..::
blackstone franks - the budget 2008 :::........
BLACKSTONE
FRANKS LLP
THE BUDGET 2008
CONTENTS
The
New Tax Rates at a Glance
Income Tax
Income Tax Rates
Personal Allowances
Alternative Finance Arrangements
Venture Capital Schemes
Individual Savings Accounts
Gift Aid
Settlor Interested Trusts
Child Trust Funds
Social Security Exemptions
Armed Forces Council Tax Relief
Foreign Dividend Income
Employee Taxation
Company Cars
Fuel for Vans Provided by Employers
Enterprise Management Incentives
Employment-Related Securities
Pensions
Corporation Tax
Rates
Simplification of Associated Companies Rules
Contributions to Approved Occupational Pension Schemes
Research and Development and Vaccine Research
Corporate Intangible Assets Regime
Controlled Foreign Companies
Capital Allowance Buying and Acceleration
North Sea Management Expenses
Funding Bonds
Life Insurance Companies
Business Tax
Capital Allowances
Community Investment Tax Relief and Banking
Trading Stock
Lease Plant or Machinery
Financial Products Avoidance - Disguised Interest
Investment Management Exemption
Offshore Funds: New Tax Regime
Timing of Income Tax Payments by Unauthorised Unit Trusts
Funds of Alternative Investment Funds
Property Authorised Investment Funds
Restriction of Trade Losses for Individuals
Double Tax Relief: Income Tax
Double Taxation Treaty Abuse
Manufactured Payments
Capital Gains Tax
Annual Exemption
Rate
Entrepreneurs Relief
IHT Values
VAT
Registration Threshold
Correction of Errors
Fuel Scale Charge
Transitional Period For Late Claims
Option to Tax
Smoking Cessation Products
Fund Management Exemption
Stamp Duty Land Tax and Stamp Duty
Stamp Duty: SUKUK
Stamp Duty: Loan Capital Exemption
Stamp Duty: £5 Fixed Charge
SDLT New Zero-Carbon Flats
SDLT Notification Thresholds
SDLT Other Administrative Changes
SDLT On Property Investment Partnerships
SDLT Group Relief Avoidance
SDLT Alternative Finance Arrangements
Other Taxes
Inheritance Tax
Threshold
Transitional Serial Interests
Pension Savings
Landfill Tax
Rate of Tax
Landfill Communities Fund
Exemption for Clearing Contaminated Land
Aggregates Levy
Climate Change Levy
Rate
Electricity from Coal Mine Methane
CCL Accounting Documents
Fuel for Yachts and Private Planes
Waste Oil Recovery
Alcohol Duties
Tobacco Products Duty
Amusement Machine Licence Duty
Gaming Duty
North Sea Fiscal Regime
Aviation Duty
Hydrocarbon Oil Duties
Insurance Premium Tax
Miscellaneous
Penalties for Value to Notify and other Failures
Compliance Checks
Payments, Repayments and Debt
Changes to Customs Powers
Tribunal Reform
Excise Reviews
Natural Disasters
Extra-Statutory Concessions
Tax Avoidance Disclosure Regime
Single Use Carrier Bags
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.
*
There will be a new starting rate for savings income
only, with a limit of £2,320. If an individual's
taxable non-savings income is above this limit then
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.
.
£
£
Income
Tax Reliefs
.
.
Personal
allowance (age under 65)
5,435
5,225
Age
allowance
.
.
-
if 65 or over by end of tax year
9,030
7,550
-
additional if married and either spouse over 65 at 6
April 2000
6,535**
6,285**
-
if 75 or over by end of tax year
7,690
7,690
-
additional if married and either spouse over 75 at 6
April 2000
6,625**
6,365**
(The
excess of age relief over the personal allowance is
reduced by half of the excess of income over £21,800
in 2008/09 (£20,900 in 2007/08)
.
.
Blind
persons relief
1,800
1,730
Maximum
Enterprise Investment Relief (restricted to 20%)
** Relief is restricted to 10%
The main change is of course the previously announced
reduction in the basic rate of tax to 20% from 6 April. The
income tax bands for 2008/09 are again increased in line with
inflation, except for the starting rate which is abolished
for earnings, pensions, taxable social security benefits and
rental income, but not for savings income, i.e.
Up to £36,000 20%
Excess over £36,000 40%
If non-savings income is less than £2,320 the difference
between it and £2,320 is taxed at 10%.
Dividends
Up to £36,000 10%
Excess over £36,000 32.5%
UK resident individuals and UK and other EEA nationals who
receive dividends from non-UK companies will benefit from
a 10% non-repayable tax credit in the same way as they currently
do for dividends from UK companies. This will not apply to
people who hold 10% or more of the shares in the company.
Such people will be eligible for the tax credit from 6 April
2009, unless the source country does not levy a tax on corporate
profits similar to corporation tax. There will be anti-avoidance
measures to ensure that these new rules are not subject to
abuse.
Personal Allowances
The standard personal allowances are also increased in line
with inflation, and, as promised last year, the age allowance
rises by inflation plus £1,180 i.e.
2008/09
2007/08
increase
Personal
allowance
£5,435
£5,225
£210
Age
allowance - up to age 75
£9,030
£7,550
£1,480
Age
allowance - 75 and over
£9,180
£7,690
£1,490
Alternative Finance arrangements
The
law will be changed, from the date when the Finance Bill receives
Royal Assent, to allow for amendments to the rules on existing
alternative finance arrangements (it does not do so at present)
as well as to new arrangements.
