The Revenue’s online calculator
100% Capital Allowances on energy saving plant and equipment
Research & development
Expenses of management
Share Schemes and FA 2003
New Double Tax Agreement with Chile
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Tax
Credits If because of a delay on the part of the Revenue tax credits payments are in arrears then the shortfall should be paid in one lump sum. In some cases we are aware that the arrears are being paid in instalments; this is not correct. If this is happening to you, you should contact us and we will make sure the correct procedure is being followed. The Revenue’s online calculator There is a potential problem due to the fact that the Revenue’s tax credit online calculator assumes that the claimant only became entitled to tax credits at the date of claim; i.e. there is no three month backdating. This means that the figures for tax credits due, shown by the calculator, may be too small. Business costs and private expenses There are a number of reports concerning letters being sent by the Revenue to taxpayers, both represented and unrepresented. These letters refer to the recently issued 2003 Tax Return and are accompanied by some ‘frequently asked questions and answers’, which explain how to calculate income for tax purposes and which expenses may be deducted. Where appropriate, we also receive a copy. This issue was raised with the Revenue since we felt that our clients would not welcome this interference. It also concerns us that we had not agreed the list of questions and answers, contrary to the implication in the letter; in particular, the following: Question I sometimes carry out work for my business at home. Can I claim part of my property running costs? Answer That depends. If you set aside an identifiable part of your home and use it only for the business (for example a room used solely as an office) then a proportion of running costs can be claimed. These might include insurance, heat and light and mortgage interest. But you should note that if you have used part of your home exclusively as an office, there could be some loss of private residence relief from Capital Gains Tax when you sell your home. If no part of the property is exclusively used for the business then these costs are not allowable - even if there is business use. This answer is not strictly correct. It has long been possible to agree a specific weekly amount for the use of home as an office; this does not require exclusive use of a specific part of the home, although it should of course be a reasonable estimate of related costs. 100% Capital Allowances on energy saving plant and equipment New Regulations specify what energy-saving plant and machinery is eligible for the 100% first-year allowances. This is by reference to the Energy Technology Criteria and Product Lists published by the Department of the Environment, Food and Rural Affairs. These lists were revised and replaced by new lists published on 14 July 2003. Unapproved share schemes – elections in respect of restricted securities Schedule 22 of the Finance Bill has come in for some fierce criticism, not least from the Tax Faculty. It represented a fundamental redrafting of the share-based remuneration legislation, other than for approved schemes, and was introduced without prior consultation or publicity. Various elections are possible under the legislation, and draft election forms have now been published by the Revenue. The new legislation amends the provisions in the Income Tax (Earnings and Pensions) Act 2003 which only came into effect from 6 April 2003. If you have any queries in regard to this then you should contact us for the details. Research & development The Government has issued a new Consultative Document in an attempt to improve the targeting of the existing tax incentives for expenditure on research and development. In relation to expenditure on licences for advanced software the document states: “R&D tax credits apply to two categories of expenditure – staff costs and consumable stores. A number of companies involved in R&D activities have noted that they incur considerable expenditure on buying in advanced software, under a time-limited licence, for use in their R&D processes. The Inland Revenue considers that such purchases do not currently fall within the meaning of ‘consumable stores’ and therefore do not qualify for the credit. However, where a company employs its own staff to write software of this type, the relevant staff costs may well qualify for the credit. The Government therefore wishes to remove this anomaly and to extend the R&D tax credits to the cost of licensing advanced software to use as part of an R&D project. The consultation paper considers how ‘advanced’ software might be defined, so that the credit can target appropriate forms of software.” The Consultative Document also considers how to give relief in a more appropriate way to large companies that subcontract out some of their R&D work. “Under the large company tax credit scheme introduced in 2002, the general principle is that large companies cannot claim the tax credit for the costs of work subcontracted to others. This can potentially leave a gap where the subcontractors themselves are unable to gain the benefit of the credit. The large company legislation therefore contains a specific rule which allows large companies to claim the credit, where work is subcontracted out to individuals, partnerships of individuals and ‘qualifying bodies’.” “Qualifying bodies are charities, higher education institutions, scientific research organisations and health service bodies. In addition the Treasury may define further bodies or classes of bodies as appropriate. The consultation paper considers two particular classes – non-UK universities and public sector research establishments – and whether an approach of individual designation or generic definition is more appropriate.” The document considers whether the definition of R&D and the Revenue guidance should be revised. It also considers whether what constitutes consumable stores should be revised. Expenses of management The High Court gave its judgement on 7 July in the case of Camas plc v Atkinson (HMIT). Patten J overturned the decision of the Special Commissioners. He accepted that the £500,000+ of expenses that Camas plc, an investment company, had incurred in an aborted takeover bid for a listed company were allowable as expenses of management. The judge decided that the relevant expenses were incurred to 'obtain advice on a possible investment in the form of the acquisition of the Bardon Group and to decide whether to go ahead. The work stopped when, on advice, the decision was taken to abort any possible acquisition. But even if the acquisition had gone ahead, the nature of the services would have been the same. Although one element of the professional services involved the working up of the bid, Mr Reed's evidence indicated that this was part of the decision-making process, and the Commissioners accepted that. I am unable to see how the cost of any of this can fairly be described as part of the cost of acquisition in the sense that brokerage fees, payments for financing and stamp duty obviously are .....' As an aside the judge did comment that if professional advisers are being paid by way of success fee then such payments 'cannot be severed from the cost of acquisition itself' and so will be part of the cost of acquisition rather than a potential management expense. Share Schemes and FA 2003 Management buy-outs, earn-outs and carried interest There have been discussions between the Revenue and the British Venture Capital Association (BVCA) to try and resolve problems which the new provisions in Schedule 22 FA 2003 are likely to cause for corporate finance deals. The Revenue and the BVCA have now jointly issued two Memoranda of Understanding to explain what they understand to be the implications of the new proposals, although the BVCA has also issued a disclaimer, details of which can be obtained from us as can a set of questions and answers issued by the Revenue about the new provisions. Charitable donations under the Payroll Deduction Scheme – 10% supplement New regulations give effect to the one year extension of the 10% supplement on donations to charities made under the payroll deduction scheme. This originally applied to sums withheld by employers up to 6 April 2003. It was extended for a year by enabling legislation for payments made in the period up to 5 April 2004. New Double Tax Agreement with Chile A new treaty with Chile was signed in London in July by the Chief Secretary to the Treasury and the Chilean Finance Minister. It will enter into force once the relevant legal proceedings have been completed in the two countries. Accounts, accounting standards & tax implications The Tax Faculty has prepared a Discussion Paper in conjunction with the CBI on the tax implications of the adoption of International Accounting Standards (or International Financial Reporting Standards (IFRS) as they will be known) for UK companies. The DTI announced in July that all UK companies will have the option to adopt IFRS from 2005 onwards: the proposal to date has been that it would be mandatory for the consolidated accounts of listed companies. This announcement follows the consultation which the DTI carried out last year. There has been a lot of uncertainty among smaller companies as to whether adoption of International Accounting Standards would be made mandatory or optional, so the DTI’s announcement provides welcome clarification. Businesses of every size will eventually be affected by International Accounting Standards. Companies need to consider the implications now and contact us to make the necessary preparations. |