Community Amateur Sports
Clubs
Who is likely to be affected?
Amateur sports clubs registered with the Inland Revenue as Community
Amateur Sports Clubs (CASCs).
General description of the measure
This measure will increase the tax thresholds below which registered
CASCs will pay no corporation tax. As a result more clubs will be
removed from the requirement to complete a tax return on an annual
basis.
Operative date
1 April 2004.
Current law and proposed revisions
The CASC scheme was introduced in 2002. It provides some of the benefits
of charitable status, but with a less stringent application process.
Registered clubs pay no tax on bank or building society interest and no
corporation tax on chargeable gains reinvested in the club. Clubs with
trading income or income from property below certain thresholds will
also pay no corporation tax.
This measure will double the corporation tax thresholds for registered
CASCs. As a result, CASCs will be exempt from corporation tax on profits
derived from trading, if their trading income is less than £30,000 and
on profits derived from property, if their gross property income is less
than £20,000. CASCs that do not exceed these thresholds will not have to
complete a tax return on an annual basis.
Immediate Needs Annuities
Who is likely to be affected?
Individuals who take out policies to cover the immediate costs of long
term care and insurance companies that provide such policies.
General description of the measure
This measure will ensure the continued exemption from tax of immediate
needs annuity payments made by an insurance company for the provision of
an individual’s long term care. Consequential changes to the tax rules
applying to the insurance companies that provide these annuities will
also be made.
Operative date
1 October 2004
Current law and proposed revisions
People using immediate needs annuities to fund the costs of long term
care were treated as being not liable to tax on the payments made by
insurance companies under these annuity contracts. Considerable doubt
has emerged as to whether this is the correct treatment and legislation
is therefore being introduced to ensure that these annuities can
continue to be paid tax-free.
An insurance company’s taxable profits from writing such business will
be calculated according to the normal rules for trading profits that
already apply to Permanent Health Insurance business, not according to
the special rules that apply to much life assurance business.
The legislation will apply to existing policies as well as to new
policies taken out after the operative date.
Amendments To Loan Relationships And Derivative Contracts
Who is likely to be affected?
All companies within the scope of corporation tax.
General description of the measure
The measure makes a number of changes to the loan relationships and
derivative contracts regimes introduced in Finance Act (FA) 2002 to
ensure that the regimes operate as intended, to provide greater
certainty for business, and to remove opportunities for avoidance.
Two amendments to the loan relationships regime were announced at the
2003 Pre-Budget Report:
• for companies in administration or liquidation, no tax charge will
arise on the release of debt between group companies solely because of
the appointment of an Administrator, Administrative Receiver or
Liquidator. The measure applies to any release of intra-group debt made
on, or after, 10 December 2003; and
• the connected party rules deferring a deduction for interest and
discount accrued by a close company will not operate solely because of
the presence of a limited partnership Venture Capital Fund, as investor.
The measure applies to accounting periods ending on, or after, 10
December 2003.
Current law and proposed revisions
The existing rules for loan relationships in FA 1996 and derivative
contracts in FA 2002 will be amended as follows:
• to ensure the continuing application of recommended accounting
practices for open ended investment companies when calculating the
capital element of their profits or losses on derivative contracts. This
measure applies to accounting periods beginning on or after 1 February
2004;
• to remove the requirement that both persons with a major interest in a
company had to make loans to the company before they were ‘connected’
for the purposes of restricting deductions for late paid interest etc.
This measure applies for accounting periods beginning on or after 17
March 2004;
• to ensure that the provisions for restricting losses on derivative
contracts which have ‘unallowable purposes’ work in the way originally
intended. This measure applies for accounting periods ending on or after
17 March 2004.
In response to artificial arrangements designed to avoid corporation
tax, to ensure the same tax treatment applies to profits or losses
accruing on loan relationships and derivative contracts irrespective of
the accounting method used. This applies in two particular
circumstances. The first is when a company ceases to be UK resident
(unless the asset, liability or contract remains held at a UK permanent
establishment of the migrating company). The second is when a
non-resident company ceases to hold a loan relationship or derivative
contract for the purposes of a UK permanent establishment, and the
cessation is other than by disposal. This measure applies to such
cessations on or after 17 March 2004.
Life Insurance Companies
Who is likely to be affected?
Life insurance companies and friendly societies.
General description of the measure
The measures will:
• counter tax avoidance by life insurance companies using certain types
of financial reinsurance;
• remove a tax disincentive to company reorganisations where life
insurance business is transferred to another company but some assets are
retained to match certain retained liabilities; and
• correct small errors in measures introduced in earlier years.
Operative date
The measure relating to transfers of business will apply for transfers
on or after Budget Day. The measure relating to financial reinsurance
will apply to accounting periods ending on or after Budget Day. The
minor corrections will mainly apply to accounting periods ending on or
after Budget Day, but one will apply only from Royal Assent.
Current law and proposed revisions
Finance Act 2003 introduced various measures to counter avoidance
involving transfers of life assurance business from one company to
another. One such measure imposed a tax charge where assets of the
long-term insurance fund were retained by the transferor. Such a charge
would be inappropriate where assets are retained solely to meet certain
retained liabilities, so the Finance Bill will include relief from the
charge in these circumstances.
Financial reinsurance can be used to temporarily reduce a life insurance
company’s liabilities to policyholders as measured for the purposes of
its regulatory return. Some companies have sought to use such
arrangements to permanently reduce their trading profits for tax
purposes. Litigation may be necessary to decide whether such schemes
succeed for previous years, but a measure in the Finance Bill will
remove the benefit and bring certainty for future years .
Measures Affecting Lloyd’s Underwriters
Who is likely to be affected?
Individual members of Lloyd’s (“Names”) who convert to underwriting
through a corporate member of Lloyd’s. The term “corporate member” means
a company or a Scottish Limited Partnership (“SLP”).
General description of the measures
Names who transfer their underwriting to a company in which they are the
majority shareholder, or to an SLP in which they are the only
underwriting partner, will be able to set off trading losses from
underwriting years before the transfer against income derived from the
company, or against partnership trading profits, from underwriting years
after the transfer.
Names may also be able to defer liability to Capital Gains Tax (CGT)
where their underwriting activities are taken over by a company and they
transfer assets to the company in exchange for an issue of its shares.
Operative date
Transfers of underwriting taking place on or after 6 April 2004.
Current law and proposed revisions
Unlike most sole traders who transfer a business to a company or an SLP,
Lloyd’s Names are unable to carry forward income tax losses, or defer
capital gains, when they convert to limited liability underwriting. This
is because the conditions for the reliefs are not capable of being
satisfied: the transfer has to take place over an extended period of
time so that the business cannot be transferred as a going concern.
The taxation of Lloyd’s Names is governed by sections 171 to 184 Finance
Act 1993. New provisions will be inserted into the current rules in
Finance Act 1993 to allow income tax losses to be carried forward and
CGT liability to be deferred. The legislation will be included in
Finance Bill 2004.
Subject to certain conditions, where a Name transfers his or her
underwriting business to a company, he or she will be able to set income
tax losses carried forward from past underwriting against remuneration,
dividends or other income derived from the company. Immediately before
the transfer of the business, the Name must own over 50% of the
company’s ordinary share capital and also control it. Where the
underwriting is transferred to an SLP of which he or she is the sole
member carrying on underwriting business, income tax losses will be
carried forward to set against the member’s share of the partnership
profits from the underwriting business.
Subject to certain conditions, where a Name transfers his or her
underwriting business to a company, he or she will be able to postpone
the tax charge on any capital gains (net of losses) arising on disposals
of syndicate capacity and assets held as Funds at Lloyd’s to the company
in exchange for an issue of shares in the company. Where this relief
applies the net amount of the chargeable gains held over will be
deducted from the acquisition cost (for CGT purposes) of the shares
issued to the Name. The effect of this hold-over is to defer any
liability to CGT until the Name makes a disposal of the shares in
question. Immediately before the transfer of the business, and each
transfer of syndicate capacity or other assets, the Name must own over
50% of the company’s ordinary share capital and also control it.
Where a Name transfers his or her underwriting business to an SLP the
normal rules for calculating any chargeable gains or allowable losses on
the transfer of assets to a partnership will apply in relation to the
transfer to the SLP of syndicate capacity and assets held as Funds at
Lloyds.
Improvements To Research And Development Tax Credits
Who is likely to be affected?
Companies, especially small and medium-sized companies, carrying on
research and development (R&D).
General description of the measure
R&D tax credits for companies that are small or medium-sized enterprises
(SMEs) were introduced in Finance Act 2000. Similar credits for large
companies, and a targeted relief aimed at R&D into vaccines and
medicines for the killer diseases of the developing world, were
introduced in Finance Act 2002.
Following a consultation in 2003, proposals to simplify the definition
of R&D and to widen the range of qualifying costs were announced at the
Pre-Budget Report. These changes are now being brought into effect,
representing a further Government investment in R&D of £35 million per
year.
Operative date
For large companies changes will take effect from 1 April 2004.
For SMEs and for vaccines research relief, changes will take effect as
soon as State aids approval has been received. They will therefore
commence from a date yet to be announced.
Current law and proposed revisions
Definition of R&D
R&D is currently defined by legislation which applies the DTI’s
guidelines of 28 July 2000. On 5 March 2004 the DTI published new
guidelines (available at www.dti.gov.uk/support/rd_guidelines.htm) which
make the R&D definition easier to understand and use. The new DTI
guidelines were given effect on 11 March 2004 for company accounting
periods ending on or after 1 April 2004, although companies may use the
new guidelines as an aid to interpretation of the previous guidelines.
As well as applying for the purposes of R&D tax credits and vaccines
research relief, this new definition of R&D also applies for a number of
other purposes including the various investment reliefs and R&D
allowances.
Range of qualifying expenditure
Broadly, expenditure qualifying for R&D tax credits and vaccines
research relief currently includes expenditure on staff costs,
consumable stores, externally provided workers and in certain cases
expenditure on sub-contracted R&D.
As announced in the Pre-Budget Report, these categories of qualifying
expenditure are being expanded to include expenditure on software,
power, fuel and water. The definition of consumable stores is also being
amended so that expenditure on consumable or transformable materials
qualifies for relief. These extensions will widen the support given to
innovative companies and reduce the real cost of R&D.
Comments were invited on whether the range of qualifying expenditure
being introduced represents the direct costs of R&D. The general theme
of representations was that all costs attributable to R&D should qualify
for the tax credit. Implementation of this would entail a cost of around
£230 million a year and may increase complexity, particularly for SMEs,
by causing companies to undertake detailed allocations of all their
overheads.
The Government considers that at this time the most appropriate way to
support R&D is to give relief for the costs which have the greatest
incentive effect on the amount of R&D done. With the extension to
software, power, fuel and water the Government considers the qualifying
costs now represent those costs which have the greatest incentive
effect, and that to extend beyond those costs is not justified at this
time.
Other changes
Announced separately today in Budget Note 36 are details of changes to
the rules for expenditure on staffing costs. These changes correct the
inadvertent inclusion of benefits in kind as a qualifying cost.
Also detailed separately today in Budget Note 25 are changes to the R&D
schemes as a consequence of the introduction of International Accounting
Standards in 2005.
It was announced at the Pre-Budget Report that the rules for large
company sub-contracting would be amended to provide a generic definition
for qualifying bodies which will aim to encompass ‘Public Sector
Research Establishments’. This proposal will be implemented after the
Budget.
To support the changes being made in the Budget and to reflect
experience of claims made since introduction of the schemes Inland
Revenue will produce improved guidance later in the year followed by a
programme to improve delivery of the credit. Inland Revenue also plans
to issue regular information on R&D tax credits in its publication of
National Statistics.
Towards A New Regime For Property Derivatives
Who is likely to be affected?
All companies within the scope of corporation tax.
General description of the measure
The measure enables regulations to be made to adapt the derivative
contracts legislation to provide a comprehensive regime to deal with
some derivatives that are currently excluded because they derive their
value from property or equities. Subject to satisfactory outcome of
consultation on the scope and detail, regulations will be made setting
out how they can be included. In order to ensure early progress on
property derivatives, these regulations will not cover equity
derivatives.
Draft regulations will be published shortly on the Inland Revenue
internet site. Comments will be invited on this draft, which reflects
discussions with industry following publication of illustrative drafts
at Pre-Budget Report, showing how a scheme might work.
Current law and proposed revisions
At present property derivatives are outside the derivative contracts
regime in Finance Act 2002.
The scheme proposed for property derivatives would have the following
characteristics:
• it would use the mechanics of the derivative contracts legislation to
identify and quantify the gain or loss arising on a property derivative;
• the resulting gain or loss would be treated as a chargeable gain for
tax purposes, unless the company is party to it for the purposes of its
trade;
• if the company is party to it for the purposes of its trade, the
profit or loss would be brought into account in the same way as amounts
from derivative contracts that are currently within the regime.
The new rules would apply to contracts entered into on or after the date
the regulations come into effect. This will depend on when the Finance
Act receives Royal Assent, as the regulations cannot be made before
then.
European Company Statute Tax Measures
Who is likely to be affected?
Companies thinking of forming European Companies, once the European
Company Statute (ECS) EU Regulation comes into force on 8 October 2004.
General description of the measure
The ECS permits the formation of a “European Company” (“Societas
Europaea or “SE”). The ECS applies directly as law in member states,
including the UK, and the DTI is introducing secondary legislation to
facilitate its introduction.
SEs will be subject to the tax law of the country in which they are
resident. It will be necessary to make some relatively minor changes to
UK tax law to enable their introduction.
Operative date
The Government intends to include the necessary tax changes in Finance
Bill 2005. This is a change to the timetable envisaged at the time of
the 2003 Pre-Budget Report. The revised timetable is to allow time for
proper consultation in the light of some possible changes in other EU
legislation that might affect SEs (see paragraphs 6 and 7 below).
The ECS comes into force on 8 October 2004. For most purposes, SEs will
be able to operate within the UK from that date within existing tax
legislation. It is possible that some of the tax measures required will
be announced in time to take effect from that date.
However, the operative date of other tax changes depends on, the tax
“Mergers Directive” (90/434/EEC). The Mergers Directive may have some
impact on the tax treatment of the transactions which can be carried out
to form SEs, or which SEs themselves can enter into once they have been
formed.
One of the proposed amendments to the MD is the addition of the SE to
its scope. Other changes are proposed, including an extension of the
scope of the transactions covered by the Directive. Currently it is not
clear from what date the addition of the SE to the scope of the
Directive and/or other changes will take effect. It could be 1 January
2005, but may be later than that.
Consultation on Tax Changes
The Government will consult on the tax changes required to allow for the
formation of SEs in the UK later in 2004 when the proposals to amend the
Mergers Directive are clearer. It is intended that the consultation
should include draft Finance Bill clauses and a partial Regulatory
Impact Assessment. If necessary, the consultation document will also set
out full details of tax changes intended to take effect in advance of
Finance Bill 2005.
Tax Avoidance: Uk Equity Repo Or Stock Loans
Who is likely to be affected?
Individuals and trustees who enter into repo or stock loan transactions
to exploit a loophole in order to avoid UK income tax.
General description of the measure
This anti-avoidance measure announced on 6 November 2003 prevents
individuals from avoiding tax by entering into sale and repurchase
(repo) or stock lending transactions over UK equities. The measures now
go further than the initial announcement by applying them to trustees,
and also covering a development of the original scheme.
Operative date
The measures as announced in November 2003 will apply to individuals
where a dividend on the equities is received on or after 6 November
2003. The additional measures will apply from Budget day.
Current law and proposed revisions
Where a person liable to income tax enters into a repo or stock loan
over UK equities, and during the term of the arrangement the equities
pay a dividend, that person will be required to pay the original owner
an equivalent compensatory payment (a ‘manufactured dividend’). Under
current law, the dividend is taxed at a lower effective rate than that
at which relief is given for the manufactured payment.
It is also possible for the person to sell the equities and generate a
capital gain rather then receive the dividend. Where that person has
capital losses, they can cover the gain by the losses but still get
income tax relief for the manufactured dividend. This effectively allows
capital loses to be set against income.
The new measures will ensure that the dividend is taxed at the same rate
as relief is given for the manufactured payment, thus ensuring the repo
or stock loan is neutral for tax purposes.
Where the equities are disposed of, the new measures will provide that
relief for the manufactured payment can be given only against the
chargeable gain arising on the disposal.
Improvements To The Venture Capital Schemes
Who is likely to be affected?
Investors whose shares qualify for relief under the Enterprise
Investment Scheme (EIS), the Corporate Venturing Scheme (CVS), the
Venture Capital Trust (VCT) scheme or for venture capital loss relief,
and the companies in which they invest.
General description of the measures
VCTs
The rate of income tax relief for investments in qualifying VCT shares
is to be increased from 20% to 40%. This will apply in relation to
shares issued by VCTs in the tax years 2004/05 and 2005/06.
Capital gains tax (CGT) deferral relief will not be available for gains
reinvested in VCT shares issued on or after 6 April 2004.
The annual investment limits in VCT shares, which apply in relation to
the tax reliefs available to individuals, are to be raised from £100,000
to £200,000 with effect for shares acquired on or after 6 April 2004.
EIS
The annual investment limit for income tax relief under the EIS is to be
raised from £150,000 to £200,000 with effect for shares issued on or
after 6 April 2004.
The “same day rule” is to be relaxed to make it easier for investors
seeking EIS reliefs to be issued with shares at the same time as other
investors. The change will apply in relation to shares issued on or
after today.
The rules for EIS income tax relief are to be amended. Subject to
certain conditions, investors who have loans repaid to them by companies
will not now be precluded from obtaining tax relief for subsequent
investments in shares in the companies concerned. This is provided that
the repayment of any loan before the date of issue of the shares is not
made in connection with any arrangements for their acquisition.
Amendments will also be made to the equivalent rule for EIS deferral
relief so that the rule is the same. These changes will take effect in
relation to shares issued on or after today.
EIS and VCTs
The EIS provisions in relation to the “active company” are to be amended
so that during the relevant period it will be easier for groups to
arrange which company carries on the activity for which EIS money is
raised without jeopardising investors’ tax reliefs. A corresponding
change is to be made to the equivalent VCT provision (“the trader
company rule”).