Blackstone
Franks' Reaction:
Alternative Finance, or Shariah Compliant, arrangements
were introduced to cope with the Muslim ban on interest
payment and receipts. Sadly, the tax avoidance industry
is seeking ways to use these rules for nefarious purposes,
so we suspect that HMRC would like to be able to block
such schemes quickly.
Venture
Capital Schemes
The
annual limit for investments qualifying for relief under the
Enterprise Investment Scheme is increased from £400,000
to £500,000. This requires EU approval but, if and when
this is obtained, the measure will take effect from 6 April
2008.
The activities of shipbuilding and of coal and steel production
will be excluded from the EIS scheme and from the Corporate
Venturing Scheme (CVS) and the Venture Capital Trust (VCT)
scheme. This will apply from 6 April 2008.
A consultation document has been issued on the Enterprise
Investment Scheme, seeking views on how it might be made more
attractive to potential investors. Apparently only 65% of
potential investors have even heard of EIS.
Individual
Savings Accounts
As
announced on 18 October 2007, individuals who withdrew cash
from their Northern Rock ISAs between 13 and 19 September
2007 can reinvest them in a new ISA (either with Northern
Rock or another provider) without it counting towards their
annual ISA subscription limit. They have until 5 April 2008
to do so.
In order to reduce the administrative burden on ISA managers,
they will, on and after 6 April 2008, make an annual statistical
return detailing subscriptions received after the end of each
tax year; they are currently required to submit quarterly
returns. The requirement to make an annual 'market value'
return will remain.
ISA managers and financial institutions need no longer retain
investors' original application. Those that choose not to
retain them will, however, still be required to record the
information contained in the application and to send a written
copy of confirmation to the customer. The original application
can then be destroyed.
Blackstone
Franks' Reaction:
Northern Rock is of course the only ISA provider which
is backed by a government guarantee!
Gift Aid
The
reduction in the basic rate of tax obviously reduces the tax
that can be reclaimed by charities on gift aid donations.
To ease the pain they will receive a 2% supplement until 5
April 2011, so that if net donations remain the same, so will
the refund.
Settlor
Interested Trusts
Legislation
will be introduced in Finance Bill 2008 to rectify, with effect
from 6 April 2006 an unintended consequence of the Trusts
Modernisation Legislation in Finance Act 2006. Currently a
non-settlor beneficiary of such a trust who receives discretionary
income from it and also has savings and/or dividend income,
may find that the non-trust income is pushed into higher rates
so that more tax is due overall.
Blackstone
Franks' Reaction:
We believe that an "unintended consequence"
is what used to be called a "mistake". However
it is a nice modern term that avoids the unpleasant
connotation that someone in the Treasury or HMRC might
not have been as careful as he should have been.
Child Trust Funds
The parent must at present hand over the Child
Trust Fund (CTF) voucher to the CTF provider and distributor
by the expiry date in order to open an account. From 6 April
2009, it will be possible to open accounts without the voucher,
using essential information provided by the customer from
the CTF voucher, such as the unique reference number, the
child's date of birth and the voucher expiry date. This change
will allow, for example, telephone and internet applications
for CTF accounts to be made in a single paperless transaction
without the need for the customer to post the voucher separately.
Blackstone
Franks' Reaction:
We welcome simplification, no matter how timid it may
be!
Social Security exemptions
Legislation will be introduced in Finance Bill
2008 to exempt from both income tax and NIC, payments made
under the following schemes, on and after 6 April 2008:
o Return to Work Credit;
o In-work Credit;
o In-work Emergency Discretion Fund; and
o In-work Emergency Fund.
In a separate measure, payments under the new GLA severance
pay scheme will be tax-exempt up to the first £30,000.
This will bring their tax treatment into line with that of
payments under similar schemes for Westminster MPs and members
of the devolved administrations.
Armed
Forces Council Tax Relief
Payments
under the new Armed Forces Council Tax Relief Scheme will
be exempt from tax. This is payable to forces serving in specified
operational locations.
Foreign
Dividend Income
The
Tax Law Rewrite accidentally taxed at 32.5% instead of 40%
remitted foreign dividend income of a person on the remittance
basis of taxation. This error will be corrected from 6 April
2008.
The Chancellor has approved a number of changes to his proposed
new system for taxing non-UK domiciled residents.
1. The proposed new test of counting days spent in the UK
to determine whether a person is UK resident has been relaxed.
A person will be regarded as present in the UK on a day in
applying the 182 and 90 day tests, only if he is here at midnight
on that day (instead of here for any part of the day). A person
who comes to the UK on Monday morning and leaves on Wednesday
evening will be here for two days not three as originally
proposed. In addition a person who simply passes through the
UK on his way to another country will be treated as not being
here at all (even if he stays overnight) unless while in the
UK he engages in an activity that is unrelated to his passage
through the UK.
Blackstone
Franks' Reaction:
These are welcome relaxations. The French businessman
who comes to the UK for a business meeting and returns
to France the same day will not have to count that day
as a day of presence. Of course it also means that the
tax exile who flies in from Jersey or Monaco on a Monday
morning and flies out again Thursday night (the main
target of the original proposal) will not have to modify
his behaviour too significantly to remain non-resident!
.
2. The £30,000 fee to remain on the remittance basis
will no longer be a fee; it will be tax payable on part of
a person's unremitted income or gains in order to leave the
remainder on a remittance basis. The individual can choose
to which unremitted income or gains the tax relates. If he
later remits that amount it will not be taxed again.
