Monthly Tax Review
Matthew Hutton
A Periodic Update
for Professional Advisers
April 2008
(Copy Date 28 March 2008)
Alistair Darling’s first Budget came and went on Wednesday 12 March. The highlight has to be
what tax professionals, if not also their non-UK domiciled clients, will see as a very substantial
climb down on the draft legislation issued on 18 January, especially in relation to the capital
payments regime. To what extent it will be sufficient to stop the anticipated flight of human
capital from the UK remains to be seen: there will no doubt be a certain degree of nervousness
that Pandora’s box has been opened at all, even if not too wide to date.
One other announcement of note was the deferral by a year of the income shifting regime
proposed following last year’s HL decision in favour of the taxpayer in Jones v Garnett. It will be
interesting to see whether this does lead to some sensible consultation before enactment of a
new regime or whether alternatively, because HMRC and the professions are so far apart on
this issue, HMRC’s desires are simply left to wither on the vine: too much to hope for?
Clearly the disclosure regimes are proving their worth for HMRC, as demonstrated by the
various targeted anti-avoidance rules announced in the Budget.
What is regrettable is the vast scope of the Budget notes, some 270 pages, quite apart from
additional releases on specific issues. I pick out for coverage this month those which I consider
likely to be of most interest to MTR delegates: they make for a fairly bulky Issue, I fear.
MTR April does not cover the main Budget 2008 material already announced, eg the
transferable nil-rate band for IHT (see MTR 11/07 Item 2.1), the CGT reform in general (see
MTR 11/07 Item 1.1) and the entrepreneurs’ relief in particular (see MTR 2/08 Item 1.1).
Thursday 27 March saw publication of the Finance Bill.
April 2008
CONTENTS
1.
1.1
1.2
1.3
1.4
1.5
1.6
CAPITAL GAINS TAX
Budget 2008 – Residence and Domicile:
Aligning the CGT Treatment for Non-UK
Resident Trusts
Residence and Domicile Reform: Non-UK
Resident Trusts
Capital Gains Tax Reform – Amended FAQ
Terminating a Company: More on ESC 16
Contribution of Assets to a Partnership:
HMRC’s Practice Revised
Trustees: Tax Liability Follows Residence
2.
2.1
2.2
2.3
2.4
INHERITANCE TAX
Budget 2008: Pensions Savings and IHT
Budget 2008: Transitional Serial Interests
Excepted Transfers and Settlements
Business Property Relief: The Identification
Rules for Shares
3.
3.1
STAMP TAXES
Budget 2008: Reduction of Stamp Duty
Administrative Burden
Budget 2008: Relief for New ZeroCarbon Flats
Budget 2008: Notification Thresholds for Land
Transactions and Rate Thresholds for
Leasehold Property
Budget 2008: Anti-avoidance
Legislation
Affecting Partnerships
Budget 2008: Anti-avoidance
SDLT: Policy and Processing Organisation
within HMRC
Practitioner’s News Issue 20 – February 2008
3.2
3.3
3.4
3.5
3.6
3.7
4.
4.1
4.2
4.3
4.4
4.5
4.6
4.7
5.
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
6.
6.1
6.2
6.3
6.4
6.5
6.6
PERSONAL INCOME TAX
Budget 2008: The New Statutory Residence
Rule
Budget
2008:
UK
Resident
Non-UK
Domiciliaries - Taxation from 2008/09
Residence and Domicile Reform: HMRC’s
FAQs
Residence and Domicile Reform: Non-UK
Domiciliaries
Budget 2008: Foreign Dividends
Budget 2008: Income of Beneficiaries Under
Settlor-Interested Trusts
Budget 2008: Gift Aid – Transitional Relief
EMPLOYMENT
Budget
2008:
Enterprise
Management
Incentives (EMIs)
Beneficial Loan Arrangements – Official Rates
Expenses Payments to Employees Travelling
Outside the UK: Scale Rates
Salary Sacrifice
PAYE: Changes From April 2008
PAYE Regulations: Changes Following
Demibourne
7.
NATIONAL INSURANCE
No Items to report
8.
8.1
8.2
8.3
VAT & CUSTOMS DUTIES
Budget 2008: Various Changes
Carousel Fraud: HL Allows HMRC’s Appeal
Transfer of Going Concern Consultation
9.
9.1
COMPLIANCE
Filing Returns and Paying Tax Online: New
Deadlines
10.
10.1
ADMINISTRATION
Budget 2008: Penalties for Incorrect Returns
and Failure to Notify a Taxable Activity
Budget 2008: Compliance Checks
Budget 2008: Payment of Tax
Offshore Disclosure Facility
10.2
10.3
10.4
11.
11.1
EUROPEAN AND INTERNATIONAL
Agricultural Property Relief: The Impact of the
ECJ Decision in Jager
12.
12.1
12.2
RESIDUE
Budget 2008: Venture Capital Schemes
Budget 2008: Investment Manager Exemption
(IME)
Budget 2008: Offshore Funds –
New Tax Regime
Budget 2008: Authorised Investment Funds
Budget 2008: Double Taxation Treaty Abuse
Budget 2008: Power to Give Statutory Effect
to Existing Concessions
Chattels Valuation: HMRC’s Fiscal Forum
Tax Law Rewrite Project
UK Regional Trade Estimates for 2007
Equitable Jurisdiction and Mistakes
Letters of Wishes: The Issue of Confidentiality
Money Laundering Regulations: Registration
Deadline Extended
12.3
BUSINESS TAX
Budget 2008: Corporation Tax Rates
Budget
2008:
Research
and
Development Tax Relief
Budget 2008: Capital Allowances
Budget 2008: 100% First Year Allowances for
Expenditure on Cars with Low Carbon Dioxide
Emissions
Budget 2008: Trading Stock
Budget 2008: Leased Plant or Machinery –
Anti-avoidance
Budget 2008: Financial Products Avoidance –
Disguised Interest and Transferring Rights to
Lease Rentals
Budget 2008: Controlled Foreign Companies
(CFC) – Anti-Avoidance
Budget
2008:
Corporate
Intangible
Assets Regime – Anti-Avoidance
Budget 2008: Restrictions on Trade Loss
Relief for Individuals
Budget 2008: Double Taxation Relief - Income
Tax
EIS: Disqualifying Payments – Or Not?
12.4
12.5
12.6
12.7
12.8
12.9
12.10
12.11
12.12
APPENDIX
1
April 2008
1.
CAPITAL GAINS TAX
1.1
Budget 2008 – Residence and
Domicile: Aligning the CGT
Treatment for Non-UK Resident
Trusts
(c) Surplus capital payments brought forward from
2007/08 will not be taxed unless (as now) the nonUK domiciled beneficiary is both resident and
domiciled in the UK when trust gains are treated as
accruing to him. (This treatment will apply whether or
not the non-UK domiciled beneficiary is a remittance
basis user in the year when trust gains are treated
as accruing to him.) Surplus capital payments to
non-UK domiciled beneficiaries made prior to
12.3.08 can be franked against future post-5.4.08
trust gains, although only to the extent that there are
no capital payments made after 5.4.08 to which the
post-5.4.08 gains can be attributed first and there
are no pre-6.4.08 gains accruing by virtue of the
rebasing election.
Overview
The Budget made very substantial changes to the
draft legislation issued on 18.1.08, which may be
summarised as follows:
 The s86 settlor charge remains restricted to
UK domiciled settlors.
 The capital payments charge under s87 will
apply to all beneficiaries wherever domiciled,
including the settlor.
 A non-UK domiciled beneficiary who claims
the remittance basis will be liable to CGT
only for a capital payment remitted to, or a
benefit received in, the UK.
 Capital payments made to non-UK
domiciliaries before 6.4.08 will not be taxed
where matched with post-5.4.08 gains and
irrespective of a remittance basis claim.
 Non-UK domiciliaries will not be taxed on
capital payments after 5.4.08 where
matched with pre-6.4.08 gains, whether or
not the remittance basis is claimed.
 Trustees will have an option to rebase
assets within trusts and certain underlying
companies as at 5.4.08.
 Transitional rules will apply to payments
made between 12.3.08 and 5.4.08.
(d) Capital payments made to non-UK domiciled
beneficiaries between 12.3.08 and 5.4.08 which are
not matched to pre-6.4.08 gains will be left out of
account in 2008/09 and subsequent years for the
purposes of s87.
(e) Trust gains brought forward from 2007/08 and
treated under s87(4) as accruing to non-UK
domiciled beneficiaries by virtue of capital payments
made on or after 6.4.08 will not be taxed unless the
non-UK domiciled beneficiary has become both
resident and domiciled in the UK. Although the
capital payment is received after 5.4.08, if it is
matched to trust gains realised prior to 6.4.08 or to
the pre-6.4.08 element of any gain on a rebasing
election, it is not necessary in this case for the nonUK domiciled beneficiary to be a remittance basis
user.
(f) Trusts which are non-UK resident on 6.4.08 will
have the option to elect for rebasing to market value
as at 6.4.08 in relation to all assets held by the trust
both directly and by its underlying companies. The
effect is that the pre-6.4.08 element of any trust
gains treated as accruing to non-UK domiciled
beneficiaries after that date will not be taxed. This
right of election is described further below.
Changes
Capital payments
(a) Capital payments made from 6.4.08 to non-UK
domiciled beneficiaries will generally be chargeable
to tax.
(b) The remittance basis will apply if the non-UK
domiciled beneficiary is a ‘remittance basis user’ (ie
where he has claimed the remittance basis under
new ITA 2007 s809B or is entitled to it under new
s809C) in the year when trust gains are treated as
accruing to him. This will be so whether the trust
gains accrue on UK or on non-UK assets. A capital
distribution will be treated as remitted if the
distributed property is received in or brought to the
UK. Benefits-in-kind will be treated as remitted if
enjoyed or used in the UK.
(g) Any supplemental charge under s91 for
remittance basis users will be calculated based on
the year in which the capital payment is made by the
trustees, not the year in which it is remitted to the UK
by the non-UK domiciled beneficiary.
(h) A general matching rule will be introduced to the
effect that a last in, first out rule (LIFO) will be used
to match any trust gains with capital payments made
on or after 6.4.08. This will apply to all beneficiaries,
not just non-UK domiciled beneficiaries, and will
apply in place of the present first in, first out (FIFO)
rule in computing the supplementary charge. It is
thought that this will generally be advantageous to
UK domiciled beneficiaries.
The new legislation will not change the tax position
of non-UK domiciled beneficiaries who receive
capital payments on or before 5.4.08 and will not tax
non-UK domiciled beneficiaries on future capital
payments where these are matched to trust gains
realised prior to 6.4.08. This will be so irrespective of
whether the non-UK domiciled beneficiary is a
remittance basis user.
Capital payments made before 6.4.08 will be dealt
with as set out below. When a capital payment is
made on or after 6.4.08:
2
April 2008



trust gains of the current year will be treated
as accruing to the beneficiary before gains
of previous years, and trust gains of later
previous years before those of earlier
previous years; and
current year capital payments will be
matched with trust gains before capital
payments of previous years and capital
payments of later previous years before
those of earlier previous years.

