Budget Alert 2013: Corporate Tax
This section looks at the main changes to corporate tax law announced in the Chancellor's Budget.
- Corporation tax rate and bank levy
The main rate of corporation tax will be reduced by a further 1% in April 2015 down to 20%, with the result that the main rate will equal the small profits rate. For banks, this reduction will be offset by an increase in the bank levy to 0.142% from 1 January 2014.
Following a series of reductions to the main rate of corporation tax, the Chancellor announced the much-anticipated further step down to 20%. This announcement was made in the context of reinforcing the message that ‘Britain is open for business’ and, based on data in the Budget Report, would make the UK’s main rate the lowest in the G20 (alongside Russia, Turkey and Saudi Arabia). This move also aligns the main and small profits rates of tax which simplifies the tax system by eliminating the complexities of marginal relief.
On the other hand, this cut will not be passed on to the banks as there will be a corresponding increase in the bank levy, which will rise once again to 0.142% (compared to 0.075% when originally introduced). The Chancellor reiterated that this sits in the context of ensuring that the banks contribute their fair share.
The reduction in the corporation tax main rate to 20% is welcome and reiterates the Government’s objective of making the UK one of the most competitive tax systems. We would not expect any further reductions now that the main and small profits rates will be harmonised. As the changes are intended to be put into Finance Bill 2013, we would expect the revised rates to be substantively enacted by late June/July.
- Tax avoidance and Government procurement
The Government has announced significant changes to the proposals for potential suppliers to the Government to certify, as part of the procurement process, that they have not been involved in certain tax avoidance arrangements.
For contracts over £5mn advertised from 1 April 2013, bidders will be required to self certify that they have not had an ‘occasion of non-compliance’ in the relevant period. The potential cost of not being able to certify is exclusion from the bidding process, although mitigating circumstances (such as changes to prevent further occurrences happening) can be taken into account.
An occasion of non-compliance occurs when an amendment is made to a tax return as a consequence of HMRC successfully challenging a taxpayer by reference to the General Anti-Abuse Rule (GAAR) or the Halifax principle. In a significant change from the original proposal, an amendment due to a Targeted Anti-Avoidance Rule will no longer need to be considered.
Non-compliance also occurs if a tax return is found to be incorrect because of the failure of a transaction which was, or should have been, notified under the Disclosure of Tax Avoidance Scheme (DOTAS) rules, or the supplier’s tax affairs have given rise to a conviction for tax related offences or to a penalty for civil fraud or evasion.
In a further change from the original proposal, only amendments made after 1 April 2013 in relation to returns submitted after 1 October 2012 will need to be considered by the certifying bidder. Going forward bidders will need to look back six years for occasions of non-compliance but never before these commencement dates.
There was significant concern with the original proposals that it might be necessary to consider every company in the group when making the certification. These concerns have been listened to and certification will now only be required in respect of the ‘economic operator’ who will fulfill the contract, as defined in the Public Contracts Regulations 2006.
Foreign economic operators bidding will be required to self-certify their tax compliance against the equivalent tax rules in their territory. This raises concerns as to what is an ‘equivalent tax rule’. In particular, the proposed UK GAAR is intentionally narrower in scope than that found in many territories.
The original proposals imposed a significant compliance burden on groups and we welcome the changes proposed. There are still areas that need clarifying but, given that the rules will apply from 1 April 2013, companies will need to consider now how they are likely to be impacted by these proposals and what steps they need to take in the future to comply with the rules.
- Research and development above the line tax credit
It has been announced that the proposed above the line (ATL) tax research and development credit rate (R&D) will be increased to 10% instead of the previously announced 9.1%.
The increase to the proposed R&D ATL credit rate is in response to comments received by Treasury throughout the R&D consultation process. The ATL regime can be opted into by companies from April 2013 and will fully replace the existing super deduction regime from April 2016.
The increase in the ATL rate continues to ensure that the incentive remains attractive for large companies. Combined with the 20% corporation tax rate from 2015, the full benefit of R&D tax relief becomes 8%. This is welcome news and sends a strong message regarding the commitment of the Government to encouraging innovation within the UK. The R&D scheme is essential as a way forward for the UK to remain competitive in a global market and reiterates that the UK is open for business.
- Capital allowances: summary of changes
In addition to the capital allowances amendments announced in last year’s Autumn Statement, some further amendments have been made.
