The paper trail

Pensions – eight into one

The main immediate change is the rise in the earnings cap from £99,000 to £102,000. However, a large proportion of the Finance Bill is taken up with anticipated changes to the whole tax regime affecting pensions.

The current eight regimes for pensions are to be consolidated into a single regime, in which the critical features for individuals will be the annual limit and the lifetime limit.

This is a huge reform, which will not come into effect until April 2006. However, the main details are as follows:

• A single lifetime allowance on the amount of pension savings that can benefit from tax relief. The value of the lifetime allowance will be set at £1.5m on introduction, rising in subsequent years.
• An annual allowance initially set at £215,000.
• Contributions will no longer be limited to a fraction of capped earnings. Individuals will be able to make unlimited contributions and tax relief will be given on the higher of 100% of relevant earnings or, where the individual contributes to a scheme that operates relief at source, £3,600.
• All schemes will be able to pay tax-free lump sums of up to 25% of the value of the pension rights.
• Various charges if the limits are exceeded.
• Transitional arrangements will protect pension rights built up before 6 April 2006.
• The minimum pension age will rise from 50 to 55 by 2010, with transitional rules and special protection for those in certain occupations.
• It will no longer be necessary for a member to leave employment in order to access an employer’s occupational pension. Members of occupational pension schemes may, where the scheme rules allow it, continue working for the same employer whilst drawing retirement benefits.
• Employers will continue to be able to claim a deduction in computing profits chargeable to UK tax for employer contributions paid to a registered pension scheme.
• It will continue to be a requirement that pensions are generally secured by age 75.
• Death benefits from a scheme can be in the form of a lump sum, a pension to one or more dependants or a combination of lump sum and pension.
• There will be new, simpler processes for scheme registration and reporting. The current limits on what a scheme may invest in will be lifted and replaced by a single set of investment rules for all pension schemes.
• Non-registered pension schemes may continue in the new regime, but without any tax advantages. They will be treated like any other arrangement to provide benefits for employees.

IHT – beware new penalties

Apart from an indexation-based increase in the nil rate band, the actual changes in inheritance tax are minimal. Administrative simplifications should reduce the need for full returns in a number of cases. However, the penalty regime is to be tightened, may affect cases where is no tax and will generally come more into line with income tax penalties.

Corporation tax – small company complications

The corporation tax rates are set out in the table in the first part of this article.

This of course was accompanied by one of the more controversial measures in this year’s Budget, the introduction of a special corporation tax on dividends of small companies. This was controversial because much that had gone before seemed designed to encourage people to incorporate and run companies. This goes in the other direction. Where profits would otherwise be taxed at less than 19%, but are then distributed to shareholders, the company is to be taxed at a minimum of 19%. If a company is expecting to pay tax at a lower rate and then distribute (remembering that distributions come from after-tax profits), it may find itself with an additional tax bill.

Companies are also to be required to notify the Revenue when they have started trading, to bring them into line with the self-employed. There will be penalties for failing to comply.

These changes further complicate the important early decisions to be made in choice of business medium.

The technical but important area of transfer pricing and thin capitalisation is reformed. The rules are essentially removed from small and medium sized enterprises; but are extended to intra-UK transactions for large ones.

There is a relaxation on the use of Enterprise Management Incentive schemes where members of a group of companies are involved.

There are changes to be made so that property derivatives are treated in the same way as other derivatives. If you do not know what that way is, it is probably not worth learning it just because of this change.

There are also some technical changes to the ever-moving field of the taxation of loan relationships; and some technical changes to the rules for life insurance company taxation.

There is a further useful extension of research and development tax credits.

There are restrictions on double benefits to be obtained from capital allowances on leased assets.

More generally, the rate of first-year capital allowances for small business spending on most plant and machinery will be increased from 40% to 50% for a period of one year.

European companies under a directly introduced European statute are to be permitted; there are to be some minor changes made to make clear their tax status, but they will fit into the existing general structure for taxation.

An anti-avoidance measure is introduced dealing with companies that are members of partnerships and which would otherwise avoid elements of UK taxation.

Companies that have investments will get relief for their investment management expenses.

VAT and indirect taxes – catching the unwary

Changes in VAT were relatively modest. The normal turnover limits are increased to £58,000 for registration and £56,000 for deregistration. There are also extensions to the annual and cash accounting schemes.

There is a further extension of relief for energy saving materials.

Further specific anti-avoidance is introduced, dealing with the eligibility for membership of a VAT group and with avoidance of tax on commercial buildings by wholly or partly exempt traders. This has already led to changes on the rules for transfers of going concerns and elected buildings, although their immediate introduction was later delayed. This is complex and some of the provisions may catch the innocent as well as those actually trying to avoid tax.

There is a consultation on the disapplication of the option to tax, where buildings are to be used for certain residential or charitable purposes.

The maximum landfill tax credit for contributions to environmental bodies is increased from 6.5% to 6.8%; but the basic rate of landfill tax rises to £15 per tonne.

A facility is introduced for what are termed Climate Change Agreements. These are to be made with Customs (rather than, as the name might imply, with God) and are in connection with reduced emissions.

