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EY's Budget News 2012 - Budget Alert - Corporate tax - EY - United Kingdom

Budget Alert 2012Corporate tax

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This section looks at the main changes to corporate tax law announced in the Chancellor's Budget.

  • Corporation tax rate
    The main rate of corporation tax will be reduced by 2% (to 24%) with effect from 1 April 2012.  The previously announced series of 1% cuts will also be preserved, resulting in a 22% main rate by 2014.  No further announcements have been made in relation to the small profits rate.

      This is the second time that the Government has gone further than previously announced in this area.  The Government originally committed to reduce the main rate of corporation tax to 24% by 2014, which was further reduced to 23% as part of Budget 2011.  This has now been reduced still further to 22% by 2014. 

      These measures are welcome and support the Government’s objective of delivering a competitive corporate tax system.  Tax rates are a function applied to the calculated tax base and creating a competitive jurisdiction also relies on measures affecting the calculation of that tax base. It is, therefore, important that, when Finance Bill 2012 is published on 29 March, the detail on other matters, such as the controlled foreign companies reform, is aligned with this wider policy objective.


  • Controlled foreign companies (CFCs)
    No further legislation has been published as part of the Budget. However, the Government has confirmed that the new rules will be introduced for accounting periods beginning on or after 1 January 2013.

      As a result of draft legislation published in January and February, no further legislation was published today. However, the Chancellor made specific reference to the enactment of the new CFC rules in his speech, stating how the new rules should stop global firms leaving the UK, and encourage others to come to the UK.

      The main changes in the February announcement included an introductory Gateway test and amended rules for the treatment of finance profits, as well as some reordering of the provisions to make it easier for groups to identify which parts will be applicable to them.

      We welcome the confirmation of the timing for the introduction of the new CFC rules, and the Government’s continued commitment to reform of this area of legislation.


  • Patent box
    The Chancellor confirmed the Government’s intention to cut taxes on patents and similar intellectual property (IP) through the introduction of a UK patent box with a 10% tax rate.

      The Chancellor referred in his speech to the Government’s intention to reduce taxes on patents. While specific reference was made to the life sciences sector, the regime will apply to a wide range of other industries that develop and exploit patents and similar types of IP.

      The draft legislation in respect of patent box was published in December 2011, and minor amendments, including clarification on qualifying income, routine expenses and the operation of the small claims safe harbour, will be published next week following the most recent consultation. The legislation will be included in Finance Bill 2012, although the regime will only begin to be phased in from 1 April 2013.

      EY continues to welcome the introduction of a UK patent box regime. We note that incentives are provided not just for the development of patents themselves, but also for development of products that incorporate patented technology. Due to its comparatively wide scope, in our view the regime is potentially more generous than those of other European countries.


  • R&D Tax credit: ‘Above the line’ (ATL)
    From April 2013, the Government will introduce an ATL credit for R&D. The R&D credit rate will be a minimum of 9.1% before tax and be a payable credit for loss-making companies.  Further consultation is expected shortly and, following this, the final rates will be announced.

      Consultation on the ATL proposals has been undertaken over the past year with Treasury and this is another step toward the implementation of the revised scheme. The primary driver for a move to an ATL credit scheme is that the R&D credit is able to be recognised in the budgets of those undertaking the R&D activities within the company.

      The ATL credit is a welcome change although, when compared to other R&D schemes such as those in France and Ireland, the proposed 9.1% minimum rate for the UK remains low.  However, combined with the introduction of the patent box this helps to make the UK a more attractive place for innovation.


  • General anti-abuse rule (GAAR)
    The Government has announced that a GAAR will be introduced in the UK.

      In December 2010, HM Treasury announced that Graham Aaronson QC would lead a study group to explore the case for a GAAR in the UK. The report on the GAAR (which included suggested draft legislation) was published on 21 November 2011.

      In summary, it concluded that introducing a ‘broad spectrum’ GAAR of the type currently in place in a number of jurisdictions would not be beneficial for the UK tax system. However, the study group strongly recommended the introduction of more moderate provisions (initially confined to the main direct taxes and national insurance) which would not be intended to affect the large centre ground of ‘responsible’ tax planning.

      The Government has decided to introduce a GAAR and has announced that a further consultation will be issued in summer 2012 with a view to introducing legislation in Finance Bill 2013. The announcement goes further than the report in one respect in that it will extend the GAAR to Stamp Duty Land Tax (perhaps reflecting the Government’s recent concern about perceived avoidance in this area).

