Businesses,
Individuals and the Settlements Legislation
The Inland Revenue have issued a Statement setting out the interpretation of the
application of the settlement legislation to businesses and individuals. This
could have a wider-ranging impact upon many individuals and businesses.
The legislation not only applies to trusts but can also apply to other
situations involving individuals, companies and partnerships.
The Inland Revenue confirmed the settlements legislation is intended to prevent
an individual from gaining a tax advantage by making arrangements, which divert
income to another person who is liable at a lower rate of tax or is not liable
to income tax.
So, in general, the settlements legislation can apply where an individual enters
into an arrangement to divert income to someone else and in the process tax is
saved. So long as those arrangements are:
bounteous, or
not commercial, or
not at arm’s length, or
in the case of a gift between spouses, wholly or substantially a right to
income.
It is a common misconception that the settlements legislation applies only to
arrangements involving a settlor’s spouse or minor children. However, the
settlor is treated as having an interest in the property if “that property or
any derived property is, or will or may become, payable to or application for
the benefit of the settlor or his spouse in any circumstances whatsoever.” It is
not necessary for the settlor’s spouse or children to be the people to whom the
income is transferred. If the settlor or their spouse retains an interest in the
property then the legislation can apply.
A small percentage of Inland Revenue enquiries involve the settlements
legislation and non-trust situations. However where appropriate they do seek
tax, interest and penalties, and it can be anticipated that the number of cases
will now increase.
The Revenue has sited the following circumstances as examples of factors they
would consider to take a case up for enquiry under the settlements legislation.
Main earner drawing a low salary leading to enhanced profits from which
dividends can be paid to shareholders who are friends or family members.
Disproportionately large returns on capital investments.
Differing classes of shares enabling dividends to be paid only to shareholders
paying lowers rates of tax.
Dividends being waived so that higher dividends can be paid to shareholders
paying lower rates of tax.
Income being transferred from the person making the most of the profits to a
friend or family member who pays tax at a lower rate.
There are a wide range of arrangements that can potentially be caught up by
settlements legislation which do not involve a trust. Each case will depend on
the facts but some of the most common situations the Revenue attribute to are:
Shares subscribed at par that carry only restricted rights.
Shares given away that carry only restricted rights.
Shares subscribed at par in a company by someone else where the income of the
company derives mainly from a single employee.
A share in a partnership gifted or transferred below value.
Dividend waivers.
Situations where dividends are paid only on certain classes of shares.
Dividends paid to the settlor’s minor children.
Whether or not the settlements legislation applies to an arrangement depends on
the particular facts of the case. It is necessary to look at the arrangements as
a whole. If these are a bounteous arrangement, which effectively transfers
income, earned by one person to another resulting in a reduction in overall tax
liability the arrangement may be liable to challenge under the settlements
legislation.
A purely commercial transaction or series of transactions at arms length is
outside the meaning of ‘settlement’. Most commonly the legislation will apply
where individuals seek to divert income to members of their family or to
friends.
If your current structure needs to be reviewed in light of the current
interpretation of the settlement legislation then you should seek immediate
professional advice.
Reimbursement Of Employee’s Training Expenses – Training Undertaken Before
Employment Begins –
In order to qualify for an income tax exemption the reimbursement must relate to
the cost of – “work related training”. The work related training definition
includes, training for a future job with the employee’s employer but does not,
except in the very limited circumstances cover the reimbursement by a new
employer of training expenses incurred by the employee before employment began.
The Inland Revenue, however, recognise that cases will arise where the link
between the employment and the pre-commencement of training is so strong that
the reimbursement should also qualify for exemption. For example, if an
individual has accepted an employment offer from a new employer, to start work
in the reasonably near future, and the individual then pays for work related
training for that job, exemption will not be denied if the employer agrees to
reimburse those costs after the employment has begun.
IR 35 – Test Case
The issue was whether Gordon Stutchbury, who worked via his own company (Synaptek
Ltd) for a client (EDS), was caught by the personal service rules.
The Revenue argued that Mr Stutchbury was caught by the NIC version of the IR35
rules. The Revenue contended that the arrangements between Gordon Stutchbury and
EDS, for the performance of services were such that, they take the form of a
contract between Gordon Stutchbury and EDS, and Gordon Stutchbury should b
regarded as in employed earner’s employment by EDS.