Blackstone
Franks' Reaction:
This is good news. It should make the £30,000
a creditable tax in other countries under the UK's double
tax agreements. It is however likely to be an administrative
nightmare to be able to identify what overseas income
or gains have been taxed and so can in future be remitted
tax free. It is probably good news for overseas banks
as it will probably mean non-doms having to maintain
lots more overseas bank accounts. Untaxed overseas income
will be deemed to be remitted before such deemed taxed
income, so it needs to be kept separate so that it can
be remitted in preference to untaxed amounts. The timing
of remittances also becomes crucial. A remittance in
the year will not count towards the £30,000. Accordingly
if money is needed here during the year it may be necessary
to borrow overseas funds and remit those, with the borrowing
being repaid the next year out of the income or gains
on which the charge is paid. It will also enable a large
gain to be remitted at the rate of £166,000 a
year with the £30,000 charge franking the remittance.
3. Children under 18 at the end of the tax year will not have
to pay the £30,000 charge.
4. The £30,000 payment to HMRC will not itself be regarded
as a remittance (unless it is later repaid by HMRC) only if
it is paid direct from an overseas bank account to HMRC by
cheque or electronic transfer - which will of course tell
HMRC about the existence of the account.
5. The de-minimis exemption will be £2,000 instead of
£1,000 as originally proposed.
Blackstone
Franks' Reaction:
These are of course all welcome relaxations. However
we fear that most of those non-doms who are packing
their bags to either return home or move to a more friendly
country, such as Ireland, are likely to consider them
too little too late. For those whose jobs do not permit
them to leave, the administrative burden created by
the complexity of these new rules is an additional price
to pay to obtain the benefit of the remittance basis.
6. The new remittance rules are also modified slightly. Clothes,
shoes, jewellery and watches can be brought into the UK without
triggering a remittance charge. So can any other asset costing
less than £1,000, assets brought here for repair and
restoration, and any other asset that is brought into the
UK for less than a total nine-month period. There will also
be a blanket exemption for assets owned at 11 March 2008.
However where an asset brought into the UK triggers tax under
the current rules (which it can do on employment income and
capital gains) the current rules remain in place.
Blackstone
Franks' Reaction:
This removes the most nonsensical features of the proposals
and should make the remittance of assets rules workable.
7. The rules on remittances from mixed funds will be changed
- but we don't yet know what the new rules will be; only that
they will be more comprehensive than those in the draft legislation.
8. The rules under which third parties can trigger a remittance
if they bring into the UK assets gifted to them overseas will
be significantly limited. The remittance must be by the individual's
spouse (or civil partner or live in partner) or children or
grandchildren under 18. However it will also extend to remittances
by close companies (or overseas companies that would be close
if they were in the UK) of which the individual or one of
the above close family members is a participator (such as
a shareholder or a person who has lent money to the company)
and by trusts of which the individual or close family member
is a settlor or a beneficiary.
Blackstone
Franks' Reaction:
This is a welcome relaxation. You can now give a Christmas
present to your brother-in-law without fearing that
he may some day bring it into the UK. However you still
need to watch how your infant children spend their presents
as the remittance charge is triggered merely by bringing
the asset into the UK; the individual who made the gift
does not have to benefit from it. The extension to remittances
by close companies seems particularly harsh. It will
effectively prevent such companies using in the UK an
overseas loan from the individual for the needs of its
own business.
9. Income and gains of overseas trusts will not be taxed on
the settlor (as such) if he is non-dom (except where they
are taxable under the current rules); they will be taxable
on a beneficiary who receives a benefit from the trust (which
will include the settlor in his capacity as a beneficiary).
Blackstone
Franks' Reaction:
This is a welcome, although somewhat surprising, relaxation.
Long live the offshore trust? An offshore trust might
still be a useful vehicle to defer tax. In some cases
it also of course has IHT benefits.
10. Capital payments from an offshore trust received by the
beneficiary before 6 April 2008 will not be matched with post
6 April gains (but capital payments after 5 April will be
matched against post 5 April income or gains in priority to
earlier payments).
11. Non-resident trustees will be given an option to rebase
trust assets to market value at 6 April 2008. The election
must be made in relation to all of the assets in the trust
(and in any underlying company if the gains would be apportionable
to the trust under TCGA 1992, s 13(10)). The election must
be made by 31 January following the first tax year in which
any capital payment is made to a UK resident beneficiary (whether
remitted or not) or a part of the trust fund is transferred
to a new settlement and TCGA 1992, s 90 applies on the transfer.
Where the election is made there will be a deemed disposal
and reacquisition at 5 April 2008. The election is irrevocable.
Blackstone
Franks' Reaction:
This is good news. It goes beyond what we were expecting.
It is hard to envisage circumstances where the election
ought not to be made. The obvious one is if the trust
assets show losses. The only downside is that it may
mean letting HMRC know of the existence of the trust
and the identity of the trustees (and probably details
of the assets) at a time before one's tax charge arises.
12. Where trustees make a rebasing election any surplus capital
payments to beneficiaries between 12 March and 5 April 2008
will be matched with the pre April element of the gain - to
ensure that post 5 April payments are set against the post
5 April element of the gain.
13. Capital payments after 5 April 2008 will be matched with
trust gains on a last in, first out, basis (instead of the
current FIFO basis).
14. The proposed requirement for a non-UK domiciled settlor
to notify HMRC of the existence of overseas trusts has been
dropped.
15. The rules in relation to offshore income gains of non-UK
trusts are also modified.