      The challenge will be to design legislation that adequately draws the line between acceptable and abusive tax planning. The proposed statutory safeguards will, therefore, need to be scrutinised very carefully to ensure taxpayers are adequately protected from the risk that reasonable tax planning will inadvertently be brought within the scope of the GAAR.


  • Bank levy
    The headline bank levy rate will rise to 0.105% from 1 January 2013. The half rate for long term chargeable liabilities will rise to 0.0525%, also with effect from 1 January 2013.

      Today the Government reiterated the policy objective that ‘the banking sector should make a fair contribution’ by raising £2.5bn annually through the bank levy. This comes on the back of the increase announced in December 2011 to 0.88% which takes effect from 1 January 2012. HMRC has confirmed that, without a further adjustment to the rate, bank levy receipts in future periods will fall short of the £2.5bn target.

      Changes to the bank levy rules including amendments to the double tax relief provisions and the treatment of joint venture liabilities will be included in the Finance Bill.

      The seemingly relentless rate rises reflect an increasing fiscal burden on the levy–paying banks, especially those parented in the UK given that the levy applies to their worldwide balance sheets. The uncertainty created by the competing policy objectives of sustainably raising £2.5bn whilst at the same time trying to encourage banks to raise less risky funding suggests the threat of further rate rises is not going away. In an environment of increasing capital requirements for banks generally, some organisations will start to factor in the increasing UK bank levy burden when making strategic decisions on where to grow new business.


  • Tax relief for the creative sector
    The Chancellor announced in the Budget speech his intention to introduce new tax reliefs for culturally British video games, television animation programmes and high-end television production.

      Subject to State Aid approval from the European Commission, the Government intends to introduce new tax reliefs for companies in the video games, animation and high-end television industry.  This is part of a new ambition to make the UK the technology hub of Europe. The Chancellor stated in his speech that he was looking to introduce schemes similar to those that exist for the film industry. However, the detailed design of the schemes is still to be finalised and the Government will be consulting on this over the summer with a view to including legislation in Finance Bill 2013.

      While details of the relief at this stage are minimal, it would seem to provide a welcome incentive to British industry in the current economic climate.


  • First Year Allowances and main rate changes for business cars
    From April 2013, the Government is extending the 100% FYA for businesses purchasing cars with low carbon dioxide emissions for a further two years to 31 March 2015. Additionally, the level of carbon dioxide emissions at which cars qualify for relief of either a FYA or within the main rate pool is decreasing.

      The limit of carbon dioxide emissions at which expenditure incurred on cars previously qualified for FYAs was 110g/km. From April 2013, this limit is being reduced to 95g/km. At the same time, the limit of carbon monoxide emissions for cars qualifying for relief within the main rate pool is decreasing from 160g/km to 130g/km. Leased business cars will no longer qualify for FYAs, regardless of the level of their emissions.

      The Government continues to demonstrate that it is keen to use tax to change behaviour, in this instance by encouraging businesses to invest in environmentally beneficial cars, through the reduction of carbon dioxide emission thresholds.


  • Further capital allowances changes
    The Government has extended the availability of existing capital allowances incentives for certain designated areas and ‘green’ technology.

      Enhanced capital allowances (ECAs) in Enterprise Zones: The Government will offer 100% capital allowances on plant and machinery investment made in designated areas of the London Royal Docks Enterprise Zone, three Scottish Enterprise Zones in Irvine, Nigg and Dundee, and Deeside in North Wales. This follows announcements of ECAs in English Enterprise Zones in 2011, and in an additional zone, Humber, announced in February 2012.  Allowances in all zones will be available from 1 April 2012, and a full list of all zones will be published shortly.

      Business premises renovations allowance: As announced previously, the 100% BPRA has been extended for a further five years from 2012. Changes will also be made to ensure compliance with State Aid rules.

      Enhanced capital allowances: The list of designated energy-saving and water-efficient technologies (ECA) qualifying for 100% enhanced capital allowances will be updated during summer 2012, subject to State Aid approval. In addition, from April 2013, the Government will extend the existing 100% first-year capital allowance for gas refuelling equipment for two years to 31 March 2015.

      First-year tax credits for plant or machinery: From April 2013, the Government will extend the availability of first-year tax credits for expenditure on certain environmentally beneficial plant or machinery (ECA) that generates a loss for a further five years to 31 March 2018.