• Enhanced Capital Allowances (ECAs) – the first year tax credit for loss-making companies investing in energy-saving or environmentally beneficial technologies has been extended to 31 March 2018. In addition, the schemes will be updated in summer 2013 (adding two new technologies, removing four sub-technologies and changing various qualification criteria)
• Northern Ireland –- where expenditure qualifies for both ECAs and Renewable Heat Incentives (RHIs), the taxpayer will not be able to claim ECAs. This brings Northern Ireland into line with the rest of the UK from April 2013
• Railway assets and ships – the general exclusion from claiming First Year Allowances (FYAs) from April 2013 will be removed
• Low emission vehicles – the 100% FYA will be extended by three years to 31 March 2018. The CO2 emission threshold will be reduced from April 2015 from 95g/km to 75g/km
• The FYA for gas refuelling equipment will also be extended by three years to 31 March 2018
• Finance Bill 2013 will introduce legislation to ensure beneficial capital allowance treatment for lessors of cars to the disabled
After significant changes to the capital allowances regime in recent years, including the abolition of industrial buildings allowances, the introduction of integral features allowances and mandatory pooling of fixtures, there have been comparatively few changes this year. Of all the above measures, the previously announced increase in the AIA to £250,000 is most notable. This will have a positive impact on all tax-paying businesses that invest more than £25,000 on plant and machinery.
- Deferring payment of exit charges
The ability of companies to opt for deferred payment arrangements in respect of exit charges is to be extended in scope. However, no change is proposed to the underlying deferral mechanism.
Legislation is to be introduced in Finance Bill 2013 to allow companies which cease to be UK resident and subsequently become resident in another EU/EEA Member State to elect to defer the payment of certain corporation tax charges, subject to conditions, in accordance with recent case law of the Court of Justice of the European Union (CJEU). The legislation is to be effective from 11 December 2012 (and not 20 March 2013 as suggested in the Budget TIIN). The scope of the proposals of 11 December 2012 is to be expanded to include the corporation tax attributable to the revaluation of trading stock. It is also now proposed that UK permanent establishments of non-resident companies incorporated elsewhere in the EU or EEA will be able to defer payment of corporation tax attributable to unrealised gains on assets which cease to be held for the purposes of a UK trade. There are no proposed amendments to the terms of the deferral. In particular, under the proposed realisation method, tax may only be deferred for a maximum of 10 years or until the asset is disposed, whichever is the earlier.
The expansion of the deferral relief may be welcome in particular circumstances. However, the terms on which deferral of tax can be obtained mean that companies may wish to explore reliefs from the exit charge, ahead of relying on the deferral relief. It is possible that the terms of the deferral / relief may be impacted by future decisions of the CJEU but any change is unlikely to be imminent.
- Foreign currency chargeable gains
Where a company uses a non-sterling functional or designated currency, it must calculate chargeable gains on a disposal of shares, ships or aircraft in that currency.
Normally, chargeable gains computations must be carried out in sterling. For companies that do not prepare accounts in sterling, this can cause gains to crystallise simply as a result of fluctuations in the sterling exchange rate even though the company has not made any economic foreign exchange gain.
Following a consultation in 2012, the draft Finance Bill published in December 2012 contained a new rule that means a company that has a functional or designated currency other than sterling must calculate chargeable gains on a disposal of shares in that currency. The Government has confirmed that the rule will be included in Finance Bill 2013 and also extended to include ships and aircraft as well as shares.
It is good news that the new rule has been extended. The change should be especially welcome as a way to simplify the chargeable gains computation for non-sterling companies which dispose of assets for which the foreign exchange risk has been hedged through an issue of debt.
- Employee share acquisition: corporation tax deductions
New legislation, to be included in Finance Bill 2013, clarifies the rules regarding the availability of corporation tax deductions for employee share acquisitions so that relief is given only under Part 12 CTA 2009. This has effect for accounting periods ending on or after 20 March 2013.
The main rules providing corporation tax relief for the granting of share options or awarding shares are in Part 12 CTA 2009 (‘Other Relief for Employee Share Acquisitions’). The new legislation will mean that companies cannot claim any corporation tax deductions as regards employee shares or share options, other than the relief under Part 12 CTA 2009 where this is available. In addition, no corporation tax deductions will be available unless shares are acquired pursuant to the employee share option. There are circumstances specified where these rules would not apply.
This is a not unexpected change to ensure that the corporation tax relief on the granting of shares or share options is linked to the amount chargeable to income tax on the employee.
- Support for the visual effects industry
The Chancellor has announced that the Government will build on the new tax reforms for the creative sector with further support for the visual effects industry.
At Budget 2012 it was announced that the Government would introduce tax reliefs for the creative sector and these are to be introduced for the animation, high-end television and video games industries from April 2013 (depending on State Aid approval from the European Commission). In addition to this, the Government is now to consult on how further support can be provided to the visual effects industry through the tax system. This will happen alongside new and increased investment funding.
Further support via the tax system for this industry is a welcome initiative towards making the UK a technology hub. It remains to be seen what the proposals in the consultation will be.
- Loss buying rules
The Government proposes to close what it sees as two loopholes which provide opportunities for companies to avoid the consequences of the loss buying rules.