Of specialist interest but great importance in Scotland are increased compliance measures in relation to spirit duty – although the original plans have been withdrawn after substantial lobbying.

SDLT – plenty to chew over

The first and main change is made to the treatment of partnership transactions. Again, this is good deal better than was originally proposed, but it will still bear watching with a great deal of care. The impact of the main change is set out below, although substantial changes were made at report stage of the Finance Bill, reducing the impact in many cases. The changes made are exceedingly complex, but their effect appears to be to remove the charge to SDLT for most family partnership transactions, at least where there is no actual consideration passing.

With that important but still vague exception, stamp duty land tax is to be charged:

• Where an interest in land is transferred into a partnership, either by an existing partner or by a person in exchange for an interest in that partnership. Stamp duty land tax will be chargeable, at the appropriate rate, on a proportion of the market value of that land interest. The proportion will be equal to the proportion of the land interest transferred to the other partners as measured (as originally proposed) by their share of partnership income profits.
• Where partnership property includes an interest in land and arrangements are in place so that either:
- an existing partner transfers all or part of their partnership interest, to a person who is or becomes a partner, for money or money’s worth; or 
- a person becomes a partner and an existing partner reduces their partnership share (or ceases to be a partner) and withdraws money or money’s worth from the partnership; then stamp duty land tax will be chargeable, at the appropriate rate, on the market value of the land interest so transferred. The proportion will be equal to the increased (or new) partnership share held by the acquiring partner.
• Where a partnership transfers an interest in land to a partner or former partner. Stamp duty land tax will be chargeable, at the appropriate rate, on the person acquiring the interest, on the proportion of the market value of the land interest transferred on which tax (which includes ad valorem stamp duty or, for transactions executed before 20 October 2003, fixed duty) has not previously been paid.
As originally announced it seemed certain that a large number of “innocent” transactions would attract tax; and certainly SDLT will be chargeable in a number of instances where stamp duty was not payable under the former regime. Great care will be required in any transactions where partnerships hold or come to hold land. There are also a number of technical changes, mainly to remove anomalies and correct mistakes in the original legislation.
These include:
• changes on the rules for subsales where part only of the property is subsold;
• potential avoidance opportunities exploiting the interaction between the provisions on sub-sales and those on group relief and sale-and-leaseback will be closed;
• changes in relation to sub-sales following pre-SDLT contracts;
• changes to the relief for Private Finance Initiative (PFI) projects will ensure that such transactions are always notifiable;
• changes where there are rights to direct a conveyance to a third party and how this interacts with the rules on sub-sales;
• changes to the rules on works carried out on land after it is purchased, where the purchase is made under a contract to be followed by a conveyance;
• changes to the rules on agreements for lease or missives of let, where these are followed by an actual lease;
• restrictions on the rules on variations of leases, essentially restricting those to extensions of the term and increases in rent;
• further minor amendments to the rules on leases;
• extension of the relief on sale and leaseback to certain residential transactions and situations where the leaseback is only partial;
• clarification that SDLT does not apply to most transfers to beneficiaries following a death;
• removal of the need to submit a full SDLT return for very small purchases of residential property (less than £1,000); and for assignations of leases where no tax is actually payable;
• clarifications and relaxations of certain aspects of the penalty regime;
• removal of the need to notify purchases of “community interests in land”, under the Land Reform (Scotland) Act 2003.

Avoidance schemes – thin end of the wedge

The Government continues to be greatly concerned about tax avoidance. One of the more interesting but potentially demanding changes announced this year involves the need to register certain tax avoidance arrangements with the Inland Revenue. This applies to a limited number of arrangements in relation to value added tax and also to certain schemes affecting income tax, capital gains tax and corporation tax (but not yet inheritance tax and stamp duty land tax, the taxes perhaps of greatest significance to non-specialist solicitors). Perhaps predictably, the rules are not the same for VAT as opposed to the other taxes affected – notably, the obligation will generally be on the taxpayer for VAT, but on “promoters” of schemes in relation to the other taxes. Recent announcements restrict the definition of “promoter”, which may remove requirements on solicitors in the vast majority of cases in which they might otherwise be involved.

At time of writing, the exact details of the reporting obligations remain to be confirmed. But it is likely that solicitors will in certain circumstances fall within the category of those required to notify the Revenue of such schemes. While the VAT requirements seem likely to be tied to specific VAT provisions, the direct tax requirements are more general, although initially restricted to (widely defined) employment arrangements and financial products.

Even with the restrictions announced since these requirements were first mooted, this looks likely to be yet another extension of obligations to inform authorities of the activities of certain of our clients, in the wake of increased requirements in relation to money laundering and the proceeds of crime. It should be stressed that if the reporting requirement does arise, it will affect entirely legal tax planning manoeuvres – and while the affected categories are currently likely to be somewhat limited, these could readily be extended in future.

This entire new regime will doubtless itself lead to new considerations, to avoid the need to register avoidance! The need for such circular thinking is sadly all too common, as vast amounts of new rules are imposed on the constantly growing superstructure of tax legislation. Once more into the maze!

Alan R Barr, Brodies LLP and the University of Edinburgh