a capital payment is made to any beneficiary
(or person treated as a beneficiary) who is
UK resident; or
a part of the trust fund which is less than the
whole is transferred after 5.4.08 to a new
settlement in circumstances where s90
applies.
The election will not in itself trigger any deemed
disposal. The one limited purpose of the election
is simply that, when there is a later actual
disposal of the asset, the trust gains realised on
that disposal will be split between the pre-6.4.08
and post-5.4.08 elements. Non-UK domiciled
beneficiaries will not be taxed insofar as any
capital payments are matched to the pre 6.4.08
element of gain. So there will still be one trust
pool but trustees will need to keep a record of
pre-6.4.08 and post-5.4.08 gains for the purposes
of being able to tell non-UK domiciled
beneficiaries whether they are taxable.
The result is that:
(i) remittance basis users will be taxable on
a remittance basis on trust gains accruing to
them under s87(4) if and to the extent that
the trust gains and the capital payments
relate to the period after 5.4.08. If they are
not remittance basis users, they will be
taxed on an arising basis;
(ii) gains accruing under s87(4) will only be
free of tax to non-UK domiciled beneficiaries
to the extent that there are no post-5.4.08
trust gains or no post-5.4.08 capital
payments.
The availability of any reliefs on the disposal (such
as main residence relief) will be given by reference
to the rules prevailing at the date of the actual
disposal not the position on 6.4.08. Where the gain
on an actual disposal is reduced by a relief, the relief
will be apportioned pro rata between the pre-6.4.08
and post-5.4.08 elements of gain.
No additional notification requirements will be
imposed on non-UK domiciled settlors of non-UK
resident trusts and there will be no change to the
existing provisions of TCGA 1992 Sch 5A.
The election will have no impact on the calculation of
the supplemental charge under s91 nor will it
accelerate any charge under s86 on a UK domiciled
and resident settlor. This is because the election will
not alter the fact that the entire gain continues to be
treated for all purposes as having arisen only on the
date of actual disposal, even if part of the gain is
allocated to the pre-6.4.08 pool for the purposes of
determining whether a non-UK domiciled beneficiary
is taxable under s87.
As now, there will be no charge to tax on capital
payments to non-UK resident beneficiaries, although
capital payments made on or after 6.4.08 will be
matched to trust gains in the same order as for other
beneficiaries (LIFO).
These changes apply to company gains apportioned
to non-UK resident trusts under s13(10), but do not
apply to the gains of non-UK resident companies
apportioned to UK resident and non-UK domiciled
individual participators.
Where a capital payment made after 5.4.08 is less
than the trust gains, the LIFO rule will mean that the
gains of later years will be treated as accruing to the
beneficiary before the gains of earlier years. Where
a rebasing election has been made by the trustees,
the post-5.4.08 element of the trust gains of a given
year will be treated as accruing before the pre-6.4.08
element in respect of capital payments made on or
after 6.4.08.
Rebasing
The trustees of any trust which is non-UK resident as
at 6.4.08, whatever the domicile of the settlor, will
have the right to elect that, for one limited purpose,
the following will be deemed to have been
reacquired at market value on 6.4.08:
(a)
assets owned by the trust on 6.4.08;
(b)
assets owned by an underlying company on
6.4.08, insofar as
(i) on the disposal of any such asset the gain
(if any) is apportionable to the trust under
s13(10), and
(ii) it would have been so apportionable if in
fact realised on 6.4.08.
Making a rebasing election will entail an
exception to the normal LIFO rule. Where surplus
capital payments are brought forward from 2007/08
and made prior to 12.3.08, they will be matched to
gains treated as accruing before 6.4.08 on any
rebasing election before being matched with gains
deemed to accrue from 6.4.08.
The election will not be made on an asset by asset
basis but, once made, will apply to all assets of the
trust and any underlying companies.
The election will be irrevocable and must be made
on or before 31 January following the tax year in
which the first of the following occurs:
Surplus capital payments made to non-UK domiciled
beneficiaries between 12.3.08 and 5.4.08 will be
matched to gains treated as accruing before 6.4.08
on a rebasing election, but will not be matched to
post-5.4.08 trust gains.
3
April 2008
Since any gain resulting from a rebasing election will
not be brought into account on 6.4.08 but only when
the asset is disposed of, the notional pool of pre6.4.08 gains will fluctuate in the future because:
(c)
(d)
(a)
(b)
when assets owned on 6.4.08 are
disposed of at a gain, the pool of pre6.4.08 gains will increase; and
capital payments will reduce the pre6.4.08 pool to the extent that there are
no post-5.4.08 gains to which the
payment can be allocated in that year.
There will be no change in the current law whereby
OIGs are taxed at the rates applicable to income.
Thus, despite the fact that OIGs may be treated as
accruing to beneficiaries in accordance with s87, the
applicable tax will be income tax not CGT.
Offshore income gains (OIGs)
Under current law, OIGs accruing to non-UK resident
trusts are taxed by a mixture of s87 and the transfer
of assets code now in ITA 2007 ss714 - 751. This is
provided for by TA 1988 s762(2)-(6), which apply
also to OIGs apportioned to non-UK resident trusts
from non-UK resident companies which would be
close were they to be UK resident.
TCGA 1992 Sch 4C (transfers between trusts)
Sch 4C applies in place of s87 where a transfer of
value between trusts has occurred within Sch 4B.
Currently, capital payments to non-UK domiciled
beneficiaries are not taken into account under Sch
4C and so are not taxed.
The proposed changes to Sch 4C are as follows:
(a)
There will be no changes as respects Sch
4C pools existing as at 5.4.08.
(b)
A Sch 4B transfer on or after 6.4.08 will
result in a separate Sch 4C pool.
(c)
Gains in Sch 4C pools coming into existence
on or after 6.4.08 will be able to be matched
with capital payments to non-UK domiciled
beneficiaries. But this will be subject to
similar transitional rules as apply to s87 and
the remittance basis will apply to remittance
basis users.
TA 1988 s762(2)-(6) will apply to OIGs realised on or
after 6.4.08 as follows:
(a)
If and insofar as an OIG realised on or after
6.4.08 is not treated under s87 as applied by
s762(2) as an OIG accruing to a UK resident
in the tax year when it is realised (because it
cannot be matched with a capital payment
made in that or earlier years), it will become
income for the purposes of the transfer of
assets code (ie ITA 2007 ss720-730 and
ss731-735 will apply).
(b)
Once an OIG has become income for the
purposes of the transfer of assets code, it
will be removed permanently from the s762/
s87 pool and will be deemed to be relevant
foreign income, so any OIG will not be
subject to double taxation.
(c)
accrued before 6.4.08 and is treated as
accruing to a non-UK domiciled beneficiary.
Any rebasing election made by the trustees
will apply to OIGs in the same way as to
ordinary capital gains.
The transitional rule applicable to capital
payments made between 12.3.08 and 5.4.08
will apply.
(Separate HMRC Budget Note 12.3.08, Residence
and Domicile: Aligning the Capital Gains Tax
Treatment for Non-UK Resident Trusts’)
HMRC’s FAQs
An extensive revised set of FAQs was issued on
17.3.08 (see Item 4.3 below).
Where, in the year in which the OIG
accrues, the transfer of assets code is
disapplied by the motive defence in ITA
2007 ss736-742, the OIG will remain in the
s87 OIG pool and will continue to be dealt
with by s87 as applied by TA 1988 s762(2)(4).
1.2
Residence and Domicile Reform:
Non-UK Resident Trusts
Context
Members of the STEP Technical Committee
attended a meeting with HMRC on 20.3.08 at which
HMRC responded to some of the questions which
had been raised following the Budget in relation to
the new rules on trusts and the taxation of nondomiciliaries.
The changes described in the previous paragraph
will apply in taxing beneficiaries and transferors who
are resident and domiciled in the UK as well as in
taxing non-UK domiciled individuals.
STEP’s understanding of several important
points which were made at that meeting
1.
The Finance Bill will be published on 27
March, but it will contain several provisions in
relation to non-resident trusts/non-domiciliaries
which HMRC already know will need to be amended
before the Bill receives Royal Assent.
OIGs treated in accordance with the above rule as
gains accruing to a non-UK domiciled beneficiary
under s87 will be treated in the same way as
ordinary capital gains. Inter alia this means:
(a)
The remittance basis will apply if the
beneficiary is a remittance basis user.
(b)
Tax will not be charged insofar as the capital
payment was made before 6.4.08 or the OIG
4
2.
In relation to the matching of gains with
capital payments made between 12 March and 5
April 2008
counteraction considered either for the original
transactions or for the combined effects of the
original and additional transactions.
April this year, the provisions which will be enacted
will not be the same as those outlined in paras 11(d)
and 24 of the paper ‘Residence and domicile:
aligning the CGT treatment of non-UK resident
trusts’ which was issued on Budget Day. Surplus
capital payments made between 12 March and 5
April will not be matched with the pre-6 April 2008
element of rebased gains.
In the circumstances described in the question
above, we will not normally refuse clearance for
disposals of loan notes, issued in a transaction for
which we originally gave clearance before October
2007, if those disposals:
1. do not provide any additional opportunity to
take consideration in a form free of income
tax (even if they result in consideration being
received earlier); and
2. are in essence motivated by a desire to take
advantage of the current (pre-6 April 2008)
CGT rules; and
3. take place between 9 October 2007 and 5
April 2008.
3.
The LIFO basis will be applied by reference
to the trust gains of a particular year and those gains
are to be pro-rated between the beneficiaries who
receive capital payments in that year.
4.
When assets are transferred between trusts,
the recipient trust receives a pro-rata amount of the
gains in the gains pool of the original trust (trust
gains will not be allocated on a LIFO basis for this
purpose).
The sale of loan notes to a company controlled by
the vendor is an example of a disposal that may fail
to meet 1. above, as it may give the vendor the
opportunity to receive consideration in a form free of
income tax that could have been paid as a dividend
by the holding company.
5.
It will not be possible to make rebasing
elections in relation to TCGA 1992 s13 companies
owned by individuals.
(Release by STEP’s UK Technical Committee
26.3.08)
1.3
Capital Gains
Amended FAQ
Tax
Reform
Where greater certainty is required, we will be happy
to consider a revised clearance application under
s701 (or s707) including particulars of all the
transactions. Applicants are reminded, however, that
February/March is always a popular time for making
clearance applications (and especially this year), so
it is particularly important to apply in good time.
–
HMRC have published a slightly amended FAQ
relating to CGT reform and clearance under ITA
2007 s701 [transactions in securities], as set out
below.
(HMRC press release 17.3.08)
Q. What will HMRC consider reasonable
rearranging of affairs where a clearance has
been given under ITA 2007 s701 (or TA 1988
s707)?
1.4
Terminating a Company: More on
ESC 16
Context
In many cases minds will have been turning to
whether now is a good time to bring the life of a
company to an end either because of a desire to
capitalise on taper relief while it lasts, or because of
the new legislation on income-shifting [deferred to
2009/10]. Or perhaps for both reasons.
A. A clearance under s701 (or s707) confirms that
HMRC are satisfied that no counteraction should be
taken under s698 (or s703) about the transactions in
securities that are described in the application for
clearance.
—
The provisions in ITA 2007 part 13 ch 1 are
concerned with income tax but not CGT (and since 6
April 2007 TA 1988 part 17 ch 1 is concerned only
with corporation tax).
Most advisers will be familiar with Extra-Statutory
Concession (ESC) C16. This is the concession
under which HMRC agree, in effect, to pretend that a
liquidator has been appointed to a company so that
what are in law dividends subject to income tax will
instead be subject to CGT. ESC C16 saves the cost
and complexity of a formal liquidation and is
sometimes wholly inaccurately referred to as the
‘informal liquidation’ route. See MTR 10/06 Item
12.1 and 7/07 Item 12.5.
No-one is required to apply for clearance, but we
receive thousands of clearance applications each
year from people who value the certainty it provides.
The clearance we give relates only to the
transactions described to us in the application.
—
It is not possible to give a blanket statement of the
view we will take where additional transactions not
covered by the clearance are effected in order to
take advantage of the current CGT rules. It will be a
matter for judgment, in the light of the facts and
circumstances of the particular case, whether the
clearance given needs to be revisited and
—
Further information required by HMRC
ESC C16 will be applied only if certain undertakings
are given to HMRC in advance. These are set out in
the concession itself. However, Berg Kaprow Lewis
are finding that before sanctioning ESC C16,
HMRC are now routinely seeking two additional
5
April 2008
willingness to accept a ‘practice prevailing’ type of
argument to preclude any recast. It is impossible to
say how local inspectors will react to this clarification
in treatment as it filters through HMRC, so we can
only hope that they take a sensible approach.
undertakings not set out in the concession.
These are to the effect that:
•
the company will not transfer or sell its
assets or business to another company
having some or all of the same shareholders;
and
The technical position is also not free from doubt
with arguments possible under the Booth and
Jenkins cases. No doubt this will be explored further
as HMRC’s approach becomes better known and
real cases along the lines of A and B in the Example
below emerge.
•
the arrangement is not a reconstruction
in which some or all of the shareholders in
the original company retain an interest in the
second company.
These additional requirements seem to be directed
to ensure that ESC C16 is not applied in the case of
‘phoenix’ companies where a counter-action notice
under ITA 2007 s698 might otherwise be considered,
nor to reconstructions where no gain would normally
be recognised. But, whatever the reason for these
additional undertakings, the point of this note is to
suggest that it will now be sensible to include
these additional undertakings in the initial
application for ESC C16 treatment.
Example
A partnership is formed between partner A and
partner B. Partner A contributes assets with a
market value of £60 million to the partnership and
partner B contributes assets worth £40 million. The
profit sharing ratio is set at 60:40 in line with the
value of the assets credited to each partner’s capital
account. The original base costs of the assets
contributed by partner A and B respectively were
£30 million and £10 million.
(TAXline March 2008 – Issue 3 Contribution by
David Whiscombe, writing in Brass Tax, published
by Berg Kaprow Lewis LLP)
1.5
Contribution
Partnership:
Revised
Based on previous understanding of HMRC’s
interpretation of the law, there would be no capital
gain arising on either partner on the contribution of
the assets. The partner’s capital accounts would be
credited with the market value of the assets
contributed.
of Assets to a
HMRC’s Practice
However, based on HMRC’s confirmed view in Brief
03/08, partners A and B would each have triggered a
disposal on their contributions, with the disposal
consideration being the fractional share of the value
of the asset passing to the other partner. The gains
arising will be calculated as follows:
Context: Looking ahead
Further to MTR 2/08 Item 1.2 an article in Taxation
comments on HMRC’s new approach. HMRC’s Brief
gives a clear view on how they will treat partnership
asset contributions for CGT purposes.
For taxpayers seeking to use partnerships in future,
the position is clear. However, such a significant
change is likely to have a major commercial impact
on the use of partnerships in future cases where
asset contributions are the principal method of
formation. It is understood that publicly available
property funds have been formed which are
reliant on HMRC’s previously held view as
expressed in their prospectuses.
A blast from the past?
For taxpayers who have already undertaken
transactions and have placed reliance on previous
HMRC practice, the position is far from clear. If they
have had specific clearance on the issue from
HMRC, PWC have been assured that HMRC will be
bound in those cases.
Partner A:
Deemed proceeds (£60m x 40%)
Base cost £30m x 40%
Gain chargeable to partner A
£24m
£12m
£12m
Partner B:
Deemed proceeds (£40m x 60%)
Base cost £10m x 60%
Gain chargeable to partner B
£24m
£ 6m
£18m
In order to mitigate the tax arising on the contribution
of these assets, they would need to be contributed in
at historic book values, although in the above
example the partnership profit ratio would change to
75:25 which may not reflect the commercial deal
struck between the partners, and so some tax
leakage would need to arise if the 60:40 ratio was to
be respected.
But in the (no doubt much more common) situation
where a transaction was carried out and the advisers
followed accepted practice based on the general
understanding of SP D12, the position is less clear.
HMRC have said they will not be bound by
statements made previously by their officers. HMRC
have confirmed orally that there is no apparent
intention to reopen old years, but open years are
vulnerable to reappraisal by HMRC. There seems no
(Taxation 6.3.08 p230, article by Alex Henderson
and Judith Wilson of PricewaterhouseCoopers LLP)
6
April 2008
1.6
not currently have effect for schemes where there
are 20 or more members and all members have their
rights increased at the same rate. A change to the
draft legislation published at PBR will ensure that the
unauthorised payment charges and the IHT
liability will not have effect so long as there are
at least 20 scheme members, who have their
rights increased at the same rate because
another member has died. This will have effect in
relation to a member who dies on or after 6.4.08.
Trustees: Tax Liability Follows
Residence
Smallwood v HMRC: the facts and the decision
In 1989 Mr Smallwood had established a trust, over
which he had the power to appoint new trustees. The
trust assets included shares which had increased in
value. From 1994 to December 2000 a Jersey
company acted as the trustee. In December 2000 Mr
Smallwood appointed a Mauritius company as the
new trustee. In January 2001 the trustees sold the
shares at a gain of more than £2,000,000. In March
2001 Mr Smallwood appointed himself and his wife
(both resident in the UK) as trustees.
FB 2008 will also provide that an IHT charge will
arise as a result of an unauthorised lump sum
payment in respect of a pension scheme member
who dies aged 75 or older and who was in
receipt of an annuity or scheme pension. Any
IHT nil-rate band which has not already been set
against the estate of the deceased may be set
against this IHT charge. A change will be made to
the draft legislation published at PBR to provide for
the situation where the estate has not used all of the
nil-rate band and more than one of the IHT charges
in respect of a scheme pension or an annuity arises.
This will ensure that the remaining nil-rate band can
be used only once against the IHT charges. The
measure, including this change, will have effect
when the member dies on or after 6.4.08.
The Revenue began enquiries, and issued closure
notices to Mr Smallwood and the trust, amending the
relevant returns on the basis that Mr Smallwood had
made a chargeable gain of more than £6,800,000,
and was liable to pay CGT of more than £2,700,000
under TCGA 1992 s77(1). Mr Smallwood and the
trustees appealed, contending that at the time the
shares were sold, the trust had been resident in
Mauritius and the effect of the UK/Mauritius Double
Taxation Agreement was that the gains were not
taxable in the UK.
The Special Commissioners rejected the taxpayers’
contention and dismissed the appeals, holding on
the evidence that ‘domestic law chargeability for the
whole tax year results in Treaty residence
throughout the tax year regardless of whether that
chargeability was caused by residing in a later part
of the tax year’. Accordingly the trust had not been
solely resident in Mauritius. On the evidence, its
‘place of effective management’ had been in the UK,
so that the gain was taxable in the UK.
IHTA 1984 ss151A to 151C give effect to similar
provisions on ‘alternatively secured pension’ (ASP)
funds to those set out above. Again, any nil-rate
band that has not been set against the estate may
be set against the IHT charges on ASP funds. To
bring these provisions into line with those for scheme
pensions and annuities, FB 2008 will ensure that any
remaining nil-rate band may be used only once
against the IHT charges arising on ASP funds. This
change will have effect when a member dies on or
after 6.4.08.
(Smallwood v HMRC, SpC 669 27.2.08, reported at
The Tax Journal 3.3.08 p4)
2.
INHERITANCE TAX
2.1
Budget 2008: Pensions Savings
and IHT
Inheritance tax on overseas pension schemes
PBR Note 14 sets out details of changes which will
be made to restore IHT protection to UK tax-relieved
pension savings in overseas pension schemes. The
provisions in FB 2008 will give IHT protection to
pension savings which have had UK tax relief and
also to all savings in certain overseas pension
schemes. The IHT protection will apply to funds in
overseas pension schemes which are taxrecognised and regulated in the country in which
they are established. Or, if there is no system for tax
recognition or regulation in that country, then the
funds must be used to provide a pension income for
life.
Context
Various changes were announced at the PBR on 9
October 2007 (see MTR 11/07 Item 2.2). These
measures will be reflected in FB 2008 along with
other changes.
The change to the IHT rules for overseas pension
schemes will have effect on or after 6.4.06.
Inheriting tax-relieved pension savings
FB 2008 will include provisions to implement the
proposals on scheme pensions and annuities.
Details of this are set out in PBR Note 15 and the
subsequent changes are set out below.
(HMRC Budget release BN45 13.3.08)
The rules preventing unused tax-relieved funds
being passed as increased pensions after death to
other family members, other than dependants, do
7
April 2008
2.2
The purpose of the second test is to make it a
requirement to deliver an account where the value
transferred by the transfer of value, or in which the
interest in possession subsists, exceeds the NRB
which is available to the transferor – but the
chargeable transfer that emerges remains below the
NRB due to exemptions or relief. And in this
connection, agricultural property relief (APR) and
business property relief (BPR) are specifically
excluded in establishing the chargeable transfer.
Budget 2008: Transitional Serial
Interests
Context
The practical implications of IHTA 1984 s53(2A)
introduced by FA 2006 have caused concern ever
since the end of August (see MTR 10/07 item 2.1).
Happily, the provision is to be interpreted as the
professions generally had suggested, and not as
proposed by HMRC. In addition, the transitional
period for TSIs is to be extended by six months to
5.10.08.
Example
The transferor creates a relevant property trust in
favour of his daughter in May 2007 and transfers
£200,000 cash to the trustees. No annual
exemptions are available. This is an excepted
transfer as the value transferred is attributable to
cash and is below the NRB.
Clarifying the effect of a TSI for a single
beneficiary
The effect of the transitional provisions is unclear
where pre-22 March 2006 IIP trusts are replaced
with a transitional serial interest as defined in IHTA
1984 ss49C, D and E for the same beneficiary. This
measure will ensure that the new rules will not have
effect where this kind of change is made in the
transitional period.
Later in August he invests £70,000 in a discounted
gift product and transfers the policy to the trustees.
Due to his age and the income withdrawals, the
value transferred is quantified at £40,000. This too is
an excepted transfer because, although this second
disposal is not of cash, the cumulative total of
chargeable transfers does not exceed 80% of the
NRB.
The legislation will also ensure that the new rules will
have effect as intended where an IIP trust is
replaced after the transitional period with a new IIP
trust for either the same or a different beneficiary.
Then in January 2008, he gives the trustees some
shares in the family company where the loss to his
estate is £100,000, but which qualify for 100%
business relief. This is not an excepted transfer
because although the cumulative total of chargeable
transfers remains at 80% of the NRB, the availability
of BPR (and APR) is ignored for the purpose of
applying these regulations. Thus the unreduced
value transferred by the transfer of value (£100,000)
exceeds the NRB available to the transferor of
£300,000 – (£200,000 + £40,000) = £60,000. An
account is therefore required.
In addition, this measure extends the transitional
period so that it will now end on 5 October 2008.
(HMRC Budget release BN46 13.3.08)
2.3
Excepted
Settlements
Transfers
and
Context
Further to MTR 3/08 Item 2.2, HMRC have published
draft guidance as IHTM 06100 - 06130. An extract
is set out below.
(HMRC What’s New? 7.3.08)
IHTM06104 Excepted transfers and terminations:
value transferred attributable to property other
than cash or quoted shares or securities
Where the property given away, or in which the
interest subsists, is wholly or partly attributable to
property other than cash or quoted stocks and
securities, the disposal must pass two tests.
2.4
Business Property Relief: The
Identification Rules for Shares
Context
The issue in this case was whether the whole or part
of the relevant shares resulted from a reorganisation
of W Ltd’s share capital so that those shares could
be identified with shares owned by the deceased
before the acquisition.
First, the value transferred by the chargeable
transfer [IHTM04027] concerned together with the
cumulative total of all chargeable transfers made by
the transferor in the seven years before the transfer
must not exceed 80% of the relevant IHT nil-rate
band (NRB).
And second, the value transferred by the transfer of
value [IHTM04024] giving rise to the chargeable
transfer concerned must not exceed the NRB which
is available to the transferor at the time the disposal
takes place.
8
Vinton and another (executors of DuganChapman) v HMRC: the facts
Ms Dugan-Chapman was allotted 1 million shares in
a company (W Ltd) two days before her death. When
she died, there was a charge to IHT as if she had,
immediately before her death, made a transfer of
value. The value transferred was equal to the value
of her estate at that time which included shares in W
Ltd. If those shares (or any of them) were relevant
business property then the value transferred as a
result of her death would be reduced, as would the
April 2008
IHT payable. The reduction in the value transferred
was BPR. The conditions for the relief were
contained in IHTA 1984 Pt V Ch 1.
have been a reorganisation if Ms Dugan-Chapman
had simply subscribed for shares. They put forward
two possible positions. First, there was a larger
reorganisation, involving 2,261,794 shares, in which
Ms Dugan-Chapman alone effectively participated
and to the limited extent of 1 million shares which
represented that number of the total of 2,261,794
which were proportionate to her original holding. If
that was the case, then 1 million shares attracted
BPR. Alternatively, there was a rights issue totalling
1 million shares all of which were taken up by the
deceased, but she acquired a substantial portion of
the shares by reference to existing holdings.
IHTA 1984 s107(4) made reference to s105(1)(bb);
s105(1)(a) to (e) inclusive contained the meaning of
‘relevant business property’ and (bb) provided that
any unquoted shares in a company were amongst
the assets that could be considered as relevant
business property because the whole of s105(1) was
subject to the conditions contained in the rest of
s105, in s106 (the two-year ownership requirement)
and ss108, 112(3) and 113. By virtue of IHTA 1984
s107(4), the shares in question would satisfy the
two-year ownership requirement and qualify for BPR
for IHT purposes only if they could be identified with
shares already owned by Ms Dugan-Chapman at
least two years before she died.
Judith Powell had no hesitation in rejecting the first
possibility. There was no evidence of any larger
reorganisation of which the issue of 1 million shares
to Ms Dugan-Chapman as a part. As to the second
possibility, there was confusion about the effect of
the rights issue throughout the process. Although
those involved hoped that the rights issue and the
allotment would have IHT advantages, it was not
clear that they were clear about the exact nature of
the advantages and the effect of the rights issue.
Moreover, the allotments were thought commercially
desirable and also supported the IHT position by
showing that W Ltd was conducting a business. That
had nothing to do with securing BPR for new shares.
Finally, it could not be said that the members
understood the relevant facts so as to permit
application of the Duomatic principle.
HMRC contended that there was a simple
subscription by Ms Dugan-Chapman which was not
a reorganisation and that the principle established in
Re Duomatic Ltd [1969] 2 Ch 365 (that where all
shareholders of a company who were entitled to vote
on a matter actually agreed to a particular decision,
the decision was binding and effective without a
meeting) could not apply to re-write a transaction
that did not occur. The executors argued that it had
been intended that the whole or part of the shares
should be treated as allotted to Ms Dugan-Chapman
in the course of a reorganisation and should be
identified with her pre-existing holding so that some
part of the new shares qualified for relief.
(Vinton and Another (executors of Dugan-Chapman)
v HMRC Commissioners SpC 666 7.2.08 reported at
CCH Weekly Tax News Issue 490 10.3.08 p181)
The decision: SpC (Judith Powell)
BPR was not available in respect of shares
allotted to Ms Dugan-Chapman two days before
her death which could not be identified with any
of her pre-existing shares for the purposes of
IHTA 1984 s107(4).
S107(4) allowed property to be treated as satisfying
the two-year ownership condition if it could be
identified with property which satisfied the condition
under any of the provisions of TCGA 1992 ss126–
136.
3.
STAMP TAXES
3.1
Budget 2008: Reduction of Stamp
Duty Administrative Burden
FB 2008 will provide that instruments transferring
stocks and shares which were previously
chargeable with £5 Stamp Duty, whether fixed or
ad valorem, will in future be exempt and will not
need to be presented to HMRC for stamping.
The phrase ‘reorganisation of a company’s share
capital’ was not a term of art but derived colour from
its context. An increase of share capital could be a
reorganisation of that capital, notwithstanding that it
did not come within the precise wording of
s126(2)(a), provided that the new shares were
acquired by existing shareholders and in proportion
to their existing beneficial holdings. It was not
obvious from the documentation signed in
connection with the acquisition in issue that there
was a rights issue or any acquisition by the
deceased as existing shareholder in proportion to
her existing holding (Dunstan v Young Austen &
Young Ltd [1989] BTC 77 considered).
(HMRC Budget release BN55 13.3.08)
3.2
Budget 2008: Relief for New ZeroCarbon Flats
FA 2007 s19 introduced regulation-making powers
bringing a new relief to provide for zero-carbon
homes.
The executors had argued that there was a
reorganisation. They accepted that there would not
9
Qualifying criteria for the relief are set out in the
Stamp Duty Land Tax (Zero-Carbon Homes Relief)
Regulations 2007 (SI 2007/3437) and require the
level of carbon emissions from energy use in the
home to be zero over the course of a year. As with
other homes, the vendor of a new zero-carbon flat
April 2008
should provide a certificate confirming that it qualifies
for the relief.
Notification threshold raised to £40,000
This measure will raise the current threshold for
notification of non-leasehold transactions from
chargeable consideration of £1,000 to £40,000.
The relief will be eligible only to new flats which
are liable to SDLT on their first sale. The relief
will not be available on second and subsequent
sales or on existing flats even when converted to
meet the zero-carbon criteria.
Transactions involving leases for a term of seven
years or more will have to be notified only where
any chargeable consideration other than rent is
more than £40,000 or where the annual rent is
more than £1,000.
The relief will provide complete removal of SDLT
liabilities for all new zero-carbon flats up to a
purchase price of £500,000. Where the purchase
price of the flat is in excess of £500,000, the
SDLT liability will be reduced by £15,000. The
balance of the SDLT liability will be due in the
normal way.
Moreover, further changes will mean that it will no
longer be necessary to complete either HMRC
form SDLT 1 or the SDLT 60 certificate that no
SDLT is due if the transaction is below the
notifiable threshold.
The regulations –The Stamp Duty Land tax (ZeroCarbon Homes Relief) Regulations 2007 – came into
force on 7 December 2007. Legislation to be
introduced in FB 2008 will amend FA 2007 s19 so
that the power to make regulations extends to
include new flats. Further regulations will be laid
after FB 2008 receives Royal Assent to provide for a
fee to be charged by a Government department and
to clarify the position in respect of certificates for any
qualifying flats brought prior to the amendments to
FA 2003 s58B.
The ‘£600 rule’
Provisions in FA 2003 prevent the manipulation of
lease thresholds and apply to leases where payment
is made by both rent and a premium when the lease
is signed. The rule states that where the annual rent
on a lease is more than £600, then the normal 0%
thresholds that would have effect (£125,000 for
residential property and £150,000 for non-residential
property) are withdrawn and SDLT is charged at 1%.
This measure will amend these rules as follows:
 for non-residential properties where the
annual rent on a lease is £1,000 or more,
then the normal 0% threshold which would
have effect at £150,000 is withdrawn and
SDLT is charged at 1%; and
(HMRC Budget release BN56 13.3.08)
3.3
Budget
2008:
Notification
Thresholds for Land Transactions
and
Rate
Thresholds
for
Leasehold Property