The proposed amendments will have effect from 20 March 2013. The first amendment is to extend the current ‘loss buying’ rules in Part 14 of Corporation Tax Act 2010 to apply to transfers of ownership of a shell company (i.e. a company not carrying on a trade, investment business or UK property business) that has non-trading loan relationship debits or deficits and/or non-trading losses on intangible fixed assets.
The second amendment is to ensure that trading losses are restricted if there is a change of ownership of a company (X) carrying on a trade followed by a transfer of that trade, or part of that trade, to a fellow group company (Y). In its accompanying Technical Note of 20 March 2013, HMRC concedes that the operation of the existing provisions is such that the intended loss restriction does not apply where there is a change in the nature or conduct of the trade when carried out by the group company Y. The amendment is intended to ensure that the three-year window to consider whether the trade has changed will now include consideration of the trade in Company Y even though there has not actually been a change in the ownership of Company Y, as well as removing the provision that previously deemed the loss in question to have been incurred by the successor company, thereby preventing the loss restriction rules from applying.
The proposals address what HMRC sees as loss buying but the amendment in respect of the subsequent group transfer of trade does introduce a potential pitfall for the unwary in commercial transactions where a business is acquired and then integrated into the existing group structure.
- Targeted loss buying rules for unrealised losses
Three changes are proposed to address the buying of unrealised tax losses. The first change extends the rules governing tax-motivated capital allowances buying while two new targeted anti-avoidance rules (TAARs) are to be introduced where there has been a change in ownership: a Deduction Transfer TAAR and a Profit Transfer TAAR.
Rules already exist to target the sale by businesses of capital allowances which they could not themselves use. Those rules address arrangements which are entered into for a main purpose of allowing another person to access those allowances. The rules are now to be extended to catch all types of allowances rather than just those taken into account in calculating trading profits. The rules will apply where the amount of the relevant excess of allowances is £50mn or more (whether or not the ‘qualifying change’ in ownership has an unallowable purpose); or the amount of the relevant excess of allowance is £2mn or more but less than £50mn and is not an insignificant benefit in the context of the transaction (whether or not the ‘qualifying change’ has an unallowable purpose); or the amount is less than £2mn and the ‘qualifying change’ has an unallowable purpose. A Technical Consultation Document will be released on 28 March along with the draft legislation.
The two TAARs to be introduced will contain an unlimited purposive test. The Deduction Transfer TAAR will apply where there has been a ‘qualifying change’ in ownership and seeks to deny claims for group relief and relief for trading losses against total profits, in respect of certain types of deductible amounts. Those amounts are ones which, at the date of the qualifying change, can be regarded as highly likely to arise as deductions for an accounting period ending on or after that date. The TAAR only applies where the purpose or one of the main purposes of arrangements connected to the qualifying change is to claim relief for such deductions. The Profit Transfer TAAR tackles the transfer of profits to a company where the purpose, or one of the main purposes, of the transfer is to utilise deductible amounts. The TAAR denies relief for deductible amounts claimed in any accounting period ending on or after the qualifying change. In this respect, the ‘Profit Transfer TAAR’ differs from the ‘Deduction Transfer TAAR’ which merely restricts the use of the relief in certain circumstances and allows losses to be carried forward.
There are a number of different provisions addressing the issue of tax loss buying, with a number of different tests needing to be considered. These changes add to the tests which a taxpayer needs to consider, even before considering whether the GAAR might be relevant.
- Loss buying rules: interaction with CFC rules
The rules governing amounts which can be surrendered as group relief are to be amended so as to close an arrangement designed to accelerate the use of tax losses.
Legislation is to be introduced in Finance Bill 2013, effective for group relief surrender periods ending on or after 20 March 2013. Under s105 CTA 2010, the following four categories of losses can only be surrendered if, together, they exceed the surrendering company’s ‘gross profits’ for a surrender period. These four categories are amounts allowable as qualifying deductions; a UK property business loss; management expenses; and a non-trading loss on intangible fixed assets.
Controlled foreign company (CFC) apportioned profits are taxed on the UK company as an amount equivalent to corporation tax. At present, no amount in respect of the CFC apportioned profits is currently included within the calculation of ‘gross profits’ and therefore they do not impact on the restriction in s105 above. Section 105 is to be amended so that chargeable profits of a CFC which are apportioned to a surrendering company are included in the threshold which the above four categories must exceed before group relief is available.
The proposal is an anti-avoidance measure which should ensure that the legislation operates in the way it was intended to.
- Review of loan relationships and derivative contracts
The Government has announced it will shortly consult on reforming the corporation tax rules for loan relationships and derivative contracts.
The tax rules on loan relationships were first enacted in 1996 while the derivative contracts rules date from 2002. Both sets of rules work reasonably well, but they have become increasingly complicated as they have been amended to tackle apparent avoidance ‘schemes’ and to reflect changes to accounting standards.
