Shining some more light...

Savings, investments and pensions

Perhaps the most practically useful change here involves what might be seen as a rather esoteric area – dividends from foreign companies. But takeovers of well-known British companies have left many shareholders with small holdings in foreign companies. Individuals owning less than 10% of non-UK companies will now be entitled to a non-repayable tax credit of one ninth of the dividend – as with UK holdings. The original restriction to total non-resident dividends of less than £5,000 has been removed; and the 10% shareholding restriction will be removed from 2009-10 for many companies, as long as the source country levies a comparable tax to UK corporation tax on company profits.

Also in the field of international matters, Finance Act 2008 provides the basis for UK-based investment managers to be appointed by non-residents to carry out specified transactions without exposing the non-resident to UK taxation.

The Finance Act provides the basis, and new regulations will supply the detail, under which investors will be taxed on offshore funds. This can remain favourable, but there will also be provision for funds to report income to investors rather than make distributions. The investor will be taxed on that income, rather than receive CGT treatment. There will also be arrangements for authorised investment funds who themselves go on to invest in such offshore funds.

In relation to ISAs, the increase in the subscription limit to £7,200, of which one half can be cash (covered by previous legislation), came into effect from 6 April 2008. There are a number of relaxations on the reports required to be made by ISA providers and the information they are required to retain.

At the other end of the investor risk scale, subject to state aid approval, the investment limit for Enterprise Investment Scheme companies is increased from £400,000 to £500,000.

Rather strangely, given their very pure trading status, shipbuilding and coal and steel production are to become excluded activities for all the tax incentive regimes – EIS, VCTs and the Corporate Venturing Scheme. The same restriction is to apply to another part of the alphabet soup of investment schemes, the Enterprise Management Incentive share scheme – which is to be further restricted to qualifying companies with fewer than 250 employees. However, the limit on the market value of options under such schemes is increased from £100,000 to £120,000.

Regulations will be introduced to allow property authorised investment funds. These are open-ended funds, as an alternative to the already available closed real estate investment trusts. As with REITS, the point of taxation will move from the fund to investors in the fund.

The new unified pensions regime is bedding down. A number of fairly technical amendments will be introduced, in areas including the rules on contributions to non-registered schemes based outside the UK; the taxation of authorised payments to members; and the commutation of very small (generally less than £2,000) funds in schemes.

The lifetime and annual allowances rise as planned, to £235,000 and £1,650,000 respectively; and various simplifications are made in relation to the calculation of the lifetime allowance.

Trusts and settlements

Most of the changes to trusts and settlements (or in some cases the lack of change) are incidental to other important developments – for example, the restrictions on entrepreneur’s relief for CGT, and the inability of trading trustees to claim the annual investment allowance. Some trust changes derive directly from these new developments – the abolition of most of the rules on settlor-interested settlements derives directly from the restructuring of that tax.

However, the income tax rules on settlor-interested settlements continue in full force and effect. The possibility of double taxation where income is distributed to beneficiaries other than the settlor has been eliminated; and the tax which is paid by the trustees under these rules is treated as paid on behalf of these beneficiaries. A new rule is introduced whereby such tax is to be treated as among the highest parts of the beneficiary’s income, so that the beneficiary does not have his income from sources other than the trust pushed into the higher rate band.

Given the ridiculous quantities of new legislation and other changes, it is something of a relief to report that new rules on alleged income shifting, which were to be introduced following HMRC’s defeat in the Arctic Systems case (Jones v Garnett [2007] UKHL 35), are to be deferred. It is less comforting that this is merely a delay; and that further consultation is intended to lead to new legislation in Finance Act 2009. If past experience is any guide, it is still likely to affect all of the guilty, the well-informed tax planner and the completely innocent bystander who does not know that perfectly sensible arrangements can be completely re-characterised for

Capital allowances

The main focus again this year is on the capital allowances regime, continuing the programme of reform started in last year’s Budget. Indeed, the bulk of the legislation to implement that programme is in this year’s Finance Act; and there have been some extensions of the programme since the first announcements.

The most important new development is the introduction of the new annual investment allowance for expenditure on plant and machinery. This is no longer restricted to small and medium sized enterprises, as originally proposed. It replaces first year allowances in most cases, although some specialised regimes continue. It will provide relief for the first £50,000 of expenditure each year by a business. It will apply to individuals, partnerships of individuals and most companies – but not to trustees or to partnerships which have other than individual partners. Any excess above £50,000 of expenditure will be dealt with under the normal (and now revised) capital allowance regime.