Context
FB 2008 will change the rules for persons notifying
HMRC about land transactions. The ‘£600 rule’ will
also be changed and, from later this year, agents will
be allowed to sign declarations in the certificate that
no SDLT is due.
for residential properties the rule will no
longer have effect and, regardless of what
rent is paid, the normal thresholds will have
effect to any premium paid. This amendment
will also have effect in respect of
disadvantaged areas relief.
The certificate that no SDLT is due (SDLT 60)
The HMRC form prescribed by regulations does not
permit agents to sign the certificate that no SDLT is
due on behalf of their clients (form SDLT 60). The
form can only be signed by the person making the
transaction. HMRC will amend that form by
regulations later in 2008 so that agents will be able
to sign the declaration in the certificate on behalf
of their clients.
HMRC must be notified about most transactions
involving the acquisition of a major interest in land
for consideration unless specifically exempted. This
measure will raise the threshold for when a person
has to notify HMRC of a land transaction.
Leases must be notified if the lease is for a period of
seven years or more and the grant is made for a
chargeable consideration. Leases should also be
notified when they are granted for periods of less
than seven years, but tax is chargeable at a rate of
1% or higher on either or both any premium or rent
paid. This also applies in circumstances where there
would have been tax chargeable at a rate of 1% or
higher but for the availability of a relief.
(HMRC Budget release BN57 13.3.08)
3.4
Since most transactions currently have to be notified
to HMRC, many of the transactions notified are ones
where no SDLT is payable.
10
Budget
2008:
Anti-avoidance
Legislation Affecting Partnerships
Context: current law
Legislation in FA 2007 tackled schemes which
allowed payment of SDLT to be avoided by using
provisions in the then existing SDLT legislation
intended to help the transfer of property between
different partners within an investment partnership.
The following parts of SDLT legislation within FA
2003 were amended:
April 2008

the charge on transfers into partnerships set
out in Sch 15 paras 10-12;

the charge on transfers out of partnerships
set out in Sch 15 paras 18-20; and

the charge on transfers of an interest in a
property-investment partnership set out in
Sch 15 para 14.
Alternative finance
FA 2003 ss71A, 72, 72A and 73 were introduced in
2005 to encourage the use of alternative finance
structures which did not use conventional mortgage
schemes to buy property. S71A(2) allows an
exemption from SDLT where there is a purchase by
the lender from the borrower. S72 allows the
equivalent exemption in Scotland. These equate to
schemes where someone takes a mortgage out on
what was a previously mortgage-free property. The
legislation also exempts a purchase by the lender
from the borrower where there is a re-mortgage.
(Ss72A and 73 allow the Scottish equivalents of
these types of exemptions.)
The 2007 legislation
The legislation in FA 2007 affected propertyinvestment partnerships by ensuring that each time
there was a change in the size of share held within
the property-investment partnership there was an
SDLT charge, regardless of whether there was any
consideration paid for the change and regardless of
whether the parties involved in the transaction were
connected to each other in any way. Previously,
provisions in SDLT legislation to help ease the
movement of property between partners had been
used to relieve these transactions of the charge to
SDLT that would have been due on transactions
involving transfers between partners.
Some financial institutions have misused these two
exemptions from SDLT by colluding with vendors so
that ownership of a property is placed in a subsidiary
company of the financial institution. The subsidiary
then claims that the transaction is intended for the
purposes of allowing the equivalent of mortgaging on
a mortgage-free property or re-mortgaging.
Once ownership of the property has passed from the
vendor to the subsidiary, however, the financial
institution can then sell the property without incurring
any SDLT by selling shares in the subsidiary
company.
Proposed revisions
FB 2008 will amend the provisions in FA 2003
inserted by FA 2007 in order to ensure that
where there is a transfer of an interest in a
property within an investment partnership, there
will be no SDLT charge, with effect from 19.7.07.
New provisions will ensure that relief under
ss71A or 72 will not be available if there are
arrangements in place for a person to acquire
control of the financial institution.
(HMRC Budget release BN58 13.3.08)
3.5
(HMRC Budget release BN60 13.3.08)
Budget 2008: Anti-avoidance
Disclosure of use of SDLT avoidance schemes
for residential property
The Government has announced that the Tax
Avoidance Scheme Disclosure Regime will
extend the SDLT disclosure rules to include
residential property above £1 million from later
this year. The draft secondary legislation allowing
this will also be the subject of consultation later in
2008.
Group relief
FA 2003 Sch 7 para 1 allows companies to claim
group relief on transfers of assets between group
members. A restriction is placed on the relief where
a property is transferred to a group company and the
purchaser then ceases to be a member of the same
group as the vendor. HMRC can then claw back any
group relief.
HMRC have identified a number of avoidance
schemes structured to avoid the clawback provisions
in the legislation. The transactions are structured in
such a way that it is the vendor who leaves the
group first, thereby allowing the purchasing company
to leave the group subsequently without there being
any clawback of SDLT group relief.
From Budget Day, anti-avoidance legislation will be
introduced to prevent abuse where financial
institutions assist parties to avoid payment of SDLT.
(HMRC What’s New? 14.3.08)
3.6
This legislation will have effect where the vendor
leaves the group and there is then a subsequent
change in the control of the purchaser within a
period of three years of the asset having been
transferred. The provision will enable HMRC to
link these two events and treat the purchaser as
having left the group first. Group relief will not
be clawed back where only the vendor leaves the
group.
SDLT: Policy and Processing
Organisation within HMRC
HMRC have published a chart to enable taxpayers
and their agents to gain an overview of the teams
involved in the SDLT process.
(HMRC What’s New? 4.3.08)
(HMRC Budget release BN59 13.3.08)
11
April 2008
3.7
Practitioner’s News Issue 20 –
February 2008
The latest issue of the Practitioner’s News covers
the following:
 Stamp Taxes Online.
 New enhancements.
 Printing and submitting the SDLT 5
certificate
A reminder to send the online certificate not the submission receipt - to the
appropriate land registry.
 Local
Authorities
and
government
departments
can
now
register.
These customers can now get the ‘unique
identifiers’ they need to register for the
service.
 Transactions with 100 or more properties:
the submission process.
 How to set up ‘Users’ and ‘Assistants’
How you can add ‘Users’ and ‘Assistants’
once you activated your registration.
 Adding ‘Company Details’ to an HMRC
return.
 Multiple properties. Confirmation that, in the
‘Multiple addresses’ article in Practitioners
Newsletter Issue 13, HMRC were referring
to PDF versions of SDLT 3s and 4s (in
respect of information that land registries
would expect to see on an SDLT 5 for
multiple properties.)
 What to do if you don’t activate your
registration within 28 days.
You must
access ‘Service Reset’ before you can begin
filing online.
 Shared
equity
lease
transactions:
confirmation that these can be filed online
 Other issues .
 SDLT6 Guidance Notes: how to use the new
HTML version. Help with navigation.
 CHAPS payments: If you deal with more
than 10 transactions per week, you can
make one CHAPS payment covering
multiple transactions.
 Interest on late paid SDLT: what happens if
an SDLT 12 statement includes a large
amount of late paid tax.
 Priority faxes : the number for the priority fax
service (used when HMRC cannot trace
original returns) has changed.
 Stamp Taxes helpline: between midday –
2pm has been identified as the quietest
period for receipt of calls by the Stamp
Taxes Helpline.
 Stamp Taxes reorganisation: as part of their
drive to improve customer service, HMRC
are continuing to centralise most of their
work in Birmingham Stamp Office.
 Previous issues of the SDLT Practitioners’
Newsletter.
 Quick links: Stamp Taxes ‘Welcome’ page.
4.
PERSONAL INCOME TAX
4.1
Budget 2008: The New Statutory
Residence Rule
Context
HMRC’s booklet IR 20 states that days of arrival and
departure are generally ignored in determining
whether an individual is UK resident. This of course
is qualified in the case where a UK resident is
seeking to become non-UK resident, in requiring a
‘clean break’. The PBR of 9 October 2007 proposed
counting days of arrival and departure as days of
presence in the UK for residence test purposes, from
2008/09, subject to a limited exception for transit
passengers (see MTR 11/07 Item 4.2 and 2/08 Item
4.1)
The statutory rule from 2008/09
A day will be counted only where the taxpayer is
physically present in the UK at midnight.
The original rule for transit passengers was very
strict, requiring them not to leave any part of an
airport or port to which members of the general
public did not have access unless arriving in or
departing from the UK. Now, transit passengers
who change between different terminals of the
same airport, between different airports or
arriving and departing by different modes of
transport will not be regarded as present in the
UK even when here at midnight. However, they
must not engage in activities ‘to a substantial
extent unrelated to their passage through the
UK’, for example business meetings.
(HMRC Budget release BN102 13.3.08)
HMRC plan to update IR 20 to apply the statutory
day count test to the non-statutory 91 day test. So,
going forward, we have a mixed statutory and nonstatutory position, which is profoundly unsatisfactory.
4.2
Budget 2008: UK Resident Non-UK
Domiciliaries - Taxation from
2008/09
Context
Significant amendments are made to the PBR
regime (see MTR 11/07 Item 4.2 and 2/08 Item 4.1).
The £30,000 charge
This will apply from 2008/09 where the taxpayer has
been resident in at least 7 out of the previous 9 tax
years if he wishes to claim the remittance basis. The
charge is in addition to any tax due on foreign
income and games remitted to the UK. There are
three main changes to the draft legislation: the
de minimis has been raised from £1,000 to
£2,000; (b) the charge will apply only to adults,
so will become payable in the year a person
turns 18; and (c) it will be a tax charge on
(HMRC What’s New? 4.3.08)
12
April 2008
unremitted income and gains rather than a
stand-alone charge.
it, even if that asset is currently outside the UK
and later imported. Any asset in the UK on
5.4.08 will also be exempt from a charge under
the remittance basis, for so long as the current
owner owns it, even if that asset is later exported
and then re-imported. The existing charge which
arises if such an asset is sold in the UK will
remain.
A person paying the charge will choose what foreign
income or gains the £30,000 is paid on. If and when
the unremitted income or gains on which the tax has
been paid is remitted to the UK, it will not be taxed
again. Ordering rules will determine that untaxed
unremitted foreign income or gains will be treated as
remitted before income or gains upon which the
£30,000 has been charged. Now that the charge is
treated as income tax or CGT it should be treated as
such for the purposes of double taxation agreements
(and will be available to cover Gift Aid donations).
An analysis of how the charge will be treated by the
US under the UK/US double taxation agreement is
the subject of an annex written by US lawyers
Skadden, Arps, Slate, Meagher & Flom LLP:
complex issues are raised.
The current rules which tax employment income and
capital gains on entry into the UK of assets
purchased out of that untaxed foreign employment
income or capital gains remain unchanged.
‘Claims mechanism’
Foreign savings and investment income arising in a
year in which the remittance basis is claimed will be
taxed if it is remitted to the UK, irrespective of the
year in which it is remitted and whether or not a
claim to the remittance basis is made in the year in
which the remittance is made.
If the £30,000 charge is paid from an offshore
source direct to HMRC by cheque or electronic
transfer, it will not itself be taxed as a remittance.
If the £30,000 is repaid it will be taxed as a
remittance at that point.
Mixed funds
Clear statutory rules will be laid down for determining
how much of a transfer from a mixed fund is treated
as the individual’s income or chargeable gains and
the manner in which these amounts are chargeable
to tax. These rules will be more comprehensive than
those in the draft legislation published on 18.1.08.
(HMRC Budget release BN107 13.3.08)
Personal allowances and the remittance basis
As proposed at the PBR, entitlement to personal
allowances and the annual CGT exemption is lost for
any year where a taxpayer claims the remittance
basis. The only difference is an increase in the de
minimis from £1,000 to £2,000.
Full personal
allowances and the CGT annual exemption will be
given for any year in which an individual does not
claim the remittance basis.
Alienation
New rules will have effect where an individual
arranges for money or property to be brought into
the UK, or services and benefits to be provided in
the UK, which were funded out of untaxed foreign
income or gains. Where that individual or their
immediate family benefits in any way, that individual
will be taxed on that money, property, services or
benefits under the remittance basis.
(HMRC Budget release BN103 13.3.08)
The definition of ‘immediate family’ will be more
limited than the ‘relevant person’ definition
proposed in the draft legislation of 18.1.08. It will
be limited to spouses, civil partners, individuals
living together as spouses or civil partners and
their children or grandchildren under 18. It will
also cover close companies, or foreign
companies which would be close if UK resident,
of which any of them are participators and trusts
of which any of them are settlors or
beneficiaries. [While a welcome improvement on
the original proposals, many traps might arise with
companies and trusts where remittances could occur
without the knowledge and/or benefit to the
individual taxpayer. In particular, foreign trusts may
have to remit money to the UK to pay for UK
professional fees.]
Closing loopholes in the remittance basis
‘Ceased source’
As from 2008/09 in a year for which the remittance
basis has been claimed income will be liable to tax if
it is remitted to the UK even where the source of the
income has ceased in a previous year.
‘Cash only’
Money, property and services derived from relevant
foreign income brought into the UK in 2008/09 or
thereafter will be treated as a remittance and will be
taxed as such. There will be exemptions for
personal effects (that is, clothes, shoes,
jewellery and watches), assets costing less than
£1,000, assets brought into the UK for repair and
restoration and assets in the UK for less than a
total 9 month period purchased out of relevant
foreign income.
Non-resident trusts
Non-UK domiciled beneficiaries who claim the
remittance basis will from 2008/09 be taxed on the
remittance basis on income and gains from all UK
and offshore assets. See Item 1.1 for CGT and, in
particular, the rebasing election.
Settlors and
Any asset purchased out of untaxed relevant
foreign income which an individual owned on
11.3.08 will be exempt from a charge under the
remittance basis, so long as that individual owns
13
April 2008
beneficiaries of non-UK resident trusts will not be
required to disclose information to HMRC about trust
assets from which a remittance arose, or details of
the trustees, provided they have made a correct
return of their tax liabilities. Beneficiaries of non-UK
resident trusts may have to provide additional
information to HMRC when the trustees choose to
make an election to rebase trust assets or where
HMRC enquire into a beneficiary’s tax return.
Art for public display
FB 2008 will allow works of art purchased overseas
from unremitted untaxed employment income,
capital gains or relevant foreign income to be
brought into the UK for public display without giving
rise to an income tax or CGT charge under the
remittance basis. This new scheme will be based on
the existing HMRC schemes for VAT and import duty
(temporary imports and items brought into the UK
permanently by museums and galleries). It will allow
for works of art to be imported either indefinitely or
temporarily without giving rise to a charge to tax on
the remittance basis, so long as that work of art is on
public display in an approved establishment. Works
of art not on display, but held by approved
establishments for the public to see or for
educational purposes, will also be covered by the
scheme.
Non-resident companies
The draft legislation amending s13 and introducing
new s14A ensure that UK resident participators of
foreign companies will be taxed on the company’s
chargeable gains irrespective of the domicile of the
participator. Some minor changes will be made as a
result of the consultation.
Transfer of assets abroad
This anti-avoidance legislation is to be amended to
ensure that it applies to non-UK domiciled
individuals. The remittance basis will apply to
remittance basis users.
(HMRC Budget release BN105 13.3.08)
Changes for employment-related securities
This measure will apply to employees who are UK
resident but not ordinarily resident or not domiciled in
the UK. Where taxable gains (eg from unapproved
options) are partly derived from employment duties
in the UK and partly from non-UK duties, they will be
apportioned appropriately. Gains from employmentrelated securities related to duties outside the UK will
be subject to UK income tax to the extent that they
are remitted.
Accrued income scheme
The draft legislation published on 18.1.08 ensures
that the income tax charge has effect for non-UK
domiciled individuals.
CGT losses
The legislation will be amended so that non-UK
domiciled individuals taxed on the arising basis who
have not claimed the remittance basis from 2008/09
will get relief for foreign losses. Individuals who
claim the remittance basis from 2008/09 will be able
to elect into a regime which enables them to get
relief for their foreign losses in the UK in years in
which they are taxed on the arising basis. That
election will be irrevocable: as it will require non-UK
domiciliaries to disclose details of unremitted capital
gains, the election will be optional.
(HMRC Budget release BN106 13.3.08)
Foreign dividend income
ITTOIA 2005 mistakenly changed the rate at which
foreign dividend income is charged to tax on
remittance basis users from 40% to 32.5%. Tax law
rewrite bills are not intended to amend the substance
of tax legislation. Remittance basis users liable at
the higher rate will be taxed at 40% on foreign
dividend income remitted to the UK.
Offshore mortgages
HMRC have said that the draft legislation published
on 18.1.08 would treat as a remittance a payment of
interest as well as repayment of the principal where
made out of foreign income or gains in cases where
the principal had been brought into the UK. FB 2008
will include grandfathering provisions, so that
untaxed relevant foreign income used to fund
interest payments on existing mortgages secured on
UK residential property will not be treated as a
remittance on or after 6.4.08. This grandfathering
will have effect for repayments for the remaining
period of the loan or until 5.4.28, whichever is
shorter. In addition, if the terms of the loan are
varied or any further advances made after 12.3.08,
the repayments will be treated as remittances from
that point.
(HMRC Budget release BN101 13.3.08)
4.3
Residence and Domicile Reform:
HMRC’s FAQs
HMRC announced on their website that additional
FAQs have been added giving more details of the
new rules on Residence and Domicile [but without
telling us which ones!].
There is a fairly extensive set of FAQs now, grouped
under the following headings:
 Arising basis
 Day counting
 Disclosure
 Domicile status
 General
 Non-resident trusts
 PAYE
 Personal allowances
(HMRC Budget release BN104 13.3.08)
14
April 2008