EIS, CVS, VCTs and venture capital loss relief
The conditions which must be met by subsidiaries of companies for the
companies to qualify for the EIS, CVS, the VCT scheme, and for relief
under section 573 or 574 of the Income and Corporation Taxes Act 1988
(‘venture capital loss relief’) are to be amended. Any subsidiaries of
EIS companies will need to be 51% subsidiaries, other than subsidiaries
whose activities benefit from the EIS money and property management
subsidiaries - these will need to be direct 90% subsidiaries of the EIS
company. The same rules will apply to CVS companies, companies forming
part of a VCT’s qualifying holdings, and subsidiaries of companies which
qualify for venture capital loss relief. These changes will apply in
relation to shares or securities issued on or after today.
EIS, VCTs and CVS
The EIS and VCT rules impose a requirement that the company carrying on
(or preparing to carry on) the trade, or research and development which
benefits from the money raised under the scheme, must be the company
which issues the shares or securities concerned, or a 90% subsidiary of
that company. This requirement is extended to the CVS in respect of
shares issued on or after today.
Operative date
Most of the new measures have effect from 6 April 2004, but some
(detailed above) take effect from today.
Current law and proposed revisions
Tax incentives for investment in VCTs
Under current VCT rules individuals can obtain income tax relief of up
to 20% of the aggregate investment they make in new full-risk ordinary
shares in VCTs up to a maximum investment of £100,000 in any tax year.
Gains arising on disposals of investments in full-risk ordinary shares
in VCTs (whether they were acquired new or second-hand) and dividends
paid on such shares are exempt from tax, provided that the investments
are held by individuals over the age of 18. These reliefs apply up to an
annual investment limit of £100,000. These limits are to be increased to
£200,000 with effect for VCT shares acquired in the tax year 2004/05
onwards.
Under the proposals announced today the rate of income tax relief will
increase from 20% to 40% for investment in qualifying shares for a two
year period. This is to apply to shares issued in the tax years 2004/05
and 2005/06 only.
VCTs: CGT deferral relief
Under the current VCT rules, individuals may defer a capital gains tax
liability if gains are reinvested in VCT shares in respect of which they
obtain income tax relief. The VCT shares must be issued in the two-year
period which begins 12 months before the gain arose. Deferral relief
will not be available for investments in VCT shares issued on or after 6
April 2004. The relief remains available in respect of gains arising in
the tax year 2004/05 where the VCT shares in question were issued before
6 April 2004 but within the period of twelve months ending on the date
the gain arose.
EIS income tax relief
Individuals who qualify for EIS income tax relief can obtain a reduction
in their income tax liabilities of an amount up to 20% of the amount
they invest in new full-risk ordinary shares in qualifying companies.
This is subject to an aggregate investment limit of £150,000 per tax
year. This is to be increased to £200,000 with effect for shares issued
on or after 6 April 2004.
“Same day rule”
For tax relief to be available under the EIS in respect of an investment
in shares, all the shares of the same class which the company issues on
that day must be issued in order to raise money for the purpose of one
or more qualifying business activities. With effect for shares issued on
or after today, investors not seeking EIS reliefs will be able to
subscribe for their shares otherwise than wholly in cash without
preventing those investors who do subscribe wholly in cash from
obtaining EIS relief.
“Active company rule” and “trader company rule”
EIS provisions have an “active company rule” which requires that the
"active company” in relation to a qualifying business activity is
determined at the time of the issue of the shares, and that company must
remain the "active company" throughout a prescribed period (generally
three years). The changes will relax this requirement so that during the
relevant period it will be easier for groups to arrange which company
carries on, at any time, the activity for which EIS money is raised
without jeopardising investors’ EIS reliefs. A corresponding change will
be made to the equivalent requirement for VCTs
Emergency loan provision
Currently, EIS anti-avoidance rules operate to prevent an individual
making a loan to a company without the repayment of that loan
jeopardising his or her ability to obtain EIS income tax relief in
respect of shares issued by the company in the following twelve months.
These loans are typically emergency funding to tide a company over a
cash flow crisis. The change will relax this rule and thereby help a
number of otherwise healthy companies survive.
Subsidiaries rule
Currently, the rules for the venture capital schemes permit a qualifying
company to have subsidiaries but only if it, or another of its
subsidiaries, owns 75% of the company concerned. There is also a
requirement under the EIS and VCT schemes that the company that carries
on, or prepares to carry on, the trade or research and development for
which the money raised under the schemes is used is a 90% subsidiary.
Under the new measures proposed today, the 75% requirement will be
replaced by a 51% requirement except in relation to subsidiaries which
hold and manage property – these must be 90% subsidiaries. The EIS and
VCT provisions described in paragraph 10 above which apply in relation
to 90% subsidiaries are extended to the CVS.
Enterprise Management Incentives (Emi): Qualifying Subsidiaries Rule
Who is likely to be affected?
All companies granting EMI share options and their employees who benefit
from those options.
General description of the measure
Relaxation of the EMI qualifying conditions for companies with
subsidiaries.
Operative date
EMI share options granted to employees on or after Budget Day.
Current law and proposed revisions
Currently, the rules for EMI permit a qualifying company to have
subsidiaries but only if it, or another of its subsidiaries, owns 75% of
the company concerned. The 75% requirement will be removed, enabling
more companies to use EMI options to recruit and retain employees who
have the skills to help them grow and succeed.
This relaxation follows the ‘75% subsidiaries rule’ change also
announced today for the Venture Capital Schemes (see REV BN 10).
Exploration Expenditure Supplement
Who is likely to be affected?
Companies undertaking oil or gas exploration and appraisal (E&A)
activities in the UK or on the UK continental shelf which are not yet
trading, or do not have a tax liability sufficient to make use of
current 100% capital allowances for E&A expenditure. These are likely to
be new entrant companies but may include others who invest heavily in
E&A.
General description of the measure
Companies cannot obtain tax relief for E&A expenditure until they have
taxable profits against which such expenditure can be offset. This may
be four or five years after the first E&A expenditure is incurred during
which time the value of the allowances will have been eroded. The
exploration expenditure supplement (EES) is being introduced to help
overcome this problem.
The EES will provide an annual uplift of 6% in the value of unused
capital allowances due to qualifying E&A expenditure that are carried
forward each year for a maximum of 6 years.
Operative date
Applies to E&A expenditure incurred on or after 1 January 2004.
Current law
Profits and gains which a company derives from UK oil or gas production
are chargeable to corporation tax subject to a special ring fence which
prevents taxable profits being reduced by losses from other activities.
These ring fence profits are also chargeable to a 10% supplementary
charge.
E&A expenditure qualifies for 100% capital allowances under the Research
and Development Code in Part 6 of Capital Allowances Act 2001.
When a trading company has insufficient revenue against which to set its
allowances, it will incur a trading loss which may be carried forward
and set against the company’s profits in the subsequent accounting
period. Losses can continue to be carried forward where they cannot be
used to offset profits in the subsequent year, and so on. This means
that the economic value of the immediate 100% allowances for a company
investing in UK oil and gas exploration with little other income from
the UK can be diminished significantly as time goes on.
Proposed Revisions
Companies subject to the special ring fence corporation tax rules will
be able to claim the EES on the amount of E&A expenditure that cannot be
used in the accounting period it is incurred and is carried forward as
(part of) a trading loss.
Where a company is part of a group with ring fence profits then the
amount qualifying for the EES will be reduced by an amount equal to
those profits. However, within that restriction, a company that has
allowances for different types of expenditure will be able to choose how
to use them in order to gain maximum advantage of the EES.
Where a company is only undertaking E&A this is normally treated as
pre-trading activity. In such cases E&A allowances may be claimed for
all pre-trading years once a decision to develop a field is made and
trading commences. In order to maximise the value of the EES for such
companies, each year of the pre-trading period will be treated
separately and the EES awarded for each.
Each company will be able to claim the EES at 6% on a cumulative basis
for a maximum of 6 accounting periods that need not be consecutive.
Technical Changes to Petroleum Revenue Tax
Who is likely to be affected?
Companies producing oil or gas in the UK or on the UK continental shelf
from fields that are liable to petroleum revenue tax (PRT).
General description of the measures
Two technical measures are proposed to remove anomalies in the current
PRT rules and prevent tax leakage. The first measure prevents companies
generating an artificial cost for PRT by buying a North Sea asset from a
connected company at an inflated price. The second measure prevents the
creation or enhancement of unrelievable field losses in fields through
the successive transfer of field interests.
Operative date
Connected company transactions – for expenditure incurred on or after
today.
Unrelievable field losses – to terminal losses (that is, losses
allowable after all production from the field has ceased) accruing in a
chargeable period ending after today, with special rules to take account
of certain profits accruing before today.
Current law and proposed revisions
Connected company transactions
When an asset, such as an interest in a pipeline or onshore terminal, is
acquired by a participator in a PRT-liable oil field (that is a field
given development consent before 16 March 1993) from a connected
company, or in a transaction otherwise than at arm’s length, the cost of
the asset allowable for PRT is restricted to the arm’s length cost to
the group. This is to prevent profits being shifted out of PRT through
transactions with other companies within the group. In certain
circumstances the corresponding disposal or tariff receipt chargeable on
the vendor or tariff recipient is also limited to cost but otherwise the
disposal or tariff receipt is equivalent to the market value of the
asset.
These rules can give rise to potential mismatches. Where the market
value of the asset is lower than the price paid for it by the connected
company but the asset is acquired from that connected company at the
higher (historic) price then the amount allowed for PRT to the payer
will be higher than the amount charged on the recipient.
The changes being introduced today will in future ensure that the cost
allowed for PRT does not generally exceed the amount charged to PRT in
the connected company’s hands.
Unrelievable field losses
Under current rules, when a field ceases production, any terminal losses
(which will usually arise from the costs of decommissioning the field)
are first carried back against the participator’s past profits from the
field and second against the profits of any participator from whom the
current participator acquired the field interest. Once these past
profits are exhausted the excess becomes an unrelievable field loss
which may then be set against the profits from any other PRT-liable
field in which the loss-making participator has an interest.
The purpose of unrelievable field losses is to provide PRT relief where
fields make an overall loss over their lifetime. However, the current
rules enable unrelievable field losses to be generated from fields
(which may be very profitable over their lifetime) by means of
successive transfers of field interests late in field life.
The changes being introduced today will ensure that a terminal loss is
carried back against the assessable profits of all previous
participators who held the relevant field interest with the exception of
previous participators whose profits could not have been taken into
account before today. Any excess will then become an unrelievable field
loss in the hands of the loss-maker. The changes will also ensure that
the current rules that prevent an unrelievable field loss being inflated
by expenditure unrelated to the field cannot be circumvented by the
transfer of a field interest prior to the accrual of a terminal loss.
Foreign Earnings Deduction For Seafarers
Who is likely to be affected?
Workers on offshore installations working outside the UK.
General description of the measure
Foreign Earnings Deduction (FED) is a deduction from earnings from
employment available to a seafarer working on a ship who has an eligible
period of absence in the UK. Workers on offshore installations are
specifically excluded from the relief. This measure will redefine
"offshore installation" to ensure that FED remains available only to the
parts of the shipping sector only for whom it is intended.
Operative date
6 April 2004.
Current law and proposed revisions
The current definition of "offshore installation" is given by reference
to legislation created for the purposes of Health and Safety, not for
the Taxes Acts.
Changes to the Health and Safety legislation can inadvertently cause
changes to FED entitlement so a free-standing definition is the best way
to provide certainty and clarity in this instance. We are also taking
the same approach with other instances in the Taxes Acts where offshore
installation is defined.
Stamp Duty Land Tax: Partnership transactions
Who will be affected?
Potentially all partnerships owning property, but primarily partnerships
involved in property investment.
General description of the measures
Stamp Duty Land Tax was introduced from 1 December, largely replacing
stamp duty on land transactions. A number of changes were made in
December 2003 to clarify points of uncertainty; counter avoidance and
extend some reliefs. These new measures will apply Stamp Duty Land Tax
to certain partnership transactions which involve an interest in land,
and which are currently excluded from the scope of the tax.
Operative date
From Royal Assent.
Current law and proposed revisions
Currently, Stamp Duty Land Tax applies to most acquisitions of an
interest in land situated in the United Kingdom. However, the transfer
of an interest in land into a partnership, the acquisition of an
interest in a partnership (where the partnership property includes an
interest in land) and the transfer of an interest in land out of a
partnership, were excluded from Stamp Duty Land Tax. Draft legislation
was published on 20 October 2003 and following consultation, these
transactions will be brought within the scope of Stamp Duty Land Tax
from Royal Assent.
Stamp Duty Land Tax will now be charged on the following transactions:
• where an interest in land is transferred into a partnership, either by
an existing partner or by a person in exchange for an interest in that
partnership. Stamp Duty Land Tax will be chargeable, at the appropriate
rate, on a proportion of the market value of that land interest. The
proportion will be equal to the proportion of the land interest
transferred to the other partners as measured by their partnership;
• where partnership property includes an interest in land and
arrangements are in place so that either:
• an existing partner transfers all or part of their partnership
interest, to a person who is or becomes a partner, for money or money’s
worth; or
• a person becomes a partner and an existing partner reduces their
partnership share (or ceases to be a partner) and withdraws money or
money’s worth from the partnership;
then Stamp Duty Land Tax will be chargeable, at the appropriate rate, on
the person acquiring the interest or increased interest, on a proportion
of the market value of the land interest so transferred. The proportion
will be equal to the increased (or new) partnership share held by the
acquiring partner; and
• where a partnership transfers an interest in land to a partner or
former partner. Stamp Duty Land Tax will be chargeable, at the
appropriate rate, on the person acquiring the interest, on the
proportion of the market value of the land interest transferred on which
tax (which includes ad valorem stamp duty or, for transactions executed
before 20 October 2003, fixed duty) has not previously been paid.
The changes will charge only the proportion of the property being
transferred into a partnership. This recognises concerns raised, that
charging the whole value of the land meant that the part of the land
retained (through their partnership share) by the person transferring
it, was being brought into the charge to tax unfairly.
Employer Supported Childcare
Who is likely to be affected?
Employees who receive the benefit of employer-contracted childcare or
childcare vouchers. Employers who provide childcare benefits.
General description of the measure
Employees will be able to receive up to £50 a week of childcare tax and
National Insurance free where their employers contract with an approved
childcarer or provide childcare vouchers for the purpose of paying an
approved childcarer.
Operative date
6 April 2005
Current law and proposed revisions
Currently where an employee receives the provision of childcare or
childcare vouchers as a benefit-in-kind a tax charge arises on the
benefit, except in limited circumstances where the employer provides a
nursery or crèche on the employer’s premises, or one that is wholly or
partially managed and financed by the employer. No employers’ Class 1A
National Insurance charge currently arises on the provision of childcare
and childcare vouchers are currently exempt from Class 1 National
Insurance.
The Government announced in the Pre-Budget Report in December 2003 that
from April 2005 a new tax exemption will apply to employer-contracted
childcare and childcare vouchers. The tax exemption will be limited to
the first £50 a week of contracted childcare or vouchers and the
National Insurance exemption will be aligned with this. The main
conditions for the exemption will be:
• that the childcare benefit is made available to all employees where a
scheme operates; and
• the childcare is registered childcare or approved home-childcare.
Corporation Tax Reform: Transfer Pricing
Who is likely to be affected?
Businesses, which have transactions with connected businesses, such as
companies in the same group.
General description of the measure
This measure will:
• end transfer pricing and thin capitalisation requirements for small
and medium sized enterprises, in most circumstances;
• abolish separate thin capitalisation requirements and subsume them
within general transfer pricing requirements;
• extend the scope of transfer pricing requirements for other
businesses, which currently apply only to cross-border transactions, so
that they apply to transactions within the UK as well;
• allow the connected UK business to make a corresponding adjustment in
the calculation of its taxable income; and
• exempt companies that are dormant at 1 April 2004 from transfer
pricing requirements for as long as they remain dormant.
Operative date
These changes apply in relation to the calculation of profit that arises
on or after 1 April 2004. In recognition of the practical issues for
businesses in introducing or adapting systems to enable them to comply
with transfer pricing requirements, there will be a temporary relaxation
of penalties for failing to keep evidence to demonstrate that a result
is an arm’s length result. This relaxation will last until 31 March
2006.
Current law and proposed revisions
Section 770A of, and Schedule 28AA to, the Income and Corporation Taxes
Act 1988 (ICTA) require a business to calculate its taxable income by
reference to an arm’s length result for transactions with connected
businesses outside the scope of UK taxation, where this would increase
the amount of the business’ income subject to UK tax.
Changes will :
• extend the scope of Schedule 28AA to include transactions within the
UK;
• repeal parts of Section 209 of ICTA and include thin capitalisation
rules within Schedule 28AA;
• exempt small and medium-sized enterprises from the requirements of
Schedule 28AA except in relation to transactions with a related business
in a territory with which the UK does not have a double tax treaty
containing a suitable non-discrimination article; and
• enable the Inland Revenue, in exceptional circumstances, to require a
medium-sized enterprise to apply transfer pricing rules.
Most of the changes were proposed in an Inland Revenue Technical Note
“Corporation Tax Reform: The Next Steps”, published for consultation
with draft legislation in December 2003, following an earlier document
issued in August 2003. In light of comments received during the
consultation, the Finance Bill changes will also contain measures to:
• exempt companies that are dormant at 1 April 2004 from transfer
pricing requirements for as long as they remain dormant, which will mean
they will continue to be relieved from the requirement to obtain an
audit under the Companies Act 1985 and will not be required to make a
tax return;
• allow groups of companies to elect for tax liabilities that arise
within special securitisation structures as a result of transfer pricing
requirements to be met by a company outside the structure. The election
will be subject to the approval of the Board of Inland Revenue.
Further advice
A new page is being created on the Inland Revenue Internet site, which
will contain draft guidance about the application of transfer pricing
requirements. This page will be made available shortly with some initial
material. Further material will be added as it becomes available. The
changes will be compatible with existing legislation governing the
treatment of exchange gains and losses on intra group foreign currency
loans used to match exchange gains and losses on assets, and will not
disrupt such hedging arrangements. Draft guidance will be published
explaining this interface.
New Simplified Self-assessment Tax Return
Who is likely to be affected?