The restrictions for companies will generally be based on a restriction to a single annual allowance for (a) groups of companies; and (b) where companies are related, which means under the control of the same individuals. It is notable that the very wide ranging rules on connected persons and associated companies do not apply for the purposes of this new allowance.

There are significant changes to the basic regime – the main rate of writing-down allowance is reduced from 25% to 20%, although that on long-life assets is increased from 6% to 10%.

There is also to be a more general “special rate pool”, to which expenditure on particular assets will be allocated. This will be significant in the property industry, as it will include a very wide range of plant and machinery fixtures described as integral features – the current list includes electrical and lighting systems; cold water, heating and cooling systems; lifts, escalators and moving walkways; and the mysterious and slightly scary “active façades”, whatever they may be. It also includes thermal insulation (which would not normally qualify at all for allowances, but in fact previously benefited from a special 25% rate of capital allowance). As well as removing the right to the main writing-down allowance rate, it is made clear that expenditure on integral features will not qualify for a full revenue deduction from profits where this might previously have been claimed, for example on certain replacements.

There is a useful provision allowing unrelieved expenditure of less than £1,000 in either pool to be claimed all at once, rather than being further written down.

The plant and machinery element in most modern commercial buildings is extremely significant, and this change of regime will affect not only those involved in development but also the balance to be struck between landlord and tenant on these matters. There are often choices to be made and planning can be significant on initial lettings and subsequent sales. This remains the case, but the principles (or at least the arithmetic) have changed somewhat and will require to be considered in negotiations.

The rules on the withdrawal of enterprise zone allowances from April 2011 are introduced. There is to be no phasing out, unlike the position for industrial buildings and agricultural buildings allowances; legislation on that phasing is also in Finance Act 2008 (as well as some anti-avoidance provisions on the withdrawal of these allowances).

There are also changes and extensions of some of the special capital allowance regimes, which will run alongside the new general rules. These special regimes overlap with environmental objectives, as 100% first year allowances are available for a range of technologies – natural gas, biogas and hydrogen refuelling equipment, low emission cars, environmental beneficial technologies (which are being reviewed and extended, for example to waste water recovery and heat pump dehumidifiers).

In the same vein, where losses arise as result of certain first-year allowances on energy-saving or environmentally beneficial plant and machinery and cannot be otherwise relieved, these losses can be exchanged for a 19% cash payment from HMRC, subject to a number of limitations.

Research and development

There is confirmation of increases previously announced in the tax credits available for research and development by large companies (to 130% of qualifying expenditure) and small and medium-sized enterprises (to 175% of qualifying expenditure, although there is a restriction to 7.5 million euro per research and development project for SMEs, which will lead to definitional problems). As these very high figures (which can involve payments from HMRC in appropriate circumstances) demonstrate, this can be a highly significant and profitable relief, providing a real tax incentive for this activity. There are also more minor changes to the specialised scheme for vaccine research relief.

Anti-avoidance

Anti-avoidance rules are introduced in relation to the crystallisation of balancing allowances on the sale of trades to enterprises which do not intend to carry on that trade; and very complex anti-avoidance legislation is extended in an area which occupies considerable government attention, the leasing of plant and machinery. These include measures designed to treat payments of “premiums” as income; and to prevent the creation of artificial losses by businesses who act as intermediate lessors, who lease plant and machinery from businesses and then let the same plant and machinery to other businesses.

There is further anti-avoidance to prevent individuals benefiting from loss relief against other income when not actively engaged in a trade. These extend the restrictions that already exist where such losses are generated via partnerships.

The anti-avoidance theme continues in complex rules to prevent disguised interest being received tax free; and in relation to attempts to avoid the controlled foreign company rules by the use of partnerships and trusts (although the latter is an example of legislation to put beyond doubt the ineffectiveness of a scheme which HMRC do not believe works in any event).

Associated companies

A minor but useful change is made to the rules on associated companies. These often depend on common control of companies; and the rights held by business partners are taken to be held by the persons under consideration when looking at how many companies are within those persons’ control (Income and Corporation Taxes Act 1988, s 839). Under the new rules, there will only be such attribution of control where there have been tax planning arrangements so as to secure a tax advantage under the rules for small companies. Thus it will no longer be necessary when considering how many companies are controlled by a particular individual to include those under the control of business partners of which the individual may have no knowledge (and no right to obtain that knowledge). This may be of particular value in large professional partnerships.

Value added tax

In relation to VAT, the registration threshold rises from £64,000 to £67,000; and the deregistration threshold from £62,000 to £65,000.