16. There is no rebasing of gains in offshore companies (except
to the extent that they are apportionable to an offshore trust).
Blackstone
Franks' Reaction:
HMRC told some professional bodies that there would
be such rebasing. It is accordingly unfair to now say
otherwise at such a late stage. To be fair, this is
probably the result of the confusion even within HMRC
of what the Chancellor intended rather than a change
of heart by Mr Darling.
17. The statement that a non-domiciled individual will not
have to provide information about the source of his remittances
also turns out to be untrue. He will have to provide such
information if HMRC enquire into his tax return or if the
trustees choose to make a rebasing election.
18. UK tax relief will in future be given for overseas losses
on non-doms. Where the individual claims the remittance basis
he will have to make an irrevocable election and will also
have to disclose details of unremitted capital gains as part
of the price of doing so.
19. Where an existing foreign mortgage is secured on a residential
property in the UK, the payment overseas of the mortgage interest
after 5 April 2008 for the remaining period of the loan (or
until 5 April 2008 if earlier) will not trigger a remittance.
If the terms of the loan are varied or further advances made
after 12 March 2008 the repayments after the date of variation,
etc will be treated as remittances though.
Blackstone
Franks' Reaction:
Another very welcome relaxation. Note, that it applies
only to residential mortgages. It is not clear if it
applies to let properties. That seems unlikely! It will
also apparently not apply to a remortgage or the renewal
of a short-term mortgage. It is unclear if it will apply
to interest on a loan to buy the property if it is not
secured on it.
20. As previously announced, works of art will be able to
be brought into the UK for public display without triggering
a remittance.
Blackstone
Franks' Reaction:
But they will not be able to be brought here for sale
or solely for the individual's own enjoyment.
21. The tax charge on employment-related securities will be
extended to cover employees who are resident but not ordinarily
resident in the UK.
22. The Chancellor has said that no further changes will be
made to the system of taxing non-doms during the life of this
parliament or the next, i.e. for the next four or five years.
The company car use rate will be set in the Finance Act for
2010/11 and subsequent years. It is intended to reduce the
lowest threshold (which attracts a 15% rate) from 135g/km
to 130g/km from 2010/11.
Fuel for vans provided by employers
Legislation will be introduced in the Finance Act
to ensure that reimbursement of private fuel cost is not treated
as earnings for tax purposes, and that the same rules apply
to the provision of van fuel for private use as those that
currently have effect for company car fuel.
Enterprise Management Incentives
To ensure compliance with EU State aid guidelines,
the Finance Act will make two changes with effect from the
date of Royal Assent: (probably July).
o Companies with 250 or more employees' will no longer be
able to offer EMI options.
o Companies involved in shipbuilding, coal and steel production
will cease to qualify for EMI.
Regulations will be made to increase, from 6 April 2008, the
individual employee limit on grants of EMI qualifying options
from £100,000 to £120,000.
Employment-Related Securities
Some promoters of avoidance schemes have argued
that deductions for 'amounts that constitute earnings' can
include earnings which were exempt income and therefore not
charged to income tax. This both reduced the amounts which
counted as employment income and chargeable gains, and increased
the corporation tax relief available. The wording will be
amended to ensure that this is no longer the case from 12
March 2008 and that only income subjected to income tax falls
within the definition.
Pensions
Migrant workers in the UK and their employers can
obtain tax relief on contributions to non-registered pension
schemes based outside the UK. In order to apply appropriate
UK tax controls on reliefs equivalent to those for registered
pension schemes it is necessary to work out how much UK tax
relief has been received on the individual's pension fund.
Currently, the larger the employer contribution, the lower
the proportion of an individual's pension fund that is treated
as having received UK tax relief. The rules will be changed
from 12 March 2008 so that the amount of the employer's contribution
will not affect the calculation of the proportion of the individual's
fund that attracts UK tax relief.
Existing regulation-making powers are to be to be amended
to:
o allow certain payments from pension schemes to be credited
as authorised instead of unauthorised payments; and
o simplify the administration of certain trivial commutation
payments.
Further changes will simplify the way the pension tax rules
operate when testing pension increases against the lifetime
allowance.
The proposed reduction in the main rate of corporation
tax from 30% to 28% for 2008/09 has been confirmed, as has
the increase in the Small Companies rate from 20% to 21%.
The Small Companies rate is due to increase to 22% in 2009/10.
Simplification of Associated Companies
Rules
For small companies rate purposes only, the rights
and powers of business partners will not need to be attributed
to an individual who is a director or a shareholder to determine
control of that company from 1 April 2008 unless "relevant
tax planning arrangements have at any time had effect in respect
of the taxpayer company".
Blackstone
Franks' Reaction:
This is a welcome change although it does not deal with
all of the anomalies in relation to associated persons
in respect of the small companies rate. It will mean
that an investor in a large investment limited partnership
or LLP who also controls his own company will not have
to take account of companies controlled by other investors
in the limited partnership. Similarly a partner in a
trading partnership will not need to take account of
companies controlled solely by his fellow partners.
In practice most people have either overlooked or ignored
the current law. The change brings the law into line
with commonsense.
.. Contributions
to Approved Occupational Pension Schemes
The
Finance Act will confirm that the amount a company is allowed
to deduct in respect of payments made into an Approved Occupational
Pension Scheme between 1 April 2004 and 5 April 2006 is equal
to the actual cash contribution made during the year. This
measure is unashamedly retrospective. It prevents a deduction
being claimable on an accruals basis, which some people believed
that the Finance Act 2004 allowed.