      The Enterprise Zone and BPRA are specifically targeted at certain designated ‘assisted areas’, and these reliefs and areas should be considered before making any investment or deciding on the investment location.

      Investment in energy and water efficient plant and machinery which qualifies for the 100% first year allowance should move up the agenda for those wishing to maximise the rate of tax relief available, as well as the availability of a 19% tax credit for companies who invest in these assets who make a loss.

      The above changes are designed to encourage investment and growth, which is to be welcomed in the current economic climate.  As the main rates of capital allowances are being reduced from April 2012, these additional incentives merit further investigation.


  • Grouping rules
    Finance Bill 2012 will amend the grouping rules in order to prevent the group status of a company being jeopardised where it issues loan notes carrying a right to conversion into shares or securities in an unconnected company which is listed on a recognised stock exchange.

      At present, holders of loans which carry a right of conversion into unconnected companies are viewed as holding equity capital in the issuing company. This risks affecting the issuer's eligibility for group relief, which broadly relies on a parent company holding at least 75% of share capital in the subsidiary.

      This is a welcome measure which should allow companies to continue to access group relief without being adversely affected when they enter into these commercial transactions.


  • Corporate capital gains on foreign currency assets
    The Government has announced a consultation on whether to allow non-sterling functional companies to compute their capital gains and losses in their functional currency.

      Current legislation requires capital gains and losses of a company to be calculated in sterling, regardless of the currency in which the asset was acquired or disposed, or the functional currency of that company. This can give rise to gains or losses on a disposal as a result of the foreign exchange movements, with a knock-on impact on the hedging strategies of groups.

      The potential change may be significant, and addresses an issue which has led to counter-intuitive results in the past. However, it is not clear as to the extent to which the legislation might apply.

      EY welcomes the Government’s consultation on this matter of preventing ‘phantom’ gains being taxed. Such a measure should also both simplify and reduce a group’s administration burden and may assist them in their hedging strategies.


  • Disincorporation relief
    As part of the simplification of the tax system for small businesses, the Government has announced that it will consult on proposals to make it easier for small businesses to move out of the corporation tax regime by introducing a disincorporation relief.

      In its February report, Understanding small businesses’ experience of the tax system, the Office for Tax Simplification (OTS) identified that incorporations may occur without people being fully aware of the consequences. Recognising that some small businesses may want to disincorporate, but feel ‘trapped’ in the corporate regime due to the tax costs associated with disincorporation, the consultation will consider the demand for a disincorporation relief and the practicalities of how such a relief could work.


  • Income tax rules on interest
    The Government has announced that it intends to consult on changes to the income tax rules on the taxation of interest and interest-like returns.

      The announcement is very brief and gives no indication of the scope of the review. It may be that it is intended that income that is economically similar to interest, but is not interest, such as the return from alternative finance arrangements, should be treated in the same way as interest.

      It is conceivable that other statutory reliefs such as the Eurobond exemption might also be subject to review.

      The Government will need to ensure that any changes do not have a negative impact on the UK’s tax competitiveness and existing and future commercial arrangements.


  • Tax treatment of regulatory capital – power to introduce regulations
    The Finance Bill is to include measures to introduce the power to issue regulations in relation to the tax treatment of new regulatory capital instruments.

      The new stricter Basel III capital requirements for banks are to be introduced in the EU through the proposed Capital Requirements Directive IV (CRD IV), which is expected to be effective from 1 January 2013. New capital instruments compliant with these rules may include features which make their treatment under existing tax legislation uncertain or problematic. HMRC has been consulting on whether legislation is required to clarify the position. It had previously been announced that the Government would attempt to give certainty in advance of CRD IV coming into force. The Government has now announced that this will be achieved by means of regulations in the second half of 2012, with the power to issue these regulations to be included in the Finance Bill.

      The Budget announcements state that the regulations will ‘determine the tax treatment’ of the instruments. This could be as broad as implementing changes to many areas of the legislation. The approach of providing such broad-ranging powers in secondary legislation is unusual and we hope will be used in a constructive way in continued consultation with the industry. In the meantime, in our experience HMRC is open to engaging with taxpayers in relation to the tax treatment of such instruments under existing legislation.

      The Budget announcements do not mention the changing environment in relation to insurance regulation, but it is hoped that the regulations will be used also to provide clarity in this area.


  • Manufactured payments
    There will be a consultation on a comprehensive reform of the rules for taxing manufactured payments and a consultation document will be published shortly.