Although these rules were rewritten with the rest of the corporation tax code in 2009, there is still plenty of scope for simplification. Any new legislation will be included in the Finance Bills of 2014 and 2015. This timetable should allow for a proper consultation with stakeholders on any changes that the Government may propose.
- Banks’ Additional Tier One Capital to be deductible
The Government has announced that it will enact secondary legislation to ensure that interest will be deductible on all current and future issues of debt instruments that qualify as Additional Tier One (AT1) under the new Capital Requirements Directive (CRD IV).
In the aftermath of the financial crisis, the international community and the EU have formulated new rules designed to make banks safer. Under these rules, banks need to raise more capital from the markets and the instruments that they can issue need to have more equity-like features, to prevent capital being withdrawn easily in the event of a financial crisis. This protects depositors and taxpayers.
The progress of CRD IV and associated regulations through the European legislative process has been much delayed, but implementation is now expected with effect from 1 January 2014. CRD IV permits banks to issue AT1 capital which may be debt in legal form, but with tough conditions of subordination, permanence and cancellable coupons.
Under normal corporation tax rules, these features would raise questions as to whether or not the coupons are deductible as debt interest. However, following a rule announced in November to make all Tier Two capital deductible, the Government has now announced that, once CRD IV is implemented, a rule will be enacted to ensure that all existing and future AT1 debt instruments will be deductible as well.
This is welcome news. In our experience, with care, it is already possible to structure AT1 instruments so that coupons are tax-deductible. However, now that any uncertainty regarding these instruments has been resolved, this favourable tax treatment may play a role in making AT1 debt instruments an important part of the capital structure for many banks operating in the UK.
- Banking Code of Practice
The Government has announced that it intends to introduce legislation in Finance Bill 2014 to provide for HMRC to publish an annual report, from 2015, on the operation of the Code of Practice on Taxation for Banks.
The Banking Code of Practice was launched in 2009 and, since then, HMRC claims that 225 banks have adopted the Code. The code has not previously been underpinned by legislation and operates well on a purely voluntary basis, with the details of its operation discussed between the taxpayer and HMRC. The only detail provided on the contents of the proposed annual report is HMRC's intention to name any bank which it does not consider to be complying with the Code. It is unclear whether this includes banks which have not adopted the Code. The Governance Protocol published by HMRC in March 2012 suggested that banks should take responsibility for making public any breach of the Code, but it would now appear HMRC has decided to assume this responsibility itself.
The Government has promised a consultation period before legislating in Finance Bill 2014 so that banks will have the opportunity to ask for more clarity on what ‘non-compliance’ actually means. Given the proposed statutory underpinning, and the fact that the interpretation of the Code is subjective, it will also be interesting to see if the consultation allows banks to be clear about the circumstances in which signing up to the code could lead to them being ‘named and shamed’ as non-compliant.
- Extension of reliefs for certain acquisitions of high value residential property
There will be an extension to the reliefs which apply to the 15% SDLT regime which relates to the acquisition by certain NNPs of higher value residential property.
A higher 15% rate of SDLT currently applies to acquisitions of residential property worth over £2mn by so called NNPs.
NNPs include companies, collective investment schemes and partnerships which include a company as a partner. NNPs are currently excluded from the 15% SDLT regime (i.e liable instead to the usual 7% SDLT rate) only where the acquisition is made by property development companies with a track record of at least two years of development activity and where the NNP in question intends to resell that property. The exemptions (to both the 15% charge and ATED) are to be extended to include:
• property development, investment rental and trading businesses (even where there is no intention to resell)
• residential properties open to the public for at least 28 days per year on a commercial basis
• residential properties held for employee accommodation
• residential properties owned by a charity and held for charitable purposes
• working farmhouses
• diplomatic properties, and
• some other publicly-owned residential properties
This will have effect for acquisitions where the effective date is on or after Royal Assent to the Finance Act.
Although we welcome the fact that the Government has listened to the views and concerns expressed during the consultation process and largely limited the 15% SDLT regime and ATED to residential property used for personal use and occupation, the rules remain extremely complex and will impose additional compliance burdens on businesses. We are also disappointed that the extension of the reliefs from the 15% SDLT regime will not come into effect until Royal Assent (unlike the ATED exemptions). In reality, this is likely to mean that many deals will simply be delayed until the new SDLT reliefs come into effect.
- Stamp Duty Land Tax: The annual tax on enveloped dwellings
There will be a new charge, known as the annual tax on enveloped dwellings (ATED), which will come into effect from 1 April 2013.
This measure was originally announced in Budget 2012 as the Annual Charge (later renamed Annual Residential Property Tax) as part of a package of measures designed to combat perceived Stamp Duty Land Tax (SDLT) avoidance. ATED will broadly apply to residential properties owned by certain non-natural persons (NNPs). The definition of a NNP is to be aligned with the special 15% SDLT regime and includes companies, collective investment schemes and partnerships which include a company as a partner. However, certain exemptions will apply (and these are dealt with in more detail below).