Research & Development and Vaccine
Research Relief Schemes
From 1 April 2008 the rate of Research & Development
(R&D) relief for large companies increases from 125% to
130% of qualifying expenditure.
For small and medium sized companies, the increase is from
150% to 175% of qualifying expenditure. However, if the company
cannot utilise the enhanced expenditure it can claim a repayment
from HMRC equal to 16% of the surrendered enhanced expenditure.
The increase in relief for small & medium sized companies
is subject to approval by the European Commission.
The Finance Act will also introduce two new conditions: the
company will not be allowed the relief if the most recent
accounts have not been prepared on a going concern basis and
a cap on the amount of relief available per R&D project
is to be introduced at €7.5 million. Both of these conditions
have been imposed by the EU.
Corporate Intangible Assets Regime
The Finance Act will clarify that the related party
rules are unaffected by any administration, liquidation or
other insolvency proceedings or equivalent arrangements that
any company or partnership may be involved in.
Controlled Foreign Companies
Anti-avoidance rules will be introduced to prevent
the use of a partnership or a trust in an attempt to escape
a CFC charge. HMRC does not believe that such schemes work
so this is a just-in-case measure.
Capital Allowance Buying and Acceleration
Legislation will also be introduced with effect
from 12 March 2008, to counter schemes under which a profitable
group purchases a company whose written down value of its
plant and machinery pool is far in excess of the market value
of the assets held, in order to obtain a balancing allowance
on disposal of the trade (rather than the company) to a third
party, rather than with the intention of carrying on the trade.
The legislation will require the whole capital allowances
pool to be carried over to the person buying the trade for
the long term so that the sale will not generate a balancing
charge.
North Sea Management Expenses
Legislation will be included in the Finance Act
(effective 12 March 2008) to close a loophole in the rules
governing the taxation of oil and gas production. It will
do so by disallowing expenses of managing an investment business
as a deduction against a company's ring fence oil and gas
profits.
Funding Bonds
The Finance Act will provide rules to confirm that
from 12 March 2008 where the tax deducted from interest was
originally paid to HMRC in the form of funding bonds they
can use all or part of those funding bonds to satisfy any
repayment claim in respect of such tax. The legislation will
allow HMRC to request that the bond issuer divides, if necessary,
any funding bond held by HMRC so that the repayment claim
can be satisfied using part of the funding bond.
Life Insurance Companies
A number of changes are proposed to the taxation
of life insurance companies. We have not covered these, as
they are unlikely to be of interest to most of our clients.
The changes that were announced in the 2007 Budget
to the Capital Allowances system to take effect from 1 April
2008 (6 April for individuals) have been implemented as expected
a) Plant
and Machinery Writing Down Allowance has been reduced to
20% from 25% on any unrelieved and new qualifying expenditure.
Where an accounting period spans 1 April the allowances
are apportioned, the old rate applying to the pre 1 April
part and the new rate to the balance.
b) Long Life Asset Pools will cease to exist from 1 April
2008. Any unrelieved expenditure will be reallocated to
a 'special rate pool' and relieved at a rate of 10% per
annum. New expenditure which attracts the 10% allowance
will be added to this pool.
c) A new rate of 10% will apply to certain fixtures that
are integral to a building. Some items of plant and machinery
that have in the past qualified for the full Writing Down
Allowance will in future come under this heading, such as
expenditure on lifts. Expenditure on some previously controversial
items, such as lighting, will now qualify under the new
regime as will new expenditure on cold water supplies. In
addition, expenditure on thermal insulation for existing
buildings will now qualify for the 10% relief. Replacement
expenditure in relation to such assets that might in the
past have attracted a revenue deduction will in future be
treated as capital expenditure if more than 50% of the initial
cost of the asset is replaced in a 12-month period.
d) The majority of First Year Allowances (FYA) are being
replaced by a new Annual Investment Allowance (AIA) giving
100% relief for the first £50,000 of expenditure regardless
of the size of the business (proportionally reduced with
respect to the length of the period). Almost all expenditure
that qualifies for relief under the capital allowances regime
will qualify for AIA with the exception of cars. Grouped
companies will have to share a single allowance between
them.
e) From 1 April 2008 if the balance of expenditure in either
the main pool or the special rate pool falls below £1,000
the balance can be wholly written off as an allowance.
f) Agricultural Buildings Allowances are being phased out
as previously announced. The rates of allowance are
Year
to 31 March 2009 3%
Year to 31 March 2010 2%
Year to 31 March 2011 1%
Year to 31 March 2012 nil
g) Special rules apply to enterprise zone capital allowances.
These will continue to attract the current 25% rate until
31 March 2011. They will attract no allowances thereafter
but will attract a balancing charge if the property is sold
within 7 years of first being brought into use.
h) From 2008/09 losses augmented by Enhanced Capital Allowances
(ECA) for environmentally beneficial and energy saving technologies
can be surrendered for a cash payment of 19% of the loss
that is attributable to such expenditure (subject to a cap
of the higher of £250,000 or the company's PAYE/National
Insurance Contributions). The rate of allowance for ECA
remains at 100% of the qualifying expenditure (a revised
list of all expenditure that qualifies for ECA will be available
from HMRC before parliament recess in the Summer).
i) The 100% first year allowance for expenditure on natural
gas and hydrogen refuelling equipment that was due to expire
on 31 March 2008 has been extended to 31 March 2013. It
will also now cover refuelling equipment for biogas.
j) The 100% first year allowance for cars with CO2 emissions
not exceeding 120g/km is similarly extended to 31 March
2013 but the qualifying CO2 limit reduces to 110g/km. There
will be a transitional rule on leased cars. They will retain
the 100% allowance where the CO2 figure is between 110 and
120g/km.