shareholding in the distributing non-UK resident
company. The other previously announced condition,
that in total the individual must receive less than
£5,000 of dividends a year from non-UK resident
companies, will not be introduced.
Remittances
The remittance basis and the £30,000
charge
(HMRC What’s New? 17.3.08)
4.4
FB 2009 to give relief for larger shareholdings
FB 2009 will further extend eligibility for the nonpayable tax credit to individuals in receipt of
dividends from non-UK resident companies where
the individual owns a 10% or greater shareholding in
the distributing non-UK resident company. The tax
credit will not be available if the source country does
not levy a tax on corporate profits similar to
corporation tax. There will be anti-avoidance
measures to ensure that these new rules are not
subject to abuse.
Residence and Domicile Reform:
Non-UK Domiciliaries
Context
Members of the STEP Technical Committee
attended a meeting with HMRC on 20.3.08 at which
HMRC responded to some of the questions which
had been raised following the Budget in relation to
the new rules on trusts and the taxation of nondomiciliaries.
STEP’s understanding of several important
points which were made at that meeting
1.
The Finance Bill will be published on 27
March, but it will contain several provisions in
relation to non-resident trusts/non-domiciliaries
which HMRC already know will need to be amended
before the Bill receives Royal Assent.
(HMRC Budget release BN29 13.3.08)
4.6
Context
The income of a ‘settlor-interested’ trust is deemed,
for the purposes of income tax, to be the settlor’s
income. Tax paid by the trustees of such trusts is
treated as paid on behalf of the settlor. This is in
contrast to other trusts where the tax paid by
trustees is available to the beneficiaries. To avoid
the double taxation which would otherwise result,
ITTOIA 2005 s685A provides that income paid by
trustees of a settlor-interested trust to (non-settlor)
beneficiaries comes with a non-repayable ‘notional’
tax credit equal to the higher rate of tax (currently
40%) which covers all the tax liability on that income.
2.
It is not intended that adult children or adult
grandchildren will be included in the definition of
‘immediate family’ under the new remittance rules.
The relevant wording of BN 104 is unclear. There will
be two sets of rules in relation to alienation and
remittances.
3.
All income from ‘source closing’, whenever
generated, which has arisen to a non-domiciliary will
be taxable if remitted after 5.4.08.
4.
In relation to the £30,000 levy, this will be
available as a credit against UK tax only if all the
individual’s offshore income and gains have been
remitted to the UK.
However, under current statutory ordering rules
income from a trust is charged before savings and/or
dividend income. The result is that a beneficiary of
such a trust who also has savings and/or dividend
income may find that the non-trust income is pushed
into higher rates so that more tax is due overall (see
MTR 1/08 Item 4.1 and 2/08 Item 4.2).
5.
As
currently
drafted,
back-to-back
arrangements are not included in the grandfathering
provisions announced on Budget Day.
(Release by STEP’s UK Technical Committee
26.3.08)
4.5
Budget
2008:
Income
of
Beneficiaries
Under
SettlorInterested Trusts
Proposed revisions
The measure amends this ordering rule, such that
income from a settlor-interested trust is treated
within ITA 2007 s1012 as one of the highest
slices of income.
Budget 2008: Foreign Dividends
Context
The Budget 2007 measure to allow foreign dividends
a tax credit subject to limitation is to be enacted and
extended by FB 2008 – and further extended by FB
2009.
(HMRC Budget release BN53 13.3.08)
4.7
No £5,000 limit
FB 2008 will extend the non-payable tax credit of
one ninth of the distribution to UK resident
individuals and UK and other EEA nationals in
receipt of dividends from non-UK resident
companies, if they own less than a 10%
Budget
2008:
Gift
Transitional Relief
Aid
–
Context
One obvious impact of the reduction of the basic rate
to 20% from 2008/09 is a reduction from 22% to 20%
of the gross payment the amount of which UK
charities can reclaim from qualifying Gift Aid
15
April 2008
donations.
The blow is to be softened by a
transitional relief for the first three years.
small companies’ rate (marginal small companies’
rate) at 7/400. Profits limits will remain the same.
The new transitional relief
FB 2008 will supplement current Gift Aid legislation
for charities and CASCs, as a consequence of the
reduction of the basic rate of income tax from 6.4.08.
The small companies’ rate for ring fence profits will
remain at 19% from 1.4.08 and the marginal small
companies’ relief fraction for ring fence profits will
remain at 11/400.
This legislation will require HMRC to pay a
transitional relief supplement to charities and CASCs
based on qualifying Gift Aid donations shown on
claim form R68, if the claim is allowed. The relief for
claims made before the date of Royal Assent of the
Finance Bill and Appropriation Bill will be paid
separately by HMRC without the need for an
additional claim by charities or CASCs.
(HMRC Budget release BN03 13.3.08)
Simplification of associated companies rules
The Small Companies’ Rate (SCR) rules are
contained in TA 1988 s13. The SCR has effect for
companies whose annual rate of profits does not
exceed the ‘lower relevant maximum amount’
(s13(1)). If the rate is above this amount but does
not exceed the ‘upper relevant maximum amount’ a
marginal relief is due (s13(2)).
The rate of the transitional relief supplement will be
2% and will be applied to qualifying donations made
in the years 2008/09, 2009/10 and 2010/11.
The upper and lower maximum relevant amounts are
set out in s13(3). S13(3)(b) reduces the amounts if
the company has one or more associated
companies. ‘Associated company’ is defined at
s13(4) as one company controlling another or two
companies being under common control, with TA
1988 s416 being used to determine control. In
establishing control of a company, s416(6) requires
the attribution to a person of any rights or powers
held by his associates.
The relief will be calculated by grossing up the
donation by the sum of the basic rate and the rate of
supplement. The amount of relief due will be the
difference between that figure and the amount of the
donation grossed up at the basic rate of tax.
Charities and CASCs will be eligible to receive
payments of the Gift Aid transitional relief in respect
of Gift Aid repayment claims allowed by HMRC
providing that the claim on form R68 is made:
S417(3) defines the meaning of associate and
s417(3)(a) includes business partner within that
definition.