ATED will be a flat tax charge based on the market value of the property (normally) on acquisition. The tax charged will depend on what band the property falls within (as follows):
Residential Property Value ATED Charge (£) Over £2mn, not exceeding £5mn 15,000 Over £5mn, not exceeding £10mn 35,000 Over £10mn, not exceeding £20mn 70,000 Over £20 mn 140,000
The annual charge will be increased by CPI inflation each year. However, there is currently no intention that the charging bands will similarly be indexed: over time this will result in significant fiscal drag.
Although the tax will apply from 1 April 2013 returns will not be required until 1 October 2013, with payment being required by 31 October 2013 (subsequent year returns will be required to be filed by April of the relevant year). However, it is unclear, as yet, whether relief from ATED will also be clawed back where the NNPs in question ceases to meet the criteria within a three-year period (please see below for further details).
The Government has listened to the views during consultation and largely limited ATED to residential property for personal use and occupation. However, the new tax remains extremely complex and will impose additional compliance burdens on businesses.
- Capital gains tax on high value UK residential property held by certain non-natural persons
A package of measures was announced at Budget 2012 to prevent tax avoidance through the wrapping of residential property in corporate and other ‘envelopes’, one of which is the imposition of capital gains tax (CGT) at 28% on any gain on disposal of such a property.
Draft legislation was published on 31 January 2013 which clarified the way in which the new CGT charge in respect of high value residential property will operate. The announcement on Budget day appears to confirm the rules as previously understood, other than for the addition of two new categories of property that will be exempt from the charges.
In summary, the new CGT charge will apply to properties that are subject to the ‘annual tax on enveloped dwellings’ (ATED), which is one of the other measures in the package originally announced at Budget 2012.
Affected properties will be residential properties worth over £2mn held in NNPs, unless one of the specified reliefs apply. A NNP is a company (whether UK or non-UK resident), a partnership with one or more corporate members, or a collective investment scheme.
The reliefs will cover:
• property development, investment rental and trading businesses
• residential properties open to the public for at least 28 days per year on a commercial basis
• residential properties held for employee accommodation
• residential properties owned by a charity and held for charitable purposes
• working farmhouses
• diplomatic properties and
• some other publicly-owned residential properties
The last two reliefs are a new addition to the list.
The CGT charge will apply to disposals of high value residential properties by NNPs from 6 April 2013, and the tax rate will be 28%.
Where the property was purchased before 6 April 2013, the charge will apply only to the part of the gain that has accrued since that date, or alternatively to the proportion of the whole gain relating to the post 6 April 2013 period of ownership (the ATED-related gain). The balance of any gain (i.e. the non-ATED-related gain) will continue to be treated as at present (i.e. subject to corporation tax or CGT where the NNP is UK-resident, and generally not subject to tax on non-UK resident NNPs – though anti-avoidance provisions may apply where UK resident individuals are involved).
Any ATED-related losses will be ring-fenced and can only be deducted from ATED-related gains from the same or future tax year. In addition, only ATED-related losses can be deducted from ATED-related gains.
Tapering is also available to reduce the ‘cliff edge’ effect for properties disposed of for proceeds close to the £2mn threshold.
With the exception of the two additional reliefs and the new name for the annual tax, the Budget announcement does not add anything to the draft legislation previously published. Those potentially affected by the new rules should seek professional advice as soon as possible, given the imminent effective date.
- Changes to sub-sale/transfer of rights rules in s45 Finance Act 2003
Amendments to the so-called ‘sub-sale relief’ rules are to be made along with some retrospective changes to those rules.
Where a person (‘B’) acquires a property (from ‘A’) and agrees to sell on or to transfer an interest in that property (to ‘C’) before he himself has either completed or substantially performed, the current sub-sale rules broadly remove the intermediate purchaser(s)/B from the charge to SDLT and ensure that only the end-purchaser (C) is subject to SDLT. HMRC has been consulting on ways to change this legislation and close perceived loopholes and the existing legislation is to be amended to address various technical deficiencies in the current sub-sale provisions. These include amendments which will identify who the purchaser for SDLT purposes is. These revisions will have effect from Royal Assent to Finance Bill 2013.
In Budget 2012, the Government made it clear that it would enact retrospective legislation to deal with apparent SDLT avoidance schemes which sought to abuse perceived loopholes, in the sub-sale legislation. These changes will have retrospective effect to 21 March 2012. The schemes which will be caught will be those where the immediate purchaser/B retains possession of the property (even after the end purchaser/C has substantially performed their transaction). C typically will not complete their transaction for many years and is typically a trust (of which B is the settlor and beneficiary) or a company or another person, sometimes connected to B. The changes prevent the transaction which B enters into as being disregarded.
