directly or indirectly by a
connected company.
Blackstone
Franks' Reaction:
This is a welcome change. The current rules are unclear,
as in most cases the owner is not a director of the
company but the risk is that HMRC might regard him as
a shadow director. They have caused a great deal of
worry for people who are aware of the tax rules. The
benefit in kind rules were clearly never intended to
apply in such a situation. It is sad that it had taken
HMRC and the government so long to respond to the numerous
representations that have been made over the issue in
the last few years.
The reason that the legislation will not be in this
year's Finance Bill is that the government want to issue
draft clauses for consultation. We cannot complain about
Gordon Brown wanting to get legislation right first
time around. We hope that the eventual legislation will
be less restrictive than the above concession. For example,
why shouldn't it apply if some or all of the shares
are owned by a family trust or a trust for infant children;
why should the relief be lost if the company is a wholly
owned subsidiary of a second company and the vendor
will only sell the top company; what if it is necessary
to put cash into the company as additional security
to enable it to borrow to buy the property, so that
the cash prevents the property from being the company's
only asset; or indeed does an overseas bank account
in which funds are placed to pay the property expenses
prevent the property being the company's only asset?
Enterprise Management Incentives
From
6 April 2007 the rules will be modified so that a transfer
of a qualifying trade of exploiting relevant intangible assets
to another group company will cease to result in the loss
of EMI qualifying status.
Employee
Benefit Trust
Legislation
will be included in the Finance Bill "to put beyond doubt"
that schemes under which an employer declares a trust for
the benefit of employees over assets which it already owns,
and other schemes which aim to enhance the value of employee
benefit trust contributions, fall within the employee benefit
trust regime. The effect is to deny a tax deduction for the
contribution or payment by the employer unless the funds are
paid to employees (so as to attract an income tax and NIC
charge) within 9 months of the end of the accounting period.
Managed
Service Companies
As
previously announced, from 6 April 2007 managed service companies
will be required to operate PAYE on all payments to individuals
providing their services through the MSC. From some time in
July or August they will similarly have to operate National
Insurance on such payments. This puts a person operating through
an MSC in a worse position than one operating through his
own company, as the IR 35 rules impose PAYE on only 95% of
the income.
HMRC
say that MSCs are "mass marketed service companies provided
by MSC providers to large numbers of individuals". However
the legislation will define an MSC by reference to certain
criteria relating to the characteristics of the company and
the characteristic of the business of the MSC provider. The
December consultation document included both composite companies
and managed personal service companies and indicated that
the characteristics of an MSC are that there is a scheme provider
who provides a generic company structure and administers the
scheme. It indicated that the legislation is not intended
to apply to situations where the worker has genuine financial
and management control over his company but outsources its
administration.
From
6 August 2007 it is proposed that where the PAYE and NIC owed
to HMRC cannot be recovered by the company HMRC will be able
to collect the debt from any of:
(a)
the MSC's directors,
(b) the MSC provider, and
(c) any person who encouraged, facilitated or was otherwise
actively involved in individuals' provision of their services
through MSC's.
Blackstone
Franks' Reaction:
This is a strange provision. The December consultation
paper indicated that many such companies did not operate
PAYE, closed down when HMRC sought the tax and were
replaced by a new company run by the same people. That
sounds like fraud, yet there have been no prosecutions
of such people as far as we are aware. It is almost
certainly also trading while insolvent, so the government
could have used the insolvency laws both to recover
the tax from the directors and to seek to disqualify
the directors from any involvement in a phoenix company.
Instead the government gave the promoters of such schemes
three months notice that they intended to change the
rules and let them get away with their past ill-gotten
gains. What an odd way to tackle fraud! Perhaps in reality
there has been very little fraud and most of these companies
are actually operating legitimately, are exploiting
poor drafting of Mr Brown's IR 35 legislation and have
never sought to evade payment of PAYE but rather had
a firm, justifiable belief that no PAYE was due.
.. Online Filing
The
Finance Bill will implement Lord Carter's recommendations
on online filing and electronic payment. It will do this by
extending HMRC's regulation-making power. However some of
the dates have been extended. Large and medium sized employers
will now be required to file in-year PAYE forms online from
April 2009 (instead of 2008) and small companies from April
2011 (instead of 2010).