for charitable trusts, up to two years after the
end of the tax year to which the claim
relates; and
 for charitable companies or CASCs, up to
two years from the end of the accounting
period to which it relates.
The amount of the transitional relief will be limited by
the amount of qualifying donations, so will increase
or decrease as levels of qualifying Gift Aid donations
received by a charity increase or decrease.
FB 2008 will revise the definition of ‘control’, solely
for the purposes of SCR, by amending the wording
of s13(2) and inserting new ss4A, 4B and 4C into TA
1988 s13.
The new wording and subsections will ensure
that the rights or powers held by business
partners will be attributed only when ‘relevant
tax planning arrangements have at any time had
effect in respect of the taxpayer company’.
‘Relevant tax planning arrangements’ will be defined
as arrangements which involve the shareholder or
director and the partner and secure a tax advantage
by virtue of greater relief under TA 1988 s13.
(HMRC Budget release BN52 13.3.08)
5.
BUSINESS TAX
5.1
Budget
Rates
2008:
Corporation
(HMRC Budget release BN04 13.3.08)
Tax
See MTR 10/07 Item 5.3.
Main rates
FB 2008 will set the main rate of corporation tax at
28% on and after 1.4.09.
The main rate for
companies’ ring fence profits (from oil extraction and
oil rights) will also remain at 30% on and after
1.4.09.
5.2
Budget 2008: Research
Development Tax Relief
and
Context
Budget 2007 announced increases as follows:
 The enhanced deduction for small and
medium-sized enterprises rising from 150%
to 175%; and
 The enhanced deduction available to large
companies to increase from 125% to 130%.
Small companies rates
FB 2008 will set the small companies’ rate for all
profits, apart from ring fence profits, at 21% from
1.4.08 and set the fraction used in smoothing the
difference between the main rate of CT and the
16
April 2008
Operative date
These changes will now not take effect until a date to
be appointed by Treasury Order.
5.4
(HMRC Budget release BN05 13.3.08)
5.3
Budget 2008: 100% First Year
Allowances for Expenditure on
Cars with Low Carbon Dioxide
Emissions
Context: current law
Capital allowances allow business to write off the
costs of capital assets, such as plant and machinery,
against their taxable income. They take the place of
commercial depreciation, which is not an allowable
deduction in computing profits for tax purposes. On
and after 1.4.08 the general rate of plant and
machinery writing down allowance (WDA) will be
20% per annum on a reducing balance basis.
Budget 2008: Capital Allowances
Context
Various changes announced at Budget 2007 and
since are to go ahead, with some other changes.
The changes in a nutshell
 The main rate of writing down allowances for
plant and machinery falls from 25% to 20%.
Pools of less than £1,000 will attract 100%
write off.
 Long life assets and integral fixtures are put
into a separate pool attracting writing down
allowances of 10% (instead of 6% and 25%
respectively).
 Agricultural business allowances and
industrial building allowances will be phased
out over a four year period, finishing in April
2011. Enterprise zone allowances (which
primarily provide a 100% incentive
allowance) will not be subject to these
phasing out rules, but they also will be
withdrawn from April 2011.
 There will be a new 10% writing down
allowance for any new thermal insulation of
a building used for a business purpose
(other than residential letting).
 First year allowances for small and mediumsized businesses will be replaced by an
annual investment allowance of up to
£50,000 per annum.
100% first-year allowances (FYAs) bring forward the
time tax relief is available by enabling a business to
claim relief on the full cost of an asset against its
profits for the year in which the investment is made.
Proposed revisions
A scheme exists which gives 100% FYAs to all
businesses that purchase new cars with CO
2
emissions not exceeding 120g/km driven. The
scheme is due to end on 31.3.08. This measure will
extend the scheme for an additional five years to
31.3.08.
The definition of a qualifying low CO car will also be
2
amended. For expenditure incurred on or after
1.4.08 the applicable CO emissions threshold will
2
be reduced from not exceeding 120g/km driven to
not exceeding 110g/km driven.
Low emission cars are not subject to the special
rules for cars costing over £12,000. So it has been
necessary to introduce a transitional rule to ensure
that lessees who have entered into contracts to
lease cars that currently qualify as low CO emission
(HMRC Budget releases BN06, 07, 08 and 15
13.3.08)
2
Capital allowances buying and acceleration: antiavoidance
FB 2008 will prevent avoidance of corporation tax
through schemes which use arrangements intended
to crystallise a balancing allowance on plant or
machinery used for the purposes of the trade to
make it available to a profitable group not intending
to carry on the trade for the long term.
cars do not find mid lease, that as a result of the
change to the definition of a low CO emissions car,
2
their cars no longer qualify as such.
This rule will ensure that payments on leases in
existence on 31.3.08 for cars costing over £12,000
with CO emissions above the new threshold but
2
below the current threshold (i.e. between 110g/km
and 120g/km) are not subject to the LRR for the
period on and after 1.4.08 until the expiry of the
lease.
The measure will have effect, for example, where a
loss-making company is sold to an unconnected
profitable group prior to the trade (rather than the
company) being sold to a third party a short time
later. The measure will prevent the sale of the trade
leading to a balancing allowance in the hands of the
profitable group.
(HMRC Budget release BN11 13.3.08)
5.5
(HMRC Budget release BN24 13.3.08)
Budget 2008: Trading Stock
Context
Business profits for tax purposes are generally
calculated in line with Generally Accepted
Accounting Practice (GAAP). This has a statutory
17
April 2008
basis in FA 1998 s42 as amended by FA 2002
s103(5). However, FA 1998 s42(1) makes clear that
this basic principle is subject to ‘any adjustment
required or authorised by law in computing profits for
those purposes’. In other words, tax law, either in
statute or case law, will take precedence in
situations where it differs from accountancy practice.
5.7
These measures address a number of avoidance
schemes which have been notified to HMRC under
the disclosure rules introduced in FA 2004. Most
involve arrangements which give rise to amounts
which in substance are interest but which are
designed not to be taxable as interest (‘disguised
interest’). One involves an arrangement which aims
to exploit existing legislation on disguised interest so
as to generate artificial losses.
One example in which GAAP differs from tax law in
this way is where business stock is disposed of other
than by way of a trading transaction. Under GAAP,
such a transaction should be credited to the
accounts at either the cost price of the stock or at the
price actually paid on the disposal. However, for tax
purposes, the GAAP treatment is overridden and the
tax computation needs to be adjusted to reflect the
appropriation from stock at market value (the ‘market
value rule’). This rule has been in place for many
years.
Work will continue to develop a ‘principles-based’, or
generic, approach to ensuring that all such
arrangements are taxed in the same way as interest
with the intention of legislating in FB 2009 (see MTR
3/08 Item 12.1). However, in order to tackle
immediate avoidance, FB 2008 will block the
following schemes:
The market value also has effect where goods are
acquired or appropriated into trading stock other
than in the course of a trade.
Proposed revisions
FB 2008 will put the market value rule on a
statutory basis. Its effect will be to preserve the
current tax treatment of non-trade appropriations
of goods into and from trading stock.
(a) arrangements to avoid corporation tax by
receiving interest in the form of non-taxable
distributions;
(b) arrangements as a result of which the charge to
tax on interest is reduced or eliminated by credits for
overseas tax in circumstances where no such tax is
ever suffered;
(HMRC Budget release BN19 13.3.08)
5.6
Budget 2008: Financial Products
Avoidance – Disguised Interest
and Transferring Rights to Lease
Rentals
Budget 2008: Leased Plant or
Machinery – Anti-avoidance
(c) avoidance of corporation tax by the adoption of
differing accounting treatments within a group for
convertible debt;
This measure will counter avoidance by businesses
which lease in and lease out the same plant or
machinery to exploit differences in the way in which
lease rentals paid and received are taxed in order to
generate a tax loss where there is no commercial
loss.
(d) arrangements where companies acquire
partnership rights in advance for an amount equal to
the discounted value of the rights so as to generate
disguised interest;
The measure will also counter avoidance involving
leases of plant or machinery which are granted in
return for a capital payment, often described as a
premium,
and
similar
arrangements,
in
circumstances where the capital payment currently
escapes taxation.
(e) arrangements (previously dealt with by FA 2004
s131) where companies which are members of
partnerships obtain disguised interest on partnership
contributions by altering profit-sharing ratios; and
(f) schemes where attempts are made to exclude
from the derivative contracts legislation transactions
which are designed to produce disguised interest.
Minor changes will be made to the leased plant or
machinery anti-avoidance measure which was
announced on 9 October 2007. The changes will
clarify the operation of the rules in a sale and finance
leaseback and introduce new rules to ensure that
lease and finance leaseback arrangements are
treated in a similar way.
Legislation will also be introduced to stop schemes
that are intended to avoid or exploit the 2005 ‘shares
as debt’ rules in FA 1996 ss91A and 91B by means
of:
(g) depreciatory transactions intended to create
artificial losses;
(HMRC Budget release BN20 13.3.08)
(h) rates of interest said to be ‘uncommercial’;
(i) spreading disguised interest between two or more
companies;
18
April 2008
5.10
(j) ‘falsifying transactions’ which, without affecting
the overall return, are said to prevent the legislation
from applying; and
Context
FA 2007 s26 and Sch 4 legislated to counteract the
use of partnership arrangements which generate
trade losses for use as ‘sideways loss relief’ by a
non-active or limited partner. Since then HMRC
have seen, through the tax avoidance disclosure
regime and otherwise, evidence of arrangements of
a similar nature based on individuals acting as
traders on their own account rather than as partners.
Proposed revisions
FB 2008 will restrict the amount of sideways loss
relief which can be claimed by an individual, other
than a partner, carrying on a trade in a non-active
capacity. Where a loss arises to an individual
carrying on a trade in a non-active capacity as a
result of tax avoidance arrangements made on or
after 12 March 2008, no sideways loss relief will
be available for that loss. Otherwise there will be
an annual limit of £25,000 on the total amount of
sideways loss relief which an individual may
claim from trades carried on in a non-active
capacity.
(k) use of exit strategies which do not amount to exit
arrangements for the purpose of the shares as debt
rules.
In addition, the measure will counter notified
schemes which are intended to allow lessors of plant
or machinery to dispose of the right to taxable
income in exchange for a tax-free sum. The changes
will ensure that where the right to receive rentals is
transferred the value receivable will be taxed as
income.
(HMRC Budget release BN21 13.3.08)
5.8
Budget 2008: Restrictions on
Trade Loss Relief for Individuals
Budget 2008: Controlled Foreign
Companies
(CFC)
–
AntiAvoidance
Context
The purpose of the CFC legislation is to counter the
artificial diversion of profits from the UK so as to
avoid UK tax. It taxes those profits which arise to
low-taxed foreign companies controlled by UK
persons and which would have been subject to UK
corporation tax as income had they not been
artificially diverted from the UK. It does not have
effect if the CFC qualifies for one of five exemptions.
For these purposes an individual, other than a
partner, carries on a trade in a non-active capacity
where the individual spends an average of less than
10 hours a week, in a relevant period, personally
engaged in activities of the trade carried on
commercially and with a view to the realisation of
profits from those activities.
General description of the measure
FB 2008 will block a number of artificial
avoidance schemes which rely on the use of a
partnership or a trust to escape a CFC charge
either by misusing one of the exemptions from
the CFC rules or by arranging for profits to be
earned in such a way that they purportedly fall
outside the scope of the rules.
The restrictions will not apply to losses which derive
from qualifying film expenditure, broadly losses that
derive from film reliefs in ITTOIA 2005 ss137 to 140,
or to losses of a Lloyd’s underwriting business.
Transitional rules will apply to the computation of
losses subject to the annual limit where these arise
for an individual’s basis period which begins before
12 March 2008 and ends on or after that date.
HMRC do not believe that these schemes work, but
these measures will put the question beyond doubt
and close off opportunities for other similar
avoidance schemes.
Legislation will also be introduced to align the
meaning of non-active partner for the purposes of
restrictions to sideways loss relief with the meaning
of non-active capacity.
(HMRC Budget release BN22 13.3.08)
(HMRC Budget release BN63 13.3.08)
5.9
Budget 2008: Corporate Intangible
Assets Regime – Anti-Avoidance
5.11
FB 2008 will clarify that the effect of the ‘related
party’ rules in the corporate intangible assets regime
is unaffected by any administration, liquidation or
other insolvency proceedings or equivalent
arrangements in which any company or partnership
may be involved.
Budget 2008: Double
Relief – Income Tax
Taxation
Context
FB 200 will ensure that the credit for any foreign tax
paid on trade or professional earnings is no more
than the UK income tax due in respect of the same
earnings.
(HMRC Budget release BN23 13.3.08)
19
April 2008
Operative date
The legislation will have effect for income arising on
or after 6.4.08 and for foreign tax paid on or after
6.4.08.
the money was received after the share register was
written up, which was the time of issue of the shares,
and accordingly the shares were not fully-paid at the
time of issue. There was no conditional issue of
shares and no evidence to support a conditional
issue.
Current law and proposed revisions
The legislation will clarify the way that TA 1988 s796
defines the maximum credit available against UK
income tax in respect of foreign taxes.
The Special Commissioner (Dr John Avery Jones)
agreed with HMRC.
The taxpayers appealed,
relying on the decision in Inwards v Williamson
(HMIT) (2003) Sp C 371, and arguing that when the
moneys were used to pay for the share subscription,
even though the money had been provided earlier to
the company, that debt was a ‘technical’ debt and Mr
Blackburn received nothing back from the company
as a matter of fact. Alternatively they submitted that
the Special Commissioner’s finding that there had
been a general intention to subscribe for shares
should have led to the conclusion that the moneys
received by the company were on account of capital
and did not give rise to a loan, relying on Kellar v
Williams [2000] 2 BCLC 390.
This measure will confirm existing practice and is in
keeping with the changes made in 2005 to the
corporation tax regime. It will remove doubts about
the basis of foreign tax credit following recent case
law.
(HMRC Budget release BN64 13.3.08)
5.12
EIS: Disqualifying Payments – Or
Not?
Context
The issues in this case were: (a) whether the value
received rules in TCGA 1992 Sch 5B para 13(2)(b)
applied in relation to the share issues; and (b)
whether the Special Commissioner had been right to
treat some of the share issues as comprising a
single issue of shares.
The decision: ChD (Peter Smith J)
The EIS legislation contained various checks and
balances to protect against abuse including the
value received rules. The purpose of the scheme
was to encourage investment by attracting fresh
money and any device or arrangement which did not
attract new money was not allowable, eg a director
could not utilise his pre-existing loan account in his
favour with a company to discharge a debt that
would fall on him for a subscription for shares.
Blackburn and another v HMRC: the facts
A company (the second taxpayer) was incorporated
in 1998 to operate a sports club. It made several
issues of shares to its controlling director Mr
Blackburn (the first taxpayer). He claimed enterprise
investment relief (‘EIS relief’) in respect of those
shares pursuant to TCGA 1992 Sch 5B. HMRC
rejected the claim, and both taxpayers appealed. Mr
Blackburn had invested money informally with the
company without a contract of allotment or a share
application. The circumstances were such that in
some cases money had been paid to the company
before any application was made for the issue of
shares in respect of that money; and in other cases
the issue of shares had been completed before the
money was paid in respect of the issue.
In Kellar v Williams [2000] 2 BCLC 390 there was an
agreement to increase the capital of the company
and the appellant provided funds for that increase.
There was no clear indication whether he intended
that the moneys would be by way of loan or capital
contribution. The funds were treated in the
company’s records as capital contributions to make
up the total of the owners’ equity. The question then
arose whether or not on a subsequent liquidation of
the company the moneys thereby contributed by the
appellant were capital contributions or loans. The
opinion of the Privy Council was that where
shareholders of the company agreed to increase
capital without a formal allocation of shares, that
capital became like share premium and became part
of the owners’ equity. Accordingly a payment made
to or on behalf of a company other than by way of
payment of shares or by way of a gift was not
repayable to the payer. The funds were not by way
of a loan.
The taxpayers contended that they were eligible for
EIS relief. New money had been put into the
company and shares had been issued. The word
‘issue’ in TA 1988 was appropriate to indicate the
whole process whereby unissued shares were
applied for, allotted and finally registered. In this
case the issue was not complete until the money
was received and accordingly there was an issue of
fully-paid shares. Alternatively, there was an issue of
shares subject to the condition precedent that the
money was received. Where money was paid in
advance of the issue of shares it was part of the
subscription for the shares and did not create a debt
within the ‘value received’ rules.
In the present case, the taxpayers submitted that the
first taxpayer was putting the money into the
company with the intention of sorting out the issue of
shares which was identical to the position in Kellar.
In effect, the finding of the Special
Commissioner that there was a general intention
to put money into the company in respect of
shares, although it could not be treated as an
application for shares, meant that the moneys
which were received by the company were on
HMRC contended that either money was paid to the
company in advance of any subscription for shares,
in which case the value received rules applied, or
20
April 2008
account of capital and not a loan. The company
could never come under an obligation to repay
them; it would become under an obligation to
issue shares pursuant to the receipt of that
money on capital account. That was the correct
analysis on the facts of the case and the moneys
paid by the first taxpayer were capital and could
not be a loan. The Special Commissioner’s
conclusion that the moneys were to be treated
as a loan was incorrect and accordingly the
appeal succeeded in its entirety (Kellar v Williams
[2000] 2 BCLC 390 applied).
Regulations will be made to increase the
individual employee limit on grants of EMI
qualifying options from £100,000 to £120,000.
Operative date
The EMI option grant limit increase will have effect in
respect of options granted on or after 6.4.08 and the
qualifying company changes will have effect in
respect of options granted on or after the date on
which FB 2008 receives Royal Assent.
Current law and proposed revisions
EMIs are tax and NICs advantaged share options
available to small companies with gross assets not
exceeding £30 million, to help them recruit and retain
employees. In addition to the gross assets test, EMI
is limited to companies or groups which are
independent and are not in one of the excluded
trading activities listed in ITEPA 2003 Sch 5 paras
16 to 23. Furthermore, employees have to satisfy a
working time requirement to be granted an EMI
share option. Currently, employees cannot hold
qualifying EMI options, taking into account Company
Share Option Plan options also granted to them, with
a total market value of more than £100,000 at date
of grant.
If the loan analysis had been correct, the argument
that there was merely a ‘technical’ loan would have
been rejected. A broad construction of the legislation
could not overturn the clear wording applying to loan
arrangements, Inwards considered.
The Special Commissioner had held that a number
of shares were part of larger issues in relation to
which, on his interpretation, the receipt of value
provision applied. To obtain relief the entirety of the
shares comprising the issue had to be issued in
order to raise money for the purpose of the
qualifying business activity. If the Special
Commissioner had decided that part of those shares
were affected by a return of value, then it could not
be said that ‘all the shares’ were issued to raise
money for the purpose of qualifying business
activity. The appellants could not successfully
challenge the factual findings of the Special
Commissioner as to whether in fact there were
separate issues or whether a set of shares was part
of a single issue.
To ensure EMI continues to meet the EU State Aid
guidelines, FB 2008 will make two changes to the
EMI legislation in ITEPA 2005 Sch 5. First, it will
insert an additional test to limit EMI to companies
with fewer than 250 full-time employees. If a
company has part-time employees, the full-time
equivalent number of these can be calculated by
adding to the number of full-time employees a just
and reasonable fraction for each part-time employee.
Second, the legislation will add shipbuilding, coal
and steel production to the list of excluded trades.
HMRC could not successfully contend that the
moneys provided to the company were impressed
with a purpose trust, Barclays Bank Ltd v Quistclose
Investments Ltd [1970] AC 567 considered.
The qualifying company changes will have effect in
respect of EMI share options to be granted on or
after the date on which FB 2008 receives Royal
Assent. The changes will not have effect in respect
of qualifying EMI share options already granted
under the existing rules.
(Blackburn & Anor v R & C Commrs [2008] EWHC
266 (Ch) 19.2.08 reported at CCH Weekly Tax News
Issue 489 3.3.08)
6.
EMPLOYMENT
6.1
Budget
2008:
Enterprise
Management Incentives (EMIs)
Context
To ensure compliance with EU State
guidelines, FB 2008 will make two changes:


The change to the individual EMI option grant limit
will have effect in respect of options granted on or
after 6.4.08. This will allow qualifying companies to
grant new or additional qualifying EMI options to
their employees up to the new limit of £120,000.
(HMRC Budget release BN18 13.3.08)
Aid
6.2
EMIs will be limited to qualifying
companies
with
fewer
than
250
employees; and
Beneficial Loan Arrangements –
Official Rates
HMRC have announced that the official rate for
2007/08 of 6.25% will be carried forward to
2008/09, subject to review in the event of significant
rate changes.
companies involved in shipbuilding, coal
and steel production will no longer
qualify for EMI.
(HMRC What’s New? 3.3.08)
21
April 2008
6.3
Further guidance can be found as follows:
Expenses Payments to Employees
Travelling Outside the UK: Scale
Rates
Context
HMRC have published new tables for benchmark
scale rates which employers can use to pay
accommodation and subsistence payments to
employees whose duties require them to travel
outside the UK.
Tables of benchmark rates
Subsistence expenses are a common example of
expenses which employers choose to reimburse by
means of a scale rate payment (see EIM05200).
EIM05210 contains guidance about the evidence
HMRC may require in support of a dispensation
request for scale rate subsistence payments to
employees travelling within the UK. The sampling
technique described in that guidance is not usually
appropriate for employees who travel outside the
UK, because most employers will not have enough
internationally mobile employees to enable them to
undertake a meaningful sampling exercise.
EIM05255
What the tables contain
EIM05260
How to use the benchmark rates
EIM05265
Employee staying as guest of a
private individual
EIM05270
Employee receiving free meals and
accommodation
EIM05275
Employee
staying
residential property
EIM05277
Airline employees – relationship with
Flight Duty Allowances
EIM05280
Examples
in
vacant
(HMRC What’s New? 7.3.08 referring to EIM 05250)
6.4
Salary Sacrifice
Context
HMRC have published a document describing how
salary sacrifice works and its impact on Income Tax,
NICs and National Minimum Wage and on
Contributions- and Earnings-Related Benefits.
HMRC have therefore published tables of
benchmark scale rates which employers can use to
pay accommodation and subsistence expenses to
employees whose duties require them to travel
abroad, without the need for the employees to
produce expenses receipts. The tables can be found
at EIM05290, and are based on information provided
by the Foreign and Commonwealth Office.
What is a salary sacrifice?
A salary sacrifice happens when an employee gives
up the right to receive part of the cash pay due under
his or her contract of employment. Usually the
sacrifice is made in return for the employer’s
agreement to provide the employee with some form
of non-cash benefit. The 'sacrifice' is achieved by
varying the employee’s terms and conditions of
employment relating to pay.
Accommodation and subsistence payments at or
below the published rates will not be liable for
income tax or NICs for employees who travel
abroad, and employers need not include them on
forms P11D. However, if an employer decides to pay
less than the published rates, its employees are not
automatically entitled to tax relief for the shortfall.
They can only obtain relief under the employee
travel rules (see EIM31800 onwards) for their actual,
vouched expenses, less any amounts paid by their
employer. By ‘vouched expenses’ HMRC mean
expenses which are supported by receipts, or some
other contemporaneous record of the amounts
spent.
Salary sacrifice is a matter of employment law, not
tax law. Where an employee agrees to a salary
sacrifice in return for a non-cash benefit, they give
up their contractual right to future cash
remuneration. Employers and employees who are
thinking of entering into such arrangements would be
well advised to obtain legal advice on whether their
proposed arrangements achieve their desired result.
When is salary sacrifice effective?
Salary sacrifice arrangements are effective when
the contractual right to cash pay has been
reduced.
These tax/NIC free amounts are in addition to the
incidental overnight expenses that employers may
reimburse tax/NIC free under ITEPA 2003 s240 and
the corresponding NICs disregard (see EIM02710
and NIM06015).
For that to happen two conditions have to be met:


