Recovery vehicle

Taxation of savings and investment

The individual savings account (ISA) limits are increased, from £7,200 to £10,200, of which half may be invested in cash. This will apply for the 2009-10 tax year for investors aged over 50, but only with effect from 6 October 2009. The new limit will then come into effect for all investors for 2010-11. These changes are made not in the Finance Act, but instead in the Individual Savings Account (Amendment) Regulations 2009 (SI 2009/1550). This is a welcome extension of the popular scheme, although the main problem for such investors is the limited return currently available from most ISA investments.

There is an extension of the 10% tax credit available to personal investors in foreign companies, to apply this to holdings of greater than 10%, subject to conditions about the location of the company. This credit will also be restored to distributions from offshore funds which invest in equities (FA 2009, sched 19).

In relation to more esoteric investments, there are some relaxations to the rules for Enterprise Investment Scheme investors. These will allow the company a longer period (24 months) to utilise the investment subscribed (and remove the link with the use of proceeds from non-qualifying share issues); permit the whole amount of an investment in any tax year to be carried back to the previous tax year; and remove an anomaly that brought a CGT charge on certain reorganisations. The “use of funds” time limit extension will also apply to Corporate Venturing Scheme and Venture Capital Trust investments (sched 19).

Investment trusts are to be given the ability to have dividends taxed as interest, depending on the nature of the underlying investments (FA 2009, s 45).

The definition of, and rules on, offshore funds are dealt with in new legislation (FA 2009, sched 22); and a new tax regime will be set out in regulations to apply from December 2009. In addition, certain distributions from offshore funds are to be treated as interest rather than dividends (s 39, inserting s 378A into Income Tax (Trading and Other Income) Act 2005).

Taxes on land

Recent figures confirm that the take from stamp duty land tax has absolutely plunged. In these circumstances, it may not be surprising that there was only a very limited extension of the increase in the nil rate band for residential property from £125,000 to £175,000. Now scheduled to expire on 31 December 2009, the temporary increase is now in primary legislation (FA 2009, s 10).

Other changes to SDLT are mainly of interest south of the border, affecting collective owners of (primarily) flats acting under leasehold enfranchisement and shared ownership rules (FA 2009, ss 80-82). There was however a small extension of the exemption for registered social landlords (s 81); and substantial rules allowing exemption (with relief from other taxes in addition) for alternative finance investment bonds (sched 61).

An omission is perhaps more surprising – there was no change to the rules on abnormal increases in rents. Given that SDLT has now been in existence for more than five years, an increasing number of leases could be affected by rules which are complex and very difficult to apply. Particularly where substantial or lengthy rent-free periods may be offered (which may be a factor in new leases now), tenants and their advisers should take care that the necessary reports are made, and the tax is paid, where an abnormal increase in rent occurs.

There are minor amendments made to the rules on real estate investment trusts. These are mainly of an anti-avoidance nature, to prevent attempts to bring non-qualifying activities within the REIT regime.

The rules on furnished holiday lettings, which allow a property business to be treated as a trade rather than an investment for a number of tax purposes, are subject to a “hokey-cokey” change. Initially, as with agricultural property relief for farmland, the rules are to be extended to property within the European Economic Area (as opposed to being restricted to the UK). However, with effect from 2010-11, the rules will be entirely withdrawn. This again is to ensure compliance with ECJ jurisprudence.

Business and employment taxes

An entire group of provisions of FA 2009 (ss 23-33) is headed “Support for business”. Businesses may vary in their agreement with whether in fact such support through the tax system is worthwhile, but there is certainly a range of measures of apparently wide import. However, on closer inspection this looks to be a fairly motley and random selection.

Apparently the most potentially expensive measure from the 2009 Budget was the introduction of a temporary first year capital allowance at 40% for expenditure on plant and machinery between April 2009 and April 2010 (s 24). This is in addition to the new (2008) annual investment allowance, which allows all businesses to claim 100% tax relief for expenditure on up to £50,000 of plant and machinery each year. This change will significantly accelerate the rate at which businesses can get relief for capital investment.

Perhaps the change most directly linked to the general economic situation is the extension of the rules on the carry-back of trading losses. The 2008 Pre-Budget Report introduced a measure to allow businesses to carry back up to £50,000 of tax losses to the previous three years and claim repayments of tax – a facility which is more generally limited to the immediately preceding year. The extension has been extended for a further year, and businesses can therefore claim extended carry-back for £50,000 of losses arising in accounting periods ending between November 2008 and November 2009; and again in the subsequent year. This applies both to companies and unincorporated businesses. The carry-back of losses to the preceding accounting period continues to be unlimited.