Armed
Forces Operational Allowance
The
new Armed Forces Operational Allowance for service in specified
areas will be exempted from tax - as promised by the Minister
of Defence - from 1 April 2006 when it was introduced.
Armed
Forces Residuary Scheme
Payments
under this scheme will also be exempted from tax from 6 April
2006 in the same way as payments under the 1975 scheme that
it replaced.
The
main corporation tax rate remains at 30% for the year to 31
March 2008. The small companies rate is however increased
from 19% to 20%.
The
big surprise is the promise that for the year to 31 March
2009 the main rate will reduce to 28% and the small companies
rate will increase to 21% with a further increase to 22% in
2009/10.
Blackstone
Franks' Reaction:
The
2% reduction in the corporation tax rate is less than
businesses have been calling for. It will not make us
competitive with Ireland (rate 12.5%) or Germany (26.375%).
It will bring the UK rate below that of the Netherlands,
but the effective rate is likely to be higher as the
Netherlands does not tax dividends and capital gains
from foreign subsidiaries. We doubt that it is a coincidence
that if Barclays Bank merge with ABN-Amro the enlarged
company intends to be based in the Netherlands not the
UK.
The
increase in the tax rate for small businesses is both
unexpected and unwelcome. It is only a few years since
Gordon Brown was seeking to encourage small businesses
to retain profits: a rate above the basic rate of income
tax is an encouragement to distribute rather than retain
in many cases (although the impact of NIC is still likely
to make it preferable to distribute as dividend rather
than earnings).
The
effective rate on the marginal band of profit between
£300,000 and £1.5 million is 32.5% for 2007/08,
29.75% for 2008/09 and 29.5% for 2009/10.
The
introduction of the nil starting rate in 2002 (albeit
that it was repealed in 2006) was regarded by many people
as intended as an incentive to incorporate. The increase
to 22% is a disincentive for very small businesses to
incorporate. There is bound to be a sense of grievance
that the apparent U-turn by the Chancellor has not been
accompanied by tax relief for disincorporation, so that
those he encouraged into companies may be trapped in
such a format because of the capital gains tax cost
of disincorporating.
..
None
of those changes will apply to the ring-fence profits of oil
companies.
Research
and development tax relief
The
amount of R&D tax credits is to be increased, but not
until 1 April 2008 for large companies and not until a date
to be decided (which is likely to be later than 1 April 2008
as it needs an EU derogation) for other companies.
For
large companies the relief will increase from 125% to 130%
of qualifying expenditure.
For
small companies the relief will increase from 150% to 175%
of the expenditure. However if a company cannot utilise the
enhanced allowance and wants to claim a repayment from HMRC
they will not get the benefit of the increase; the repayment
will remain at around 24% of the qualifying expenditure.
The
Chancellor also intends to extend the small companies rate
to some medium-sized companies (those with fewer than 500
employees, a turnover of under 100 million Euro and/or a balance
sheet total of under 86 million Euro but again only if the
EU will let him and only if the company meets the EU definition
of a medium-sized company (in some cases employees and turnover
of associated companies have to be taken into account under
that definition).
The
Finance Bill will also correct a drafting error in the Vaccine
Research Relief scheme which allows a 250% deduction in some
circumstances instead of the 150% that was intended.
Loss-buying
of Lloyds Underwriters
This
will be an anti-avoidance provision to prevent companies buying
the trading losses of corporate members of Lloyds who are
leaving the market and with which they have no previous economic
connection. The tax losses of such companies are calculated
by reference to historic accounting losses which enables the
group relationship to be changed with the benefit of hindsight.
Unusually for an anti-avoidance provision, the change will
not take effect until Royal Assent to the Finance Act.
Film
Production Tax Relief
The
Finance Bill will include a provision to allow companies to
opt out of the new relief introduced only last year and instead
use the normal tax rule. The election can apply either only
to future films or to all films that started principal photography
in the previous two years. The election will be irrevocable.
The change is likely to mainly be of benefit to companies
that do not make films for the cinema and are not entitled
to the enhanced reliefs that apply to cinema production.
Blackstone
Franks' Reaction:
Yet another case of ill thought through legislation
having to be corrected before the ink is dry.