Employers are not obliged to use the published
rates. It is always open to an employer to
reimburse their employees’ actual, vouched
expenses, or to negotiate a scale rate amount
which they believe more accurately reflects their
employees’ spending patterns. Employers
wishing to negotiate such an amount must of
course be able provide HMRC with evidence in
support of their figures.
the potential future remuneration must be
given up before it is treated as received for
tax or NICs purposes; and
the true construction of the revised
contractual arrangement between employer
and employee must be that the employee is
entitled to lower cash remuneration and a
benefit.
When is salary sacrifice not effective?
A salary sacrifice is not effective if, in practice,
the arrangement enables the employee to
22
April 2008
continue to be entitled to the higher level of cash
remuneration. In other words he has merely
asked the employer to apply part of that cash
remuneration on his behalf.
P46 and the Lower Earnings Limit
The employer will have to send HMRC a P46
(Statement A and B cases) when the employee’s
earnings reach the Lower Earnings Limit, now £87 a
week, £377 a month or £4,524 a year.
What information does an employer need to
provide to HMRC?
In order to decide whether a salary sacrifice is
effective or not HMRC have to consider what the
true construction of the revised contractual
arrangements is. The employer should provide full
details of the scheme and of the new contractual
arrangements. The employer will need to satisfy
HMRC that the employee’s entitlement to cash pay
has been reduced, that a non-cash benefit has been
provided by the employer, and that the employer is
not simply meeting the employee’s own financial
commitments.
No P45(Part 3) or P46
If the employer does not get a P45 (Part 3) or a
completed P46 from the new employee, the
employer will have to fill in section 1 of a P46 and
send it to HMRC. The default code BR is used.
Penalties
From April 2009, there will be penalties for sending
in-year forms on paper when they should be sent
online. But HMRC will not be charging these straight
away.
Salary sacrifice and the National Minimum Wage
A salary sacrifice cannot reduce the employee’s
cash pay below the National Minimum Wage.
At the end of the first, second and third quarters of
the 2009/10 tax year, HMRC will write to the
employer if paper forms have been sent when online
filing should have been made, reminding the
employer of the new requirements and offering
guidance and support. If the employer then sends
any paper forms during the fourth quarter (or later),
HMRC will charge a penalty.
How could a salary sacrifice affect future
entitlement to the State Pension, benefits and
Tax Credits?
A salary sacrifice may affect the employee’s
entitlement to state benefits and tax credits and the
employee should carefully consider the possible
effects before deciding to go ahead with a change in
the employment contract. The information in the
document is based on the rules that apply at the time
of writing.
(HMRC news release 19.3.08)
6.6
(HMRC What’s New? 17.3.08)
6.5
PAYE
Regulations:
Following Demibourne
Changes
Context
The Special Commissioner’s decision in the case of
Demibourne Ltd v HMRC highlighted a number of
tax issues for employers and their employees which
can arise as a consequence of an employer’s failure
to operate PAYE (Pay As You Earn). These issues
relate to a situation where Income Tax has been
paid in relation to what is PAYE income, but by the
wrong legal person (ie the employee rather than the
employer). See MTR 10/06 Item 6.3.
PAYE: Changes From April 2008
Context
Within the scope of an HMRC news release entitled
‘Doing PAYE online all year round’ is the following
guidance about changes to the P46 reporting
requirements from April 2008.
Changes from April 2008
The Demibourne case confirmed that where an
employment relationship exists, the employer is
responsible for deducting tax from payments
made to the employee in accordance with the
PAYE Regulations. Under the law as it stands,
HMRC do not have the discretion to choose
whether to collect tax from the employer or the
employee. This can lead to a situation where
HMRC are obliged to seek recovery of tax from
the employer in relation to income on which tax
has previously been paid by (or on behalf of) the
employee under SA.
Changes to P46 processes
From April 2008, HMRC have agreed a relaxation in
the P46 process.
When a completed P45 (Part 3) is not provided, the
employee will not necessarily have to complete form
P46. The employer may ask the employee to provide
this information on the employer’s own stationery or
in an e-mail, for example. It will be up to the
employer to decide how the P46 information is
obtained and whether a signature from the employee
is needed for the employer’s own purposes. The
necessary information can be obtained in a way
which best suits the employer’s business needs as
long as a record is kept of where it came from.
HMRC have engaged with the main bodies of the tax
and accountancy professions and business to
identify a solution to the issues highlighted in the
Demibourne case. As a consequence of this
dialogue a legislative solution is being introduced
from 6 April 2008.
23
April 2008
(including investment trust companies and venture
capital trusts) and certain overseas funds, with effect
to supplies of services on or after 1.10.08.
New regulations
Regulations have been made on 20.3.08 which
amend The Income Tax (Pay As You Earn)
Regulations 2003 (The PAYE Regulations) to
extend the limited circumstances where HMRC
may make a direction to transfer an employer’s
PAYE liability to the employee who received the
relevant payments from which tax has been
under deducted. Broadly, the new power to make a
direction will apply where an employer has failed to
deduct or account for tax in relation to a relevant
payment (payments subject to PAYE as defined in
Regulation 4 of the PAYE Regulations), while tax on
that payment has been included in the employee’s
SA, or where no SA has been made but tax has
been paid as a SA payment on account, or has been
deducted as a sub-contractor deduction.
(HMRC Budget release BN74 13.3.08)
Indirect tax returns: correction of errors
There is a threshold below which previous errors can
be corrected on the VAT return for the period in
which the errors are discovered. For accounting
periods commencing on or after 1.7.08, the limit is
increased from £2,000 to the greater of £10,000 and
1% of turnover, subject to an upper limit of £50,000.
(HMRC Budget release BN75 13.3.08)
Transitional period for claims
FB 2008 will provide a transitional period to 31.3.09,
during which eligible businesses can make VAT
claims for rights which accrued before the
introduction in 1996 and 1997 of the three-year time
limit for claims (see MTR 2/08 Item 8.3 and 3/08
Item 8.1).
HMRC will be publishing draft guidance on the
practical effect of this new legislation in April, but in
the meantime reference should be made to further
details on new legislation to transfer a PAYE liability
from an employer to an employee.
The legislation will also correspondingly amend the
powers of assessment of HMRC to ensure that
assessments may be made to recover any amounts
paid, which are subsequently found to have been
incorrectly claimed by business.
(HMRC news release 20.3.08)
7.
NATIONAL INSURANCE
(HMRC Budget release BN73 13.3.08)
No Items to report.
Option to tax land and buildings
8.
VAT & CUSTOMS DUTIES
8.1
Budget 2008: Various Changes
Context: general description
This measure will simplify the legislation relating to
the option to tax land and/or buildings. It will also
introduce minor changes to enable taxpayers to
revoke an option to tax after 20 years and make a
number of associated changes to improve practical
administration of the option to tax.
Increased turnover threshold for registration and
deregistration
The taxable turnover threshold which determines
whether a person must be registered for VAT will be
increased from £64,000 to £67,000.
Operative date
The rewritten legislation will have effect on and after
1.6.08. The earliest date an option to tax will be
revocable will be 1.8.09.
The taxable turnover threshold which determines
whether a person may apply for deregistration will be
increased from £62,000 to £65,000. The existing
conditions for determining entitlement or liability to
deregistration remain unchanged.
Current law and proposed revisions
The law relating to the option to tax land and
buildings for VAT is contained in VATA 1994 Sch 10.
The registration and deregistration threshold for
relevant acquisitions from other European Union
Member States will also be increased from £64,000
to £67,000.
A Treasury Order will be laid after Budget 2008 to
insert a revised Sch 10 into VATA 1994 and make
certain consequential changes to other VAT
legislation, including new appeal rights. This will be
accompanied by a public notice having the force of
law.
The new registration and deregistration thresholds
will have effect on and after 1 April 2008.
A number of associated changes to improve
practical administration of the option to tax and its
revocation will be included in the legislation. These
deal with:
(HMRC Budget release BN73 13.3.08)
Amendment to the exemption for fund
management
The VAT exemption for fund management will be
extended to cover UK-listed investment entities

24
opted properties held in a VAT group;
April 2008

opted buildings acquired for use as
dwellings or for a relevant residential
purpose and bare land acquired for
construction of building for such purposes;

the introduction of a new option to simplify
the option to tax process for taxpayers with a
number of properties;

early revocation of an option to tax within a
‘cooling-off’ period;

due from such others to the Commissioners.’ There
was ‘no incongruity in their and the public’s interests
being in this respect protected by a common law
action for conspiracy. ... the claim is not for the VAT
due or for repayment of the VAT credit, it is for
damages in respect of loss suffered by the
Commissioners due to a successful conspiracy to
manipulate the VAT system.’ Accordingly there was
‘nothing in the statutory scheme to preclude the
Commissioners’ pursuit of a common law claim for
conspiracy against [Total Network]’.
(HMRC v Total Network SL reported at the Tax
Journal 24.3.08 p3)
the automatic lapse of an option to tax six
years after the taxpayer ceased to have any
interest in a property which they had
previously opted to tax;

the ability, in certain circumstances, to
exclude a new building from a previous
option to tax; and

late applications for permission to opt to tax.
8.3
Carousel
Fraud:
HMRC’s Appeal
HL
Going
Concern
On 29 February HMRC issued a summary of final
responses to its consultation on TOGCs. This can
be found at:
http://customs.hmrc.gov.uk/channelsPortalWebApp/
downloadFile?contentID=HMCE_PROD1_028404.
(HMRC Budget release BN79 13.3.08)
8.2
Transfer
of
Consultation
(HMRC What’s New? 29.2.08)
Allows
The HL has allowed HMRC’s appeal against the CA
decision reported at [2007] STC 1005 (see MTR
3/07 Item 8.1). HMRC had formed the opinion that a
Spanish company (Total Network) had been involved
in a series of carousel frauds in relation to the sale of
mobile telephones from Spain to the UK. They took
proceedings against Total Network, claiming
damages for conspiracy to cheat the public revenue.
9.
COMPLIANCE
9.1
Filing Returns and Paying Tax
Online: New Deadlines
HMRC have published a series of FAQs, dealing
with the following:


The High Court gave judgment for HMRC, and the
HL upheld this decision (by a 3-2 majority, Lord
Hope and Lord Neuberger dissenting). Lord Scott of
Foscote described the transactions as a ‘charade’
and ‘a fraudulent scheme designed to extract by
deception money from the Revenue’. The statutory
provisions relating to VAT did not ‘provide protection
against tort claims for those who by fraudulent
schemes succeed in extracting money from the
Commissioners’. Lord Walker of Gestingthorpe
observed that the case concerned ‘illegal, fraudulent
tax evasion which is costing the Exchequer more
than a billion pounds a year. Indeed it is worse than
evasion: it is the fraudulent extraction of money from
the Exchequer.’ Lord Mance held that ‘there would
be an evident lacuna if the law did not respond to
this situation by recognising a civil liability ... The
wrongful extraction of the money from the
Commissioners by deceit involved unlawful means
and a sufficiently actionable wrong to justify a civil
claim in conspiracy.’ HMRC were entitled ‘to take
common law action in respect of a successful
conspiracy which abstracts monies en route to the
Commissioners
or
which
prevents
the
Commissioners from recovering from others what is





I’m interested in changes to SA for my
personal tax affairs.
I’m an employer and want to know about the
PAYE changes.
I’m VAT registered and want to know what
changes are coming.
I’m responsible for a CT return – what do I
need to do?
I’m an agent – what does this mean for me?
I’m a software developer – how can I get
involved?
Why are these changes happening?
(HMRC What’s New? 14.3.08)
10.
ADMINISTRATION
10.1
Budget
2008:
Penalties
for
Incorrect Returns and Failure to
Notify a Taxable Activity
General description of the measure
FB 2008 will extend the provisions enacted in FA
2007 Sch 24, to create a single penalty regime for
incorrect returns across all the taxes, levies and
25
April 2008
duties administered by HMRC. The penalty will be
determined by the amount of tax understated, the
nature of the behaviour giving rise to the
understatement and the extent of disclosure by the
taxpayer. The use of suspended penalties will be
extended.
For failure to notify a taxable activity there will be no
penalty unless there is tax and/or NICs due but
unpaid as a result, nor where the taxpayer has a
reasonable excuse for the failure. Otherwise there
will be a penalty of:

Provision will also be made to extend and adapt FA
2007 Sch 24 to cover penalties for failing to register
or notify HMRC of a new taxable activity across all
the taxes, levies and duties administered by HMRC,
including late VAT registration.


Operative date
The new provisions will have effect from a date to be
appointed by Treasury Order. For incorrect returns,
this is expected to be for return periods commencing
on or after 1.4.09 where the return is due to be filed
on or after 1.4.10. New penalties for failure to notify
are expected to have effect for failure to meet
notification obligations which arise on or after 1.4.09.
Each penalty will be substantially reduced where the
taxpayer makes a disclosure (takes active steps to
put right the problem), more so if this is unprompted.
For Class 2 NICs, the provisions will replace the
fixed penalty of £100 for notification more than
three months after starting self-employment with
a behaviour based penalty. The obligation to
notify remains unchanged.
Current law and proposed revisions
The measure will repeal a large number of different
penalty provisions which are specific to each of the
taxes, levies or duties covered and replace these
with a single legislative framework for penalties for
incorrect returns and another similar one for failing to
notify a taxable activity by the required date.
The measure will include full and explicit provisions
for the right of appeal against all penalty decisions.
HMRC will continue to consult on guidance on the
operation of these penalty provisions between the
date on which the FB 2008 receives Royal Assent
and the implementation of the changes. It is intended
that guidance will be published well ahead of
implementation.
The new provisions for incorrect returns will provide
for penalties in line with FA 2004 Sch 24, which are
based on the amount of tax understated, the nature
of the behaviour and the extent of disclosure by the
taxpayer. There will be no penalty where a taxpayer
makes a mistake, but there will be a penalty of up to:



30% of tax unpaid for non-deliberate failure
to notify;
70% of tax unpaid for a deliberate failure to
notify; and
100% of tax unpaid for a deliberate failure
with concealment.
This measure was the subject of a consultation
document published on 10.1.08 – Penalties Reform:
The Next Stage with draft clauses and explanatory
notes. A summary of responses to that consultation
and a Final Impact Assessment, including an
explanation of any resulting changes, will be
published shortly.
30% for failure to take reasonable care;
70% for a deliberate understatement; and
100% for a deliberate understatement with
concealment.
The measure will provide for each penalty to be
substantially reduced where the taxpayer makes a
disclosure (takes active steps to put right the
problem), more so if this is unprompted. For an
unprompted disclosure of a failure to take
reasonable care the penalty could be reduced to nil.
Where a taxpayer discloses fully when prompted by
a challenge from HMRC, each penalty could be
reduced by up to 50%.
(HMRC Budget release BN96 13.3.08)
Where a return is incorrect because a third party has
deliberately provided false information or deliberately
withheld information from the taxpayer, with the
intention of causing an understatement of tax due,
there will be a new provision allowing a penalty to be
charged on the third party.
There will be three elements:
 aligned and modernised record keeping
requirements;
 new inspection and information powers;
and
 aligned and modernised time limits for
making tax assessments and claims.
10.2
Budget 2008: Compliance Checks
Context: General description of the measure
FB 2008 will reform the rules for checking that
businesses and individuals have paid the correct
amount of IT, CGT, CT, VAT and PAYE or claimed
the correct reliefs and allowances.
The measure will also provide for reformed penalties
for some specific excise duty wrongdoings: misusing
goods subject to reduced excise duty rates, eg red
diesel; and, handling goods on which excise duty
should have been paid but has not.
26
Operative date
Information powers and penalties for failure to
comply with these obligations will have effect on and
after 1.4.09. Time limits for making assessments and
April 2008

claims will need a transitional period and so will
become fully operative on and after 1.4.10.
Record Keeping Requirement
Primary legislation requires records to be kept which
enable a taxpayer to make an accurate return.
Further detail of the required records is then set out
in secondary and tertiary legislation. The current
rules differ from tax to tax and this measure will pave
the way for an aligned approach.
Assessment Time Limits
Time limits for changing the amount of tax due by
assessment vary across the taxes. Current time
limits are set out below:
Information powers
For VAT and PAYE, HMRC have inspection powers
with no rights of appeal. For IT, CGT and CT, HMRC
have a combination of information powers, which
need pre-authorisation by the appeal commissioners
and can be challenged only by judicial review, and
enquiry powers which can only be used once an SA
enquiry notice into a particular return has been
issued. Authorisation levels, penalties and appeal
rights differ across the different regimes. The
relevant legislation is at TMA 1970 ss19A and 20,
VATA 1994 Sch 11 para 7, FA 1998 Sch 18 para 27
and the Income Tax (PAYE) Regulations 2003 reg
97.
The new powers will align and modernise HMRC’s
access to records and information.
The new package will align existing powers and
safeguards and introduce:
 a power to inspect records required under
the record-keeping legislation – this restricts
the existing VAT and PAYE inspections to
statutory records and introduces a new
power of inspection for direct tax;



removal of VAT and PAYE powers to
undertake inspections at private homes
without taxpayer consent;

appeal rights against any penalty, and
against information notices which have not
been pre-authorised by an appeal tribunal;

Mistake
Failure to
take
reasonable
care
3 years
Deliberate
understatement
VAT
(VATA
1994
s77)
(TMA
1970 ss
34 & 36)
(FA 1998
Sch 1
para 46)
PAYE
(TMA
1970
ss34 &
36)
3 years
5 years
10
months
6 years
20 years 10
months
20 years 10
months
21 years
21 years
5 years
10
months
20 years 10
months
20 years 10
months
20 years
Tax
Mistake
Discovery
N/A
4 years
Failure to
take
reasonable
care
4 years
6 years
Deliberate
understatement
or Failure to
notify liability
20 years
20 years
VAT
IT &
CGT
CT
PAYE
4 years
N/A
N/A
4 years
4 years
N/A
6 years
6 years
20 years
20 years
Time limits for taxpayers’ claims will also be aligned,
at 4 years.
a power to require third parties to provide
information which is relevant to establishing
a taxpayer’s correct tax position;
a power to visit business premises and to
inspect records, assets and premises;
Tax
The new legislation will align the time limits for
assessments to the following model:
a
power
to
require
supplementary
information which is relevant to establishing
the correct tax position;

an updated criminal offence of destroying or
concealing records requested under a notice
authorised by a tribunal.
This measure was the subject of initial consultation
in May 2007. Responses to that consultation
together with draft legislation for further consultation
were published on 10.1.08 – A New Approach to
Compliance Checks: Responses to Consultation and
Proposals. A summary of responses to that
consultation and a Final Impact Assessment,
including an explanation of any resulting changes,
will be published shortly.
(HMRC Budget release BN97 13.3.08)
10.3
penalties for failure to allow an inspection
and failing to comply with an information
notice, including a tax-geared penalty which
can be imposed by the new upper tier
tribunals; and
Budget 2008: Payment of Tax
Context: general description of the measure
The measure will make it easier for taxpayers to pay
what they owe on time, and for HMRC to tackle
those who seek to avoid their obligations by paying
late or not at all. There are three separate changes
to the current law:
27
April 2008

new legislation to enable HMRC to
introduce a credit card payment service;