We understand that, in certain circumstances, sub-sale relief may be limited or restricted but trust that the Government will continue to recognise the value of sub-sale relief for many genuine commercial transactions and that any changes will only target avoidance schemes.
Notwithstanding the retrospective legislative changes, it is questionable whether the schemes being targeted achieved the desired effect. However, anybody who has implemented such a scheme on or after 21 March 2012 must report the transaction, and pay the tax, no later than 30 September 2013. Interest will be payable thereon and HMRC will consider whether a penalty should be levied for making an original incorrect return. Where the purchaser acted on proper professional advice and submitted a Veltema-style disclosure letter at the time, it may be difficult for HMRC to pursue any penalties in relation to the original return.
- Sundry SDLT changes
There will be some simplification of the SDLT rules which apply to certain leases, and disadvantaged areas relief is to be abolished.
As previously announced, the rules which apply to ‘abnormal rent increases’ will be abolished and the reporting requirements in respect of:
• leases which continue after the fixed term has expired, and
• agreements for lease which are substantially performed prior to the grant of the actual lease will be simplified.
Further, we understand that the remaining vestiges of disadvantaged areas relief are now to be abolished once and for all.
Whilst we welcome these small simplifications to the lease rules, it is unlikely that these will go far enough in addressing what will still be a complex set of rules.
- Abolition of certain stamp duty and SDRT charges
Legislation will be introduced in Finance Bill 2014 to abolish the stamp duty reserve tax charge on UK unit trusts and open-ended investment companies in Schedule 19 Finance Act 1999.
UK domiciled unit trusts and open-ended investment companies are subject to a special regime of SDRT on the dealings in their units/shares. The regime requires fund managers to perform weekly calculations and the cost is ultimately borne by the investors in the fund.
The investment management industry has long been lobbying for the abolishment of the Schedule 19 charge, arguing that it is a tax on ordinary savers, that it impedes the UK’s ability to compete as a fund domicile, and that it collects relatively small amounts of revenue.
This measure will allow UK domiciled funds to complete more effectively with funds domiciled in Dublin and Luxembourg, and will be welcomed by the UK asset management industry.
At the same time, legislation will be introduced to abolish stamp duty and SDRT on shares quoted on growth markets such as the Alternative Investment Market and the ISDX Growth Market. The Government intends that this measure will improve financing conditions for approximately 1,000 quoted UK businesses.
- 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. Beneficiaries of policies issued from that date must make a statutory declaration that the policyholder is not in breach of the limit. The insurance company must pass on details of the statutory declaration to HMRC within three months of the end of the tax year in which it was received.
Qualifying life assurance policies have the benefit that gains on death, maturity or surrender do not attract tax at the higher or additional rates. Tax at the basic rate will have 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.
This change has been the subject of consultation since Budget 2012. Policies issued between 21 March 2012 and 5 April 2013 will be subject to the change but not in respect of premiums payable before 6 April 2013.
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 to cap the ability of higher and additional rate taxpayers to obtain specific tax benefits and reliefs. There is an additional administrative burden on providers which will increase the cost of writing what should be a low cost business.
- Decommissioning: tax certainty for oil and gas investment
After a long period of engagement between the oil and gas industry (led by Oil & Gas UK and supported by us among others) and the Government, the Chancellor confirmed that oil and gas companies will be able to enter into contracts (Decommissioning Relief Deeds or DRDs) with Government later this year that will guarantee the basis on which tax relief for decommissioning will be available.
At Budget 2012, the Government first announced its intention to introduce certainty for decommissioning tax relief, with the aim of unlocking billions of pounds of additional investment in the UK Continental Shelf (UKCS). Following a period of consultation in 2012, the first draft DRD and associated legislative amendments to underpin the DRD were published in December 2012. A further period of consultation in early 2013 has refined the DRD and highlighted a number of additional legislative changes required for the DRD to operate effectively. The DRD, in what is hoped will be a near final form, will be published for comment on 28 March 2013 alongside updated Finance Bill legislation.
The Chancellor’s reaffirmation that the Government intends to sign up to DRDs with oil and gas companies later this year is a very welcome announcement.
- Shale gas
The Government has announced that it will consult on the introduction of incentives for UK shale gas exploration and production.
During 2012, the Government informally consulted on its approach to shale gas in the UK. Following these discussions, the Chancellor announced that a new field allowance will be introduced in Finance Bill 2014 for shale gas projects. The detailed parameters of the field allowance will be subject to consultation in the period before the Finance Bill is published. Additionally, the Government intends to allow Ring Fence Expenditure Supplement to be claimed for shale gas projects over 10 years, as opposed to the six years available to normal oil and gas operations. Regulations applying to shale gas will be developed before the summer of 2013, encompassing planning guidance, benefit to local communities, and the role and responsibility for the Office for Unconventional Gas and Oil.