      The aim of the consultation is both to simplify the rules and to reduce opportunities for tax avoidance. Following consultation, if legislation is introduced in Finance Bill 2013, this will be published in the autumn. Any changes are not expected to have effect before Finance Act 2013.

      In addition, Finance Bill 2012 will contain legislation which was previously announced in the written ministerial statement made on 15 September 2011. We understand that this was to deal with a particular avoidance transaction that was disclosed to HMRC. The amendment is designed to prevent manufactured overseas dividends being used to obtain a repayment of tax or set off against income tax that is not paid to the Exchequer under the rules.

      Manufactured dividends commonly arise in the context of transactions such as stock lending and repo arrangements. The rules for the taxation of manufactured overseas dividends impose obligations to account for relevant withholding tax on payments or receipts which represent dividends on overseas equities. The rules and accompanying regulations date back to the early 1990's. EY welcomes the opportunity to make representations and suggestions in the context of the proposed wider reform of the regime.


  • New corporate tax regime for life insurance companies: targeted anti-avoidance rule
    A targeted anti-avoidance rule applies to steps taken on or after Budget day to secure a tax advantage under the transitional arrangements for the new life insurance tax regime which will come into effect from 1 January 2013.

      Taxation of life insurance business profits is currently based on returns made to the Financial Services Authority.  Under the Solvency II regulatory framework, these returns will no longer exist and it is necessary to institute a new basis for taxing life insurance business profits. 

      Transitional provisions will be introduced to spread the effect of the difference between accumulated taxed and accounting profits.  For items such as deferred acquisition costs, where there is already provision in tax legislation, the existing approach of disregarding the effects of the transition will be followed.  For the balance, a 10-year spreading of the impact is proposed.  There is a deferral of tax for two years where the availability of profits is restricted by a Court order. More specific and detailed transitional provisions will be contained in regulations to be published in draft at the same time as Finance Bill 2012.

      This targeted anti-avoidance rule has been subject to extensive consultation with the industry and others in which EY played a full and active part.  The rule is to be narrowly focused on avoidance in connection with the transitional rules.  The Budget day commencement date also means that it should not apply to anything brought into account in the FSA returns for 31 December 2011.


  • General insurance companies: Claims equalisation reserves (CER)
    The tax rules relating to CERs are to be repealed from the date that the Solvency II capital requirements come into force for general insurance companies.

      CERs are used to smooth the results of certain lines of general insurance business for regulatory purposes.  General insurers and Lloyd’s insurers currently receive a tax deduction as if regulatory CERs formed part of insurance liabilities, which extends the smoothing effect to taxable profits. Under the Solvency II Directive, expected to apply to companies from 1 January 2014, there will be no regulatory requirement for CERs. This change means that an amount equal to the CERs at that date for which relief has been obtained will fall into taxable profits. This amount will be taxed in equal amounts over a six-year period, although insurers can elect to tax the remaining balance in any year during the transitional period.

      This change has been subject to extensive consultation with the industry and others in which EY played a full and active part. As the six-year transitional period passes, general insurance business taxable profits may become more volatile in response to movements in best estimate liabilities for future claims.


  • Life insurance: qualifying policies
    From 6 April 2013 there will be a limit of £3,600 per annum on the amount which can be invested by an individual in qualifying life assurance policies.

      Qualifying life assurance policies have the benefit that gains on death, maturity or surrender do not attract tax at the higher or additional rates, and tax at the basic rate is treated as having been paid by the company under the I minus E basis of life assurance taxation. They are already subject to a requirement for level regular premiums and a minimum 10-year duration unless terminated on death. The qualifying policy regime is what remains from a general exemption from tax on gains from life assurance policies which ended on 19 March 1968.

      Policies in existence before 19 March 1968 and qualifying policies from before 13 March 1984 benefit from life assurance premium relief currently at 10%. As announced at Budget 2011 legislation is being introduced in Finance Bill 2012 to abolish this relief for premiums payable on or after 6 April 2015 and actually paid before 6 July 2015.

      Although there is little evidence of the widespread use of large qualifying policies by high net worth individuals, this change needs to be seen in the context of the measures in the Budget to cap the ability of higher and additional rate taxpayers to obtain specific tax benefits and reliefs. Life assurance premium relief is now of very limited application.


  • Life assurance policies: income tax avoidance
    This change is intended to preclude avoidance of income tax on gains derived from life assurance policies by preventing the deduction of certain gains, or deferring the taxation of gains until the maturity of the last policy in a ‘cluster’ of policies.