People who receive self assessment tax returns but have simple affairs –
for example, straightforward investment income, or a modest amount of
income from property, including:
• employees (other than company directors);
• small businesses (i.e. self-employed with a turnover less than
£15,000); and
• pensioners in receipt of state retirement pension, an occupational
pension or a retirement annuity.
General description of the measure
The short tax return is four pages long and is around one-third the size
of an average self assessment tax return with supplementary pages. The
associated guidance is also much shorter and simpler. There is no need
to calculate the tax on the form. Taxpayers are encouraged to file by 30
September so Inland Revenue can calculate their tax position for them
and let them know how much to pay (if anything) by January. But for
those who want to know sooner, there is a two page simple calculation to
give people a rough idea of their tax liability.
The short tax return will be issued automatically based on the
information in the previous year’s return. However, it will remain the
taxpayer’s responsibility to check their eligibility to complete the
return as their circumstances may have changed during the year, meaning
a short tax return is no longer appropriate. Details of eligibility are
set out clearly at the front of the guide.
The short tax return has been designed so that the information provided
on it can be captured automatically onto the Inland Revenue’s systems,
using automated data capture technology. This will result in the more
efficient and accurate processing of these returns.
Customers receiving the form can choose to file electronically using the
Inland Revenue’s own online tax return or approved commercial product.
The ‘telefiling’ pilot, allowing customers to give their short tax
return information over the telephone to a voice recognition facility,
will be continued this year on a small scale.
Operative date
From April 2004 over 400,000 taxpayers will be sent the short tax return
instead of the main return, increasing from 50,000 in last year’s pilot.
The new form will be rolled out nationally in April 2005, when around
one and a half million taxpayers should benefit from the new form.
Current law and proposed revisions
No changes in the law are required.
National Insurance Contributions and Statutory Payments Bill - Consequential Tax Changes
Who is likely to be affected?
Employees who agree to bear the employers’ (secondary) Class 1 National
Insurance liability due on earnings arising after the acquisition of
employment-related restricted or convertible securities (usually
shares).
Any employer who chooses to award restricted or convertible securities
to their employees.
General description of the measures
The earnings in question result from what are referred to as ‘post
acquisition chargeable events’, for example the lifting of a restriction
applying to the securities or the conversion of securities into another
form of security. Changes will be made to provide employees with income
tax relief by way of a deduction from their taxable income, equal to the
amount of any Secondary Class 1 National Insurance contributions (NICs)
paid by them.
The changes will also ensure that the provision of the income tax relief
to the employee will not affect:
• the Capital Gains Tax (CGT) liability on any subsequent disposal of
the securities; or
• the Finance Act 2003 Schedule 23 Corporation Tax relief for employee
share acquisition.
Operative date
These changes will be brought into effect to coincide with the
commencement of changes to be made to the Social Security Contributions
and Benefits Act 1992, by the National Insurance Contributions and
Statutory Payments Bill 2004 (“NICs Bill”). The relevant NICs Bill
clauses will come into force at a time to be provided for by way of a
Treasury Order following Royal Assent of the Bill.
Current Law and Proposed Revisions
Employers are currently able to ask employees receiving share options to
agree to pay the employer’s (secondary) Class 1 NICs liability arising
on gains made from those options. Employees who agree to pay their
employer’s NICs liability under these limited circumstances benefit from
a reduction in their taxable income equivalent to the amount of the
employer’s liability they pay. Changes to tax legislation are necessary
to provide the same income tax relief to employees who bear the
employer’s NICs liability due on post-acquisition earnings derived from
restricted and convertible securities.
When securities acquired by way of a securities option are eventually
disposed of, CGT may be due on their growth in value. Existing
legislation ensures that the calculation of the CGT liability is
unaffected by the income tax relief the employee benefited from when
they paid their employer’s NIC liability. This legislation needs to be
amended to ensure that when employees pay employer’s NICs on earnings
from restricted and convertible securities, any CGT liability arising on
disposal of those securities is not affected by the earlier income tax
relief.
Minor changes will also be made to Schedule 23 in Finance Act 2003, to
ensure the amount of the Corporation Tax relief which the employer
obtains when employees acquire employment-related shares is not affected
if the employee pays the secondary NICs.
The Rate Applicable to Trusts
Who is likely to be affected?
Trustees receiving income or realising capital gains and personal
representatives administering an estate that realise capital gains.
General description of the measure
Pre Budget Report announced that the tax rate applicable to trusts (RAT)
is to increase from 34% to 40% and the corresponding dividend trust rate
from 25% to 32.5% with effect from 6 April 2004.
People who receive income from trusts will still be able to reclaim any
excess tax paid by the trustees on their behalf and those liable at
higher rates will still get credit for tax paid by the trustees.
There is also an amendment to section 677 of the Income and Corporation
Taxes Act 1988 which charges tax on loans or other capital sums made by
trustees to the settlor of a trust (that is the person who put funds
into the trust) or their spouse.
Operative date
6 April 2004.
Current law and proposed revisions
The rate applicable to trusts (RAT) is a rate that applies principally
to the income and gains of trusts where the trustees can accumulate
income and/or pay it out to the beneficiaries at their discretion.
Specifically it applies to:
• the income of discretionary and accumulation trusts other than
dividend income;
• the capital gains of all trusts and estates of deceased persons in
administration; and
• certain amounts received by all trusts, for example gains from
offshore funds.
At present this rate is 34% and is increasing to 40%.
There is also a separate trust tax rate of 25% that applies to dividends
and similar income received by trusts that is linked to the RAT. This is
increasing to 32.5%
Loans or other capital payments made by the trustees of a settlement to
the settlor or their spouse are treated as the income of the settlor on
which the trustees may have paid tax. The change to section 677 Income
and Corporation Taxes Act 1988 ensures the settlor is not given credit
for more tax than the trustees have actually paid.
Modernising the Tax System for Trusts
Who is likely to be affected?
Trustees, beneficiaries and settlors of trusts.
General description of the measure
A package of measures to modernise the tax system for trusts; to
simplify the regime for a large number of trusts, particularly those
with relatively small amounts of income, and to bring the tax paid by
trusts for the most vulnerable beneficiaries more in line with what it
would have been had the beneficiaries held their assets directly.
Operative date
From 6 April 2005, though certain measures designed to protect trusts
for the vulnerable will be backdated to 6 April 2004.
Current law and proposed revisions
Under the current regime, many trusts are taxed at the rate applicable
to trusts, a compromise rate designed to reflect the fact trusts have a
variety of beneficiaries, some of whom are taxable at the higher rate of
tax and others who are taxable at lower rates or may be non-taxpayers.
The effect of this compromise is that an individual beneficiary’s tax
bill will almost always be different depending on whether assets are
held directly or via a trust.
The Chancellor announced in the Pre-Budget Report that the rate
applicable to trusts would increase from 34% to 40%, and the dividend
trust rate from 25% to 32.5%. It was also announced that the Inland
Revenue would be consulting with interested parties on a series of
measures to modernise the Income Tax (IT) and Capital Gains Tax (CGT)
system for trusts.
Four discussion papers were issued in December 2003, and these were
followed by a series of meetings with representative bodies and other
interested parties in January and February 2004. A large number of
written representations and suggestions were also received. A full
summary of the responses will be published later in March 2004. The main
features of the modernised tax system for trusts will be:
Basic rate band
There will be a basic rate band applying to the first £500 of income for
all trusts liable at the rate applicable to trusts.
Trusts which receive all their income up to the basic rate band either
net of tax or with an associated tax credit will have no further tax to
pay. Those which receive their income gross will have to pay tax at the
basic or lower rate depending on the nature of the income.
This measure will take around 30,000 of the smallest trusts out of the
full Self-Assessment system. To ensure that these trusts still comply
with their obligations we will issue returns to them every few years.
The basic rate band will apply to all trusts not just those with income
below £500.
Trusts for the vulnerable
There will be a new tax regime for trusts for the most vulnerable,
allowing these trusts to be taxed on the basis of the vulnerable
beneficiary’s individual circumstances for both IT and CGT.
Trustees will be able to use the individual beneficiary’s personal
allowances, starting and basic rate bands, rather than being taxed at
the rate applicable to trusts.
Exactly which trusts will be eligible for this new regime has yet to be
decided but Ministers have indicated it will include trusts for the
disabled and orphaned minor children.
Definitions and tests
A set of common definitions and tests will be introduced for IT and CGT.
The aim is to improve consistency and make it easier for all trustees,
especially lay trustees, to correctly determine their tax status and
treatment.
Trust Management Expenses
We will be seeking to work with the main representative bodies to
develop better guidanceon the correct treatment of trust management
expenses under the law as it presently stands.
Other issues
A number of other issues discussed during the consultation, such as
streaming income and gains through a trust and the taxation of
chargeable gains when received by estates in administration are still
under consideration.
Summary
Further work will be carried out over the summer to refine all the
proposals, with the aim of publishing draft legislation at the time of
the 2004 Pre-Budget Report.
Change to the Law on Jointly Owned Property
Who is likely to be affected?
Married couples who jointly own shares in close companies.
General description of the measure
Distributions (usually dividends) from jointly owned shares in close
companies will no longer be automatically split 50/50 between husband
and wife but will be taxed according to the actual proportions of
ownership and entitlement to the income.
Operative date
6 April 2004.
Current law and proposed revisions
At present, income from property (such as company shares or a rented
house) that a married couple owns jointly is treated for tax purposes as
belonging to them in equal shares, in accordance with section 282A
Income and Corporation Taxes Act 1988, unless an election is made under
section 282B for the income to be taxed according to the actual
proportions of ownership and entitlement to the income.
This change will mean that income distributions (normally dividends)
from jointly owned shares in close companies (broadly small companies
owned and run by five or fewer people) will be taxed on the husband and
wife according to their actual ownership rather than in equal shares.
For example, if the wife is entitled to 95% of the income from some
jointly owned shares she will pay tax on 95% of the income from those
shares. The guidance at IN115 and Form 17 will be updated to reflect
this change.
Tax Avoidance: Companies in Partnerships
Who is likely to be affected?
Companies that are members of partnerships.
General description of the measure
This measure is an anti-avoidance measure which imposes a charge to
corporation tax on a company which realises capital from a partnership,
where the capital realised represents profits that would have been
taxable on the company in the UK if profits had been allocated in
proportion to shares of partnership capital.
Operative date
Applies to untaxed profits arising on or after today and reflected in
realisations of partnership capital made on or after today.
Current law and proposed revisions
For tax purposes, profits and losses are computed for a partnership as a
whole, but are then allocated to the partners in accordance with the
shares agreed between the partners. Tax is then charged on each partner
on the amount allocated to them as their share of the profit.
Avoidance schemes have been developed where profits are allocated
between the partners to secure a tax advantage. One such scheme involves
allocating all the income to a partner that is not liable to UK tax, and
all the capital to the UK partner. The result is that the UK partner can
realise what should have been taxable profits as a low-taxed or even
untaxed increase in their capital share in the partnership.
From today, a charge to corporation tax will be made on a company where
the following conditions are met:
• the company realises some or all of its capital from the partnership
over and above the amount that it has contributed to or invested in the
partnership; and
• some or all of the increase in the company's partnership capital has
been derived from profits, arising on or after today, that would have
been taxable in the UK had they been allocated to the company in
proportion to its share of partnership capital.
Where these conditions are met the company will face a charge to
Corporation Tax on an amount equal to the lower of the amount withdrawn
or the amount of profit calculated under the second bullet above.
Corporation Tax Reform: Management Expenses
Who is likely to be affected?
Companies with investment business and life assurance companies.
General description of the measure
Relief for the expenses of managing investments will become available to
companies with investment business, whether or not they qualify as
investment companies under current legislation.
Operative date
1 April 2004.
Current law and proposed revisions
Under current law, relief for the expenses of managing investments
(“management expenses”) is available only to companies qualifying as
“investment companies”. Relief is given in the accounting period for
which the expense is “disbursed”.
The proposed change lifts the requirement to be an investment company
and extends relief to companies with investment business. The
requirement for a company to be UK resident will also be removed, so
that UK permanent establishments of non-resident companies will be able
to obtain relief for the costs of managing their investments.
The rule governing the timing of relief will also change, to align with
the accounting treatment.
These proposals were included in the December 2003 Inland Revenue
Technical Note Corporation Tax Reform: The Next Steps, which included
draft legislation. This followed two previous consultation documents in
August 2002 and August 2003. Draft consequential legislation was
published on the Inland Revenue website earlier this month.
The Finance Bill will contain legislation to give effect to these
changes. The legislation will broadly follow the draft clauses published
in December 2003. A summary of the responses to consultation will be
published alongside the Finance Bill.
Changes in response to points raised during the consultation will
include:
• repeal of the provisions which require appeals on management expenses
to go to the Special Commissioners; and
• drafting changes to ensure that the legislation achieves its intended
purpose in the most straightforward way.
The Finance Bill clauses, like the draft clauses published in December
2003, will specifically exclude capital expenditure from deduction as a
management expense. This is not intended to restrict the deductibility
of expenditure as compared with the Revenue’s view of the law prior to
the High Court decision (currently under appeal) in the case of Camas
plc v. Atkinson.
The Finance Bill will also contain legislation to give effect to changes
to the way relief is given to life assurance companies for their
expenses. This legislation will also broadly follow the draft clauses
published in December 2003, but a number of changes will be included as
a result of points made in consultation.
Further advice
Draft guidance on the new legislation will be made available on the
Inland Revenue website following publication of the Finance Bill. This
will include detailed guidance on the issue of capital expenditure
mentioned above.
Tax and Accounting (IAS and UK GAAP)
Who is likely to be affected?
Listed companies, other companies and non-corporate entities that choose
to adopt International Accounting Standards (IAS).
General description of the measure
The measures are to ensure that companies choosing to adopt IAS to draw
up their accounts receive broadly equivalent tax treatment to companies
that continue to use UK Generally Accepted Accounting Practice (UK
GAAP).
Operative date
Periods of account beginning on or after 1 January 2005.
Current law and proposed revisions
UK tax law requires the use of accounts drawn up under recognised
accounting principles as the starting point for tax returns of trading
profits. Since 1998 this requirement has been included in statute law,
and provides that the computation of the taxable profits of a trade, a
profession or a property business must be based on accounts drawn up
under UK GAAP. This applies to individuals as well as companies. UK GAAP
is also used to determine the profits in some other areas, especially
loan relationships (debt and securities), derivative contracts and
intangibles outside the trading context.
The revisions will:
• ensure that IAS accounts are valid for UK tax purposes; and
• amend the legislation on loan relationships, derivative contracts,
intangibles and R&D to accommodate accounting changes, both under IAS
and UK GAAP.
Detail of the changes
Intangible fixed assets
Legislation will ensure that where tax relief for amortisation of
goodwill has been claimed, relief will not be allowed again if the
goodwill is written up to original cost when a company adopts IAS.
Research & Development
The benefits of the R & D deductions and credits will be maintained by
allowing a claim for revenue expenditure treated as added to the cost of
an asset when it is incurred, instead of when it is amortised in the
profit and loss account over later periods.
Financial assets and liabilities (loan relationships)
The loan relationships legislation is being amended to:
• remove the concept of separate authorised accounting methods and to
simply require GAAP (whether UK GAAP or IAS) to be followed, subject to
the existing special rules where a particular accounting method must be
followed for tax purposes, but the rules on sovereign debt are not being
amended pending a review of their future applicability;
• divide up certain assets which contain a derivative element
(convertibles, asset linked securities and index-linked gilts) into a
loan relationships part and a derivative contracts part. The loan
relationships part will be fully within the loan relationships rules.
The derivative contract part will be taxed in accordance with capital
gains rules where sections 92 and 93 currently apply. The index linked
element will be exempt; and
• allow matching of exchange gains and losses on certain loans even
where the gains and losses are not taken to reserve.
Derivative Contracts
The derivative contracts legislation is being amended to:
• remove the concept of separate authorised accounting methods and to
simply require GAAP (whether UK GAAP or IAS) to be followed, subject to
the existing special rules where a particular accounting method must be
followed for tax purposes;
• allow matching of exchange gains and losses on certain currency
contracts even where the gains and losses are not taken to reserve;
• provide a regulatory power to allow fair value gains and losses on
certain hedging instruments to be deferred for tax purposes until gains
and losses on the underlying hedged item are recognised; and
• provide a coherent tax treatment for the derivative contract element
of convertible and asset-linked loans and of index linked gilts.
Currency accounting
The legislation will be adapted to cater for cases where the
presentation currency differs from the functional currency, and will
also be simplified to rely more on following GAAP.
Offshore funds
Who is likely to be affected?
Fund managers of offshore funds, and UK residents who have investments
in offshore funds.
General description of the measure
The changes reform the tests to determine whether or not a fund
qualifies for "distributor status". This in turn determines the tax
treatment of a UK investor. The aim of the changes is to bring more
investments within the scope of being "distributing" which will mean
that a UK investor will have the same tax treatment as if they had
invested in an equivalent UK fund.
Operative date
To the first account period of an offshore fund ending on or after the
date of Royal Assent.
Current law and proposed revisions
At present, offshore funds have to determine whether or not they qualify
as "distributing" funds. In order to do this they must satisfy three
main tests:
• they must distribute annually at least 85% of their income as shown in
their annual accounts;
• they must distribute at least 85% of their income as measured by the
"UK Equivalent Profits" test (UKEP), which broadly measures what the
income would have been had it been drawn up for the purpose of measuring
profits chargeable to UK Corporation Tax; and
• the fund must satisfy certain investment rules.
In order for a fund to qualify, any sub-funds of that fund must also
satisfy all the above requirements, and any separate share classes
within that fund or any of its sub-funds must qualify.
If a fund qualifies, UK investors are chargeable to tax in respect of
chargeable gains on their disposal of any units or shares in the fund,
provided that the fund qualified throughout the period that the UK
investor held that investment. If the fund does not qualify, the entire
gain arising on any disposal of units or shares is chargeable to tax as
income (an "offshore income gain").