It is encouraging to see the Government target incentives to shale gas production, particularly as the tax rates applying generally to oil and gas activity would act as a barrier to the development of a fledgling industry.
- Real Estate Investment Trusts: (REITS): ongoing consultation
The Government will consult further on whether UK and non-UK Real Estate Investment Trusts (REITs) should be treated as an institutional investor for the purpose of the UK REIT rules.
Recent changes to REIT legislation has provided for certain ‘institutional investors’ (including pension funds, life companies, and sovereign wealth funds) to be major shareholders in UK REITs. The industry had argued the case for REITs to be included in this list, but they are currently excluded.
This change, if introduced, will allow REITs to joint venture some of their largest assets with other investors and should greatly increase the attractiveness of the UK REIT regime, which is increasingly being seen as a vital holding structure for investment into UK real estate. This would be a major shot in the arm to the UK real estate sector, both in terms of existing and aspiring REITs, but also investors looking to co-invest in assets currently held by UK REITs.
- HMRC offshore evasion strategy
HMRC has published a paper called ‘No Safe Havens’ setting out its strategy for tackling tax evasion using offshore structures and bank accounts.
The paper draws together the various strands of HMRC’s ongoing and well-publicised efforts to clamp down on offshore tax evasion. It has been prepared by HMRC’s offshore evasion strategy team (OEST) which was set up with new funding announced at Autumn Statement 2012. The OEST will work alongside HMRC investigators, particularly those in its Offshore Co-ordination Unit (OCU), to implement the new strategy. It has three key objectives:
1. To reduce the opportunity to evade tax using offshore structures and accounts. This will be achieved through international agreements and multilateral measures which will supplement the UK Swiss Tax Cooperation Agreement, Liechtenstein Disclosure Facility and the newly announced disclosure facilities for those with assets in the Crown Dependencies – Jersey, Guernsey and the Isle of Man
2. To increase the likelihood of evaders being caught. This will involve new and updated international agreements to obtain and exchange information with other jurisdictions, the effective use of data profiling techniques by the OCU and compliance activities targeted at specific groups
3. To strengthen the severity of the punishments imposed. HMRC will seek to increase the number of criminal investigations into alleged offshore tax evasion and to publicise successful prosecutions. It will also use its new powers to charge penalties of up to 200% of the tax due and to ‘name and shame’ those found to have committed offshore tax evasion
We welcome the publication of this strategy paper. The paper does not, however, announce any specific new measures, but it is nevertheless useful in drawing together the work that HMRC is doing in this area and in setting out the way it will work to tackle offshore tax evasion in the future. Our experience has been that with some of its previous offshore initiatives, HMRC has sometimes missed opportunities to do more with the information it holds. This was often caused by operational challenges and a lack of dedicated resource. It is encouraging to see the Government address this by increasing the amount of funding available to HMRC and by introducing an over-arching strategy to support the work that its investigators are doing.
- Information powers
HMRC will introduce new legislation which will give effect to a number of international agreements to improve tax compliance. Regulations will also be issued to implement the UK-US agreement on Foreign Account Tax Compliance act (FATCA).
It has been announced that Finance Bill 2013 will include legislation to give effect to new international agreements between the UK and other jurisdictions which are intended to improve tax compliance. These agreements are part of HMRC’s efforts to tackle tax evasion through the automatic exchange of information.
Final regulations will also be issued shortly to bring into effect the Agreement to Improve Tax Compliance and to Implement FATCA. This agreement was signed by the UK and US on 12 September 2012 to increase the amount of information that is automatically exchanged by the two countries. The background to the agreement is the FATCA legislation which aims to combat tax evasion by US persons with bank accounts outside the US. FATCA places an obligation on non-US financial institutions to provide information about US account holders to the Internal Revenue Service or face a 30% withholding tax on US income. The publication of the regulations follows an HMRC consultation exercise in autumn 2012, the publication of draft regulations and guidance and a subsequent extension of the time allowed for comments to be made to HMRC.
The requirements that UK financial institutions must meet under FATCA are extensive. Measures to implement its requirements into UK law have, not surprisingly, been the subject of a formal consultation exercise and lengthy debate. We await the final regulations with interest and would urge any client affected by FATCA to ensure that they have explored all the options available to become compliant.
- Notification requirement for ‘avoidance scheme’ users
HMRC proposes to consult on a penalties-based approach to taxpayers who choose not to settle with HMRC in relation to certain tax planning arrangements (‘avoidance schemes’) which have been defeated in other taxpayers’ litigation through the courts.