      The regime for taxing gains from life assurance policies provides that the amount of a gain that may be liable to income tax is the difference between the value of benefits paid from a policy and the total of premiums paid into the policy and certain gains arising earlier in the life of a policy. There is currently no requirement under these rules that the earlier gains must be included in the total income of a person liable to any tax under the chargeable event gain regime.

      The changes in Finance Bill 2012 will provide that, when calculating the amount of a chargeable event gain under a life insurance policy, a deduction for earlier gains will only be allowed to the extent that the earlier gains were themselves chargeable. They also aggregate 'cluster policy' arrangements which would otherwise defer any income tax until the final policy in the cluster comes to an end. The changes will apply to policies issued on or after 21 March 2012, and to certain existing policies.

      One reason why gains might not have been taxed is that the policyholder was non-resident. The Government will, therefore, also consult on reform in Finance Bill 2013 of the rules in the chargeable event gains regime that reflect a policyholder's period of residence outside the UK.

      This legislation is designed to counter disclosed avoidance schemes. It fits into the wider context of increasing the tax take from potentially wealthy individuals able to invest in specific types of life assurance policy.


  • Oil and gas: field allowances
    A package of measures relating to field allowances were announced in the Budget.

      A new category of field allowance will be introduced through secondary legislation. This allowance will apply to certain large, deep water developments and is targeted at the West of Shetland.

      The Government has also announced that it will double the existing small field allowance to £150m and increase the size of fields that qualify for such allowances to 6.25m tonnes with a taper to no allowance at 7m tonnes.

      In addition, the Government will bring forward legislation in this year's Finance Bill which will give it the power to introduce field allowances for existing fields - in essence a brown field allowance. It will continue to engage with industry on the precise nature of that new allowance ensuring that it does not incur cost in providing incentives to investment which would have occurred in any case.

      Finally, the Government has indicated that it will continue to consider potential changes to the existing High Pressure High Temperature field allowance.

      Following last year's Budget which saw the unexpected and unwelcome increase in the supplementary charge, the outcome of these changes led to Industry increasing its lobbying effort for further field allowances or other incentives for prospects that had become commercially marginal as a result of the tax increase. It is encouraging to see this work has borne fruit and these measures will be very welcome by the oil and gas industry.


  • Oil and gas: decommissioning security
    The Government announced today that it intends to bring forward legislation in Finance Bill 2013 which will give it statutory authority to sign contracts with companies operating in the UK and the UK Continental Shelf.  The purpose of such contracts will be to create further assurance on the tax relief that companies will receive on decommissioning.  There will be a period of consultation on the precise form of such contracts.

      This measure should be very advantageous to the oil and gas industry and should result in companies being willing to accept the provision of decommissioning security on a post-tax rather than a pre-tax basis, thus freeing up funds that can be put to more profitable use through further investment.  Whilst the Finance Bill published in December last year does contain the decommissioning cap legislation which the Government promised in last year's Budget, the Government has indicated that it will also take the opportunity to align such restrictions with the loss carry back rules. The latter alignment will be beneficial to the industry.


  • Real Estate Investment Trusts (REITs): further consultation
    The Government will consult this summer on further changes to the REIT regime.

      The Chancellor announced that the consultations will focus on:

      • the introduction of social housing REITs and
      • enabling REITs to hold shares in other REITs tax-efficiently.

      Next week’s Finance Bill 2012 will also provide final clarity on the changes to be implemented to encourage investment in and the creation of new REITs.

      We welcome further positive announcements on improving the UK REIT regime and the continued development of what we hope will become a world-leading regime. The changes demonstrate the Government’s commitment to improving the attractiveness of the UK for inward investment from overseas pension and sovereign wealth funds and its commitment to increase the supply of affordable homes for rent.

      We are disappointed, however that both mortgage and residential REITs have been excluded from the 2012 consultation process. However, early discussions with HM Treasury officials have confirmed that mortgage REITs are not entirely off the agenda and could be the subject of consultation in 2013.


  • Asset backed pension contributions
    Further provisions will be introduced in relation to asset backed pension contributions. These will be effective from 21 March 2012 and follow the changes announced on 29 November 2011 and 22 February 2012 which were designed to prevent excessive relief for such contributions.