The new rules reform the tests for distributor status in the following
ways:
• the UKEP test will follow UK Corporation Tax rules more closely. In
particular, it adopts the "loan relationships" rules, used by all UK
companies, in place of the "accrued income scheme" rules which apply for
Income Tax;
• the investment restrictions will be abolished. Instead, if a fund
crosses certain investment thresholds it must demonstrate that any
underlying investments also satisfy the "distributor" tests;
• separate sub-funds and share classes of funds can now qualify on their
own and will not be affected by non-qualifying sub-funds or share
classes within the same fund.
Some consequential changes will also be made to the existing tax rules
to ensure that an offshore income gain will arise where an investor
switches between a non-distributing and a distributing share class of
the same fund or sub-fund.
Avoidance using Life Insurance Policies
Who is likely to be affected?
Individuals who own life insurance policies, capital redemption policies
and life annuity contracts where there has been both a change of
ownership and there have been earlier gains on the policy or contract.
General description of the measure
The measure amends the rules on deficiency relief, which may be
available to an individual to set against their income taxed at the
higher-rate when a policy comes to an end. It removes the opportunity
for individuals to use life insurance policies to manufacture deficiency
relief in order to avoid higher-rate tax.
Operative date
To all policies and contracts made on or after 3 March 2004. It will
also apply to all existing policies and contracts which are assigned in
part or whole, or become used as security for a debt, or into which
policyholders choose to pay further premiums, on or after 3 March 2004.
Current law and proposed revisions
Deficiency relief is a tax relief available to an individual who owns a
life insurance policy, life annuity contract or capital redemption
policy if the final computation of gain when the policy or contract
comes to an end shows a deficiency. Relief is restricted to the amount
of gains that arose on earlier part surrenders or part assignments of
the rights conferred by the policy or contract. The relief reduces an
individual’s liability to tax on their income at the higher rate. There
is currently no requirement that those earlier gains formed part of the
income of the same individual who is entitled to the deficiency relief.
It is possible, for instance, that the policy may have been owned by a
different person when the earlier gains arose.
Under the proposed revision, the amount of deficiency relief allowable
against an individual’s income will be further restricted to the amount
of gains which formed part of that same individual’s total income in an
earlier year of assessment.
The measure will apply to all life insurance policies, capital
redemption policies and life annuity contracts made on or after 3 March
2004.
It will also apply to existing policies and contracts:
• where the benefits secured are increased on or after that date, either
by a variation of the policy or contract or by the exercise of rights
conferred by the policy or contract. This means that the measure will
apply to any policies into which the policyholder chooses to pay
additional premium on or after 3 March 2004;
• where all or part of the rights conferred by the policy or contract
are assigned on or after 3 March 2004. This applies whether or not the
assignment is for money or money’s worth; or
• where all or part of the rights conferred by the policy or contract
become held as security for a debt on or after 3 March 2004.
If there is a deficiency when a policy or contract ends, and all of the
gains made over the life of the policy have formed part of the income of
the individual entitled to the deficiency, then the computation of
deficiency relief will be unaffected by the new legislation.
Tackling tax avoidance – disclosure requirements
Who is likely to be affected?
Promoters who devise and market certain tax schemes and arrangements,
and taxpayers who use them.
General description of the measure
The new disclosure rules are designed to provide the Inland Revenue with
information about potential tax avoidance schemes and arrangements much
earlier than at present to enable swifter and more effective
investigation and, where appropriate, counteraction.
Operative date
Details of when the rules will come into effect will be included in the
Finance Bill.
Current law and proposed revisions
The new rules will require tax scheme promoters to provide details of
certain defined schemes and arrangements to Inland Revenue shortly after
the scheme is sold. They will be required to provide a description of
the scheme, including details of the types of transactions planned which
form part of the scheme and the tax consequences of the arrangements and
the statutory provisions they rely upon. Inland Revenue will register
these schemes and allocate each a reference number.
In most cases, taxpayers using schemes and arrangements within the new
rules will be required only to include on their tax return the
registration number of the scheme, which promoters will be required to
provide to them. But where they have used a scheme purchased from an
offshore promoter which affects their UK tax liability, or where the
scheme has been devised in-house rather than purchased from a promoter,
taxpayers themselves will be required to provide details of the scheme
to Inland Revenue. Taxpayers will be required to disclose details of
schemes shortly after the scheme was purchased or first implemented.
The new rules will require disclosure of schemes and arrangements where
a main benefit is the obtaining of a tax advantage and where they meet
further conditions. These conditions are designed to target schemes and
arrangements based on financial products, and employment based products.
Full details of these conditions will be published in the Finance Bill.
The tax treatment of particular transactions will not be affected by the
new rules.
There will be penalties for failing to comply with the disclosure
requirements. Details will be published in the Finance Bill.
Double Benefit Leasing
Who is likely to be affected?
Where businesses gain a double benefit from the sale and leaseback or
lease and leaseback plant or machinery, and to both incorporated and
unincorporated businesses.
General description of the measure
Some businesses have exploited the capital allowance rules by entering
into transactions that give them an unintended tax advantage. Plant or
machinery is sold for a sum, or leased out for a premium, that is
largely or wholly untaxed, allowing the business to retain capital
allowances. The plant or machinery is then leased back and the lease
rentals are allowable for tax purposes, giving the businesses a double
benefit of the capital allowances retained and the deductible lease
rentals. The commercial effect of the transactions is that the business
has borrowed money and obtains tax relief for all or part of the cost of
repaying the amount borrowed.
This new measure will remove the unintended tax benefits for lessees by
limiting the relief for the lease rental payments, bringing the tax
treatment of these transactions more closely into line with their
commercial substance.
Operative date
The new legislation will apply from today to all rental payments which
fall due on or after today. It will therefore apply to rental payments
arising under new and existing arrangements.
Current law and proposed revisions
The leasing arrangements
Capital allowances enable the cost of plant and machinery to be written
off against a business’s taxable profits. They take the place of
depreciation charged in the commercial accounts, which is not allowed
for tax. There are two ways in which the capital allowances rules have
been exploited.
In one variant the business sells plant or machinery to a lessor and
finance leases it back so that it may continue to use it in its
business. The other involves plant or machinery that is not sold, but
instead leased out at a premium and then leased back to the original
user.
In both cases the leases replicate many of the commercial effects of a
loan but aim to get tax deductions for the loan repayments as well as
the interest charge, whilst retaining the benefit of capital allowances.
Who will be affected?
The new measure will affect sale and finance leasebacks as defined in
Chapter 17, CAA 2001. It will also affect arrangements where the plant
and machinery is not sold but where the owner grants a lease over the
plant or machinery for a premium and the plant or machinery is leased
back for use by the owner or a person connected with him.
Effects on lessees
Where a lessee accounts for the lease as a finance lease the amount of
the rentals allowable as a deduction will be restricted to the finance
charge element of the lease rentals shown in the lessee’s accounts plus,
in the case of a sale and leaseback, a further amount. The further
amount will be equivalent to the disposal proceeds brought into account
for capital allowances purposes. The deduction for this amount will be
spread over the life of the lease in proportion to the depreciation of
the leased asset.
Where a business enters into a lease and finance leaseback of plant and
machinery no disposal proceeds are brought into account for capital
allowances purposes. Accordingly, the only allowable deduction will be
the finance charge element of the rentals.
In most arrangements the lessee will account for the lease as a finance
lease under generally accepted accounting practice (GAAP). It is,
however, possible that in some cases the lease could be accounted for as
an operating lease by the lessee but as a finance lease in the
consolidated accounts of the group. In these circumstances the new
measure will apply to the lessee as it would if his accounts had
reflected the treatment in the consolidated accounts of the group.
Transitional rules will apply where leases rentals are payable under
existing arrangements. Where a period of account straddles Budget day
the amount of rentals that would have been allowed as a deduction for
tax purposes for the period will be apportioned so that any amount
attributable to the period up to Budget day will remain allowable. In
addition, the rules will ensure that where a lease rental is payable
before today, the lease rentals are allowable on the basis of the
current regime, whenever accounted for.
If a lease were to be terminated on or after today it would be possible
to make arrangements that would enable the tax benefits to be retained.
In contrast, if the lease runs to term the benefits will be recovered
through restricting the allowable amount of lease rentals. Therefore the
measure will introduce rules so that, where a lease is terminated on or
after today, the lessee will be charged to tax on a deemed income
receipt of an amount equivalent to the lease rentals that would not have
been allowable in computing profits had the lease run to its full term.
Where a lessee assigns a lease the measure will treat the assignment as
if it were the termination, and create a tax charge on the basis set out
above for terminations.
Effects on lessors
Under the current regime lessors are taxed on the gross rentals
receivable and, in leases affected by this measure, have no or limited
entitlement to capital allowances. In future lessors entering into these
arrangements will be taxed on their gross earnings as defined by GAAP
(in effect only the finance charge element of the rentals) plus that
part of the rental income which recovers the capital expenditure on
which capital allowances are available.
In a lease and leaseback the lessor does not incur any qualifying
expenditure, so no capital allowances will be available and only the
gross earnings will be taxable.
Transitional rules will apply where leases rentals are receivable under
existing arrangements. Where a period of account straddles Budget day
the rentals received or receivable in the period up to Budget day will
remain taxed under the existing rules.
Tackling Avoidance: Strips Of Government Bonds
Who is likely to be affected?
Individuals (other than those trading in securities) who manipulate the
market value of strips of government bonds in order to avoid UK income
tax.
General description of the measure
This measure is an anti-avoidance measure which implements the
announcement made by the Government on 15 January 2004. It prevents
individuals from avoiding income tax by acquiring strips of government
bonds and entering into arrangements, usually involving options, to
manipulate either the cost or disposal proceeds for tax purposes. The
measures go further than the initial announcement by preventing the
accrual of a capital loss in certain circumstances.
The change will also disallow any loss arising on the actual or deemed
disposal of a strip to the extent that the disposal proceeds fall below
the original cost of acquisition.
Operative date
The anti-avoidance measures as announced in January 2004 will apply to
individuals who dispose of strips of government bonds on or after 15
January 2004, whenever those strips were acquired. The additional
capital loss measures will apply to losses accruing on or after Budget
day. The loss restrictions announced in January 2004 will apply to
disposals of all strips of government bonds which were originally
acquired on or after 15 January 2004.
Current law and proposed revisions
Strips are instruments created by the separation (or ‘stripping’) of the
underlying security into rights to payments of interest at separate
future dates during the life of that security (coupon strip) and rights
to payment of the principal at maturity (principal strip). Each strip is
equivalent to a zero coupon bond.
Where an individual disposes of a strip of a government bond or it is
redeemed, any profit or loss is recognised for income tax purposes. In
addition, individuals are treated as disposing of each strip on 5 April
each year for its market value and reacquiring them at that value on 6
April. They are taxed on any profit over the previous 5 April value, or
the acquisition cost if more recent, and allowed loss relief if the
value of the strip has decreased.
The new measure will ensure that where a scheme or arrangement is
entered into in order to secure a tax advantage, ‘market value’ will be
substituted for cost of acquisition and disposal proceeds. Where a
capital loss accrues from any such scheme or arrangement, that loss will
be disregarded.
The changes will also introduce a new definition of ‘market value’, both
for the purposes of year-end deemed disposals and re-acquisitions, as
well as the new anti-avoidance rule described above. This will be solely
by reference to publicly available pricing information and will not take
account of any way the value of the strip may have been affected by the
scheme or arrangement.
A further change will also be made to disallow any loss arising on the
actual or deemed disposal of a strip of a government bond to the extent
that the proceeds fall below the original cost of acquisition.
Landlord's Energy Saving Allowance
Who is likely to be affected?
Individual landlords (and other landlords who pay income tax) who let
residential property.
General description of the measure
The measure gives an allowance for capital expenditure on loft and
cavity wall insulation in rented accommodation.
Operative date
From 6 April 2004.
Current law and proposed revisions
Income tax law does not generally permit a deduction against revenue for
expenditure on new capital assets in computing the taxable profits of a
property business. Expenditure on repairs, renewals or replacements is
allowed in the normal way in computing profits. Capital allowances can
also be claimed for capital expenditure on plant and machinery installed
in property other than a dwelling house.
The changes will allow landlords a deduction for income tax purposes up
to a maximum of £1,500 when they install loft or cavity wall insulation
in a dwelling house which they let. There will also be a power for the
Treasury to amend or extend the definition of allowable expenditure for
this purpose by statutory instrument.
Simplifying Inheritance Tax Administration
Who is likely to be affected?
Personal representatives of most estates where no inheritance tax (IHT)
is payable. Also personal representatives of the few estates where the
IHT account is delivered late or includes negligent or fraudulent
understatements.
General description of the measure
This measure will bring a further 30,000 estates a year within the
simpler reporting regime for IHT so that other than in the largest
estates (and a small number of other exceptions), an IHT account will be
required only where there is tax to pay. In other cases contact with the
Probate Service will cover both tax and probate formalities (in Scotland
a Sheriff Court covers confirmation formalities). As a corollary the
existing penalty rules will apply to the delivery of incorrect
information under the simplified reporting regime. Inland Revenue is
also bringing the IHT penalty rules more into line with those for income
and capital gains taxes.
Operative date
The detailed changes to the simplified reporting process will be
discussed with interested parties and the necessary changes to secondary
legislation will be made later this year. The changes to the penalty
rules will take effect from Royal Assent, with suitable transitional
provisions.
Current law and proposed revisions
The Inheritance Tax (Delivery of Accounts) (Excepted Estates)
Regulations 2002 (SI 2002 No. 1733) (as amended by SI 2003 No.1658)
specify the circumstances in which an IHT account can be dispensed with.
In such estates, very limited information is delivered to the Probate
Service with the application for a grant of probate. To monitor the
process, the Inland Revenue ask for a full account to be completed in a
small number of these estates. The new processes will ensure that basic
information about the vast majority of estates is provided to Government
only once and passed as necessary between the Probate Service and Inland
Revenue. The numbers of estates that have to complete a full account
will be substantially reduced as a result. Exactly what information
should be provided and how that may vary in some cases will be discussed
with interested parties before the changes are made to the Regulations
later this year. The Inland Revenue will continue to make enquiries in
any cases deserving further enquiry. In Scotland, the Inventory which is
already delivered to the Scottish Court Service in every estate will
contain some further information about the estate for IHT purposes.
Provision will be made to allow for the information delivered via the
Probate Service to be treated as having been furnished direct to the
Inland Revenue. This means that the current penalty rules for delivery
of incorrect information will apply to information delivered to the
Inland Revenue via the Probate Service. The changes will apply similarly
to information delivered via the Scottish Court Service.
To bring the IHT penalty rules more in line with those for Income and
Capital Gains taxes provision will be made:
• for a penalty to be charged (up to £3,000) for failure to submit an
IHT account, or to notify the Inland Revenue if a disposition on death
is varied, within 12 months of the account or notification being due;
• to change the current penalty provisions by removing the penalty
charge where no additional IHT arises as a result of negligent or
fraudulent material submitted to the Inland Revenue;
• to fix the penalty charge at £100 for the late delivery of an IHT
account unless the tax involved is less than that amount or there is a
reasonable excuse.
NHS Foundation Trusts: Tax Treatment Of Non Health Care Trading
Activities
Who is likely to be affected?
NHS Foundation Trusts carrying on non-health care trading activities
where those activities are not carried on within separate companies.
General description of the measure
The measure introduces a power to make regulations to specify the tax
treatment of profits arising from the non-health care trading activities
of NHS Foundation Trusts. This power is necessary to ensure that any
profits arising from such activities are chargeable to corporation tax.
The regulation making power will only be used in the event that an NHS
Foundation Trust is involved in carrying on such an activity which is
not carried on within a company. Companies owned by NHS Foundation
Trusts will be subject to corporation tax in the normal way.
Operative date
The measure will be operative from the date the Finance Bill receives
Royal Assent.
Current law and proposed revisions
This measure does not affect the position of core health care provided
by NHS bodies including NHS Foundation Trusts. Those activities will
continue to be exempt from direct tax. In addition to health care,
however, NHS Foundation Trusts, like NHS Trusts also carry out ancillary
trading activities. The Government can ensure that where significant
profits arise from these activities in NHS Trusts, such profits can be
liable to tax, but no such mechanism exists for NHS Foundation Trusts.
The proposed measure will provide a power to dissapply the tax exemption
for ancillary trading activities of NHS Foundation Trusts so that
profits arising from them will be subject to tax. Where NHS Foundation
Trusts form companies to conduct these activities, as with NHS Trusts,
those companies will be subject to corporation tax in the normal way.
Tax Treatment of Small Incorporated Businesses
Who is likely to be affected?
Companies or groups with profits chargeable to corporation tax below the
threshold for the small companies’ rate who make distributions to
non-company shareholders.
General description of the measure
The combined effect of measures introduced to support small business and
the long standing differences between the tax treatment of earned income
and dividend income have resulted in a number of businesses
incorporating, solely or mainly, for tax reasons.
This measure puts matters on a more balanced footing by ensuring that
when profits are distributed to non-company shareholders by a company or
group, profits are charged at a minimum rate of corporation tax of 19%.
There will be rules to cover situations where distributions made exceed
profits for the relevant accounting period.
There will also be new administrative requirements for companies coming
into the corporation tax regime.
Operative date
The minimum rate will apply to distributions made on or after 1 April
2004.
Current law and proposed revisions
The rate at which corporation tax is payable depends on the amount of a
company’s profits for the financial year in question. Corporation tax is
charged at the Starting rate (currently 0%) where profits are £10,000 or
less, the Small companies’ rate (currently 19%) where profits are
£50,001 - £300,000, and the main rate (currently 30%) for profits
exceeding £1,500,000. Marginal relief is given to smooth the transition
from one rate to another where profits fall within these limits.
The measure will ensure that a minimum rate of corporation tax of 19% is
charged when a company makes distributions to non-company shareholders.
Lower rates of corporation tax will continue to apply where profits are
retained or are distributed to other companies.
Inland Revenue: Compliance Package
Who is likely to be affected?
Those who are not paying their share of tax or contributions, in
particular those:
• who fail to comply with their legal obligations such as by trying to
stay hidden from the Inland Revenue or don’t file accurate returns; or
• who seek to avoid tax by exploiting loopholes in the law.
General description of the measure
The package provides extra funding for the Inland Revenue. This will be
used to invest in extra specialist staff and in new systems for
targeting where best to deploy resources in order to improve performance
in areas where the Exchequer is at significant risk from non-compliance.