Blackstone
Franks' Reaction:
There are obviously winners and losers from these changes.
The Annual Investment Allowance is likely to allow most
very small businesses to obtain full relief for their
expenditure in the first year. However some may need
to monitor their expenditure fairly carefully. For example
a business that spends £60,000 in 2008/09 and
£20,000 in 2009/10 will get allowances of £50,000
in year 1, £22,000 in year 2, £1,600 in
year 3, £1,280 in year 4 and reducing allowances
thereafter. If it spends £50,000 in 2008/09 and
£30,000 in 2009/10 its allowances will be £50,000
for 2008/09 and £30,000 for 2009/10.
.. Community
Investment Tax Relief and Banking
This
scheme allows relief to individuals or companies that invest
in accredited Community Development Finance Institutions (CDFI).
The relief is linked to the amount invested. The legislation
will be treated as having always been in effect. The Finance
Act will allow banks that invest in CDFI under the Community
Investment Tax Relief Scheme to receive monies from the CDFI
in the normal course of business without having their relief
under the scheme reduced.
Trading Stock
When trading stock is appropriated or disposed
of other than by way of a trading transaction, the Courts
have held that it must be treated as disposed of at market
value. However under UK GAAP the item must be treated as disposed
of at either cost or the price actually paid. As accounts
prepared in accordance with GAAP are now the starting point
for calculating taxable profits, a rule will be introduced
in the Finance Act to apply the traditional market value rule
instead of the GAAP rule.
Leased Plant or Machinery
There will be an anti-avoidance provision to prevent
businesses generating a loss from exploiting the different
ways in which GAAP allows lease rentals paid and received
to be treated. The sort of arrangements this change is aimed
at are where a capital sum is received as a premium on a lease
with an attached peppercorn rent, and mismatched lease chains
that exploit the ways in which leases are taxed. In both cases,
the business will be taxed on a commercial basis by effectively
looking through the transactions.
The effective date of the new legislation is 13 December 2007,
so any transactions entered into after that date will be subject
to the new legislation.
Financial Products Avoidance - Disguised
Interest
Legislation will be introduced in the Finance Act
to address a number of avoidance schemes that have been notified
to HM Revenue & Customs under the disclosure rules introduced
in Finance Act 2004. Most involve arrangements that give rise
to amounts that in substance are interest but which are designed
not to be taxable as interest ("disguised interest").
One involves an arrangement which aims to exploit existing
legislation on disguised interest so as to generate artificial
losses.
Investment Manager Exemption
The Investment Manager Exemption (IME) allows non-resident
companies, individuals and funds to appoint a UK-based investment
manager to carry out transactions on their behalf without
being subject to UK tax. The Finance Act (once it receives
Royal Assent) will bring together all the transactions that
are covered by the legislation and ensure that all transactions
that meet the IME conditions qualify for IME (which is currently
not the case!).
Offshore Funds: New Tax Regime
Powers will be provided to regulators of offshore
funds to class them as 'reporting funds'. In effect, the fund
will still have to prove that it qualifies as a qualifying
fund each year (albeit that the new rules will be less onerous).
Such a fund will not have to distribute 85% of its funds each
year but the investors will be chargeable to income tax on
the amounts 'reported' to them even though they do not receive
the money. Such a status will enable profits on a disposal
of the investment to be taxed as capital gains, not as income.
Timing of Income Tax Payments by
Unauthorised Unit Trusts
With effect from the tax year 2008/09 and all subsequent
tax years, trustees of unauthorised unit trusts will be required
to make payments on account of the tax due to HMRC on the
31 January and 31 July of one year, with a balancing payment
or claim made on 31 January the following year. This legislation
has been brought in to reverse unintentional changes made
in the Income Taxes Act 2007 allowing tax to be paid on the
31 January following a tax year only.
Funds of Alternative Investment Funds
The changes will enable certain funds to elect
for a tax treatment as "Tax FAIFs", which will move
the taxation of offshore income gains of the fund from the
fund to its investors. This means that the Tax FAIF will not
be chargeable on any offshore income or gain (unlike at present)
but its investors will be chargeable to income tax, not CGT,
on gains derived from a disposal of units in the fund.
Property Authorised Investment Funds
From 6 April 2008, If an Authorised Investment
Fund (AIF) invests mainly in property and certain related
securities it may qualify to elect for the Property AIF regime
to have effect. Property AIF rental profit and certain other
property related income will be exempt from taxation in the
fund but will normally have to be fully distributed to its
investors where it will be taxed as income in their hands.
Such a distribution will need to be made under deduction of
tax.
Restrictions on Trade Losses for
Individuals
From 12 March 2008, the limitation on sideways
loss relief that currently applies to certain partnerships
is extended to individuals. An individual who carries on a
trade in a non-active capacity (spends less than on average
10 hours a week personally engaged in commercial activities
of the trade) will be limited to £25,000 of sideways
loss relief.
These rules do not apply to individuals whose losses derive
from qualifying film expenditure.
Blackstone
Franks' Reaction:
Qualifying film expenditure refers to the film reliefs
under ITTOIA 2005, ss 137 to 140. This is the old system
of film leasing which applied to films where principal
photography commenced before 1 January 2007 or the film
was acquired before 1 October 2007. It will not cover
the new generation of "sole trader film schemes"
that is currently being offered as tax shelter investments.