HMRC’s compliance strategy update Levelling the Playing Field published today highlights recent HMRC successes in litigating ‘tax avoidance’ cases and notes that HMRC won 85% of ‘avoidance cases’ decided between April 2010 and October 2012. As part of its anti-avoidance strategy, HMRC aims to leverage its successes in litigation by taking a project management approach. This involves identifying taxpayers who have undertaken similar or connected ‘avoidance arrangements’, putting protective assessments or enquiries in place and seeking to treat all but the lead case or cases being litigated as ‘follower’ cases. This, however, presupposes that HMRC is able to identify the ‘follower’ cases and persuade the taxpayers concerned that their case is indeed comparable to a lead case being litigated. HMRC is therefore proposing to consult on a penalty-based incentive for taxpayers in this situation to settle in accordance with the ‘lead’ case decision.
The proposal suggests that taxpayers should either amend their return in accordance with the judgment or confirm that they stand by their original return, with a tax-geared penalty charged if they fail to take reasonable care. Legislation to give effect to these proposals is anticipated in Finance Bill 2014.
It is not yet clear how various elements of this proposal might work in practice. Some of the main areas of uncertainty include:
• Whether taxpayers will be expected to take the initiative in notifying HMRC of court judgments which might potentially be of relevance
• If so, whether this will apply only to arrangements, such as marketed schemes or schemes to which the DOTAS arrangements apply, where it will be clear to the taxpayer whether or not their own scheme is substantially the same as the scheme defeated in litigation
• Whether HMRC proposes to set aside or reduce current taxpayer safeguards which provide that HMRC can only extend its normal enquiry window if it makes a ‘discovery’; or making even a ‘discovery’ assessment after four years or six years unless there is carelessness or deliberate non-compliance respectively
• How tax-geared penalties for failure to take reasonable care might be applied to taxpayers’ decisions over whether or not decided tax cases are on all fours with their own tax position.
This proposal raises a number of questions as to how taxpayers are to be expected to apply a decision in someone else’s case to their own circumstances, and it is not yet clear what safeguards will be included to ensure that taxpayers making a full disclosure of what they believe to be the right tax will be protected from a liability to penalties.
- PAYE late payment and filing penalties
Following a consultation process, HMRC has amended the measure announced in Budget 2012 to introduce a new penalty process for late filing of returns and amending the ‘late payment’ and ‘inaccuracy in returns’ regimes for the Real Time Information (RTI) reporting regime for PAYE.
Under RTI, employers are required to report electronically to HMRC details of the pay and deductions made to each employee in real time (on or before the payment is made to the employee). The measure was announced in the 2012 Budget, and, since April 2012, has been phased in with almost all employers scheduled to be participating in April 2013. Following a consultation process and pilot, certain amendments have been proposed, with small amendments to the operation of RTI and, more significantly, the penalties that are to underpin the reporting process and encourage compliance.
The main proposal is that a new ‘late filing’ penalty regime for RTI is to be introduced in Finance Bill 2013. Under this regime, employers will be categorised based on the number of employees as large, medium, small or micro and the size of potential penalty for late filing will depend on which category the employer is in.
It has been announced that each PAYE scheme will now be liable to no more than one penalty per month, no matter how many returns are due in that month, with each PAYE scheme allowed one unpenalised default in a tax year. In addition, there are amendments to the penalty regimes governing late payments and inaccuracies in returns to ease the administrative burdens on both HMRC and the employer, limit the number of penalties that could be charged in a tax year and simplify the process to complement the RTI process.
The new penalty measures for late filing and payments will apply from 6 April 2014, with the change to the penalties for inaccuracies regime having effect from the date that the Finance Bill 2013 receives Royal Assent.
We welcome the measures to simplify the penalty regimes in respect of RTI reporting, and the impact that these provisions will have to limit the number of penalties that employers may incur in respect of a single PAYE scheme. These measures will ease the potential burden on employers who become liable to a penalty, whilst at the same time supporting compliance with the new RTI process.
- Data gathering from merchant acquirers
Legislation will be introduced in Finance Bill 2013 to amend the current data-gathering powers to allow HMRC to issue notices to card payment processors. This legislation will now cover all institutions that settle card payments to businesses.
The measure will provide HMRC with a power to require card payment processors to provide bulk data about business taxpayers, in order to identify those that do not declare their full sales.
Card payment processors are not explicitly specified as data-holders in Schedule 23 to Finance Act 2011 and, due to their contractual arrangements, do not fall within any other categories of data-holder specified in Schedule 23. Schedule 23 will be amended by adding a new category of data-holder. This will allow HMRC to issue a notice to card payment processors requiring them to provide data.
The measure will have effect on and after the date that Finance Bill 2013 receives Royal Assent. The Government intends to put the necessary secondary legislation in place by autumn 2013, after which HMRC will issue notices requiring data from the relevant card payment processors.
HMRC expects the data to help close the tax gap by targeting retailers and cross-checking sales declared for VAT purposes. It will be important that HMRC discusses the timing and format of the notices with those affected and that the administrative burden is manageable.