We
wonder if the Chancellor is aware that the special
rules for films were introduced as an anti-avoidance
measure to prevent companies claiming capital allowance
on the cost of film production. Accordingly those
who opt out of the special rules will presumably revert
to claiming such allowances.
.. Sale of Lessor companies
More
changes to correct last year's legislation, in this case on
anti-avoidance rules on the sale of lessor companies. They
block schemes that promoted a mismatch between the definitions
of control in two parts of the tax legislation and schemes
that manipulated the accounting value of leased asset. The
change was announced on 22 November 2006 and will take effect
from that date in relation to subsidiary companies (which
is what the announcement covered) and from 21 March 2007 for
other companies.
Blackstone
Franks' Reaction:
We are tempted to say that the continuance of avoidance
that he thought he had blocked serves Gordon Brown right,
not only for introducing defective legislation but for
complicating the tax system by creating a multitude
of different definitions of a group of companies.
.. Securitisation Companies
The
tax rules on securitisation of debt are to be amended from
the date of Royal Assent. It is unclear what is proposed,
as the HMRC Budget Note merely says that it will extend HMRC's
power to alter the rules by Regulation.
Sale
and Repurchase Agreements ("Repos")
A
new corporation tax regime will be introduced for repos. It
is proposed to move to a largely accounts based system for
calculating profits and losses.
Blackstone
Franks' Reaction:
Any simplification of the current very complex rules
on repos is welcome. The legislation is likely to be
enabling legislation, with the details left to be fleshed
out by Regulation as HMRC are still consulting in this
area.
. Enterprise
Investment Scheme companies
(a)
For shares issued after the date that the Finance Bill receives
Royal Assent (probably mid-July) a company (or group) will
not be eligible for EIS relief if it has more than 50 full
time employees (or their equivalent).
(b) From the same date, at the time of issue of the shares
the company must not have raised more than £2 million
in the previous 12 months under any or all of the EIS, Corporate
Venturing Scheme or Venture Capital Trust schemes. If the
limit is exceeded none of the shares in the issue that causes
it to be breached can qualify for relief. This suggests that
the current EIS issue has to be included in the £2 million
figure.
(c)
The qualifying subsidiary rule will be modified from 6 April
2007 to allow a subsidiary company to be either a 90% subsidiary
of an intermediate 100% subsidiary, or a 100% subsidiary of
an intermediate 90% subsidiary.
(d) The investment period in which the manager of an approved
EIS fund has to invest 90% of the fund will be extended from
6 to 12 months for funds that closed after 6 October 2006.
(e) The rules will be amended from 6 April 2007 to allow a
qualifying trade of exploiting relevant intangible assets
to be moved to another group company.
Blackstone
Franks' Reaction:
It is disappointing that the opportunity is not being
taken to reverse the recent High Court decision in Optos
plc which denied EIS relief where a manufacturer of
advanced optical equipment found that the only way to
exploit the machines was to lease them to opticians.
The restriction on leasing was clearly not intended
to prevent such companies attracting the relief.
.. Venture Capital Trusts
The
changes to the EIS rules also apply to VCTs. In addition,
from 6 April 2007, where a VCT disposes of a qualifying investment
that it has held for at least six months, the disposal will
be ignored for the following six months in determining whether
it has 70% of its investment in qualifying holdings. This
will prevent a sale triggering a loss of relief, provided
that the proceeds are reinvested in qualifying investments
within the following six months.
Corporate
Venturing Scheme
The
changes to the EIS rules also apply to CVS investments.
Offshore
Funds
(a)
The rules will be modified for account periods beginning after
31 December 2006 to remove the restriction which stops a fund
qualifying as a distributing fund if it owns more than 5%
of another offshore fund which itself owns 5% of another and
all three meet the distribution requirement.
(b) From the same date a seven year "reasonable period"
will apply in which to realise an investment in deciding if
an open-ended investment company is within the regime. The
FSA regards only 6 months as a reasonable period so a different
test needs to be adopted for the tax purposes.
(c) From 1 April 2007 (6 April for income tax purposes) it
will be made clear that a loss on disposal of units is a capital
loss, not an income loss.
(d) From the date of Royal Assent offshore income gains will
no longer be taken into account in deciding whether the income
of an investment trust derives wholly or mainly from shares
or securities - although such gains will of course remain
taxable in the hands of the investment trust.