      The further provisions include the following changes:

      • Provisions to recover relief where an employing entity ceases to be chargeable to tax following the implementation of asset backed pension contribution arrangements.
      • Related amendments to the Structured Finance Arrangements (SFA) rules (in part 13 of ITA 2007 and Part 16 of CTA 2010) to:
        • clarify that arrangements can fall within the SFA rules even when entitlement of parties to an arrangement contains an element of conditionality,
        • prevent a timing advantage where a transferor or connected person disposes of an asset to a partnership which it is a member of.

      HMRC’s stated desire for tax simplification will not be helped by having the third iteration of complex legislation in less than three months with two sets of transitional provisions.


  • Anti-avoidance – leasing of plant or machinery and sale of lessor companies
    Additional anti-avoidance provisions have been introduced which affect certain leasing arrangements.

      Disposal values of long funding leases

      Under the current legislation, a lessee of plant or machinery under a long funding lease is entitled to claim capital allowances and is required to bring in a disposal value at the end of the lease according to a specified formula.

      Amendments to previous legislation have been made to ensure that all amounts in connection with the relevant lease are brought into account so that the total relief claimed is not greater than the capital expenditure incurred.

      Sale of lessor companies

      Under current legislation, a charge to tax occurs where there is a change in ownership of a lessor company. On 21 March 2012, a new ‘trigger’ event has been introduced for situations when a company comes within the tonnage tax provisions.

      Additional changes also prevent losses being carried back following a change of ownership and set off against income arising under the sale of lessor provisions. 

      These are examples of anti-avoidance provisions being tightened to ensure they achieve their stated intention.


  • Other anti-avoidance initiatives
    In addition to the proposed GAAR, the rolling review of ‘high risk’ areas continues.  This process introduces an element of consultation in the drafting of anti-abuse rules which has even led to suggested initiatives being abandoned, notably the TAAR for tax treaties.  Areas for review with a view to legislation in FA 2013, with the aim of simultaneously simplifying the legislation and limiting opportunities for abuse, include the taxation treatment of manufactured dividends and of unauthorised unit trusts.

      A less welcome development has been the proposal, originally announced at the end of February, to include a retrospective element in anti-abuse rules designed to prevent groups buying back their own debt in the market at a discount to par without being taxed on the resulting profit.

      Further measures are mentioned in the Budget documents, some reflecting earlier announcements, in respect of a range of disparate matters including:

      • asset-backed employer pension contributions
      • companies obtaining credit for tax that has not been suffered in economic terms on investment in AIFs (authorised investment funds)
      • property business loss relief for certain agricultural expenses
      • diversion of taxable income to companies (taxed at a lower rate than individuals) by corporate settler-interested trusts
      • site-restoration payments, and
      • a TAAR relating to post-cessation trading or property business reliefs. 

  • Disclosure of tax avoidance schemes (DOTAS)
    The Government has announced a formal consultation this summer on an extension to the existing DOTAS ‘hallmarks’, with a view to publishing draft regulations later in the year.

      Broadly, any arrangement which involves income tax, CGT or corporation tax is required to be disclosed to HMRC under the DOTAS rules where it falls within the circumstances set out in one or more hallmarks. The Government is concerned that certain arrangements do not currently require disclosure because they do not fall within an existing hallmark. It is therefore proposing to extend the hallmarks to deal with these.

      HMRC consulted informally with interested parties in summer 2011 in relation to extending the existing hallmarks. At that time, it was noted that it was important that the scope of any proposals in this regard should be clearly defined in order to avoid unnecessary disclosures to HMRC, and we await the formal consultation document with interest.


  • Introduction of 7% SDLT rate for residential properties worth over £2m
    A new SDLT rate of 7% will be introduced for purchases of residential properties where the chargeable consideration exceeds £2m. The new rate will apply to transactions where the effective date is on or after 22 March 2012, subject to transitional rules in respect of certain contracts entered into before this date.

      Before the Budget, the highest SDLT rate was 5% for residential properties worth over £1m. 

      The introduction of an increased SDLT rate for high value residential properties is not a surprise as the Government has been open in its desire to make the wealthy pay what it considers to be their fair share when it comes to SDLT. However, raising the top rate of tax is in sharp contrast to many other European countries, including Ireland, where property transfer tax rates have been cut significantly in the last few years. Given that there are currently around 3,000 transactions a year in the UK involving residential properties worth over £2m, the increase in tax take for the Government is unlikely to be material.  


  • SDLT on the enveloping of high value residential properties

      A higher rate of SDLT will apply on certain acquisitions of high-value residential property. The rate of tax will be 15% and the charge will apply where:

      • The chargeable consideration exceeds £2m, and
      • the persons acquiring the property are certain non-natural persons.