We are currently sceptical whether such schemes were
effective. This change seems to ensure that they become
unattractive.
..
Double Taxation Relief: Income Tax
From
6 April 2008, the legislation will be clarified to ensure
that the credit in respect of foreign tax paid on earnings
from a trade or profession carried on outside the UK cannot
exceed the tax that would have been suffered on this income
had it been derived from the UK.
Double Taxation Treaty Abuse
Legislation will be introduced to block a wholly
artificial scheme which seeks to avoid UK tax by diverting
income of a UK resident to a foreign partnership comprised
of overseas trusts of which the UK resident is a beneficiary.
It is claimed that the business profits article of the UK's
double tax treaties prevents the income being taxed at all.
The change will ensure that the business profits article of
a double tax treaty will not exempt a UK resident from UK
tax on his profits from a foreign partnership, and also that
a tax treaty cannot be read as preventing income of a UK resident
being chargeable to UK tax
Blackstone
Franks' Reaction:
The draft legislation seems far wider than is needed
to counter this abuse. All tax structures involving
offshore vehicles of UK residents that rely on double
tax agreements may need to be reviewed.
..
Manufactured Payments
The
Finance Act will stop individuals avoiding income tax by making
manufactured payments; payments representative of interest
or dividends payable on securities, such as gilts or shares,
arising in the course of a sale and repurchase or stocklending
arrangements. This change applies from 31January 2008
The capital gains tax annual exemption for 2008/09 is increased
by £400 to £9,600 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 £4,800.
Rate
A
flat rate of 18% will apply for 2008/09 onwards except where
the gain qualifies for Entrepreneurs' Relief (see below).
Taper relief and indexation relief will no longer be available
on disposals after 5 April 2008. None of these changes affect
capital gains realised by a company (including gains of offshore
companies that are attributed to a UK resident shareholder).
As a simplification measure, from 6 April 2008 it will cease
to be possible to calculate the gain on a asset held at 1
April 1982 by reference to it's original cost.
Blackstone
Franks' Reaction:
There are obviously winners and losers. Where an asset
has been held for a long time before 5 April 1998 the
loss of indexation relief can significantly increase
the taxable gain. Indexation relief on an asset held
at 1 April 1982 (when the relief was introduced) is
equal to 1.047 times the cost (or 1 April 1982 value)
of the asset. Consideration ought to be given to disposing
of such assets before 6 April 2008 as the effective
tax rate on a sale this year might well be below 18%.
Indexation relief can be preserved by making a disposal
between husband and wife before 6 April 2008. It is
obviously worth considering making such disposals.
.. Entrepreneurs' Relief
This will, subject to detailed rules, be available
in respect of gains made by individuals on the disposal of:
o all or part of a trading business that the individual carries
on alone or in partnership;
o assets of the individual's or partnership's trading business
following the cessation of the business;
o shares in (and securities of) the individual's "personal"
trading company (or holding company of a trading group);
o assets owned by the individual and used by his / her "personal"
trading company (or group) or trading partnership.
o for a company to qualify as the shareholder's personal company
he must own at least 5% of the ordinary share capital and
5% of the voting rights and must also be a director or employee
of the company
It will also be possible to claim relief where, on or after
6 April 2008:
o shares or securities are exchanged for other shares or securities
(including qualifying corporate bonds (QCBs)); and
o gains on disposal of the original shares or securities would
meet the qualifying conditions for relief; but the gains are
treated as not arising at the time of the exchange under the
normal CGT rules for such exchanges.
Transitional rules will also allow Entrepreneurs' Relief to
be claimed where gains that were deferred on or before 5 April
2008 under the rules for exchanges of shares, etc., for QCBs,
or on investment under the EIS or in a Venture Capital Trust
(VCT) become chargeable on or after 6 April 2008. The relief
will be claimable if the disposal that gave rise to the deferred
gain would have qualified for the Entrepreneurs' Relief if
it had been in force at the time.
There is a "lifetime" limit (starting from 6 April
2008) of £1 million. The asset has to be held for a
minimum of a year to qualify. The relief is given by reducing
the gain (or net gain where some relevant disposals show gains
and others are at a loss) by four- ninths. The balance of
five-ninths is taxed at the flat rate of 18% so that the effective
rate is 10%, the same rate that currently applies to disposals
eligible for Business Asset Taper Relief.
Blackstone
Franks' Reaction:
A qualifying period of only one year makes this an attractive
relief.
Reducing the taxable amount increases the value of brought
forward losses, as a loss set against four-ninths of
the gain effectively gives 18% tax relief on the reduced
gain, whereas if the whole gain were taxed at 10% relief
for the loss would be at 10%.
There is a problem where in the past, shares were sold
in exchange for non-QCBs. In such circumstances the
gain was not deferred; the exchange was treated as a
no gain/no loss transaction. Accordingly on redemption
after 5 April 2008 Entrepreneurs' Relief can apply to
the gain on the bonds only if the company qualifies
as the holder's personal company at that date, which
it rarely will do.
.. IHT Values
Currently
where a value is ascertained for IHT purposes it will also
apply for CGT (TCGA 1992, s 274). HMRC take the view that
if they do not need to consider a value because it does
not affect the tax payable, it has not been ascertained.
Where no IHT is payable on the death of a spouse but IHT
is payable on the death of the surviving spouse, so at that
stage HMRC have to revisit the earlier death to ascertain
the unutilised amount of the nil rate band and to do so
have to ascertain the then value of the assets, section
274 will be disapplied so that there will be no need to
revisit the CGT valuation.