Operative date
The Inland Revenue will start implementing the new package soon after
the Budget and the package will be introduced in phases over the coming
months.
Current situation and proposed enhancements
This package builds on the compliance and enforcement package announced
by the Chancellor in his 2003 Budget. That provided additional resources
which have been deployed into three areas where significant compliance
risks had been identified:
• non-payment of tax and National Insurance contributions (NICs) debts,
and failure to file tax returns on time;
• tackling fraud involving the concealment of undeclared income or
profits offshore; and
• countering avoidance of corporation tax, and of NICs and tax on
employment income.
The new package takes that initiative into new areas and will also
enable the Inland Revenue to use its resources for tackling
non-compliance more effectively. It includes:
• better publicity to raise public awareness of tax obligations, the
assistance the Inland Revenue can provide to help its customers meet
their obligations, and the implications of non-compliance;
• new data systems to improve analysis of tax compliance issues and
support the better deployment of staff to areas of significant Exchequer
risk;
• more specialist staff to deal with high risk issues involving large
businesses and individuals whose tax affairs are substantial and
complex; and
• measures to identify those working without being registered for tax.
This will include identifying people working in the shadow economy and
follow up work by Inland Revenue staff to ensure they remain compliant.
Income Tax (Earnings And Pensions) Act 2003: minor corrections
Who is likely to be affected?
Employees and employers whose income falls to be taxed under the
provisions of Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and
companies claiming Research and Development (R&D) or contaminated land
tax credits.
General description of the measure
This measure corrects a number of errors in ITEPA, including
typographical errors, updates of language and references, and clarifies
the meaning of certain sections of the Act.
Operative date
6 April 2004 for many of the measures but some have more detailed
commencement provisions, set out below.
Current law and proposed revisions
The majority of these corrections update reference errors or return the
law to the position prior to ITEPA’s enactment in April 2003. Five of
the corrections are more substantial:
Repeal of Section 108 Finance Act 1995
Schedule 8 ITEPA 2003 inadvertently repealed section 108 Finance Act
1995 which affects those subject to the income tax self assessment
payment on account regime. Section 108 Finance Act 1995 amended the
rules for payments on account and should not have been repealed. The
position is therefore being clarified.
Research & development tax credits
ITEPA amended the rules determining the expenditure on staffing costs
which qualify for R&D tax credits and vaccines research relief. Prior to
ITEPA, benefits in kind were excluded from relief. ITEPA amended this to
include, among other employee-related expenditure, benefits in kind as
qualifying for relief.
The position is being returned to the pre-ITEPA position so that
benefits in kind do not qualify for R&D tax credits or vaccines research
relief. This will have effect for expenditure incurred by both large
companies and SMEs on or after 1 April 2004.
Remediation of contaminated land
ITEPA amended the rules determining the expenditure on staffing costs
which qualify for relief under the provisions applying to the
remediation of contaminated land. Prior to ITEPA, benefits in kind were
excluded from relief. ITEPA amended this to include, among other
employee-related expenditure, benefits in kind as qualifying for relief.
The position is being returned to the pre-ITEPA position so that
benefits in kind do not qualify for contaminated land relief. This will
have effect for expenditure incurred by companies on or after 1 April
2004.
Exemption for the benefit of subsidised workplace meals
Section 317(1)(a) ITEPA 2003 affects employers providing free or
subsidised meals in a staff canteen. This corrects a drafting defect in
the law to ensure that, for the exemption to apply, subsidised meals
have to be available to employees generally. The existing law exempting
the benefit of subsidised canteen meals for employees contains a
loophole which could allow the exemption to apply, even though a meals
subsidy was not offered to all employees. This amendment removes that
unintended effect so that the exemption will not apply unless subsidised
canteen meals are available to employees generally.
Employments where earnings charged on remittance
Section 389 ITEPA 2003 affects certain employees whose employers make
contributions to non-approved pension schemes. This section exempts
employees from tax on contributions made on their behalf by their
employer to a non-approved retirement benefits scheme. The exemption
applies only if the employee’s income was of the sort previously taxable
under Case III of Schedule E.
Prior to ITEPA 2003 the exemption applied provided the employee did not
have any earnings from the employment which were taxable under ‘Cases I
or II of Schedule E’. The current law erroneously excludes the rare
situations in which, although there were earnings, no earnings were
chargeable under any of the three Cases of Schedule E (which is the
case, for example, for certain non-residents). The proposed revision
will ensure that the exemption continues to operate properly from April
2003 when ITEPA was enacted, and will address concerns raised by those
affected.
Stamp Duty Land Tax: Technical Clarifications
Who is likely to be affected?
Purchasers and lessees/tenants of land, especially those engaging in
more complex commercial transactions. Residential purchasers and tenants
are unlikely to be affected.
General description of the measure
Stamp Duty Land Tax (SDLT) was introduced from 1 December, largely
replacing stamp duty on land transactions. A number of changes were made
in December 2003 to clarify points of uncertainty; counter avoidance and
extend some reliefs. These new measures make further changes in these
areas.
Operative date
The majority of measures apply from Budget Day. Those in paragraphs 15,
16 and 18 below apply from Royal Assent. The measure in paragraph 17
applies with effect from 1 December 2003.
Current law and proposed revisions
Anti-avoidance
Changes will clarify the provision for sub-sales (where a contracting
purchaser sells on without taking title) where part only of the property
is sub-sold.
Potential avoidance opportunities exploiting the interaction between the
provisions on sub-sales and those on group relief and sale-and-leaseback
will be closed.
Changes will be made so that the transitional provisions apply as the
Government intended on contracts entered into pre-implementation, where
there is a sub-sale post-implementation.
Changes to the relief for Private Finance Initiative (PFI) projects will
ensure that such transactions are always notifiable.
Clarifications
Currently SDLT is charged on uncompleted contracts which are
‘substantially performed’ when the purchaser either pays or takes
possession. Changes will make explicit how the charge works for
agreements where the contracting purchaser has a right to direct a
conveyance to a third party. Such agreements are common where land is to
be developed and sold.
Under certain conditions, works carried out on land after it is
purchased do not count as consideration. Changes will ensure that an
unintended charge does not arise when a contract is later completed by
conveyance.
‘Agreements for lease’ are an important part of conveyancing in England,
Wales and Northern Ireland. These look like contracts to grant a lease
but in practice are often treated as equivalent to leases. There will be
clarification on the treatment of agreements for leases which are
‘substantially performed’ so that for most purposes, and in particular
when they are assigned, they are treated as leases. This will apply to
all agreements for lease whenever they were entered into.
Similar changes will be made as regards ‘missives of let’ in Scotland.
Missives of let are in essence agreements under which a lease is to be
executed
To provide certainty, all variations that extend a lease or increase the
rent will be treated as the grant of a new lease. All other variations
will be disregarded. This will apply to all leases whether the original
grant of the lease was within the scope of SDLT or not.
Minor amendments will be made to the rules on leases:
• to ensure the rules on surrenders and regrants work as intended;
• to clarify that where a lease ends part-way through a year only the
rent actually paid is taken into account;
• to reduce the compliance burden where there is a rent review just
before the end of the fifth year because a lease is expressed to
commence from a date earlier than the date it is granted
• to provide that ‘rent’ for a period before a lease is granted is taxed
as a premium and not as rent.
Changes will ensure shared ownership leases are treated in a way similar
to their treatment under the old stamp duty regime.
Extensions of reliefs
Current rules provide relief for ‘chain-breaking’, relocation and
similar transactions when people move house. However, the rules do not
permit relief when people buy a new house but cannot move into it
immediately and stay on in their old house. Changes will extend this
relief provided people do not stay on in their old home for more than
six months
Currently relief for ‘sale and leaseback’ transactions is restricted to
commercial property. This restriction will be removed to help people
entering into ‘home reversion plans’ to raise capital from their homes.
The relief will also be extended to include ‘lease and leaseback’
transactions and transactions where part only of the property is leased
back.
Changes will put it beyond doubt that when property passes to a
beneficiary under or in satisfaction of an entitlement under a will, or
on an intestacy, there is no charge to Stamp Duty Land Tax. This change,
which reflects the law under the old stamp duty regime, will apply to
all such transmissions of property since 1 December 2003.
Reduced compliance burden
To help reduce the burden on purchasers there will be changes to the
administrative and compliance provisions with effect from Royal Assent
of Finance Bill 2004:
• at present all acquisitions of a freehold interest have to be notified
to the Inland Revenue where there is chargeable consideration, however
small. This includes for example the purchase by a lessee of a
residential property of the freehold reversion for a few hundred pounds.
In future there will be no requirement to notify where the transaction
is the acquisition of a freehold (or other “major interest in land”)
where the consideration is less than £1000. Instead such transactions
may be self-certified;
• the grant of a lease for seven years or less (a ‘short lease’) only
has to be notified to the Inland Revenue if there is tax to pay, or a
relief to be claimed. But all assignments of such leases by tenants have
to be notified, whether or not there is tax to pay. In future a short
lease is assigned this will only have to be notified to the Inland
Revenue if there is tax to pay, or a relief to be claimed. Other
assignments of short leases may be self-certified;
• changes will make clear that the Inland Revenue will not charge two
tax-geared penalties on the same amount of tax. This is the same as the
rule for income tax;
• current procedures for claiming relief do not cover all kinds of
claim. There will be comprehensive rules similar to those for income
tax; and
• changes will ensure that the acquisition of ‘community interests in
land’ will not have to be notified to the Inland Revenue when these
interests are created in Scotland later this year.
Increase in rate of first-year Capital Allowances for small businesses
Who is likely to be affected?
Small businesses investing in plant and machinery.
General description of the measure
The rate of first-year capital allowances for small businesses spending
on most plant and machinery will be increased from 40% to 50% for a
period of one year.
Operative date
To spending incurred on or after 1 April 2004 for businesses in the
charge to corporation tax, and on or after 6 April 2004 for businesses
in the charge to income tax.
Current law and proposed revisions
Capital allowances allow the cost of capital assets to be written off
against a business's taxable profits. They take the place of commercial
depreciation charged in commercial accounts. The main rate of capital
allowances for general spending on plant and machinery is 25% a year on
the reducing balance basis. First year allowances (FYAs) bring forward
the time that tax relief is available for capital spending and allow a
greater proportion of the cost of an investment to qualify for tax
relief against a business's profits of the period during which the
investment is made.
Small and medium-sized enterprises can claim 40% FYAs on their
investments in most plant and machinery. There are some exceptions,
including spending on long-life assets, cars and assets for leasing.
This measure will increase the rate of FYAs for small enterprises only,
from 40% to 50% for a period of one year, providing an increased
cash-flow benefit for small businesses’ investment in plant and
machinery. The rate of FYAs for medium-sized enterprises remains
unchanged at 40%.
Simplification Of The Taxation Of Pensions
Who is likely to be affected?
Pension scheme savers in occupational and personal pension schemes,
employers, the pensions industry, and Independent Financial Advisers..
General description of the measure
Simplification will replace the eight existing tax regimes with a single
universal regime for tax-privileged pension savings. The numerous
controls in the current regimes will be replaced by 2 key controls in
the new regime. These will be:
• the lifetime allowance; and
• the annual allowance.
Additionally, the other main changes are:
• there will be a single set of rules on pensions in payment allowing
all schemes the ability to offer members a tax free lump sum of up to
25% of their pension fund;
• occupational pension schemes will have the opportunity to offer
flexible retirement if they wish. This will enable people in
occupational pension schemes to draw retirement benefits while
continuing to work for the same employer;
• there will be a single set of investment rules for all pension
schemes. Subject to Department for Work and Pensions (DWP) requirements,
pension schemes will be allowed to invest in all types of investments,
including residential property; and
• the complex approval process for pension schemes will be replaced by a
simplified regime requiring registration only.
Operative date
6 April 2006.
Current law and proposed revisions
There are currently eight different tax regimes governing pensions, each
with its own complex rules limiting the amount an individual can
contribute to a pension scheme and the consequent benefits a scheme can
pay out. This has led to anomalies between Defined Benefit (DB) and
Defined Contribution (DC) schemes in the level of contributions that can
be made and what benefits can be taken.
Contributions are currently subject to an earnings cap (£99,000 in
2003-04). However, current schemes allow different levels of
contribution. For example:
• occupational schemes (1989 regime): employees may contribute, with tax
relief, up to 15% of earnings up to the earnings cap. Employer
contributions are limited to the earnings cap; yet
• personal pension plans (1988 regime): individuals may receive tax
relief on contributions up to the higher of £3,600 a year or a
percentage of capped earnings, the percentage varies on age.
• Even then, different rules apply to pre-1970 schemes, post-1970
schemes, 1987 regime, and Retirement Annuity Contracts. Members of
Retirement Annuity Contracts also have the facility to carry forward and
carry back unused relief from year to year.
These regimes also have different rules regarding what benefits can be
paid out to members. Members in a 1989 occupational scheme are limited
to two thirds of final earnings up to the earnings cap after 20 years’
service, but there are no limits on the size of pension benefits for
people in personal pensions. There are also different rules governing
the amount of tax-free lump sums that different schemes can pay.
Under simplification all these controls will be removed. In their place
will be a single set of rules that will apply to all tax registered
pension schemes. Benefits that schemes pay out will be decided by scheme
design and not by Revenue regulations.
The key elements of the simplified regime will be:
A single lifetime allowance on the amount of pension savings that can
benefit from tax relief. The value of the lifetime allowance will be set
at £1.5m on introduction rising as follows:
2007 - £1.6m
2008 - £1.65m
2009 - £1.75m
2010 - £ 1.8m
The lifetime allowance will be reviewed quinquennially.
An annual allowance initially set at £215,000. It will increase
steadily each year such that in 2010 it will be at £255,000 for
contributions to DC schemes or increases in accrued benefits in DB
schemes. The level of the annual allowance will be reviewed
quinquennially.
• Contributions will no longer be limited to a fraction of capped
earnings. Individuals will be able to make unlimited contributions and
tax relief will be given on the higher of 100% of relevant earnings or,
where the individual contributes to a scheme that operates relief at
source, £3,600.
• All Schemes will be able to pay tax-free lump sums of up to 25% of the
value of the pension rights. The maximum permissible tax-free lump sum
rises, under simplification, to 25% of lifetime allowance.
• A lifetime allowance charge of 25% on funds in excess of the lifetime
allowance. Funds in excess of the lifetime allowance may be taken as a
lump sum, in which case the lifetime allowance charge will be at a rate
of 55%.
• An annual allowance charge of 40% on contributions or increases in
excess of the annual allowance.
• In order to value the capital worth of defined benefits for the
purpose of the lifetime allowance, there will be a single valuation
factor of 20:1. Individuals who receive payment of a pension at 5 April
2006 will be treated as having used up part of their lifetime allowance
if, after 5 April 2006, they receive payment of a new benefit. The
factor for valuing such pensions will be 25:1, which reflects the fact
that people will generally have taken tax-free lump sums.
• A valuation factor of 10:1 will be used to measure the annual increase
for the purpose of the annual allowance.
• Transitional arrangements will protect pension rights built up before
6 April 2006. There will also be protection for rights to lump sum
payments that exist at 6 April 2006. There will be two options for
transitional protection from the lifetime allowance charge:
• Primary Protection which will be given to the value of the pre-April
2006 pension rights and benefits in excess of £1.5 million; or
• Enhanced Protection which will be available to individuals who cease
active membership of approved pension schemes by 6 April 2006. Provided
that they do not resume active membership in any registered scheme, all
benefits coming into payment after 5 April 2006 normally will be exempt
from the lifetime allowance charge.
• The minimum pension age will rise from 50 to 55 by 2010. Those with
certain existing contractual rights to draw a pension earlier may have
that right protected. There will be special protection for members of
those approved schemes in existence before April 2006 with low normal
retirement ages, such as those for sports people.
• It will no longer be necessary for a member to leave employment in
order to access an employer’s occupational pension. Members of
occupational pension schemes may, where the scheme rules allow it,
continue working for the same employer whilst drawing retirement
benefits.
• Employers will continue to be able claim a deduction in computing
profits chargeable to UK tax for employer contributions paid to a
registered pension scheme. The Government intends to continue the
current practice of spreading large contributions over 2 to 4 years.
• It will continue to be a requirement that pensions are secured by age
75. However, pension income may be delivered after age 75 through
Alternatively Secured Income, an alternative method to provide benefits
via an income for life which may be used by those with principled
objections to the pooling of mortality risk.
• Death benefits from a scheme can be in the form of either a lump sum,
a pension to one or more dependants or a combination of lump sum and
pension. This will depend on whether the benefit is in payment at the
time of the member’s death and the age of the member at death.
• There will be new, simpler processes for scheme registration and
reporting. The current limits on what a scheme may invest in will be
lifted and replaced by a single set of investment rules for all pension
schemes.
• Non-registered pension schemes may continue in the new regime, but
without any tax advantages. They will be treated like any other
arrangement to provide benefits for employees. Amounts in non-registered
pension schemes will not be tested against the lifetime allowance and
the lifetime allowance charge will not apply to them. Transitional
protection will be available for pension rights accrued at 6 April 2006
within non registered schemes.
Tax Treatment Of Pre-Owned Assets
Who is likely to be affected?
People who have entered into contrived arrangements to dispose of
valuable assets, while retaining the ability to use them. The main
purpose of arrangements subject to the charge is to avoid inheritance
tax. There are specific exceptions to the charge which are explained
below.
General description of the measure
Pre-Budget Report announced that a free-standing income tax charge will
apply from the 6 April 2005 to the benefit people get by having free or
low-cost enjoyment of assets they formerly owned (or provided the funds
to purchase). The charge will apply in appropriate circumstances both to
tangible assets (with separate provision for land, including living
accommodation, and for chattels) and to intangible assets. Broadly
following the model of the benefit-in-kind charge on employees, the
rules will quantify an annual cash value for the benefits enjoyed by a
taxpayer: this will be treated as an addition to their taxable income,
subject to a de minimis threshold, and a set-off for any amounts made
good by them for the benefit.
Operative date
The charge will apply when a benefit is received in chargeable
circumstances in or after the income tax year 2005-06.