There were a number of factors in support of the contention that the contract
was one for services (i.e. that the worker was not within IR35), which included:
1. Synaptek was in business on its own account;
2. Limited control by EDS and the manner in which Mr Stutchbury performed the
services;
3. The right of substitution;
4. Synaptek was responsible for Mr Stutchbury’s training and the provision of
computer facilities at its own premises;
5. The requirement for professional indemnity insurance;
6. The flexibility of the hours worked; and
7. The use by him of his own reference books
The factors against were:
1. The minimum hours to be worked were broadly equivalent to a normal working
week;
2. That the only risk borne by Mr Stutchbury was the insolvency of NESCO/EDS;
3. The duration of the contract was for a fixed period rather than in relation
to the completion of a particular project;
4. That Mr Stutchbury worked alongside EDS employees and had a line manager, and
5. The requirement in the NESCO agreement that he comply with all EDS
instructions.
This was the first case on IR35 to reach the High Court. Employment status is a
question of fact and higher courts cannot substitute their own view on facts
over and above that of the Commissioners. They can only look at any
misdirection’s in the law. This highlights the need to make a strong case at the
General or Special Commissioners – and this case was lost in front of the
General Commissioners where the individual involved represented himself.
Other factors to consider include the substitution clause used in the agreement.
It gave wide power to EDS to veto anyone other than Mr Stutchbury and the Judge
found that in the circumstances the contract effectively only allowed Mt
Stutchbury to do the work. A stronger substitution clause may have helped the
appellant’s cause.
NI Notes
The following two updated NI leaflets are now available:
National Insurance contributions for widows or widowers
National Insurance for examiners, moderators and invigilator, lecturers,
teachers and instructors.
In addition, new leaflet:
Child Benefit and Guardian’s Allowance – If you think our decision is wrong, is
also available.
If you require a copy of the notes or would like to discuss these topics further
please contact us.
Voluntary nic’s
The time limit for paying voluntary National Insurance Contributions (NICs) for
the tax years from 1996/97 to 2000/01, is being extended. The limit for these
years will now be 5 April 2008.
Later this year the Revenue will contact people who have gaps in their records
for the years from 1996/97 to 2001/02, to allow them to check their positions
and make voluntary Class 3 contributions if they wish to do so.
Student loans
Employers are now involved in the Collection of Student Loans. Revised leaflet
IR59 explains how the scheme operates and the employer’s responsibilities. If
you would like a copy of the leaflet or wish to discuss this or any other
payroll issue please contact us.
Tax credits protective claims
The revenue have issued the following statement:
“The focus of the publicity for tax credits has been to encourage people to make
their claims in good time for the start of tax credits in April and to ensure
that recipients of the existing tax credits understand the changes that are
happening. In the next two or three months, we will want to make clear to people
that they need to claim by 6 July to make sure they get their money from the
start of the tax year. Alongside that, we
will be considering how best to get over another important message: that tax
credits entitlement will depend upon 2003/04 income and that people who think
their income is currently too high for them to qualify should still claim if
they meet the other criteria and want to make sure that any payments based on
2003/04 income go back to 6 April.
If you require any further assistance please contact us.
Childcare and tax credits:
new leaflet
This leaflet explains about the child care element and how it affects parents
and child care providers. A taxpayer can claim the child care element for the
costs of any registered or approved child care which are actually paid for.
The child care element can provide help with up to 70% of the child care costs,
subject to maximum weekly limits.
The leaflet then goes on to explain at length how to calculate the estimated
average weekly cost of child care. There is a potential £300 penalty, if the
claimant gets things wrong.
If you require assistance please give us a call.
Farming:
Herd Basis: Minor Disposals Without Replacement.
The profit arising from minor disposals without replacement is chargeable. The
Inland Revenue, have however now reconsidered their interpretation of the
legislation.
They no longer consider it necessary or appropriate to compute the profit on a
minor disposal from a herd, without replacement, using what they previously
described as the “herd basis cost”. In previous interpretation of the herd basis
provisions, the “herd basis Cost” consisted of the initial cost of the herd and
the cost of any improvement or increase in herd size. These cost were not and
still are not deductible in the farm trading account. When an animal replaced
another of the same quality it took on the “herd basis cost” of its predecessor.
They now consider a disposal that amounts to less than 20% of the herd to be
minor. Profits on these disposals are taxable. In the past they computed this
profit by reference to “herd basis cost”. In old established herds the original
animals would have been replaced, perhaps several times, and this brought into
charge a profit largely due to inflation. On the revised view of the situation
where a farmer sells, without replacement, a small part of the herd they accept
the profit should be computed by reference to the actual cost of the animal or
animals disposed of. The fact that an animal taken from the herd replaced an
earlier one is no longer relevant.