      Initially ‘non-natural’ person will include companies, collective investment schemes and partnerships which include a company as a partner. Although in certain circumstances property developer companies, property development partnerships and corporate trustees will be excluded, there will be power for the definition to be amended by Statutory Instrument.

      This will have effect for any transaction where the effective date is on or after 21 March 2012, subject to transitional rules in respect of certain agreements entered into before this date.

      In addition to this 15% ‘entry charge’, HMRC will consult in the coming months on introducing an annual charge on residential properties which continue to be owned by non-natural persons.

      These measures are being introduced in order to tackle perceived avoidance in this area and are designed to be a disincentive to residential property being held in complex ownership structures. Certain types of residential property, such as halls of residence and care homes, will be excluded from the higher rate charge by virtue of the fact that they are currently excluded from the definition of residential property. Certain other types of residential property, which would otherwise be caught, will be specifically excluded from the charge (this will include accommodation for students or the armed forces).

      The effective date of a transaction will normally be the date of completion but may be earlier in certain situations.

      Although it is unclear what the annual rate of tax would be, any annual charge would not come into effect until April 2013.

      The SDLT charge on residential property held by companies and other non-natural persons would appear to be a ‘mansion tax’ by another name. It is difficult to get property into such structures without triggering SDLT in the normal way when the property is initially put into the structure. In most cases, the structures are put in place simply to provide anonymity for the individual and/or for local inheritance law purposes. Where the structure has been put in place solely for the purposes of avoidance of SDLT, the structure is likely to be held in an offshore vehicle which may mean that there are difficulties in practice for HMRC to enforce the SDLT.

      Changes have also been made to the existing partnership rules to align these with the new provisions. There is, however, a sting in the tail for property developer companies and property development partnerships as the carve-out (which would otherwise apply) will not apply unless the business has been carried on for at least the last two years prior to the property in question being acquired.

      The annual charge would seem to introduce a land levy by the back door.


  • SDLT avoidance for certain sub-sale schemes
    A specific amendment will be made to the sub-sale provisions to ensure that sub-sales involving the grant or an assignment of an option to purchase land will not benefit from sub-sale relief. This change will apply to transactions with an effective date on or after 21 March 2012.

      A consultation document will also be published in the coming months on sub-sale relief generally. 

      Where a person agrees to onwardly sell or transfer an interest in land before they have either completed or substantially performed the agreement, the current sub-sale rules broadly remove the intermediate purchaser(s) from the charge to SDLT and ensure that only the end purchaser is subject to SDLT. The draft legislation which has been published ensures that sub-sales involving the grant or an assignment of an option to purchase land will not benefit from sub-sale relief.

      The measure introduced is targeted at one particular situation that the Government has identified as avoidance. Although it is hard to argue against the introduction of anti-avoidance measures, we trust that the Government will continue to recognise the value of sub-sale relief more generally, particularly for the off-plan property sector.  Any moves to scrap the relief entirely could badly impact what remains a fragile property market.


  • Sundry Stamp Duty Land Tax (SDLT) announcements
    There will be informal consultation on simplifying the SDLT rules that apply to certain leases.

      The SDLT relief for purchases by certain NHS bodies will be re-enacted. This measure will take effect from the date of Royal Assent to the Finance Bill.

      The re-enactment and updating of the SDLT relief for purchases by certain NHS bodies merely ensures that the relief applies to all the new NHS bodies which have been established.

      Given the complex SDLT rules which apply to leases, it is disappointing that any consultation will only be informal and that it will be limited to lease arrangements that involve an abnormal rent increase, the substantial performance of an agreement for lease or a lease that continues after a fixed term. 


  • Information powers
    Following consultation in 2011, changes will be made to HMRC’s information powers to reflect international standards for transparency and exchange of information. The draft legislation is in Finance Bill 2012.

      The draft legislation will extend HMRC’s information powers in Sch 36 FA 2008 in respect of taxpayers for whom it holds identifying information but not full identity details. The new power, which will be available to check UK taxes as well as for exchange of information with overseas tax authorities, will allow HMRC to obtain the name, last known address and/or date of birth (in the case of an individual) of taxpayers for whom it holds identifying information. To comply with international standards, the new power will apply without HMRC having to show that a serious loss of tax is suspected. Unlike existing powers to obtain information about persons whose identity is known, the new power will not require HMRC to obtain the approval of the tribunal.