There is a further simplification of the rules on the reallocation of capital gains and losses within a corporate group. Essentially, these will remove the need for actual transfers of assets within the group, allowing gains and losses to be matched by entities within the group relationship (FA 2009, sched 12).

There are significant tax reliefs available in relation to the remediation of contaminated and derelict land. These are extended and focused in sched 7. It is worth a reminder that this relief is one of those which is of value even if the company entitled to it has no profits against which to set the relief, as in appropriate circumstances, HMRC will make a payment to the taxpayer. While the relief is hedged with numerous conditions, it does increase the attractions of development on brownfield sites.

There is a return to one of the apparent obsessions of HMRC, with a limited relief from the anti-avoidance rules on the sale of leasing companies (FA 2009, sched 10). But three schedules (31, 32 and 33) extend the anti-avoidance rules on leasing. The last of these deals specifically with film leasing.

There are substantial changes to the rules on tax relief for business expenditure on cars and motor cycles (sched 11). Most of these relate to the capital allowance treatment of such expenditure; and they are claimed to represent a simplification. There are also changes in relation to expenditure on hiring and leasing cars; and as is common now in relation to car taxation, a renewed focus on carbon emissions as opposed to other factors.

Anti-avoidance

The relatively new regime of disclosure of tax avoidance schemes continues to produce new legislation to counter such attempts – even where HMRC do not accept that the avoidance attempts are effective. Thus in FA 2009, in addition to the rules on leasing mentioned above, substantial measures are included in relation to anti-avoidance from financial arrangements (including interest arrangements and attempts to utilise amounts not fully recognised for accounting purposes – sched 30); transfers of trade to benefit from terminal loss relief (s 62); deductions from profits for purported employee liabilities (s 67); disguised interest for corporation tax (sched 24); and the exploitation of the rules on intangible fixed assets and goodwill (s 70).

A more general anti-avoidance measure, although billed under the heading of “Simplification”, lies in sched 25. This deals with the transfer of income streams, by both companies and individuals. The purpose is to ensure that receipts derived from a right to receive income are treated as income. This may be seen as an attempt (perhaps not the last) to ensure that what might otherwise be treated as a capital receipt (otherwise liable at only 18%) will instead definitely be treated as income (soon to be liable at up to 50%).

Value added tax

Anti-forestalling is also the buzzword for VAT. The Pre-Budget Report brought the much criticised reduction in the standard rate of VAT, from 17.5% to 15% for the limited period from 1 December 2008 until 1 January 2010. FA 2009, sched 3 contains legislation intended to counter schemes that purport to apply the 15% rate to goods or services to be supplied on or after the date that the rate returns to 17.5%.

This takes the effect of a 2.5% surcharge on the supplier, to take the VAT charged up to the 17.5% rate which should have been paid. It is aimed at recipient businesses which cannot recover all of their VAT. The circumstances where the charge will apply are where the parties are “connected”; where the supplier funds the purchaser; and where an invoice is issued more than six months in advance. The charge will also apply to supplies worth more than £100,000 where prepayment takes place (unless such prepayment represents normal commercial practice).

As with much anti-avoidance legislation, care will be required to ensure that innocent transactions are not caught by what are wide-ranging rules. In particular, the nature of land transactions (where substantial sums are generally involved, sometimes paid over extended periods, and where there may be a financial or other relationship between parties) will mean that particular care is required to ensure that the 15% rate is applied only to those amounts of consideration which properly qualify.

In more basic territory, the VAT registration threshold is increased to £68,000, and the deregistration threshold to £66,000. There are changes in the VAT fuel scale charges; and some administrative simplifications are made to the procedures for opting to tax supplies of land. (These latter changes have been made by amendments to Notice 742A – an example of “tertiary legislation” not uncommon in VAT.)

There are major changes to the rules on the place of supply of services, to be introduced over three years from 2010. The legislation is contained in FA 2009, sched 36. There is a change in a basic rule, in that the new basic rule for services provided to other businesses is that the supply will be treated as made where the business customer is established. However, supplies to non-business customers will be treated as made where the supplier is established.

This in fact reflects the general rule in relation to legal services within the EU in any event. And one of the most important exceptions will continue to apply, in that services relating to land will deemed to be supplied where the land is situated. Various other exceptions for particular kinds of service will be introduced.

It will become necessary for suppliers of services to other EU countries to provide a sales list with information about those supplies (FA 2009, s 78). This will affect solicitors with clients in other EU countries.

A more useful administrative change is that HMRC will now facilitate claims for VAT refunds from other member states, via their electronic portal (FA 2009, s 77).