Current law and proposed revisions
The Government is aware that various schemes designed to avoid
inheritance tax have been marketed in recent years. These use artificial
structures to avoid the existing rules about gifts made with
reservation. As a result, people have been removing assets from their
taxable estate but continuing to enjoy all the benefits of ownership.
The Government is determined to block this sort of avoidance and
announced in the Pre-Budget Report that people who benefit from these
sorts of schemes would be subject to an income tax charge from April
2005, to reflect their additional taxable capacity from receiving these
benefits at low or no cost.
Following consultation, the Government has confirmed, and proposes to
extend, the exclusions outlined in the consultation document published
following the Pre-Budget Report. So the proposed charge will not apply
to the extent that:
• the property in question ceased to be owned before 18 March 1986;
• property formerly owned by a taxpayer is currently owned by their
spouse;
• the asset in question still counts as part of the taxpayer’s estate
for inheritance tax (IHT) purposes under the existing “gift with
reservation” (GWR) rules;
• the property was sold by the taxpayer at an arm’s length price, paid
in cash: going further than the consultation document, this will not be
restricted to sales between unconnected parties;
• the taxpayer was formerly the owner of an asset only by virtue of a
will or intestacy which has subsequently been varied by agreement
between the beneficiaries; or
• any enjoyment of the property is no more than incidental, including
cases where an out-and-out gift to a family member comes to benefit the
donor following a change in their circumstances.
More generally, the rules for tangible assets will mean that former
owners will not be regarded as enjoying a taxable benefit if they retain
an interest which is consistent with their ongoing enjoyment of the
property. For example, the proposed charge will not arise where an
elderly parent formerly owning the whole of their home passes a 50 per
cent interest to a child who lives with them.
Intangible assets formerly owned by the taxpayer (or derived from other
property formerly owned by them) will be treated as giving rise to a
taxable benefit, only to the extent that the taxpayer may derive
benefits from them, and those benefits would diminish the benefits
potentially available to others. So for example, no charge would apply
if the taxpayer has funded life insurance policies held on trust and the
taxpayer’s continuing claims are limited to particular retained
benefits, such as the return of the life assurance premium, and the
balance of the policy value is held on trust solely for others. But a
charge would be due if, say, the whole value of such a life policy was
held on discretionary trusts for a class of beneficiaries including the
settlor (and the circumstances were such that the trust property was not
covered by the existing “gift with reservation” rules).
Territorial scope
The charge will apply to residents of the UK. For taxpayers who are
domiciled in the UK (or deemed to be), the charge will apply to their
assets anywhere in the world. For taxpayers who are not domiciled in the
UK (or not deemed to be), the charge will apply only to their UK assets.
For taxpayers who have become domiciled in the UK (or deemed to be), the
charge will not apply to any non-UK assets which they ceased to own
before they acquired that domicile.
De minimis
The consultation document said that there would be a substantial de
minimis threshold below which the cash value of benefits in a given year
would be disregarded. The Government has decided to set this threshold
at £2,500 per year.
An election for transitional relief
A number of responses in consultation made the point that existing users
of tax-driven schemes may find it difficult or impossible to dismantle
the resulting structure – so eliminating any income tax charge and
re-instating the potential IHT charge they originally sought to avoid –
although that is, with hindsight, the outcome that many of them would
prefer. In response to that, the Government proposes, additionally, that
taxpayers involved in existing schemes may choose a special transitional
treatment if they elect for this by 31 January 2007. If they elect, they
will not be subject to the new income tax charge in relation to property
covered by the election, but the property in question will be treated as
part of their taxable estate for IHT purposes, while they continue to
enjoy it, in essentially the same way as under the existing “gift with
reservation” rules. As under those rules, property subject to such an
election would be potentially eligible, in due course, for the normal
IHT reliefs and exemptions available, for example, to business and
agricultural property, and to heritage assets.
Valuation and further consultation
The Government has confirmed the approach outlined in the consultation
document and proposes that the cash value of benefits should be
determined by reference to market rentals in the case of land, and by
reference to imputed percentages of capital value in the case of
chattels and intangible assets. They would welcome further
representations, in the light of the decisions now announced, on the
detailed arrangements that should apply to valuation and on the rates of
return for chattels and intangibles, so they reflect available market
evidence while minimising avoidable compliance costs. They therefore
propose to settle these matters in secondary legislation following a
further round of consultation which the Inland Revenue will undertake
later this year.
Company Car Tax
Who is likely to be affected?
Employees provided with a car that is available for their private use,
and employers who bear Class 1A National Insurance on the taxable
benefit of a provided car and fuel.
General description of the measure
Setting the company car tax charge for 2006/07 and the company car fuel
charge for 2004/05.
Operative dates
Company car tax: 6 April 2006
Company car fuel tax: 6 April 2004
Current law and proposed revisions
Company car tax
Where a car is made available for an employee’s private use a taxable
benefit arises. Since April 2002 the taxable benefit has been calculated
by applying a percentage to the list price of the car. The percentage is
related to the CO2 emissions of the car and ranges from 15% to 35% (in
1% increments) for a petrol car. Diesel cars that do not meet Euro IV
emissions standards attract a 3% supplement on the petrol percentages
(capped at 35%). Cars that run on alternative fuels attract discounts to
the petrol percentage. The CO2 emissions qualifying for the minimum
petrol percentage charge have been set as follows:
• 2004/05 145 grams per kilometre of CO2
• 2005/06 140 grams per kilometre of CO2
To provide continued certainty of the tax charge for the next three
years the level of CO2 emissions qualifying for the minimum petrol
percentage (15%) will be frozen at 140 grams per kilometre in 2006/07.
Company car fuel
An additional taxable benefit arises if the employee receives free fuel
for the company car for their private use. The taxable benefit
calculation was reformed in April 2003 to align the charge with the
environmental principles of the company car tax system. Since April 2003
the fuel benefit charge has been calculated by applying the company car
tax appropriate percentage to a set figure. In 2003/04 the set figure
was £14,400.
For 2004/05 the set figure for the company car fuel benefit charge will
be frozen at £14,400.
Employer Provided Vans
Who is likely to be affected?
Employees provided with a van that is available for their private use
and employers who bear Class 1A National Insurance on the taxable
benefit of a provided van. Self-employed van drivers are not affected by
these new rules.
General description of the measure
Following consultation, new rules are being introduced to determine the
amount of the taxable benefit that arises where an employee is provided
with a van by his or her employer and the van is available for private
use.
Operative date
6 April 2005
Current law and proposed revisions
Under the current rules, the benefit charge that arises where a van is
available to an employee for private use is £500 (or £350 for a van that
is 4 or more years old at the end of the tax year) and has been in place
and unchanged since 1993. The charge also includes any private fuel
provided.
A major deregulation of the company van rules has been announced today.
Scale charges based on the type of private use will be introduced with a
new charge for employer provided fuel.
From 6 April 2005 a nil charge will apply to employees who have to take
their van home and are not allowed other private use. Where private use
is unrestricted the existing £500 or £350 scale charge will apply
dependent upon the age of the van. From 6 April 2007 the discount for
older vans will be removed and the scale charge for unrestricted private
use will increase to £3000 and if an employer provides fuel for
unrestricted private use an additional fuel charge of £500 will also
apply.
Exemption For On Call Emergency Service Vehicles
Who is likely to be affected?
Employees working for the fire, police and ambulance services.
General description of the measure
The measure removes the tax and National Insurance charge that arises
when emergency service workers have to take their emergency vehicles
home when on call.
Operative date
6 April 2004
Current law and proposed revisions
Emergency service workers in the fire, police and ambulance services,
are often required to take their vehicles home at night so they can
respond quickly to emergencies. The current rules on employees’ home to
work travel mean that there is a tax and National Insurance charge when
this happens.
The new measure will ensure that no such charge arises where there is an
operational requirement for emergency vehicles to be kept at home.
VAT: new disclosure rules
Who is likely to be affected?
Businesses that use or market VAT avoidance schemes.
General description of the measure
The measure introduces a requirement for businesses with supplies of
£600,000 or more to disclose the use of specific avoidance schemes that
HM Customs and Excise will publish in a statutory list. A business using
a listed scheme must disclose its use to Customs. This must be done
within 30 days of the date when the first return affected by the scheme
becomes due after 'listing'.
Failure to disclose will incur a penalty of 15% of the tax avoided.
The measure also introduces a requirement for businesses with supplies
exceeding £10 million a year to disclose the use of schemes that have
certain of the hallmarks of avoidance. This must be done within 30 days
of the date when the first return affected by the scheme becomes due.
The measure also includes provisions that provide a voluntary facility
for those who devise and market VAT avoidance schemes (promoters) to
register schemes that have the hallmarks of avoidance with Customs. A
business using a scheme registered by a promoter will not have to make a
separate disclosure of its use.
Failure to disclose will incur a flat rate penalty of £5000.
Operative date
Soon after Royal Assent.
Current law and proposed revisions
The VAT Act 1994 will be amended to reflect these changes. Certain of
the changes will be made by statutory instruments to be made under
powers within the amended law.
VAT: eligibility rules for VAT groups
Who is likely to be affected?
Certain businesses within VAT groups or seeking to join VAT groups whose
main activity is making positive-rated supplies to other VAT group
members.
General description of the measure
Under the current rules, two or more bodies corporate are eligible to be
treated as members of a VAT group if each is established or has a fixed
establishment in the United Kingdom and they are under common "control".
The present definition of control is taken from UK company law and is
wide in scope.
The measure will change the rules for VAT group eligibility and is aimed
at stopping abusive arrangements where a jointly owned entity is able to
join a VAT group, even though it is run by and for the benefit of an
external third party. These arrangements can result in substantial
revenue loss, which goes beyond the normal operation of grouping, and
can give companies concerned a significant advantage over competitors.
In the light of responses to the consultation, the original proposal has
been modified to make it more targeted on cases where there may be
avoidance. The Government will retain the existing eligibility rules for
VAT grouping but introduce two additional tests. These tests will apply
in very few cases and will not impose any additional burdens or changes
on the vast majority of VAT groups. The measure will apply where:
• a jointly owned company or a wholly owned subsidiary run by a third
party makes or intends to make positive-rated supplies to a member of
the VAT group which it wants to join (other than supplies which are
incidental or ancillary to its business activities); and
• the VAT group would be unable to recover VAT on such supplies in full.
Limited partnerships will be subjected to these additional tests too.
These partnerships can join a VAT group because for VAT purposes they
are identified with the general partner of the partnership.
The two additional tests in these limited circumstances will be based on
economic benefits and on consolidation in group accounts. The first test
will not allow grouping where the majority of the economic benefits from
the entity in question go to a third party. The second test will be that
under generally accepted accounting practice, the entity's accounts are
consolidated in the group accounts for the person controlling the VAT
group (or would be so consolidated if that person prepared group
accounts). Both of these tests will have to be satisfied.
The eligibility changes will prevent VAT grouping in the circumstances
set out in paragraph 3 unless the conditions in paragraph 6 are met.
Where a body ceases to be eligible to be VAT grouped as a result of
these changes, Customs will be able to remove it from the group from the
date it ceases to be eligible. They will no longer need to use their
discretionary revenue protection powers against arrangements of the type
outlined in paragraph 3. However, these powers are being retained for
use in other circumstances that are not covered by the new rules.
The law is also being clarified to make it clear that a company or other
corporate body cannot be in two VAT groups at the same time.
These changes will be made by a Treasury order under new powers
conferred by the Finance Bill
Operative date
1 August 2004.
Current law and proposed revisions
Section 43A of the VAT Act 1994 will be amended to include the power to
make a Treasury Order to impose the additional tests above.
VAT: reduced rate for energy-saving materials
Who is likely to be affected?
Businesses installing ground source heat pumps in all forms of
residential accommodation and consumers having such systems installed.
General description of the measure
Currently a 5% reduced rate of VAT applies to the installation of a
specific list of energy saving materials.
The measure extends this list to include ground source heat pumps. This
amendment reflects government support for the domestic energy efficiency
agenda by encouraging the use of renewable sources of energy.
Operative date
1 June 2004.
Current law and proposed revisions
Group 2 of Schedule 7A to the Value Added Tax Act 1994 will be amended
by Treasury Order.
VAT: change to the place of supply of natural gas and electricity
Who is likely to be affected?
Suppliers, importers and VAT registered recipients of natural gas and
electricity. Also providers, and VAT registered users, of services
comprising access to, and use of, natural gas and electricity
distribution networks.
General description of the measure
The measure provides that VAT on wholesale supplies of natural gas and
electricity will be accounted for in the place where the customer
receiving the supply is established, Otherwise the place of supply will
be where the natural gas and electricity is consumed.
The measure also provides for:
• any VAT to be accounted for by the VAT-registered customer where a
supplier is in a different country;
• natural gas and electricity to be relieved from VAT when imported from
outside the EC;
• changes in the place of supply of services related to providing access
to, and use of, natural gas and electricity distribution systems; and
• a number of other consequential changes.
Operative date
1 January 2005
Current law and proposed revisions
Amendments are required to, or under powers provided by, the following
provisions of the Value Added Tax Act 1994:
• section 5(3) (to amend schedule 4, paragraph 6);
• section 7;
• section 37; and
• schedule 5.
Amendments will also be made to regulations 175 and 178 of the Value
Added Tax Regulations 1995. Also, new legislation will be introduced to
provide a reverse charge mechanism for gas and electricity.
VAT: increased turnover limits for registration and deregistration
Who is likely to be affected?
All businesses whose taxable turnover is close to the current VAT
thresholds for registration and deregistration.
General description of the measure
The measure increases the annual taxable turnover limit which determines
whether a person must be registered for VAT from £56,000 to £58,000.
This means that a person will have to apply for registration if:
• •at the end of any month, the value of the taxable supplies made in
the past 12 months or less has exceeded £58,000; or
• •at any time there are reasonable grounds for believing that the value
of the taxable supplies to be made in the next 30 days alone will exceed
£58,000.
If at the end of any month, a person's taxable turnover in the past 12
months or less exceeds £58,000 but Customs & Excise are satisfied that
it will not exceed £56,000 in the next 12 months, that person will not
have to be registered.
The taxable turnover limit which determines whether a person may apply
for deregistration will be increased from £54,000 to £56,000. The
existing conditions for determining entitlement or liability to
cancellation remain unchanged.
The registration and deregistration limits for acquisitions from other
European Union Member States will also be increased from £56,000 to
£58,000.
Operative date
1 April 2004.
Current law and proposed revisions
Schedules 1 and 3 to the VAT Act 1994 will be amended to reflect these
changes.
Further advice 8. The supplement to Notices 700/1 Should I be registered
for VAT, and 700/11 Cancelling your registration will be amended to show
the increased limits. This supplement also gives details of the
historical registration and deregistration limits. Notices 700/1 and
700/11 respectively give further information on how to register and
deregister.
VAT: changes to the annual accounting scheme for small businesses
Who is likely to be affected?
The measure affects businesses with an annual taxable turnover of
between £600,000 and £660,000 who will, for the first time, be able to
join the VAT annual accounting scheme. Businesses already using the
scheme will be able to continue to use it until their annual taxable
turnover reaches £825,000.
General description of the measure
This measure increases the turnover limits for the scheme in line with
inflation.
The annual accounting scheme allows businesses to make one VAT return a
year, instead of the usual four. It is normally a condition of the
scheme that a business must have been VAT registered for 12 months.
However, businesses with a taxable turnover up to £150,000 may join the
scheme immediately.
Operative date
1 April 2004.
Current law and proposed revisions
Regulations 52 and 53 of the VAT Regulations 1995 provide the turnover
limits for entry to and exit from the scheme. The limits will be changed
by amendments to those regulations in the Value Added Tax (Amendment)
Regulations 2004.
Further advice
Notice 732 Annual accounting will be updated in due course to reflect
the change.
VAT: changes to the cash accounting scheme for small businesses
Who is likely to be affected?
The measure affects businesses with an annual taxable turnover of
between £600,000 and £660,000 who will, for the first time, be able to
join the VAT cash accounting scheme. Businesses already using the scheme
will be able to continue to use it until their annual taxable turnover
reaches £825,000.
General description of the measure
The measure increases the turnover limits for the scheme in line with
inflation.
The measure also provides the option to bring outstanding VAT to account
on a cash basis for a further six months after leaving the scheme.
Currently, when businesses leave the cash accounting scheme, for
whatever reason, they must account for any VAT outstanding on supplies
made or received while using the scheme, on the VAT return for the
period in which they become ineligible to use the scheme.
The six month option applies only to supplies made and received while
using cash accounting, but where payment is still outstanding when a
business leaves the scheme. The option is only available to businesses
who leave the cash accounting scheme voluntarily or because they have
exceeded the turnover limit for the scheme. Any VAT still outstanding at
the end of the six month period must be brought to account on the VAT
return ending then.
Operative date
1 April 2004.
Current law and proposed revisions
Regulation 58(1) of the Value Added Tax Regulations 1995 provides that
taxable persons may begin to use the VAT cash accounting scheme if they
do not expect their taxable turnover to exceed £600,000 in the coming
year. Regulation 60(1) provides that a taxable person must withdraw from
the scheme when their taxable turnover exceeds
£750,000 in the previous year.
The turnover limits will be increased to £660,000 and £825,000
respectively. The rules for leaving the scheme will be amended by new
Regulations 61 and 64A of the Value Added Tax (Amendment) (No)
Regulations 2004.
VAT: changes to valuation provisions
Who is likely to be affected?
Motor dealers and motor manufacturers who provide demonstrator cars to
their employees for their private use and change only a nominal fee for
this use.
General description of the measure
Most businesses cannot reclaim input tax on the purchase of motor cars.
This serves as a proxy for private use. However, stock-in-trade cars of
motor traders are not subject to this input tax block. This includes
cars held by the business as demonstrator cars before being sold on at a
later date.
It is common practice for employees to have personal use of these
demonstrator cars outside of business hours. Because there is no input
tax block, motor trade businesses must account for output VAT on the
private use of these demonstrator cars. A simplification scheme exists,
agreed between Customs and the major trade bodies in the industry,
whereby businesses pay a set amount according to the value band of the
car.