A new transitional relief is introduced following House of Lords judgments on the original introduction of the three year cap on input tax claims from 1997. Until 31 March 2009 only, businesses may submit claims for output tax overpaid before 4 December 2006 (not specifically covered by the judgments in question but affected by the principle); and input tax incurred prior to 1 May 1997. HMRC have had trouble in fully enforcing the three year cap on VAT claims pretty much since its introduction. This new short transition period will close another line of attack.

An important VAT concession on the supply of temporary staff by employment businesses is to be withdrawn from 1 April 2009. This will lead to VAT being payable on the wages element of payments to such agencies.

Employment

The changes in pure employment tax were relatively minor this year. The tax on company cars is reduced for cars with lower CO2 emissions.

The rules on reimbursement for fuel purchased for business use in company vans is to be brought into line with those on company car fuel, so that reimbursement is not to be treated as taxable.

A possible confusion has arisen in the tax law re-write in relation to employment-related securities (shares or options from employment share schemes). This will be corrected to make clear the full amount which is liable to tax.

Also in relation to employment-related securities, changes will be made to bring the position of employees who are not ordinarily resident, or not domiciled, in the UK, into line with those who are so resident, ordinarily resident and domiciled. But the changes will also take account of the remittance basis where this applies to employees, and provide for apportionments of amounts that would otherwise be chargeable.

Environmental taxes

The join between environmental taxes as economic instruments to direct environmentally desirable behaviour, and as a means of filling growing gaps in the tax take, becomes much harder to distinguish. But the rhetoric of environmental taxes as being for purposes other than raising revenue continues. Landfill tax continues its planned rise to very high levels, while aggregates levy and climate change levy have more modest rises. Some of the landfill tax incentives are being reduced or removed, such as the exemption for cleaning contaminated land. The maximum rate of possible offset of landfill tax liabilities for contributions made to registered environmental bodies is being reduced.

The use of reduced rates of fuel duty for pleasure flying and pleasure boating will be removed. Air passenger duty is to be replaced in November 2009, with a new tax which will be based on plane flights rather than individual passenger numbers.

Alan Barr, Brodies LLP and University of Edinburghg

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Residence and domicile: high stakes

This was another tax change which attracted huge interest beyond the specialist. While there was some retreat from the original proposals, much of the original package announced will be implemented.

As regards residence, there will be a change to the longstanding practice in relation to days of arrival and departure. Now, any day in which an individual is present in the UK at midnight will be counted as a day of presence in the UK. Days of transit will not count (even if midnight comes), as long as the individual does not engage in activities inconsistent with merely being in transit. So reading rubbish at the airport will be just fine; straying over into business activities may not be. This sounds like one of the better excuses!

The major changes are to the remittance basis of taxation. From 2008-09, if an individual who is not domiciled or not ordinarily resident in the UK has nevertheless been resident in more than seven out of the last 10 years, he will not be permitted to utilise the remittance basis of taxation unless he pays an additional tax charge of £30,000 for that year. Otherwise, such a person will be charged to tax on total worldwide income and gains. There is a de minimis exception where unremitted foreign income and gains for the year do not exceed £2,000. If the £30,000 charge is paid, its payment directly to HMRC from abroad will not be regarded as an additional remittance and thus will not be liable to tax under the normal remittance basis – a concession which seems both logical and surprising at the same time!

The “attack” on those using the remittance basis continues, with new rules whereby those using it will not be entitled to income tax personal reliefs or the CGT annual exemption, unless their unremitted foreign income and gains are less than £2,000. This seems somewhat unfair on some comparisons, for instance in relation to some non-residents with UK-sourced income. On a more positive note of fairness, it will be possible for those not being taxed on the remittance basis to claim relief for foreign capital losses.

There is also legislation to close what are described as loopholes in the remittance basis, but which might more accurately be described as inherent in its operation – for example the use of different years for receipt and remittance; the use of entities different from the individual under consideration; and the remittance of assets other than cash.

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Land taxation: nuts and bolts

The legislation which removes the income tax potential benefit in kind charge on those who own holiday homes abroad through companies is contained in Finance Act 2008.

Many of the capital allowance changes dealt with elsewhere have significant effects on land taxation.

Again there were no changes to the main stamp duty land tax rates or thresholds, but there were quite significant SDLT changes.

There is an element of relaxation of SDLT for some transfers of interests within property investment partnerships.

In the other direction, group relief clawback rules are tightened, so as to impose a charge when the vendor company leaves the group (not normally an occasion of charge, unlike the departure of the purchaser company) and there is a later change of control of the purchaser. There is also legislation to counter SDLT avoidance utilising the rules on alternative property finance; and the disclosure regime is being extended to cover residential properties worth £1 million or more.