HMRC will be able to set the repayments
they must make to individuals and
businesses against the payments HMRC
are owed by them; and

were published on 10.1.08 – Payments, Repayments
and Debt: Responses to Consultation and
Proposals. A summary of responses to that
consultation and a Final Impact Assessment,
including an explanation of any resulting changes,
will be published shortly.
(HMRC Budget release BN98 13.3.08)
HMRC’s debt enforcement powers to
collect unpaid sums by taking control of
goods in England and Wales, or by taking
action through the civil courts will be
modernised and aligned.
10.4
Offshore Disclosure Facility
Context
From 17.3.08 HMRC have begun to begin to issue
forms and help sheets to around 5,000 individuals
for whom information is held which indicates that
they currently hold or have held an offshore bank
account or accounts but who did not disclose under
the Offshore Disclosure Facility (see MTR 3/08 Item
12.4).
Operative dates
It is intended that HMRC will be in a position to
accept payments by credit card from Autumn 2008.
The ability to set repayments against debt will have
effect on and after Royal Assent to FB 2008.
The forms ask for more information about their
circumstances and this information will be used to
verify replies against the bank information held or
consider what further action is necessary.
The changes to HMRC’s powers to enforce payment
through the courts will have effect on and after the
date on which FB 2008 receives Royal Assent. In
England & Wales the power to take control of goods
will come into effect in line with the appointed day for
the Tribunals, Courts and Enforcement Act 2007 Sch
12.
The initial forms will be accompanied by Help sheets
designed to guide the individual through completion
of the form. Help and support will also be available
through HMRC Contact Centres by calling a
designated 0845 number.
Current law and proposed revisions
Legislation supports a range of payment methods,
but HMRC cannot accept payment by credit cards
except in certain limited circumstances such as at
ports and airports. FB 2008 will allow individuals and
businesses to pay tax, duties etc by credit card.
Taxpayers who choose to pay in this way will be
charged the transaction fee which HMRC will
themselves be charged. Legislation will be needed
because passing on this fee would otherwise be
outside the functions of HMRC.
Where the individual has authorised an agent to act
for him/her, HMRC will send the questionnaire to the
agent, with a copy going to the individual.
(AccountingWeb 17.3.08)
HMRC’s news release
HMRC confirm that they are pursuing those with
offshore accounts and tax liabilities who did not
notify their intention to disclose under the scheme by
22 June 2007, as well as those who notified but
decided not to disclose.
Under common law, or by request, HMRC may
already set off repayments payable to taxpayers
against debts they owe to HMRC. This measure will
give a specific power to HMRC to make set-off
across the different taxes, duties etc it administers,
at their discretion.
How will HMRC contact me?
HMRC are now contacting holders of offshore bank
accounts who chose not to disclose under the
Offshore Disclosure Facility.
HMRC’s powers to enforce the payment of civil debt,
where reminders and other actions have not been
successful, were inherited from the former Inland
Revenue and HM Customs & Excise. These powers
differ across regimes, which can be confusing for
taxpayers and lead to unnecessary costs to the
Exchequer. This package of changes will modernise
and align the enforcement powers in England &
Wales and Scotland, so that HMRC may recover
debts in a single action. It will also mean an end to
the current practice where taxpayers may face two
sets of costs and fees.
Depending on the circumstances this contact may
take the form of:
 a letter and an initial form, followed, where
appropriate, by the issue of a disclosure
form to enable account holders with unpaid
tax to bring their tax affairs up to date;
 a formal notice of enquiry;
 the issue of an SA return for the years where
none has been submitted;
 in exceptional circumstances that meet the
criteria within our published Criminal
Investigation Policy, the undertaking of a
criminal investigation;
This measure was the subject of initial consultation
in June 2007. Responses to that consultation
together with draft legislation for further consultation
28
April 2008
If we cannot accept your disclosure, it is likely that
we will make enquiries in the normal way.
1. Tell me more about the initial form (OCG1)?
In some circumstances HMRC may choose to issue
a form to ask you for more information before we
consider what further action is appropriate.
For further information on the initial form call our
dedicated telephone helpline 0845 366 7801
(international +44 125 384 6155).
If you receive a form this will be because HMRC
holds information from one or more banks that
indicates that you hold or have held an offshore
bank account or accounts. We will use this
information to verify your replies to the form. If you
receive a form, even if you don’t feel that any tax is
due, please complete and return it.
2. What if I receive a formal notice of enquiry into
a return?
You may receive a formal notice of enquiry. You can
find more details about HMRC enquiries on the
internet under Self Assessment, the legal framework
and then enquiries into tax returns.
A Helpsheet will be included to guide you through
completion of the initial form, OCG1(HS) Offshore
Compliance Group - helpsheet for initial form.
HMRC will open an SA enquiry because we hold
information from one or more banks that indicates
that you hold or have held an offshore bank account
or accounts and we wish to enquire into the
completeness and accuracy of the information
provided in tax returns you have made.
What action will HMRC take on receipt of the
initial form?
What further action is taken will depend on the
information you provide.
If we find that your returns are incomplete and
you chose not to participate in the Offshore
Disclosure Facility we will take this into account
in determining the level of penalty to be applied
which is unlikely to be less than 30% of the tax
and duties due.
If you have a reason for not disclosing your
account(s) we will consider the explanation you give.
We will either accept your explanation, or, in certain
circumstances we may challenge the explanation.
What happens if I consider I have unpaid taxes to
disclose?
We want to encourage those with unpaid tax and
duties to pay what they owe. If you consider you
have any unpaid taxes we will send you the
necessary forms for you to calculate the tax you
owe.
3. What if I receive an SA return(s)?
If you have a net tax liability you will usually need to
declare this on a SA tax return.
It may be that you have never been in receipt of an
SA return or have not received one for some time. If
you have not been issued with a notice requiring you
to complete a return you still have a statutory
responsibility to notify HMRC that you are
chargeable to income tax. You can find out more
about your obligation to notify chargeability on the
internet under SA Requirement to notify
chargeability.
This will include a disclosure form (OCG2)
accompanied by a OCG2(HS) Offshore Compliance
Group - disclosure helpsheet and OCG2(WS)
Offshore Compliance Group - disclosure worksheet
designed to guide you through completion of the
form.
The information HMRC has received from the banks
may indicate that your circumstances require a
return(s) to be issued.
When you return this to us we will then calculate the
interest and invite you to make an offer to include an
amount for penalties.
The issue of the return(s) will allow you to declare
your income and for HMRC to take appropriate steps
to regularise your tax position, including charging
any interest and penalties due. In certain
circumstances we will make enquiries into your
returns in the normal way.
Although you did not participate in the Offshore
Disclosure Facility you will now have this further
opportunity to put things right. Co-operation at this
stage will be taken into account in determining the
level of penalty to be applied. However, this is
unlikely to be less than 30% of the tax and duties
due.
What if I receive no contact and wish to make a
full disclosure?
HMRC encourage customers to make voluntary,
unprompted disclosures. If you wish to do this, you
should contact your own tax office.
We expect the vast majority of disclosures to be
accepted.
However, we may need to contact you or your tax
adviser, if you have one, to clarify any points. You
may have to provide appropriate evidence of your
circumstances to satisfy us that your disclosure is
complete.
(HMRC news release 17.3.08)
29
April 2008
11.
EUROPEAN AND
INTERNATIONAL
11.1
Agricultural Property Relief: The
Impact of the ECJ Decision in
Jager
partnership or controlled company, where BPR is
available at the rate of only 50% (IHTA 1984
s104(1)(b)) but APR may be available at 100%.
Should such an issue come before the ECJ, some
difficult legal issues would arise.
The basis of the decision in Jager was that the tax
system in one member state must not discriminate
against ‘identical assets’. The provisions of IHTA
1984 are of course drafted to take account of UK
property law, and UK tenancy legislation. In
particular, the proposition that APR will be available
at 100% for land farmed by a controlled company or
farmed partnership, where BPR would be limited to
50% assumes that the owner is entitled to vacant
possession, or at least that the land is valued on a
vacant possession basis. This proposition holds
good in England because the decision in HarrisonBroadley v Smith [1964] 1 AER 867 confirmed that
the rights enjoyed by a partner did not give rise to a
secure tenancy under the Agricultural Holdings Acts.
It may be that, in other EU Member States, it would
be found that the rights enjoyed by a farming
partnership or company were greater than under
English law, and that the owner of land farmed in this
way could not be said to enjoy the rights to vacant
possession.
Context
In general terms, EU legislation requires its Member
States to permit free movement of capital within the
EU Member States may not enact legislation which
has the effect of discouraging residents or nationals
from investing capital in other Member States.
Clearly, a national government may enact tax
legislation which could have the effect of
discouraging residents or nationals from investing in
another Member State.
The ECJ has considered the case of German
inheritance tax relief for agricultural and forestry
land. The relief was limited to agricultural and
forestry land situated in Germany. The son of a
deceased German resident who owned agricultural
and forestry land situated in France, the full value of
which was subject to German inheritance tax,
complained that if the land had been situated in
Germany, the German inheritance tax would have
been based on only 10% of the market value. On the
death of a German resident, German inheritance tax
would be charged on assets outside Germany, as
well as those situated in Germany.
The greater area of contention would probably be
property which under IHTA 1984 could not qualify at
all for BPR. This could obviously include farmland
let to a tenant. Given the extensive political influence
enjoyed by farmers, in most EU Member States, and
in many cases a somewhat revolutionary tradition, it
would be surprising if many UK domiciliaries were
keen to invest in farmland let to tenants, without a
very close and possibly expensive study of the
respective legal rights and obligations of owners and
occupiers of farmland.
The decision (ECJ)
Articles 73b(1) and 73d of the EC treaty precluded a
national tax provision like that being considered,
under which inheritance tax would be charged on the
full market value of agricultural and forestry land
situated in another Member State, while being
charged on only 10% of the value of identical
domestic assets. (Theodor Jager v Finanzamt KuselLandstuhl (2008) EUCJ 256/06.
Perhaps the most likely area of contention, where a
UK domiciliary might be unable to claim BPR, will be
in relation to farmhouses. The active UK owner of
farmland in another EU country may be able to claim
BPR in relation to the land, and be no worse off in
relation to the land he is farming even though he is
unable to claim APR. But, as is well known, HMRC
are unwilling to allow BPR for the business
proprietor’s living accommodation. However, one of
the requirements for obtaining APR, for a farmhouse,
is that it should be occupied for the purposes of
agriculture. Practitioners will be all too aware of the
close attention paid by HMRC to this point, in
relation to farmhouses. If the farmhouse is situated
outside the UK, in another EU country, and the
owner himself claims to be occupying it for the
purposes of agriculture, there may be a question as
to whether his presence in that other Member State
has become so permanent that he has become
domiciled there. In this event, the farm, including the
farmhouse will be excluded property for IHT
purposes and the question of whether it qualifies for
APR under IHTA 1984 will be academic.
Analysing APR in the light of Jager
IHTA 1984 s115(5) does of course restrict APR
under IHTA 1984 part V chapter II to agricultural
property situated in the UK, Channel Islands and Isle
of Man. There is therefore clearly the possibility that
a UK domiciliary might die leaving farmland situated
in another EU country, the full value of which would
be subject to IHT, while such property situated in the
UK IHT would be charged on only the nonagricultural value, plus possibly only 50% of the nonagricultural value if relief is only available at 50%.
Whilst the IHTA 1984 restricts APR to property
situated in the UK itself and adjacent islands, there is
no such geographical limitation for business property
relief. For the UK purchaser of farmland in another
EU country who will farm the land himself, there will
often be no practical difference between APR and
BPR. Both will in practice be available at the rate of
100% after only two years. There may be problems
with farmland being held outside, but farmed by, a
30
April 2008
The ECJ judgment was handed down only on 17
January 2008. It is therefore hardly surprising that
there has been no reaction from HMRC, though
note that the judgment largely follows an opinion of
the Advocate General delivered on 11 September
2007. There may, however, be another factor which
would prevent, or at least discourage, a challenge to
the present EU legislation. The provisions governing
UK APR, and particularly those establishing the rate
of relief, essentially represent legislation as enacted
in 1992.The German legislation considered by the
ECJ seems to have been enacted in 1997. The
significance of the date is that an important change
was made to the EC Treaty taking effect in
1994.This was an issue discussed briefly by the
Advocate General, but not explored further because
of the timing of the German legislation. Clearly this
would have to be explored in more detail if there
were a challenge to the UK provisions. It has to be
said, however, that the issue is not entirely clear cut.
The comments of the ECJ suggest that the type of
restriction being discussed might have contravened
EU law even if put in place before 1994.
FB 2008 will raise this limit, but the changes will
have effect only when a Treasury Order is laid,
following State Aid approval of the change.
(Trust and Estates February 2008 Vol 22 No 2,
article by Richard Williams)
(HMRC Budget release BN16 13.3.08)
Qualifying activities
The venture capital schemes are intended to support
investment
in
smaller,
higher-risk,
trading
companies. Most trades qualify under the schemes,
but not those which consist to a substantial extent of
listed ‘excluded activities’.
These excluded activities are listed in the relevant
legislation (for EIS – ITA 2007 s192; for VCTs – ITA
2007 s303 for CVS – FA 2000 Sch 15 para 26).
Where necessary, more detailed explanation and
definitions follow the list.
The proposed changes would, in each case, add
three new activities – shipbuilding, coal production
and steel production – to the list, together with
definitions. The definitions are based on those
provided by the European Commission, for State Aid
purposes.
12.2
12.
RESIDUE
12.1
Budget 2008: Venture Capital
Schemes
Budget 2008: Investment Manager
Exemption (IME)
Context
The IME enables non-UK residents, whether
companies, individuals or funds, to appoint UKbased investment managers to carry out
transactions on their behalf without the risk of
exposure to UK tax, subject to meeting certain
conditions. Two categories of change will be made,
benefiting investors.
Context
Various changes are announced for investors under
the EIS, CVS and VCT schemes, companies which
qualify to attract investment under those schemes
and VCTs themselves.
Simplifying
the
approach
to
defining
transactions
The IME has effect for transactions meeting the
statutory definition of an ‘investment transaction’.
For the future, HMRC will be able to make an order
designating transactions as ‘investment transactions’
for the purposes of the IME. After the change there
will be a single list of transactions coming within that
definition and there will be no need to refer to the
current range of different statutory provisions, which
will be repealed. The list of eligible transactions will
be available on the HMRC website, so that all
interested parties can see which transactions are
covered.
Operative date
For EIS, the changes to qualifying activities will have
effect for shares issued on or after 6.4.08, but the
change to the investment limit can have effect only
once the European Commission has given approval.
When State Aid approval is received, the new limit
will be brought into force but will have effect on and
after 6 April.
For CVS, the changes to the qualifying activities will
have effect for shares issued on or after 6.4.08.
For VCTs, the changes to the qualifying activities will
have effect for money raised on or after 6.4.08 (but
not for money derived from the investment of money
raised before that date).
Current law and proposed revisions
EIS income tax relief and investment limit
The limit on the amount on which an individual can
receive EIS income tax relief is currently in ITA 2007
s158(2).
31
Achieving proportionality
At present where an investment manager carries
out, on behalf of a non-UK resident, a transaction
which does not qualify for the IME, one of the
qualifying conditions can operate in a way which
means that no other transactions carried out by that
investment manager for that non-UK resident are
capable of qualifying for the IME, even where those
other transactions would themselves meet the
qualifying conditions. This can result in the non-UK
resident being exposed to UK tax on all the
April 2008
transactions carried out through the investment
manager. This measure will remove that condition
and produce a more proportionate outcome. All
transactions which meet the qualifying conditions will
qualify for the IME. If there are any non-qualifying
transactions, it will be only those transactions which
will be exposed to UK tax.
alternative investment funds (AIFs) and the other
dealing with Property Authorised Investment Funds.
The AIF changes will take effect on and after a date
to be set by Treasury Order, the date to be
determined by the date the FSA regulatory changes
become effective. The second will take effect from
6.4.08.
(HMRC Budget release BN28 13.3.08)
Funds of alternative investment funds: current
law and proposed revisions
Under the current regulations:
12.3
Budget 2008: Offshore Funds –
New Tax Regime
Context
An offshore fund is any type of fund which is resident
outside the UK or established under foreign law and
would, if it were established in the UK, constitute a
collective investment scheme for the purposes of the
Financial Services and Markets Act 2000.
Where HMRC certify a fund as a qualifying fund, a
test which must be satisfied each year, the fund
must distribute at least 85% of its income. On
disposal of his interest the investor is liable to CGT
or corporation tax on chargeable gains instead of
income tax or corporation tax on income if the fund
were a non-qualifying offshore fund.

a gain made by an authorised investment
fund on disposal of an interest in a nonqualifying offshore fund is an offshore
income gain and will be subject to
corporation tax in the fund; and

when an investor realises a gain by
disposing of units in the fund, they may also
be taxable on a capital gain.
Under the proposed new regulations:


A ‘reporting’ rather than a ‘distributing’ fund
FB 2008 will provide powers to make regulations
dealing with the taxation of investors in offshore
funds and the rules for allowing certain funds to be
classed as ‘reporting funds’, under which a fund will
be able to ‘report’ income to investors who will then
be subject to tax on the reported income.
in the case of an authorised investment fund
electing for the new tax treatment, the fund
will be exempt from tax on offshore income
gains; and
an investor in a FAIF that had so elected
would then be chargeable solely to income
tax on any gain made on disposal of units in
the fund.
Property authorised investment funds: current
law and proposed revisions
Under the current regulations:
The definition of what constitutes an offshore fund
will not be changed in FB 2008. The Government
intends to continue its discussions with industry on
this point and will legislate for a revised definition in
FB 2009. Draft regulations will be published shortly
after the FB, which set out the conditions which an
offshore fund must fulfil to ensure that a disposal of
an interest is subject to CGT treatment. It is
expected that the conditions for obtaining the
new qualifying funds status will be less onerous,
and the tests required for this will be applied
only at the outset (instead of, as now, annually).
It is also envisaged that minor failures to keep to
the conditions will not result, as they do at
present,
in
the
fund
being
removed
retrospectively from the more favourable regime.

an AIF pays corporation tax (CT) on rental
profit or other property income such as
property income distributions from UK-REITs
or their foreign equivalents;

any other taxable income received by an AIF
investing in property is treated in a similar
way to property income;

the income is distributed by the AIF, along
with any other income the AIF may accrue,
as a dividend carrying a tax credit;

exempt recipients (such as pension funds
and charities) cannot reclaim the tax credit;
and

dividends received from UK companies are
not taxable in the AIF.
(HMRC Budget release BN31 13.3.08)
12.4
Budget
2008:
Investment Funds
Authorised
Under the proposed new regulations:
Context
With a view to attracting non-UK resident investors
to certain UK authorised funds, typically those
investing in hedge funds or property, two measures
have been proposed, the one dealing with funds of

32
an AIF which invests mainly in property and
certain related securities will be able to elect
for the Property AIF regime to have effect;
April 2008



intended.
This
will
ensure
that,
notwithstanding the wording of any
double taxation treaty, UK residents pay
UK tax on their profits from foreign
partnerships; and
in a Property AIF rental profit and certain
other property-related income will be exempt
from taxation in the fund. It will normally be
distributed to investors under deduction of
tax. Basic rate taxpayers will have no further
tax liability, non-taxpayers and exempt
bodies will be able to reclaim this tax, while
higher rate taxpayers and some corporates
will have a further tax liability to pay;