By charging a nominal sum businesses are avoiding paying the VAT that
ought to be due on the private use of these demonstrator cars. VAT is
accounted for only on this nominal amount, typically £1 charge (VAT of
15 pence) for 2 years use, rather that the full cost of providing the
car. The rates agreed with trade bodies result in businesses paying VAT
of around £120 - £140 per year per employee.
The measure will allow Customs to direct that VAT is accounted for on
the 'open market value' on supplies of demonstrator cars to employees.
These changes require the UK to obtain an exception from common European
Community VAT rules. This exception or 'derogation' has been applied
for.
Operative date
The measure will come into effect by an Appointed Day Order after the
date of Royal Assent.
Current law and proposed revisions
The changes will be made by amendment to Schedule 6 of the VAT Act 1994,
which covers the valuation of supplies in certain circumstances.
Gaming Duty: changes to duty bands
Who is likely to be affected?
Casino operators.
General description of the measure
The gross gaming yield (GGY) threshold for each duty band will be
increased.
The new duty bands are as shown below:
The first £516,500 of GGY 2.5%
The next £1,146,500 of GGY 12.5%
The next £1,146,500 of GGY 20%
The next £2,007,500 of GGY 30%
The remainder 40%
Operative date
The changes to the duty bands come into effect for accounting periods
starting on or after 1 April 2004.
Current law and proposed revisions
Section 11 of the Finance Act 1997 and regulation 5 of the Gaming Duty
Regulations 1997 will be amended to reflect these changes.
Amusement Machine Licence Duty (AMLD): changes in duty rates
Who is likely to be affected?
People who provide amusement and gaming machines for play.
General description of the measure
The annual cost of licences will increase as follows:
• for machines falling in Category B, from £645 to £665;
• for machines falling in Category C, from £695 to £715;
• for machines falling in Category D, from £1,375 to £1,415;
• for machines falling in Category E, from £1,860 to £1,915.
The cost of licences for machines falling in Category A will be frozen.
The revised rates are set out in the table below, with a brief
description of the machine duty types.
Category A
• amusement machines which cost more than 50p per play
Category B
• small prize gaming machines which cost more than 10p to play;
• medium prize and jackpot machines which cost no more than 5p to play
Category C
• medium prize gaming machines which cost more than 5p per play
Category D
• jackpot gaming machines which cost more than 5p but no more than 10p
per play
Category E
• jackpot gaming machines which cost more than 10p per play
Period (in Category Category Category Category Category
months) for A B C D E
which licence
is granted £ £ £ £ £
1 30 80 85 170 230
2 50 155 165 330 445
3 75 225 245 480 650
4 95 295 315 625 845
5 120 355 380 755 1020
6 140 410 445 875 1185
7 160 465 500 990 1340
8 185 515 555 1095 1480
9 205 560 600 1190 1610
10 225 600 645 1275 1725
11 240 635 680 1350 1825
12 250 665 715 1415 1915
Operative date
The duty increases will apply to any licence applications received at
Greenock Accounting Centre (GAC) on or after 22 March 2004.
Current law and proposed revisions
Part II of the Betting and Gaming Duties Act 1981 will be amended to
reflect the changes.
Further advice
Notice 454 Amusement Machine Licence Duty will be amended to reflect the
changes.
Aggregates Levy: Northern Ireland Credit Scheme
Who is likely to be affected?
Aggregates and construction businesses in Northern Ireland.
General description of the measure
This measure covers an extension to the current 5-year scheme providing
relief from aggregates levy for aggregate used in processed products in
Northern Ireland. Tax relief will be provided to operators who have
entered into an agreement to comply with the Northern Ireland Code of
Practice Compliance Scheme (COPCS) - an environmental improvement
scheme. The extended scheme is dependent on European Commission state
aid approval. This notice therefore sets out the details envisaged at
present. Customs will write to all those registered for the levy in
Northern Ireland and issue a business brief to confirm the arrangements
once state aid approval has been given.
Relief will continue to cover aggregate in processed products and be
extended to cover virgin aggregate used in its raw state. It will be
fixed at 80% of the full rate (currently £1.60 per tonne) until 31 March
2012.
Relief will be claimable only by operators who are registered with
Customs for the levy and will apply only in respect of aggregate that is
both extracted and used in Northern Ireland. It does not matter what the
aggregate is used for. The relief will be claimable as a tax credit set
against the amount of aggregate levy due on first commercial
exploitation of the aggregate.
If aggregate is exported from Northern Ireland outside the UK in any
form, the 80% relief will still apply, although, where it is exported in
its natural state, the exporter will be able, as an alternative, to
claim 100% export credit under section 30(1) of the Finance Act 2001.
Aggregate (including aggregate contained in processed products)
transferred from Northern Ireland to Great Britain will not be eligible
for the relief and will bear the full rate of the levy, unless it is
transferred merely for onward export from the UK, in which case it will
be entitled to the relief and may be entitled to 100% export credit if
transferred in its natural form. Aggregate that is imported from other
member states to Northern Ireland will not be eligible for relief.
In order to qualify for the relief, an aggregate business in Northern
Ireland will have to be in possession of a Northern Ireland aggregates
levy credit certificate issued by the Department of the Environment in
Northern Ireland (DoE) which confirms that they have entered into an
agreement with DoE to comply with the COPCS. This agreement will require
operators to make specified environmental improvements over a specified
period of time. Each certificate will relate to one site only and will
not be transferable. Where an operator has more than one site in
Northern Ireland, he will have to enter into a separate agreement, and
obtain a separate certificate, for each site. When a new operator takes
over a site, he will have to enter into a new agreement for that site
and acquire a new certificate in his name before he can claim relief.
Eligibility to claim this new tax credit will cease from the date that:
• a certificate is withdrawn by the DoE, for example, where it is found
that an operator is not complying with COPCS; or
• an agreement is withdrawn at the request of the site operator.
Special arrangements will be put in place to cover the start of the
scheme. Any operator wishing to benefit from the new relief will be
required to complete an application form which will seek information on
whether their quarry is registered with all the relevant statutory
agencies monitoring the current environmental regulatory framework. A
Northern Ireland aggregates levy credit certificate will be issued only
to those operators that have applied for all the necessary permits and
licences. Operators not registered for all necessary permits/licences
will be able to rectify deficiencies and re-apply to join the scheme at
any time.
Within 12 months of joining the COPCS, an operator will be required to
commission an environmental audit by an accredited environmental
management consultant, in accordance with the COPCS audit protocol. This
audit will record the baseline environmental performance of the site. It
will be submitted to DOE, which will use the audit to set environmental
improvement targets within specified timescales, usually 2 years. DOE
will set further improvement targets for each of the subsequent
improvement periods until the current scheme ends in 2012. At the end of
each improvement period, the operator will be required to provide
audited evidence of the satisfactory achievement of improvement targets,
within the specified timescales. DOE will also carry out a programme of
verification audits during the period of the scheme, to monitor the
accuracy and consistency of operators' performance.
Operative date/current law and proposed revisions
The new scheme will be introduced as soon as is practicable after
European Commission state aid approval has been obtained. Section 30A of
the Finance Act 2001 (which covers the current scheme) will be replaced
by a new section 30A which will be brought into effect by an Appointed
Day Order made at or after Royal Assent. However, the regulations which
can be made under new section 30A can cover an earlier period back to
the date when state aid approval is given if this is before Royal
Assent, though not before 1 April 2004.
The new section 30A will provide for a new tax credit scheme for
Northern Ireland and for:
• new secondary legislation: this will replace the Aggregates Levy
(Northern Ireland Tax Credit) Regulations 2002 (SI 2002/1927) and will
set out the details of the scheme, including:
• the making of claims;
• the keeping of records;
• notification of relevant changes and penalties for specified breaches;
• notification to Customs of information relating to the content, issue
and withdrawal of Northern Ireland aggregates levy credit certificates.
It will also make a consequential amendment to section 48(1) of the
Finance Act 2001.
A separate, contingency provision is also being introduced to cover the
possibility that state aid approval for the new scheme will not be
obtained by 1 April 2004. The level of relief on aggregate used in
processed products under the current scheme is due to fall from 80% to
60% from 1 April 2004. The contingency measure provides for the
amendment by Treasury Order (on or after 1 April 2004) of the time
periods and percentage relief levels for the current scheme set out in
the existing section 30A of the Finance Act 2001 (which remains in place
until the new section 30A is brought into effect by Appointed Day
Order). This gives the Government the option, providing the Commission
agree, of maintaining or reinstating the level of relief on aggregate in
processed products at 80%, pending a decision on state aid approval for
the new scheme.
Any amendments made by such a Treasury Order cannot be retrospective but
would take effect from the date specified in the Order, which cannot
predate Commission approval for such a change to the existing relief
scheme. In all other respects, the current scheme would continue to
operate as before. This means, for example, that until the new scheme is
introduced, virgin aggregate commercially exploited in Northern Ireland
will continue to be liable to the full rate of levy.
Landfill Tax: increase in the maximum credit claimable under the
Landfill Tax Credit Scheme
Who is likely to be affected?
Landfill site operators who make contributions to bodies with objects
concerned with the environment, enrolled under the Landfill Tax Credit
Scheme.
General description of the measure
The maximum credit that landfill site operators may claim against their
annual landfill tax liability is to be increased from 6.5 per cent to
6.8 per cent.
Operative date
The measure will come into effect at the start of the new landfill tax
contribution year, 1 April 2004.
Current law and proposed revisions
An amendment will be made to regulation 31(3) of the Landfill Tax
Regulations 1996, as last amended by the Landfill Tax (Amendment)
Regulations 2003.
Landfill Tax: Waste Transfer Notes in Northern Ireland
Who is likely to be affected?
Landfill site operators in Northern Ireland.
General description of the measure
The measure brings the requirements for landfill site operators in
Northern Ireland, on the preservation of records and evidence to support
a claim to bad debt relief, into line with Great Britain.
Waste transfer notes will have to be preserved for six years, unless a
shorter period has been agreed with Customs.
Operative date
1 May 2004.
Current law and proposed revisions
An amendment will be made to the definition of "transfer note" in
regulation 2(1) of the Landfill Tax Regulations 1996, so as to include
transfer notes that are required under the Controlled Waste (Duty of
Care) Regulations (Northern Ireland) 2002.
Landfill Tax: increase to the standard rate
Who is likely to be affected?
Businesses liable for landfill tax.
General description of the measure
The standard rate of landfill tax will be increased from £14 per tonne
to £15 per tonne.
The lower rate of tax, which applies to landfilled inactive or inert
wastes listed in the Landfill Tax (Qualifying Material) Order 1996,
remains unchanged at £2 per tonne.
Operative date
The £15 per tonne rate applies to any standard rated disposal of waste
made, or treated as made, on or after 1 April 2004.
Current law and proposed revisions
Section 42 of the Finance Act 1996 specifies the rates of landfill tax.
Legislation in respect of this year's increase in the standard rate was
passed in last year's Finance Act.
Background
The Government announced in Budget 1999 that the standard rate of
landfill tax, which applies to active waste (which give off emissions)
disposed of by way of landfill in a licensed landfill site, would
increase by £1 per tonne each year from 1 April 2000 until at least
April 2004, by which time it will have reached £15 per tonne. In the
2002 Pre-Budget Report the Government confirmed that it would fulfil
this commitment and announced that, following consultation, the standard
rate of landfill tax will subsequently be increased by £3 per tonne in
2005-06, and by at least that amount in the years thereafter, on the way
to a medium-to long-term rate of £35 per tonne.
Increased thresholds for determining when bookmakers qualify for
three-monthly accounting periods
Who is likely to be affected?
Any bookmaker where the total amount due to him in respect of bets made
with him, in the last 12 months, is less than £660,000; and any
bookmaker, currently accounting for duty on a three-monthly basis, where
the total amount due to him in respect of bets, in the last 12 months,
is approaching £750,000.
General description of the measure
This measure amends the thresholds for determining when a bookmaker
qualifies to have three-monthly accounting periods.
At present, a bookmaker is entitled to three-monthly accounting periods,
if the amount due to him in respect of bets, in the last 12 months, was
no more than £600,000. This measure increases this threshold to
£660,000.
A bookmaker currently accounting for duty on a three-monthly basis must
revert back to monthly accounting, if the amount due to him in respect
of bets, in the 12 months to the end of his last three-month period,
exceeds £750,000. This measure increases this threshold to £825,000.
Operative date
1 April 2004.
Current law and proposed revisions
The current thresholds are laid down in Regulations 10 and 11 of the
General Betting Duty Regulations 2001; amending regulations 'The General
Betting Duty (Amendment) Regulations 2004' were laid today 17 March
2004.
Lorry Road-User Charge
Who is likely to be affected?
This measure does not directly affect industry or trade.
General description of the measure
The Finance Bill 2004 assigns Lorry Road-User Charge (LRUC), which is in
the process of being developed, to the care and management of the
Commissioners of Customs and Excise.
Operative date
From Royal Assent.
Current law and proposed revisions
The original paving provisions for LRUC, in S137 of the Finance Act 2002
left open which Minister or government department would eventually have
the care and management of LRUC. This measure amends S137 subsections
(4)-(6) to make it clear that Customs & Excise will be responsible for
this tax.
Customs Duty: mutual assistance between Andorra and UK in recovery of
Customs debts
Who is likely to be affected?
Businesses or individuals resident in Andorra or the UK with outstanding
customs debts due in the other State.
General description of the measure
This measure allows for mutual assistance between Andorra and the UK
where recovery of customs debts has proved unsuccessful, and where it
appears that the debtor now resides or has assets in the other State.
A Customs Union between the EC and Andorra has existed since 1991. An EC
Council Decision has established mutual assistance provisions for the
recovery of customs debts. The term 'customs debt' means customs duties
or charges having an equivalent effect payable on the importation or
exportation of goods. The definition does not cover other indirect taxes
(for example VAT or excise duties) or direct taxes (for example income
tax or corporation tax).
Where an Andorran company owes the UK Exchequer a customs debt Customs
and Excise will first attempt recovery of the debt in the UK. If
recovery is not achieved, we will forward details of the debtor and the
outstanding liability to the Andorran Customs Authority, who will seek
to recover the debt on Customs’ behalf using their domestic recovery
procedures. Reciprocal arrangements will apply to Andorran debts where
the debtor resides or has assets in the UK.
Mutual assistance provisions will also allow the exchange of information
about the debtor prior to requests for recovery. Such information may
enable the requesting State to continue to pursue debts themselves under
their own procedures.
Where a debt is disputed, the State requested to undertake recovery will
suspend action, but only where the taxpayer is able to demonstrate that
a formal appeal has been lodged in the State where the disputed
liability arose.
Operative date
Royal Assent.
Current law and proposed revisions
The measure is new. It will provide for Section 134 and Schedule 39 of
the Finance Act 2002 to apply in relation to recovery of customs debts.
Alcohol strategy: duty stamps for spirits
Who is likely to be affected?
Manufacturers, packagers and importers of spirits, wine or made-wine
subject to the spirits rate of duty, and excise warehousekeepers who
store these goods.
General description of the measure
Under this measure retail containers of spirits will, subject to certain
exceptions, be required to bear a duty stamp indicating that UK duty has
been paid. Retail containers of wine or made-wine with an abv over 22%
will also be subject to the same requirements.
Duty stamps, a key component of the Government's strategy to combat the
£600 million lost in tax through spirits fraud, will limit the
opportunities for diversion fraud and reduce the profitability of
spirits fraud.
A number of new offences and penalties for dealing in unstamped products
which are required to bear a stamp will also be introduced.
Operative date
Royal Assent.
Current law and proposed revisions
The Alcoholic Liquor Duties Act 1979 will be amended and new regulations
introduced, to reflect this change, in due course.
Climate Change Levy: climate change agreements
Who is likely to be affected?
Energy-intensive sectors of business that are not already eligible for
climate change agreements (CCAs).
General description of the measure
Eligibility to enter CCAs, which provides entitlement to an 80%
reduction in the rates of climate change levy in return for agreeing to
reduce their emissions and/or energy use, is currently dependent on
criteria based on the Pollution Prevention and Control Regulations 2000
(SI 2000/1973) (PPC). CCAs are drawn up and agreed between relevant
trade associations and Department for Environment, Food and Rural
Affairs (DEFRA). The trade associations make the agreements on behalf of
the companies within the sectors concerned. These umbrella agreements
detail the facilities covered by the agreement and the relevant process.
They also list sector targets, and the conditions which apply to
participating companies.
Subject to European Commission state aid approval, the eligibility
criteria are to be extended to cover other energy-intensive sectors of
industry not included within the existing arrangements (those already
eligible for CCAs under the current arrangements will continue to
benefit and will be unaffected by these changes).
To qualify under the new eligibility criteria, businesses will have to
be in sectors above a threshold of energy intensity (using a definition
of energy intensity set out in the EU Energy Products Directive which
came into force on 1 January 2004). This definition states that: 'An
energy-intensive business is defined as a business entity ….. where …..
the purchases of energy products and electricity amount to at least 3.0%
of the production value….'.
There will be a one-off test of energy intensity, based on measuring a
4-year period of data (the lowest year’s data will be discounted).
All businesses in sectors that meet or exceed a 12% threshold of
energy-intensity will be eligible to enter a CCA. Businesses in sectors
that meet or exceed a 3% threshold but fall below the 12% threshold will
be eligible to enter an agreement only if they meet or exceed one of the
following two international competitiveness tests:
• an import penetration ratio of 50%. This is the percentage ratio of
imports to home demand (where home demand is defined as total
manufacturers’ sales plus imports minus exports); or
• an export to production ratio of 30%. This is the percentage ratio of
exports to total manufacturers’ sales.
Operative date
The new eligibility criteria will not apply until the proposed measure
has received state aid clearance from the European Commission. A
business brief will confirm the commencement date for the new
eligibility criteria and will set out more details about what businesses
need to do to make a climate change agreement.
Current law and proposed revisions
Amendments to legislation will not be made until state aid approval has
been granted. It is likely that paragraph 51 of Schedule 6 to the
Finance Act 2000 will be amended by regulations made under paragraph 52
of that Act. It is possible that changes will be made, additionally or
instead, to the Climate Change Agreements (Eligible Facilities)
Regulations (SI 2001/662).
Climate Change Levy (CCL): leviable energy products used to create
excisable energy products
Who is likely to be affected?
Producers of bio fuels.