The SDLT relief introduced for zero carbon homes is extended to new flats (not conversions), on their first sale.

The most important changes to SDLT were probably administrative. Form SDLT 60 has been withdrawn; and, broadly, there is no longer a requirement to notify transactions with a chargeable consideration of £40,000 or less. The rules on notification of transactions involving leases remain complicated but have also been relaxed – the £40,000 threshold will apply to payments other than rent; leases for more than seven years will only be notifiable where the annual rent is £1,000 or more; and leases for less than seven years will only be notifiable where the chargeable consideration exceeds the zero rate threshold.

In some circumstances, it will remain a matter of practical necessity to explain to Registers of Scotland why a transaction with apparently significant consideration does not attract SDLT, doing the job formerly done by the SDLT 60.

In relation to VAT, the most significant change is in relation to the option to tax (election to waive exemption, although that expression is no longer to be used). This involves the complete substitution of sched 10 to the Value Added Tax Act 1994 with effect from 1 June 2008, by means of the Value Added Tax (Buildings and Land) Order 2008 (SI 2008/1156). There is also a new version of the VAT Notice 742A, some of which has the force of law. Space does not permit the changes made by this important piece of legislation to be dealt with in full here, but the following changes are highlighted in the new VAT notice: new rules providing that an option to tax affects land and buildings on the same site, with transitional rules, and ability to exclude new buildings from the scope of an option to tax; a new certificate for buildings to be converted to dwellings etc and new ability for intermediaries to disapply the option to tax;

a new certificate for land sold to housing associations;  new rules for ceasing to be a relevant associate of an opter;  an extension to the “cooling off” period for revoking an option to tax (now six months);  the introduction of automatic revocation of the option to tax where no interest has been held for six years;  the introduction of rules governing the revocation of an option to tax after 20 years; a revised definition of “occupation” for the anti-avoidance test, including new exclusion for automatic teller machines;  the introduction of a new way to opt to tax (a real estate election, which covers all relevant land owned or acquired after the real estate election).

Most of these provide opportunities rather than threats, but the procedural and form-filling requirements have changed and the new rules will require to be followed when dealing with any property to which the option to tax is relevant.

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Tax administration: penalty trap

The changes to tax penalties and related administrative matters continue to generate huge volumes of new legislation. The stated aim is consolidation towards “a single legislative framework for penalties for incorrect returns, and another similar one for failing to notify a taxable activity by the required date”. This regime is to apply to a whole new range of taxes, including with particular relevance for solicitors stamp duty land tax and inheritance tax.

It is nice to be told that “there will be no penalty where a taxpayer makes a mistake” – but HMRC giveth and HMRC taketh away. Thus penalties will arise, based on the amount of tax understated, of amounts up to 30% for “failure to take reasonable care”. As ever, this will lead to much consideration of the ability to make mistakes while taking reasonable care, a concern which has exercised students and others down the generations. The rate rises to up to 70% for deliberate understatement and 100% for deliberate understatement with concealment – and these can be visited upon third parties who deliberately withhold or provide false information. There are provisions for reduction of penalties for co-operation and disclosure, particularly where this is “unprompted”.

In relation to failure to notify, a similar scale and rules will operate – but one very positive development is that there are to be no penalties unless there are unpaid tax or NIC liabilities as a result of the failure.

There is also to be new legislation about record keeping, inspection and information powers and the making of assessments and claims to tax. Again the aim is to align the rules across a range of taxes. In particular, the rules on VAT and the main direct taxes will be brought into line with each other, a development which is welcome, and perhaps inevitable following the merger of Customs & Excise with the Inland Revenue.

Extra-statutory concessions have been a feature of our tax system for a very long time. But doubts have been expressed in court about the scope of HMRC’s discretion in such matters. As a result, Finance Act 2008 contains powers to make existing concessions statutory by Treasury order.

The future for new concessions is more doubtful. Given this and the vast quantities of new legislation apparently required in relation to avoidance and all the other things covered in these articles, it seems certain that primary and secondary tax legislation will continue to occupy an increasingly large part of the statute book. The constant and seemingly irreversible need to tinker with the system indicates that the tax monster shows no signs of being tamed any time in the near future. Perhaps most worrying of all, there are increasing signs that with pressures on their own staff, the number of people who understand the beast even within HMRC is declining. This will not, it seems, stop its growth.

Finally, in our debt-ridden times, it was perhaps inevitable that arrangements should be made so that tax and duties can be paid by credit card. So for some the payment of their air passenger duty (or its replacement) may soon lead to a healthy injection of air miles, leading to further air passenger duty, and so on and on, until the end of time…