Tax administration and penalties

Once more, a really substantial proportion of the Finance Act is devoted to administrative changes, building on much that has already been enacted. It is a mark of the extent of the new rules (and perhaps of the quality of the legislation) that (for example) the new information powers which were contained in sched 36 to FA 2008 (and which came into force only on 1 April 2009) are substantially amended by scheds 47 and 48 to this year’s Finance Act. As well as making corrections and amendments, this schedule also introduces a penalty where a person deliberately or carelessly provides incorrect documents or information in response to requests under the 2008 provisions.

The information provisions are extended by sched 48 to cover the more minor taxes, including stamp duty land tax, inheritance tax, climate change levy and landfill tax. Similar extensions to the record-keeping rules in sched 37 to the 2008 Act are made by sched 50 to this year’s Act; and to the time limit rules by sched 51. Of particular relevance to solicitors will be paras 5-13, which deal with inheritance tax, and paras 14-16, which deal with stamp duty land tax. In very general terms, time limits which were formerly set at six years (and in some cases three years) will be uniformly set at four years, whether these periods run for or against the taxpayer. But carelessness or deliberate fault on behalf of the taxpayer will increase these time limits for HMRC, considerably.

In addition, there is some rather circular clarification of the meaning of carelessness, which will be crucial under the new penalty regime – for example, s 240A(2) of the Inheritance Tax Act 1984 will read “A loss of tax is brought about carelessly by a person if the person fails to take reasonable care to avoid bringing about that loss”.

Schedule 49 is more specific, giving HMRC powers to obtain contact details of debtors from third parties; and sched 52 sets out new rules on the recovery of overpaid tax, replacing the rules on error or mistake claims. Schedule 53 deals with interest payable to HMRC, while sched 54 deals with its somewhat distorted mirror image, interest payable by HMRC.

Schedule 55 deals with penalties for failures to make returns for the full range of taxes, and sets out criteria for mitigation of those penalties. These provisions represent substantial potential increases in penalties for failure to make returns; some penalties will continue to be chargeable even if no tax is due.

Schedule 56 contains detailed provisions on penalties for failure to pay taxes, generally imposing a 5% penalty where tax is not paid for 30 days after the due date. This could be very significant particularly in relation to the two “event” taxes (as opposed to annual taxes), inheritance tax and SDLT, with which solicitors work regularly. The regime will also be important in relation to (for example) taxpayers who do not normally make a return but have an occasional liability to capital gains tax.

All of the above falls within the normal scope of administrative and penalty provisions, although the practical effects of the changes should certainly not be underestimated. But this seems not to be enough for HMRC. FA 2009 also contains a range of more esoteric measures in the field of enforcement.

Thus by virtue of sched 46, para 1:

“(1) The senior accounting officer of a qualifying company must take reasonable steps to ensure that the company establishes and maintains appropriate tax accounting arrangements.

“(2) The senior accounting officer of a qualifying company must, in particular, take reasonable steps–

(a) to monitor the accounting arrangements of the company, and (b) to identify any respects in which those arrangements are not appropriate tax accounting arrangements.”

This personal duty (albeit restricted, for the moment, to very large companies) is hedged with various penalties for non-compliance; and has to be certified.

Equally personal are the “name and shame” provisions contained in s 94. This allows HMRC to publish the names of tax defaulters who have suffered penalties of at least £25,000. The information which can be published includes the name and address of the defaulter and details of the offence; the information “may be published in any manner that the Commissioners consider appropriate”. It will be interesting to see whether, if this power is used, tax defaulters start to display their notices of default as a badge of honour, in the same manner as is alleged to be the case with certain ASBO recipients. It is to be hoped that tax avoidance is not the national sport it appears to be in some countries, but there can be no doubt that it attracts less opprobrium than some dubious activities. Of more concern must be the fact that most penalties that could give rise to the use of this power will still be assessed on the civil standard of the balance of probabilities, rather than the criminal basis of beyond reasonable doubt.

Finally it is worth mentioning

s 92, which demands that the Commissioners of Revenue and Customs prepare a Charter; and that “The Charter must include standards of behaviour and values to which Her Majesty’s Revenue and Customs will aspire when dealing with people in the exercise of their functions.” This must be reviewed and reported upon. Given the other administrative provisions contained in this year’s Finance Act, it is very hard not to be cynical about this development, but it can only be hoped that HMRC apply the same rigorous standards to their own performance as they appear to expect from taxpayers. In contrast to the position for taxpayers, however, the penalties for failure to comply with the aspirations in the Charter are left unspecified. I am sure I would not be alone in offering to fill this particular gap.