General description of the measure
Supplies of leviable energy products used to create excisable energy
products are generally exempt from CCL. This treatment is to stop the
potential 'double taxation' of these products, and has been in place
since the introduction of the levy on 1 April 2001.
The creation of new bio fuels (such as biodiesel and bioblend), however,
has meant that the scope of this exemption has fallen behind, and it now
needs to be extended to incorporate energy products used to create such
new fuels. CCL legislation will also be amended to allow future changes
(which may be needed to incorporate any further new fuels into the
exemption) to be made by statutory instrument.
Changes are also being made to CCL legislation to ensure that leviable
energy products used to create bioethanol continue to qualify for the
exemption when a new excise duty rate is introduced for that product.
Operative date
The extension of the CCL exemption to include biodiesel and bioblend,
and the power to make future changes by statutory instrument, will take
effect from Royal Assent to the Finance Act.
The revised exemption for supplies of products used in the creation of
bioethanol will take effect from 1 January 2005 when the new excise duty
rate for bioethanol is introduced.
Current law and proposed revisions
Paragraph 13 of Schedule 6 to the Finance Act 2000 will be amended to
cater for the new fuels and the new treatment of bioethanol. A new
paragraph 13A will be added to the Schedule so that future changes to
paragraph 13 may be made by statutory instrument.
Further advice
In order to obtain this relief, supplier certificate Form PP11 and
supporting analysis Form PP10 must be completed and provided to the
energy supplier. Guidance on this subject can be found in C&E notice
CCL1/3 – 'Reliefs and special treatments for taxable supplies'.
VAT: changes in fuel scale charges
Who is likely to be affected?
All businesses using cars for business purposes that recover input tax
on fuel used for private motoring.
General description of the measure
The measure amends the VAT scales for taxing private use of road fuel to
reflect changes in fuel prices. The table below shows the revised scale
charges and output tax payable in each accounting period.
12 month period 3 month period 1 month period
£ £ £ £ £ £ £ £ £ £ £ £
Engine Scale VAT Scale VAT Scale VAT Scale VAT Scale VAT Scale VAT
size (cc) charge due charge due charge due charge due charge due charge
due
diesel per car other per car diesel per car other per car diesel per car
other per car
1400 or 865 128.82 930 138.51 216 32.17 232 34.55 72 10.72 77 11.46
less
1401 to 865 128.82 1175 175.00 216 32.17 293 43.63 72 10.72 97 14.44
2000
2001 or 1095 163.08 1730 257.65 273 40.65 432 64.34 91 13.55 144 21.44
more
Operative date
Businesses must use the new scales from the start of their first
prescribed accounting period beginning on or after 1 May 2004.
Current law and proposed revisions
The scales are set out in Table A in Section 57(3) of the Value Added
Tax Act 1994. This measure replaces the current table with a new table
to reflect the changes to the scales.
Further advice
An update to notice 700/64 VAT; Motoring Expenses, will be available
from the National Advice Service shortly.
Tobacco products: changes in duty rates
Who is likely to be affected?
Manufacturers and importers of tobacco products (i.e. cigarettes,
cigars, hand-rolling tobacco, other smoking tobacco and chewing
tobacco).
General description of the measure
The rates of duty on tobacco products imported into, or manufactured in,
the United Kingdom will be increased in line with inflation.
The new rates of duty are:
Cigarettes An amount equal to 22 per cent of the retail price plus
£99.80 per thousand cigarettes
Cigars £145.35 per kilogram
Hand-rolling tobacco £104.47 per kilogram
Other smoking tobacco £ 63.90 per kilogram
and chewing tobacco
Operative date
The rate changes will come into effect at 6pm on Budget day.
Current law and proposed revisions
Schedule 1 to the Tobacco Products Duty Act 1979, as last substituted by
section 1 of the Finance Act 2003 (c.14), will be amended to reflect the
new rates.
Alcohol duty rates
Who is likely to be affected?
Manufacturers and importers of alcoholic drinks.
General description of the measure
The excise duty on spirits, cider and sparkling wine is frozen. The duty
on beer and still wine is increased by 3.01%, adding 1p (duty and VAT)
to a pint of beer and 1p (duty and VAT) to a standard 175ml glass of
wine. The new rates of duty are shown on the table below.
The reduced rates scheme for small breweries remains unchanged at the
time of the effective date of these changes, except that calculations of
duty liability must now be based on the new standard beer duty rate of
£12.59 per hectolitre per cent of alcohol in the beer.
Operative date
The new rates come into effect at midnight on Sunday 21 March 2004.
Current law and proposed revisions
The Alcoholic Liquor Duties Act 1979 and the Customs and Excise Tariff
will be amended to reflect the changes.
Alcohol duty rates, including the new duty rates for beer and still wine
(highlighted) are as follows:
Rate per litre
of pure alcohol
Spirits £19.56
Spirits-based RTDs £19.56
Wine and made-wine: Exceeding 22% abv £19.56
Rate per hectolitre
per cent of alcohol in the beer
Beer £12.59
Rate per hectolitre
of product
Still cider and perry: Exceeding 1.2% - not exceeding 7.5% abv £25.61
Still cider and perry: Exceeding 7.5% - less than 8.5% abv £38.43
Sparkling cider and perry: Exceeding 1.2% - not exceeding 5.5% abv
£25.61
Sparkling cider and perry: Exceeding 5.5% - less than 8.5% abv £166.70
Wine and made-wine: Exceeding 1.2% - not exceeding 4% abv £50.38
Wine and made-wine: Exceeding 4% - not exceeding 5.5% abv £69.27
Still wine and made-wine: Exceeding 5.5% - not exceeding 15% abv £163.47
Wine and made-wine: Exceeding 15% - not exceeding 22% abv £217.95
Sparkling wine and made-wine: Exceeding 5.5% - less than 8.5% abv
£166.70
Sparkling wine and made-wine: 8.5% and above - not exceeding 15% abv
£220.54
Alcohol duties: small breweries’ relief
Who is likely to be affected?
UK breweries (and overseas breweries exporting to the UK) whose annual
production is between 30,000 and 60,000 hectolitres per year and those
dealing in such beer in duty-suspense.
General description of the measure
This measure introduces reduced rates of duty for beer brewed by
independent breweries which produce between 30,000 and 60,000
hectolitres per year. These reduced rates will taper from the reduced
rate presently paid at a production level of 30,000 hectolitres per year
to the full standard rate on exceeding 60,000 hectolitres.
The percentage of duty payable for beer produced by breweries whose
annual production is between 30,000 and 60,000 hectolitres will be
calculated using the following formula:
Annual production will normally be calculated according to production
levels over the previous year in the same manner as the scheme operating
up to 30,000 hectolitres production.
Operative date
1 June 2004.
Current law and proposed revisions
Provision for reduced rates of duty for beer produced by small breweries
is contained in European law (Directive 92/83/EEC).
The Finance Act 2002 introduced amendments to the Alcoholic Liquor
Duties Act 1979 for the scheme to run up to a production level of 30,000
hectolitres per year.
The Beer and Excise Warehousing (Amendment) Regulations 2002
(S.I.2002/1265) contained amendments to The Beer Duty Regulations 1993
(S.I.1993/1228) and the Excise Warehousing (Etc) Regulations 1988
(S.I.1988/809) which provide for operation of the scheme.
The relevant changes required will be made by Treasury Order.
Hydrocarbon oils: introduction of a reduced rate of duty for
sulphur-free fuels
Who is likely to be affected?
Businesses producing and importing diesel and petrol.
General description of the measure
A new duty rate will be introduced for sulphur-free petrol and diesel.
The rate will be 48.52 pence per litre. This has been set at 0.5 penny
per litre less than the duty rate for ultra-low sulphur petrol and
diesel.
Sulphur-free fuels have a sulphur content not exceeding 10 parts per
million.
To assist the oils industry with the smooth introduction of these new,
more environmentally friendly fuels, the mixing of duty paid road fuels
will no longer be prohibited.
Operative date
1 September 2004.
Current law and proposed revisions
Amendments to the Hydrocarbon Oil Duties Act 1979 will be made by the
Finance Act 2004.
Hydrocarbon oils: duty rates
Who is likely to be affected?
Businesses producing and importing hydrocarbon oils products.
General description of the measure
The following excise duty rates will be amended from 1 September 2004:
New duty rate
Light oils per litre (£)
Ultra-low sulphur petrol (ULSP) 0.4902
Unleaded petrol which is not ULSP 0.5170
Aviation gasoline (AVGAS) 0.2895
Light oil delivered to an approved person for use as furnace fuel 0.0624
Other light oil (including leaded petrol) 0.5790
Heavy oils
Ultra-low sulphur diesel (ULSD) 0.4902
Heavy oil which is not ULSD (i.e. conventional diesel) 0.5487
Marked gas oil not for road fuel use 0.0664
Fuel oil 0.0624
Road fuel gases per kilogram (£)
Liquefied petroleum gas (LPG) 0.1303
Natural gas (NG) 0.1110
Fuel substitutes per litre (£)
Biodiesel 0.2852
The following rates remain unchanged:
Heavy (gas) oils per litre (£)
Other heavy oils delivered otherwise than for use as road fuel, e.g: Nil
• marked kerosene for heating;
• aviation turbine fuel (AVTUR);
• lubricating oil,
but excluding oils within the gas oil or fuel oil definition.
Fuel substitutes per litre (£)
Biodiesel used otherwise than as road fuel 0.0313
The following new duty rates will be introduced:
Light oils per litre (£) From
Sulphur-free petrol 0.4852 1 September 2004
Heavy (gas) oils
Sulphur-free diesel 0.4852 1 September 2004
Fuel substitutes
Bioethanol for use as a fuel for any engine, 0.2852 1 January 2005
motor or other machinery
Fuel substitutes used to generate electricity using a diesel engine will
be exempt from duty.
The Finance Bill will contain powers to amend the definition of fuel oil
by secondary legislation. It is intended to use these powers to bring
oils which are residues from atmospheric distillation within the
definition of fuel oil.
Operative date
The new rate for bioethanol will come into effect on 1 January 2005.
The changes to rates outlined in paragraph 2 above will come into effect
on 1 September 2004, as will the changes in relation to fuel substitutes
used to generate electricity. The power to amend the definition of fuel
oil will come into effect from Royal Assent to the Finance Bill 2004.
Current law and proposed revisions
Amendments to the Hydrocarbon Oil Duties Act 1979 will be made by the
Finance Act 2004.
Hydrocarbon oils: introduction of a reduced rate of duty on bioethanol
Who is likely to be affected?
Businesses producing, distributing or importing bioethanol, and those
blending or mixing bioethanol with hydrocarbon oils.
General description of the measure
Rate of duty
A new rate of duty is being introduced on bioethanol used (or set aside
for use) as fuel in any engine, motor or other machinery, or as an
additive or extender in any substance so used.
The rate will be 28.52 pence per litre. This rate has been set at 20
pence per litre below the prevailing rate for sulphur-free petrol, and
will apply to pure bioethanol and to the proportions of bioethanol
blended or mixed with hydrocarbon oils.
Definition of bioethanol
To qualify for the new rate of duty, bioethanol must be petrol quality
liquid fuel consisting of ethanol produced from biomass.
Petrol quality means capable of being used for the same purposes as
light oil. Biomass means vegetable and animal substances consisting of
the biodegradable fraction of products, wastes and residues from
agriculture, forestry and related activities, or industrial and
municipal waste.
Duty
The point at which bioethanol becomes taxable will continue to be the
point at which it is used or set aside for use as a fuel for any engine,
motor or other machinery, or as an additive or extender in any substance
so used.
Blending and mixing
Blending of hydrocarbon oil and bioethanol before the duty point for the
hydrocarbon oil has passed will be permitted in a tax warehouse where
sufficient records are kept to show the proportion of each ingredient in
the resultant mixture. The bioethanol duty rate will apply only to the
bioethanol part of the blend, including any denaturant.
Mixing of bioethanol and hydrocarbon oil after the duty point will be
permitted.
Where blending or mixing is allowed, there will be no restriction on the
proportions of the constituent parts.
Other requirements
As bioethanol is an alcohol, businesses producing, distributing or
importing bioethanol, and those blending or mixing bioethanol with light
oils will need to comply with the requirements of the Alcoholic Liquor
Duties Act 1979, Spirits Regulations 1991, and the regulations that
govern the denaturing of alcohol, which are currently the Methylated
Spirits Regulations 1987.
Operative date
1 January 2005.
Current law and proposed revisions
Amendments will be made to the Hydrocarbon Oil Duties Act 1979 by
Finance Act 2004. Changes to the administrative arrangements of the tax
will be made by secondary legislation.
Further advice
A Bioethanol notice will be published shortly.
Hydrocarbon oil: change to provisions for mixing different dutiable
products
Who is likely to be affected?
Persons mixing road fuels after the duty point.
General description of the measure
This measure will remove the mixing provisions that impose a charge to
duty when two road fuels of differing duty rates are mixed together.
This will only affect the mixing of duty paid road fuels and is designed
to assist the oils industry in the smooth introduction of new, more
environmentally friendly fuels.
Operative date
Royal Assent.
Current law and proposed revisions
The provisions relating to unapproved mixing are contained in sections
20AAA and 20AAB of the Hydrocarbon Oil Duties Act 1979 and Schedule 2A
to that Act. Those provisions will be amended to allow the mixing of
duty paid road fuels of different duty categories with each other
without further duty charge. The provisions relating to the mixing of
rebated heavy oils with other fuels have been rationalised and
re-written.
Hydrocarbon oil: bio fuel - implementation of provisions of energy
products directive
Who is likely to be affected?
Businesses dealing in hydrocarbon oil or other energy products.
General description of the measure
This measure will implement into UK law new requirements contained in
Council Directive 2003/96/EC ('the Energy Products Directive'). The
Energy Products Directive repeals Council Directive 92/81/EEC and
Council Directive 92/82/EEC, extending duty suspension arrangements to
some additional products. The changes will facilitate intra-EU movement
of dutiable products. However, the changes will not affect the scope or
rate of duties in the UK.
Operative date
Regulations will be made after Royal Assent.
Current law and proposed revisions
The law relating to the treatment of products intended for use as motor
and heating fuels, and related duty suspension arrangements, is
contained in the Hydrocarbon Oil Duties Act 1979, the Customs and Excise
Management Act 1979 and regulations made under those Acts. Amendments to
the Hydrocarbon Oil Duties Act 1979 will enable regulations to be made
to extend the existing duty suspension rules to some new energy
products, which may be treated as dutiable in other member states.
VAT: commercial buildings - anti-avoidance
Who is likely to be affected?
Businesses in exempt sectors who are not entitled to recover all of the
VAT they incur on the purchase of land or buildings, and who try to
avoid VAT by use of artificial structures designed either to increase
the amount of input tax they can claim or to spread the VAT cost of the
purchase or construction over a number of years.
General description of the measure
The avoidance scheme this measure blocks is complex and involves the
need for co-operation of a third party developer, and the establishment
of a Special Purpose Vehicle, either by the user of the building, or the
developer.
The measure will make adjustments to rules for Transfer of Going
Concerns (TOGC) and the Option to Tax in order to close this avoidance
scheme. There are two main variants of this scheme:
Transfer of a going concern with an opted property
The amendments to close this scheme will:
• Remove the de-supply of a TOGC in property in certain circumstances,
thereby causing the developer’s supply of the freehold to be taxable;
and
• Disapply the option to tax for the Partly Exempt User’s SPV, so
causing the VAT on its purchase to 'stick' with it. The new provision
requires anyone making supplies under a lease (but who did not make the
initial grant), to apply the option to tax disapplication test as though
they had made a new grant.
Sale of a company with taxed lease
The measure will again close this variant by:
• if there is a TOGC - removing its de-supply thereby causing the
developer’s supply of the freehold to be taxable; and in all cases;
• disapplying the Developer’s SPV’s option to tax, so causing the VAT on
its purchase to 'stick' with it. The disapplication will be triggered
where there is any consideration used to purchase shares or securities
where this consideration originates from someone using the building for
an exempt purpose.
This anti-avoidance measure has been carefully targeted to work within
the framework of existing VAT legislation and, as far as possible,
affect only those participating in the VAT avoidance. Under current law
a transferee in a TOGC has to look at the option to tax rules to ensure
that the current disapplication of the option to tax rules do not bite.
Under this measure the transferee must look at the same provisions, but
on doing so will find that he will be deemed to have made a new grant
and must therefore apply the disapplication test. Currently the
transferor must be satisfied that the transferee has opted to tax. There
will now be an additional requirement to tell the transferor whether or
not the option they have made will be disapplied as a result of the new
changes to paragraph 2 of Schedule 10.
Operative date
18 March 2004.
Current law and proposed revisions
This measure involves amendments to paragraph 5 of the VAT (Special
Provisions) Order 1995, and Schedule 10 to the VAT Act 1994. These
changes require two Statutory Instruments.
Taxation of pool betting
Who is likely to be affected?
Anyone who promotes or conducts pool betting in the UK.
General description of the measure
Most pool betting is liable to pool betting duty but certain types of
pool betting are currently liable to general betting duty:
• any pool betting through the Tote’s facilities; and
• pool betting through a totalisator on an event that is taking place on
that day at the track where the totalisator is situated.
This means that pool betting on horse or dog racing that is not made
through the facilities described above, is liable to pool betting duty.
This measure means that, in future, all pool betting on dog racing or
horseracing will fall within the general betting duty provisions when
the promoter or the totalisator is based in the UK. All other pool
betting, where the promoter or totalisator is based in the UK, will fall
within the pool betting duty provisions.
Operative date
Accounting periods ending on or after Royal Assent.
Current law and proposed revisions
Section 4 of the Betting and Gaming Duties Act 1981 (BGDA) currently
makes certain types of pool betting liable to general betting duty. This
liability depends on where, and by whom, the betting is being provided
or promoted. These changes will mean that any pool betting on dog or
horseracing will fall within the scope of general betting duty when the
promoter or totalisator is in the UK. Additionally changes will be made
to:
Section 7B, which defines a dutiable pool bet;
Section 9, which prohibits certain pool betting;
Section 10(2), which defines ‘totalisator odds’; and
Section 12, which defines ‘bookmaker’, ‘on-course bet’ and ‘sponsored
pool betting’.
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