Insurance
Companies
There
are a number of proposed changes in relation to insurance
premium tax and life insurance companies but as our clients
are unlikely to be affected by these we have not reviewed
them.
Online
Filing
The
Finance Bill will contain the legislation to enact Lord Carter's
recommendations on online filing. However the date from which
online filing and electronic payment for all corporation tax
returns using "XBRL standard" will become mandatory
will be 1 April 2011 (instead of 2010). This does not affect
the proposal to link the enquiry window to the date the return
is filed from 1 April 2008.
The
Chancellor is proposing to substantially recost the system
of capital allowances - but not this year.
The
changes will occur in stages:
a)
The 50% first year allowance on Plant and Machinery for small
businesses is extended for a further year to 31 March 2008
(5 April 2008 for unincorporated businesses). A small business
is one that if it were a company would be small under s 247,
Companies Act 1985, i.e. it meets two out of three tests:
turnover not exceeding £5.6m, balance sheet totals not
exceeding £2.8m and no more than 50 staff.
b) An annual 100% Plant and Machinery investment allowance
of £50,000 will be introduced from the 2008/09 tax year.
Blackstone
Franks' Reaction:
The Chancellor thinks that allowing a deduction for
100% of a company's expenditure on plant and machinery
will offset the increase in the small companies rate
of corporation tax for most companies. In our experience
this falls firmly into the category of wishful thinking!
..
c)
The Writing Down Allowance for long life assets (those whose
expected life when new is 25 years or more) will increase
from 6% to 10% from 2008/09.
d) From the 2008/09 tax year a payable tax credit will be
introduced for losses arising out of Capital Allowances on
investment in items on a designated list of "green technologies".
e) Plant and Machinery Writing Down Allowance will be reduced
from 25% to 20%, and to 10% for certain fixtures integral
to a building to help to pay for these measures. The detailed
design and scope of the latter provision and those in b) and
d) above will be the subject of consultation.
f) In order to "remove outdated and unjustified distortions",
Writing Down Allowances on industrial and agricultural buildings
will be phased out between now and the 2010/11 tax year. As
a first step, most balancing adjustments, and the recalculation
of Writing Down Allowances on sale will be withdrawn from
21 March 2007. The exceptions are for existing contracts and
expenditure in enterprise zones.
Blackstone
Franks' Reaction:
This effectively means that a purchaser will inherit
the right to any allowances to which his vendor would
have been entitled. It will be interesting to see the
effect of this change (and the reduction from 25% to
10% after plant and machinery allowances on lifts, central
heating etc) on the market in industrial property.
..
g) The Business Premises Renovation Allowance, to enable owners
or lessees of business premises that have been vacant for
a year or more in one of the designated disadvantaged areas
of the UK to claim a 100% first year allowance for capital
expenditure on renovating or converting those premises, will
be effective from 11 April 2007. The scheme was announced
in the 2005 Budget but has not yet been brought into effect
as approval had to be obtained from the EU.
Secondments
to Charities and Educational Institutions
Employers
who second staff to Charities and Educational Institutions
are allowed to deduct the relevant costs even though they
have not been incurred "wholly and exclusively"
for the purpose of their business. To attract a deduction
the salaries have to be paid within nine months of the end
of the relevant accounting period in the normal way. This
requirement was inadvertently omitted when the legislation
was rewritten, so needs to be corrected with effect from 6
April 2007.
Carbon
Trading for non-residents
A
non-resident who trades in the UK through an agent is normally
liable to tax. Certain defined investment activities undertaken
by investment managers on behalf of non-resident companies
and individuals are exempt though. Trading in carbon emission
credits (which give the holder a legal entitlement to emit
carbon) is to be added to the list. The measure will be effective
from 12 April 2007 (21 days after 22 March, when the Regulations
are intended to be laid before parliament).
Landlords
Energy Saving Allowance
From
6 April 2007, expenditure incurred on floor insulation is
added to the list of eligible items. The £1,500 will
in future be a limit per property, instead of per building.
This will allow £1,500 for each flat in a block. The
relief which was due to expire in 2009, which will now last
until 2015. It will also be made available to corporate landlords
who let residential properties, subject to obtaining state
aid approval from the European Commission.