The VAT registration threshold is again increased
by £3,000 to £67,000 from 1 April 2008. The
deregistration threshold similarly increase by £3,000
to £65,000 and the registration and deregistration
thresholds for acquisitions from other EU countries are
increased by £3,000 to £67,000.
Correction of Errors
For return periods commencing from 1 July 2008
errors of up to the greater of £10,000 or 1% of net
VAT turnover (the box 6 figure) for the return (subject
to an upper limit of £50,000) can be corrected in
the next return after the error is discovered. It is not
clear if the turnover figure is that for the return in which
the error arose or that in which it is corrected.
Blackstone
Franks' Reaction:
Hurrah! This increase from £2,000 is much overdue.
HMRC have not gone as far as we would have liked but
for most small companies it is likely to mean that virtually
all errors can in future be corrected on the return.
HMRC say that 70% of voluntary disclosures are under
£10,000. Correcting through the return will normally
avoid penalties and interest.
.. Fuel Scale Charge
The scale charge is of course now based on carbon
emissions the lowest quarterly rate (140 or below) being £27.11
(VAT on £182) and the highest (240 or over) £63.45
(VAT on £426) per quarter. The new scale starts at 120
or less and the highest is 285 or more. The quarterly figures
at the top and bottom of the scale are:
120 or less £20.55 (on £138) i.e. a reduction
of £6.56
140 or less £32.91 (on £221) i.e. an increase
of £5.80
235 or less £71.94 (on £483) i.e. an increase
of £10.28
240 or less £71.94 (on £483) i.e. an increase
of £8.49
Blackstone
Franks' Reaction:
As the charges are supposed to represent increases in
fuel prices some of these variations look odd.
.. Transitional
Period for Late Claims
The
House of Lords has recently held that the legislation imposing
the three year cap is ineffective for periods prior to 1 May
1997. Under EU law the UK has to provide for a transitional
period during which they tell taxpayers that they will have
the right to make a claim after the end of that period. This
was not done. Accordingly the cap is ineffective for:
a) input tax claims for periods ending between 1 April 1973
and 1 May 1997, and
b) output tax claims for periods ending between 1 April 1973
and 4 December 1996.
The Finance Act will introduce a transitional period for such
claims, which will end on 31 March 2009.
Blackstone
Franks' Reaction:
Anyone whose claims for one of the above periods was
capped, or who did not make a claim because they knew
that it would be disallowed, can now make a refund claim
in relation to the above periods. There are however
two problems. You will need to have kept the appropriate
records and you will need to show that you will not
be unjustly enriched by being repaid, ie that you will
pass on the repayment to the customers to whom you charged
VAT in error or the VAT inclusive price you charged
would have been the same irrespective of whether or
not VAT was due. We somehow doubt that most people will
be able to clear these two hurdles in relation to transactions
that took place over 10 years ago.
Option
to Tax
A
number of changes will be made to the option to tax property.
The details have not been announced. They will cover:
a) Opted properties within a VAT group (there is a problem
where the company leaves the group).
b) Opted buildings and bare land acquired for residential
purposes
c) Global elections for a number of properties.
d) A "cooling off" period.
e) The option will lapse six years after the taxpayer disposes
of the property (currently there is an issue where the property
is reacquired some years later).
f) The ability in certain circumstances to exclude a new
building from a previous option.
g) Late applications for permission to opt.
Blackstone
Franks' Reaction:
These are matters that are unlikely to affect options
to tax by many people. They are however welcome administration
relaxation for a lot of others.
.. Smoking
Cessation Products
The
5% rate that was due to end on 1 July 2008 on over the counter
sales of pharmaceutical smoking cessation products will be
extended indefinitely.
Fund Management Exemption
The current exemption for fund management will
be extended from 10 October 2008 to cover UK listed investment
entities (including investment trust companies and VCTs) and
certain overseas funds. back
to top
STAMP DUTY LAND
TAX AND STAMP DUTY
Stamp
Duty: Sukuk
Alternative
finance (i.e. Shariah Compliant) investment bonds which are
similar to a debt security will be reclassified as loan capital
for stamp duty purposes for transfers after the date of Royal
Assent (probably next July). This will exempt transfer of
such bonds from stamp duty.
Stamp Duty: Loan Capital Exemption
From Royal Assent the loan capital definition will
also be amended to extend exemption to transfers of loan capital
that is subject to a capital market arrangement on limited
recourse terms so that in the event of a default the right
to interest might be determined to some extent by the results
of the business or the value of its assets.
Stamp Duty £5 Fixed Charge
Where the 0.5% stamp duty on the sale of shares
amounts to under £5, duty is charged at a minimum figure
of £5. There will be an exemption from stamp duty for
instruments executed after 12 March where the consideration
is under £1,000, which will eliminate this charge. However,
this exemption will not apply to SDRT (which is charged instead
of stamp duty where no instrument is brought into being).
The exemption has to be certified on the stock transfer form
to confirm that the sale is not part of a larger transaction.
Accordingly old forms should not be used as they will not
contain the appropriate certificate. The fixed £5 charge
for instruments transferring shares other than on sale (and
other than under an exemption) is also abolished from the
same date.
SDLT New Zero-Carbon Flats
The current relief for new zero-carbon homes will
be extended to new zero-carbon flats (with retrospective effective
to 1 October 2007). The relief exempts flats costing under
£500,000 and exempts the first £500,000 on larger