      The need for HMRC to amend its information powers to bring these into line with international standards is accepted. It remains a concern that this provision, if enacted in its present form, would introduce the new power without a requirement for tribunal approval which applies to HMRC’s comparable existing powers.


  • Dishonest tax agents
    Following consultation it was announced that from 1 April 2013 HMRC will have powers to charge civil penalties, ‘name and shame’ and access the working papers of dishonest tax agents.

      The draft legislation included in Finance Bill 2012 provides for HMRC to make a determination that an individual is engaging in or has engaged in dishonest conduct, to be known as a conduct notice. This power applies in relation to tax agents, defined as including any individual who, in the course of business, directly or indirectly assists other persons with their tax affairs. The individual concerned may appeal against the conduct notice, but once a conduct notice has been issued, it will be a criminal offence for documents relevant to that notice to be concealed or destroyed. With the permission of the tribunal, HMRC may also follow up a conduct notice by requiring access to the tax agent’s files. Such access requests do not need to identify the clients of the agent in respect of which the conduct notice has been issued. The legislation also provides for penalties of between £5,000 and £50,000 for a tax agent who engages in dishonest behaviour, and allows HMRC to publish details on its website of dishonest agents subject to a penalty. There is a power for Treasury to make regulations which are consequential on the new powers.

      Action against dishonesty in the tax system is to be encouraged wherever that arises, although care needs to be taken to ensure that the measures are well targeted and that neither innocent parties (including those where there is a suspicion which proves on investigation to be unfounded) nor an individual’s colleagues, employees and clients suffer unwarranted reputational damage which could ruin their career and livelihood.


  • Criminal investigations powers
    It has been announced that HMRC’s powers under the Proceeds of Crime Act 2002 (POCA) will be aligned across all of the taxes for which it is responsible. The intention is to introduce legislation in Finance Bill 2013.

      HMRC officers undertaking criminal investigations into matters relating to indirect taxes and duties currently have powers under POCA to seize suspected criminal cash and to exercise search and seizure warrants. The new legislation will provide the same power in respect of direct tax and tax credits criminal investigations.   

      HMRC requires adequate powers to tackle criminal behaviour in the tax system. In appropriate cases, the ability to search premises and seize suspected criminal cash and assets is an important element of these powers. The alignment should ensure identical powers for all types of criminal investigation across HMRC.


  • Simplification of regulatory penalties
    The Government has decided not to press ahead with the simplification of regulatory penalties on the grounds that the potential benefits do not justify the cost. This decision follows a consultation exercise launched in January 2011.

      HMRC is responsible for a wide range of taxes and for the various penalties which can be charged if obligations are not met under them. The term ‘regulatory penalties’ is often applied to penalties that can be charged for the failure to meet a basic obligation. Often there will be no impact on the tax liability as a result of this failure, but there may be an impact on the administration of a regime. HMRC consulted in 2011 to replace approximately 250 penalties across 30 pieces of primary legislation with a simplified regime.

      We welcome any measure which could potentially simplify the very complex UK tax code so it is disappointing that HMRC will not proceed with the simplification process. That said, there were numerous technical and practical difficulties to overcome and we understand why a decision has been taken not to proceed on a cost / benefit basis.


  • PAYE late payment and filing penalties
    HMRC will issue a consultation shortly on the design of a late payment and filing penalty regime as part of Real Time Information (RTI), a new system designed to improve the operation of PAYE.

      HMRC has already issued a number of consultations on the introduction of RTI which will require employers to tell HMRC about tax, NICs and other deductions before payments are made to employees.  The system will require electronic filing of information and HMRC aims to ensure that all employers and pension providers will have joined the RTI system by October 2013.  The intention is that appropriate adjustments can be made in real time so that employees pay the correct amount tax and NIC, rather than wait until after the end of the tax year when employers submit end of year returns for HMRC to adjust the tax code. RTI will be supported by an appropriate penalty regime to encourage employers to submit information and to pay tax and NICs over to HMRC on time.

      As with any tax system operated by HMRC, we had expected legislation to be introduced to provide for penalties.  We anticipate that these will closely mirror the late filing and payment penalty regimes for other taxes and we will await the consultation exercise with interest.  As RTI relies on electronic filing, we would be particularly keen to see appropriate transition measures so that employers are given an appropriate amount of time for RTI to bed in before they are penalised for minor and technical breaches.


  • Withdrawing a notice to file a self assessment tax return
    HMRC will consult later in 2012 o
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