The
capital gains tax annual exemption for 2007/08 is increased
by £400 to £9,200 for individuals, trustees of
settlements for the disabled and personal representatives
of the estate of a deceased person. For trustees of other
settlements it is increased by £200 to £4,600.
Capital
loss and gain buying by companies
Amendments
will be made to the current rules to prevent them being sidestepped
by means of arrangements involving the purchase of a company
together with its subsidiaries. Changes are also being made
to simplify the conditions relating to relief for losses on
deemed disposals of assets arising before the 2005 Pre Budget
Report. The relief will now not necessarily be lost after
a takeover of the original group or where the company which
incurred the loss is sold or liquidated. The measures will
take effect from 21 March 2007.
Targeted
Anti-Avoidance Rule
With
effect from 6 December 2006, the targeted anti-avoidance rule
("TAAR") that currently applies for corporation
tax will be extended to anyone who creates and uses artificial
capital losses. Only those arising from genuine commercial
transactions will be allowable.
Blackstone
Franks' Reaction:
Tax avoidance rules are generally designed with precision
to block a particular loophole that has been identified.
They suffer from the drawback that they may not catch
a slight variant of the device that was blocked. A TAAR
counters avoidance by describing the conditions on which
it is to apply rather than trying to define how it is
to apply. Whilst this gives it a very wide effect it
also creates great uncertainty as to when it will apply
and what its effect is likely to be. This particularly
applies to the CGT TAAR where one of the conditions
is that the loss arises from arrangements that have
as one of their purposes the securing of a tax advantage.
HMRC's view of when such arrangements exist may well
be far removed from the taxpayer's own perception.
Uncertainty
of the tax effect can be a massive deterrent to carrying
out commercial transactions, so the imposition of a
TAAR without an accompanying clearance procedure is
very unwelcome.
The
VAT registration threshold is increased by £3,000 to
£64,000 from 1 April 2007. The deregistration threshold
is similarly increased by £3,000 to £62,000 and
the registration and deregistration thresholds for acquisitions
from other EU countries are increased from £61,000 to
£64,000.
Fuel
scale charge
As
previously intimated the calculation of the fuel scale charge
has been recast completely in respect of VAT periods beginning
after 30 April 2007. The new charge, like the income tax scale
charge, is based on carbon dioxide emissions. There are 21
steps in the scale starting at VAT on £182 per quarter
(or £60 per month) where the carbon dioxide emissions
figure is 140 or less and rising to VAT on £426 per
month (£142 per quarter) where the figure exceeds 240.
For
old cars with no emissions figure HMRC have prescribed a level
of emissions by reference to the vehicles engine capacity.
Blackstone
Franks' Reaction:
In their Regulatory Impact Assessment HMRC recount that
in advance of the legislation they sent a discussion
paper to 14 trade and professional bodies and, "In
general terms there was not much enthusiasm for the
proposal". They also recount that one of the respondents
indicated that not many large employers would use the
scale charge system because of the cost inefficiencies
of the benefit in kind rules, so, HMRC concluded, "it
would appear that the proposed measure would impact
more on small and medium enterprises". This accordingly
seems to be a variant of a stealth tax, namely make
a relief so complicated that people would rather forgo
claiming any VAT relief on fuel rather than incur the
costs of claiming the part to which they are entitled.
.. Mixed
Business and Private Use of an Asset
Where
an asset is used partly for business and partly for private
purposes HMRC have always felt that a business should be able
to deduct only an appropriate proportion of its input tax.
In Lennartz V Finanzamt Munchen III in 1995 the ECJ said that
the HMRC view was wrong. Undaunted the UK changed the law
to apply the Lennartz decision to some assets but not to property.
The subsequent ECJ decision in Charles and Charles Tijmens
showed that HMRC were still wrong. Following that the HMRC
accepted that a trader could claim full input tax relief and
account for output VAT on the private element over 20 years.
In a more recent case, Hausgemeinschaft J and S Wollny v Finanzamt
Landshut, the ECJ has said that it is up to a Member State
to determine the clawback period. Accordingly from 1 September
2007 the Chancellor proposes to halve the claw-back period
for mixed use property to 10 years. This will mean that a
business can claim as input tax the whole of the VAT on the
building or improvement work but will have to treat 10% of
the private use element of that amount as output tax in each
of the next 10 years.