Operative date
The first measure will be treated as having always
had effect. The second will have effect for income
arising on or after 12.3.08.
other taxable income of the Property AIF will
also be distributed to investors under
deduction of tax. Investors will similarly be
able to either reclaim the tax or incur a
further charge as appropriate; and
Current law and proposed revisions
UK law taxes a UK resident beneficiary of certain
trusts on the income to which they are entitled under
the trust arrangement as it arises. This means that,
in cases exploiting the above avoidance scheme, the
UK resident should be taxable in the UK on his or
her share of the profits of the partnership comprised
of the foreign trustees.
UK dividends which are currently not taxable
in the fund will remain exempt, as they are
for all corporate recipients and will fund
dividend payments carrying a tax credit to
investors as at present.
To qualify for the new regime Property AIFs will have
to meet certain conditions, including:

incorporation as an open-ended investment
company (subject to Financial Services
Authority regulation);

carry on a property-investment business
(amounting to at least 60% of the business);

a ‘genuine diversity of ownership’ condition,
so that the fund is not limited to or targeted
at only a few specified investors; and

limits on the holdings of corporate investors
and on the type and amount of loan
financing in the fund.
prevent tax avoidance through the
misuse of Double Taxation Treaties by
UK residents.
But the users of the scheme claim that a provision,
known as the Business Profits Article, common to
most tax treaties, exempts the partnership profits
from UK tax – not only in the hands of the foreign
partners but also in the hands of the UK
beneficiaries.
The first provision will make clear that (in line with
retrospective legislation introduced in F(No2)A 1987)
tax treaties do not exempt UK residents from UK tax
on any profits of a foreign partnership to which they
are entitled. The second measure will ensure that
the Business Profits Article in the UK’s tax treaties
cannot be read as preventing income of a UK
resident being chargeable to UK tax.
(HMRC Budget releases BN33 and 34 13.3.08)
(HMRC Budget release BN66 13.3.08)
Draft guidance has been issued on the Property AIF
regime, to be finalised before the end of April
12.6
(HMRC news release 27.3.08).
12.5
Budget 2008:
Treaty Abuse
General description of the measure
The decision in the case of ‘The Queen (on the
application of John Wilkinson) v The Commissioners
for Her Majesty’s Revenue and Customs’ made clear
that the scope of the discretion of HMRC to make
concessions from the strict application of tax law is
not as wide as had previously been thought.
Double Taxation
Context
UK residents are taxable on their income wherever it
arises. A wholly artificial scheme seeks to avoid UK
tax by artificially diverting income of a UK resident
individual to a foreign partnership comprised of
foreign trustees. The scheme is designed to ensure
that the income nonetheless continues to belong to
the UK resident as they will be a beneficiary of the
foreign trust. FB 2008 will:

Budget 2008:
Power to Give
Statutory
Effect
to
Existing
Concessions
HMRC have been reviewing their concessions in the
light of the Wilkinson judgment and that review is
expected to be completed in the autumn. The
majority of HMRC’s concessions are clearly
within the scope of their ‘collection and
management’ discretion and so can continue to
operate as they are.
clarify,
retrospectively,
legislation
introduced in 1987, which itself was
retrospective, so that it has effect as
33
April 2008
Indications are that when the review is
completed it will be possible to legislate a
substantial proportion of the remaining minority
and so enable the tax treatment they afford to
continue. FB 2008 will provide for existing HMRC
concessions (which include concessions operated by
HMRC’s predecessor departments of Inland
Revenue and HM Customs & Excise) to be made
statutory by Treasury Order. Details of the outcome
of the review, including those extra statutory
concessions to be legislated by order, will be
available later in the year.
sources and establish which indices/databases
are most commonly used and meaningful.
Anastasia Tennant (Christies) raised a case she
was involved in where several siblings had been
given part shares in assets on the same date.
The Inspector was seeking to value each part
share in isolation which would result in a
discounted acquisition value for the siblings.
This seemed to her not to be right and the
siblings’ acquisition value should be a fractional
share of the whole with no discount.
Mike Fowler explained that in CG cases the
Inspector is responsible for advising SAV what to
value. If there is any dispute as to what should be
valued it is up to the Inspector to resolve. As regards
the scenario mentioned he said that he had taken
advice and, on the facts as reported, HMRC capital
gains specialists agreed that the Inspector
appeared to be wrong and no discount was in
point. In general terms he said that any
disagreement over the valuation requirement could
be drawn to the attention of the SAV valuer who
would then consult the instructing office.
Operative date
This power will be operative on and after the date
that FB 2008 receives Royal Assent, but no orders
under this power are expected to be made until after
HMRC’s review of their concessions has been
completed.
Current law and proposed revisions
At present there is no enabling power of this kind to
allow existing concessions to be legislated by order.
In the context of this measure:

‘existing HMRC concession’ - means any
statement made by HMRC (before the
enactment of this measure) which allows a
person a reduction in liability to tax or duty,
or allows any other concession in relation to
tax or duty to which there is no legal
entitlement; and

‘statement’ - means statement of any sort
however described.
Anastasia Tennant and Susan Johnson (Christies)
asked why, when valuing for CG purposes at
31.3.82, HMRC feel that joint ownership discounts
are appropriate even when the joint owners were
happily married at that time. Anastasia Tennant
noted that until 5 April 1990 the CGT legislation
mostly treated spouses as a single unit: disposals
between spouses were at no loss/no gain; there was
joint taxation; the annual exemption was shared; the
loss of one spouse could be set against the gains of
the other.
Any order under this power will be made only if a
draft of that order has been laid before, and has
been approved by a resolution of, Parliament.
Mike Fowler drew attention to paragraph 7.24 of the
Valuation Office Agency Operational Instructions
which explains the reasoning.
(HMRC Budget release BN95 13.3.08)
12.7
Susan Johnson noted that for CG purposes, the
actual acquisition price is used if a chattel was
bought jointly after March 1982, but a discounted
joint ownership price is applied if a chattel was
purchased before March 1982 and the taxpayer
elects for rebasing to apply. Mike Fowler said
this is a widely acknowledged feature of the
legislation but, again, it is for the Inspector to
advise SAV of the exact valuation requirement.
He drew attention to the Lands Tribunal case of
Hatt v Newman (2001) where the Tribunal agreed
a 10% discount when valuing a husband and wife
joint interest at 31 March 1982. The CG Manual
gives detailed guidance about March 1982
valuations.
Chattels Valuation: HMRC’s Fiscal
Forum
On HMRC’s website can be viewed the minutes from
both November 2006 and, most recently, November
2007 meetings. From the latter:
Use of indices
Mike Fowler (Shares and Assets Valuation Team)
gave a brief recap from the last Chattels Valuation
Fiscal Forum which concluded that, whilst indices
such as Art Market Research (AMR) and ArtNet are
not perfect, they can be useful in recording market
trends. He advised that SAV had not received details
of any further databases since the last meeting. He
explained that indices are one of the tools used by
SAV when risk assessing cases, particularly if an
item has been sold and SAV need to establish if the
proposed 1982 value looks reasonable. SAV are
keen to keep abreast of the latest information
Anastasia Tennant noted that Mr Hatt had
represented himself against the Revenue Solicitor
and the expert witness was a valuer from the VOA.
Nick Parnell asked if the usual discount for 50:50
ownership cases was around 10% in both IHT and
34
April 2008

CGT cases. Mike Fowler confirmed that this was the
case and drew attention to the minutes of the Shares
Valuation Fiscal Forum held on 12 October 2004
(link above).
(HMRC Chattels Valuation Fiscal Forum minutes of
meeting on 14 November 2007).
12.8
Comparison of Exports and Imports between 2006
and 2007 are affected by changes in trade
associated with VAT carousel fraud (MTIC) and by
EU enlargement in January 2007.
Tax Law Rewrite Project
Transactions in land – response document
HMRC have published a response document
containing summaries of the documents received on
the draft clauses published with Paper CC/SC (07)
29. The document also shows how HMRC have
dealt with the comments received.
(HMRC news release 6.3.08)
12.10 Equitable
Mistakes
Minutes published
The Minutes of the February Meeting of the
Consultative Committee and the March Meeting of
the Steering Committee have now been published.
Jurisdiction
and
Context
Re Griffiths [2008] EWHC 118 (Ch) is an interesting
case which, on the right facts, might be
extremely useful in allowing taxpayers to escape
from the consequences of their actions in certain
circumstances.
(HMRC What’s New? 7.3.08 & 20.3.08)
12.9
The value of UK imports from countries
outside the EU increased by £2,686m (2%).
Nine of the 12 regions and countries of the
UK saw increases, with the largest increase
in Yorkshire and The Humber (£1,326m).
The largest percentage increase was in the
North East (44%).
UK Regional Trade Estimates for
2007
The court has an equitable jurisdiction, which allows
it to set aside a voluntary disposition where a donor
shows that he made the disposition as a result of a
mistake so serious as to render it unjust on the part
of the donee to retain the property given to him. The
jurisdiction is similar to the Hastings-Bass jurisdiction
and was used comparatively recently in Wolff v Wolff
[2004] STC 1633, where taxpayers had entered into
a complex tax planning exercise which they had not
understood and which would have rendered them
homeless.
Context
UK Regional Trade in Goods estimates were
released on 6.3.08, for the fourth quarter of 2007.
Exports
 The total value of UK exports for the 12
months ending December 2007 was
£218,919m.
 The total value of UK exports for the 12
months ending December 2007 fell by
£24,902m (10%) compared to the 12 months
ending December 2006.
 The value of UK exports to the EU
decreased by £25,595m (17%) in the same
period. Northern Ireland was the only
country of the UK which had an increase.
 The value of UK exports to countries outside
the EU increased by £693m (1%).
Re Griffiths: the facts
Mr Griffiths, aged 73, received tax planning advice,
as a result of which he made three substantial PETs,
hoping to survive for seven years (or at least three
years, in which case the IHT due on the lifetime gifts
would have been reduced by IHT tapering relief). He
made two transfers in April 2003 and one in
February 2004. In autumn 2004, he was diagnosed
as having lung cancer and, in April 2005, he died.
There were increases in five regions and countries of
the UK with the largest increase in North East
(£1,133m).
All three PETs became chargeable to IHT and the
tax payable exceeded £1 million. Mr Griffiths also
made a Will under which he left a life interest in his
residuary estate to his widow. If, therefore, he had
not made the transfers, there would be no IHT
immediately payable.
Imports
 The total value of UK imports for the 12
months ending December 2007 was
£308,689m.
 The total value of UK imports for the 12
months ending December 2007 rose by
£6,725m (2%) compared to the previous 12
months.
 The value of UK imports from the EU
increased by £4,039m (2.5%) in the same
period. Decreases were only seen in the
North West, London and Wales.
35
The executors sought to set aside the transfers on
the ground that they were made under a mistake. Mr
Griffiths mistakenly believed, at the times of the
transfers, that there was a real chance that he would
survive for seven years, whereas in fact at that time
his state of health was such that he had no real
chance of surviving that long. Had he known that his
life expectancy was so short he would not have
made the transfers, and so they should be declared
void or set aside.
April 2008
The issue in this case was whether a letter of wishes
written by the settlor to the trustees of a family
discretionary trust was confidential.
The medical evidence was that Mr Griffiths was not
suffering from cancer in 2003, but he was in 2004.
The decision: ChD (Lewison J)
A mistake of fact is capable of bringing the
equitable jurisdiction into play provided it is
sufficiently serious. It was then necessary to
show that, if Mr Griffiths had been aware of the
true facts, he would not have acted as he did.
Breakspear and Others v Ackland and Another:
the decision
In the absence of special terms, the
confidentially in which a wish letter was enfolded
was something given to the trustees for them to
use, on a fiduciary basis, in accordance with
their best judgment and as to the interests of the
beneficiaries and the sound administration of the
trust.
On the facts, there was no evidence that the
transactions in 2003 were made under a mistake. Mr
Griffiths was not ill at the time the gifts were made.
However, the 2004 gift was different. Had he known
in February 2004 that he was suffering from lung
cancer, he would also have known that his
chance of surviving for three years, let alone for
seven years, was remote. In those circumstances
he would not have acted as he did. It was
appropriate to set the 2004 disposition (of £2.6m)
aside.
Disclosure of the letter of wishes to the claimant
beneficiaries was ordered.
Briggs J turned to the question whether, and, if so, in
what way, the principle in In re Londonderry’s
Settlement ([1965] Ch 918) that the process of the
exercise of discretionary powers by trustees was
inherently confidential, and that that confidentiality
existed for the benefit of the beneficiaries rather than
merely for the protection of the trustees, applied to
wish letters.
Additional points worth noting:
(1) Quite apart from the fact that there was no
mistake in relation to the 2003 dispositions, the
Judge said that he would have refused to set aside
one of them because it was a joint disposition by Mr
and Mrs Griffiths, and Mrs Griffiths had not applied
for it to be set aside. Counsel said that she would be
happy to make such an application but she had not
done so and, even if she had, it would have been
necessary to show that she too made a relevant
mistake.
In that context, he confined himself to wish letters
arising in the context of family discretionary trusts.
Generally, the confidence which ordinarily attached
to a wish letter was such that, for the better
discharge of their confidential functions, the trustees
need not disclose it to beneficiaries merely because
they requested it unless, in their view, disclosure
was in the interests of the sound administration of
the trust, and the discharge of their powers and
discretions.
(2) Was the disposition void or merely voidable? It
made a difference because the executors had paid
IHT on a provisional basis. If the assignment was
void, they were entitled to interest on the overpaid
tax as from the date on which they made the
payments (IHTA 1984 s235), whereas if it was
voidable, interest was only payable from the date
when a claim to repayment was made (IHTA 1984
ss150 and 236(3)). The Judge held that, as the
jurisdiction is to relieve against the consequence of a
mistake, unless and until the transaction is set aside
(or relief is given), it has legal effect. In other words
the transaction is voidable rather than void ab initio.
His conclusion that, in general, wish letters fell within
the Londonderry principle made it unnecessary to
decide whether wish letters fell into any of the
Londonderry excluded categories.
(Breakspear and Others v Ackland and Another
10.3.08 reported in The Times 10.3.08 p55)
12.12 Money Laundering Regulations:
Deadline Extended
Note that the application was not opposed by the
donees. HMRC were asked whether they wished to
intervene in the proceedings in view of the large
amount of tax potentially involved. They declined to
do so, although asked for certain authorities to be
brought to the court’s attention. There was,
therefore, no adversarial argument either on the law
or on the facts.
Further to MTR 3/08 Item 12.2, the deadline for Trust
or Company Service Providers to register has been
extended from 1 April to 31 May 2008.
(Revenue & Customs Brief 18/08 26.3.08)
(The Law Society’s Gazette 6.3.08 p26 article by
Professor Lesley King, College of Law, London)
12.11 Letters of Wishes: The Issue of
Confidentiality
Context
36
April 2008
APPENDIX
HMRC press
statements
releases,
notes,
notices
and
Revenue and Customs Business Briefs
1.
2.
Note that the Budget Press Notices are not
listed.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
HMRC Chattels Valuation Fiscal Forum
Beneficial loan arrangements – official rates
(3.3.08)
Stamp Taxes – Stamp Duty Land Tax Policy
and Processing Organisational Chart
(4.3.08)
Stamp Taxes – SDLT Practitioners News
(4.3.08)
Tax Law Rewrite: Transactions in land –
response document (7.3.08)
Draft Guidance on excepted transfers and
settlements (7.3.08)
Latest UK regional trade estimates (7.3.08)
Employment Income Manual (7.3.08)
Budget 2008 changes to Stamp Duty, Stamp
Duty Land Tax and Stamp Duty Reserve
Tax (14.3.08)
New deadlines for filing returns and paying
tax online (14.3.08)
Salary sacrifice (17.3.08)
Offshore bank accounts (17.3.08)
CGT reform – amended FAQ (17.3.08)
Stamp Taxes – dealing with missing UTRNs
(withdrawal of priority fax process) –
(17.3.08)
FAQs: residence and domicile (17.3.08)
Does claiming tax credits affect my level of
benefits? (18.3.08)
Changes to the P46 reporting requirements
from April 2008 (19.3.08)
Doing PAYE online all year round (19.3.08)
Benefits and Expenses Sub Group Minutes
(19.3.08)
HMRC: Change Programme (19.3.08)
Corporation Tax on chargeable gains:
indexation allowance: February 2008
(20.3.08)
Tax Law Rewrite (20.3.08)
Changes to the PAYE regulations to deal
with issues highlighted in the Demibourne
case (20.3.08)
Finance Bill: Impact Assessments (27.3.08)
Property Authorised Investment Funds
(Property AIFS): Draft Guidance (27.3.08)
3.
4.
5.
6.
VAT: Access to Intrastat Data (13/08 4.3.08)
Animal rescue charities - VAT liability of the
sale of abandoned dogs and cats (14/08
4.3.08)
Money Laundering Regulations (MLR) 2007:
How HMRC will handle late applications to
apply to re-register under the MLR 2007
(15/08 5.3.08)
Valuation of imported goods: Customs
valuation declarations and general valuation
statements (16/08 11.3.08)
Follow up and reminder to new Notice 75
‘Fuel for Road Vehicles’, issued on 8
January 2008, on changes to some vehicle
categories from 1 April 2008 (17/08 13.3.08)
Important news for Trust or Company
Service Providers (TCSPs) about changes
to Registration Guidance and when to
register with HMRC (18/08 26.3.08)
The Crown copyright material in this publication
is reproduced with the permission of the
Controller of Her Majesty’s Stationery Office.
The extracts reported from HMRC’s IHT
Newsletter have not been approved by HMRC.
For the precise words of the original article,
reference should be made to the original
publication. The extract should be read subject
to the qualifications mentioned therein, to which
reference should be made before reliance is
placed upon an interpretation.
YOU SHOULD NOT ACT (OR OMIT TO ACT) ON
THE BASIS OF THIS REVIEW WITHOUT
SPECIFIC PRIOR ADVICE. WHILE I NO LONGER
PROVIDE A CONSULTANCY SERVICE, I CAN
DIRECT YOU TO AN APPROPRIATE SOURCE OF
ADVICE.
Matthew Hutton
Broom Farm
Chedgrave
Norwich NR14 6BQ
Tel: 01508-528388
Fax: 01508-528096
E-mail: mhutton@paston.co.uk
www.matthewhutton.co.uk
37
April 2008