Blackstone
Franks' Reaction:
This looks like a Gordon Brown sulk. If eventually he
has to obey the European Court he is determined to get
his VAT back as quickly as possible.
.. Surrender
of Interests in Land
This
is what HMRC describe as "a disputed loophole" in
relation to surrenders. The law will therefore be clarified
with effect from 21 March 2007 to put beyond doubt that a
surrender of an interest in land for no consideration is treated
in the same way as an assignment of an existing interest.
Blackstone
Franks' Reaction:
It is unclear what this means. If there is no consideration
there is no VAT. HMRC say that the change blocks a possible
loophole that could give a VAT saving of up to 50% and
it needs to be blocked to prevent avoidance of the above
claw-back.
VAT
on Smoking Cessation Products
The
rate of VAT on "over the counter" sales of smoking
cessation products (such as patches, gums, inhalers and
other pharmaceutical products held out for sale for the
primary purpose of helping people quit smoking) will be
reduced to 5% from 1 July 2007. Prescription sales of such
products are of course already zero-rated.
Blackstone
Franks' Reaction:
"We want you to quit but not just yet". The
government view seems to be that anyone who wants to
give up smoking should wait until 1 July. That is when
the ban on smoking in public places comes into effect,
so perhaps the idea is that patches, etc might become
a placebo for cigarettes.
.. Transfer of a going concern
Where
a business is transferred as a going concern the acquirer
takes over the vendor's VAT history (but not his VAT liabilities
unless he opts to take over his VAT number too) and the transfer
does not constitute a supply. The law requires the vendor
to pass his business records over to the purchaser unless
HMRC give permission for him to retain them. In practice such
permission is either sought or, apparently, the requirement
is ignored. From 1 September 2007 the law will be amended
to allow the seller to keep the business records "in
all but a few specified cases".
Blackstone
Franks' Reaction:
This is welcome. It would of course be even more welcome
if the government were to leave this to commonsense,
with HMRC having a right to obtain information from
whoever has the records. Sadly that seems akin to crying
for the moon. Gordon Brown's oft repeated claim to want
to scrap unnecessary regulation apparently does not
mean scrapping regulations completely but replacing
one regulation with another that will accord more often
with commercial practice.
..
VAT: Gaming Act 2005
Legislation
will be included in the Finance Bill to update VAT law on
participation fees for playing bingo or other games of chance
in the light of the Gambling Act 2005, probably from 1 September
2007.
Blackstone
Franks' Reaction:
HMRC say that the changes maintain the existing exceptions
from taxation. As they have recently issued a Business
Brief saying that charges for participating in games
of chance, as opposed to stakes risked in the game,
are VATable the changes probably actually maintain HMRC's
new interpretation of the law.
.. VAT
Joint and Several Liability
The
VAT legislation allows HMRC to direct that a VAT registered
business receiving specified types of goods (mainly mobile
phones, computer chips and other high value computer parts)
should be jointly and severally liable for the VAT of everyone
else in the supply chain. This is aimed at combating MTIC
(or carousel) fraud. From 1 May 2007 this provision will be
extended to a wider range of electronic equipment of the sort
used by individuals for the purposes of leisure, amusement
or entertainment.
Such
a direction can currently be made only if the business had
reasonable grounds to suspect that VAT would go unpaid elsewhere
within the supply chain. The legislation is to be amended
to allow HMRC to presume that a person had reasonable grounds
for suspicion if the price a business paid for the goods is
less than the vendor paid for them (which the purchaser would
of course be unaware of) or less than the open market value
of the goods.
Blackstone
Franks' Reaction:
When the provision was introduced in 2003 we said "It
is not surprising that the government wants to stop
such fraud. But imposing a tax liability on an innocent
third party is surely not the right way to do it".
That is still our view. Changing the law to require
a person to prove his innocence in circumstances where
he is likely to be unaware of the full facts only adds
to the unfairness of this unreasonable impost. It is
also questionable whether it conforms with EU law.
.. VAT and Academies
The
Chancellor said in his speech "to encourage the community
use of schools' sports facilities we will remove the VAT restriction
and enable