In a situation where the farmer’s records are such that no identification is
possible. They will accept that the cost of the animals removed be computed by
reference to the BEN19 formula applied to the sale price.
New trust form R185 (Trust
Income)
The Inland Revenue have now combined the discretionary trust part of the old
R185 with the old R185 (Non-discretionary trust) (1999) and produced one form
for both types of trust. The New form is called the R185 (Trust Income). The old
R185 (Non-discretionary trust) and R185 (Non-discretionary trust) (1999) forms
will no longer be needed.
The new form can be used by trustees of discretionary and interest in possession
trusts to notify beneficiaries about income and any tax credit. The
beneficiaries can use the information in the form to complete their SA returns
or claim repayments.
Offshore
manning arrangements in the shipping industry
The Government has announced its intention to prevent avoidance of employer’s
National Insurance Contributions (NICs) by shipping companies operating within
UK territorial waters. Some operators have transferred their employees’
contracts of employment to companies outside the UK in order to take advantage
of a loophole in the National Insurance Contributions legislation. The change
will not affect mariner’s employed wholly or mainly outside UK territorial
waters.
Since 6 April 1994, UK companies who use the personal service of employees of
non-resident UK companies have been liable for employer’s NICs, even though they
did not employ the workers. However, these rules have not been applied in the
case of mariners, for whom there are special NICs rules. This has led to a
practice in some parts of the UK shipping industry of using offshore manning
companies. The offshore manning companies supply the UK resident shipping
company with UK resident mariners to operate the ships. Neither the UK shipping
company nor the offshore manning company has paid employers NICs.
In order to ensure that all the operators of ships within UK territorial waters
pay employer’s NICs on the same basis as other UK employers, the Inland Revenue
has reviewed the relevant legislation introduced from 6 April 1994. That review
now confirms that a liability for employers’ NICs does not exist for UK shipping
companies that man their ship using employees of offshore manning companies.
This is the same as for other employers in the UK who use their personal
services of employees provided by overseas companies without a place of business
in the UK. As a result of this review changes will be made to clarify the
legislation.
Stamp Duty
The Finance Bill, sets out the framework for stamp duty land tax, which will be
introduced on 1 December 2003 to replace the existing stamp duty regime on UK
land and buildings.
The current proposals provide for
The introduction of e-conveyancing systems, which will allow purchases of
property to be affected or registered electronically
The means to tackle avoidance of stamp duty on certain property transactions
New enforcement powers
There will also be new processes for reporting the details of land transactions
and for paying any tax due
The changes will be implemented on 1 December 2003 for all land transactions
completed on or after that date, unless they relate to certain contracts entered
into before Royal Assent.
The Government has also announced that consultation will continue on certain
kept aspects of the regime:
Transfer of land into and out of a partnership by a partner
The transfer of interests in a partnership that hold UK land
The approach to large developments, including the treatment of subsales and
successive transfers, sale and leaseback deals and securitisation of land.
There will be cases where no tax is due, for instance where relief can be
claimed or where the transaction is below the zero rate band threshold. It is
proposed the threshold will be £60,000 for residential property and £150,000 in
other cases. In these cases purchasers may still have to make a return to the
Inland Revenue or, in certain cases, provide a self-certificate to the land
registries.
New relief’s are proposed for the modernised regime including:
Acquisition of dwellings by relocation companies,
Acquisition by local authorities or other public bodies under compulsory
purchase orders, and
Acquisitions by local authorities or other public bodies under the terms of
planning arrangements.
Some transactions will qualify for special rules.
Holdover relief
Where shares in certain companies are given away or sold for less than their
market value it may be possible for the donor to make a claim for any gain on
the shares to be held over. The Company in question must be either a trading
company or the holding company of a trading group. It must normally also be an
unlisted company.
From 6 April 2003 the definitions of what is a “trading company”, a “holding
company” and a “trading group” change. From 6 April the definitions which apply
for taper relief will be used.
Indexation allowance
The value of the retail price index for March 2003 is 179.9.
Vat: Electronically Supplied Services
A VAT Information Sheet, explains the changes to EU place of supply rules for
electronically supplied services and radio and TV broadcasting services provided
on or after 1 July 2003.
Colaingrove Ltd v The Commissioners for Customs and Excise
The case of Colaingrove Ltd V The Commissioners for Customs and Excise (2003
EWHC 821 (Ch) has finally been decided. Mr Justice Jacob commented on the
unacceptable length of time that it had taken for it to reach the High Court.
The appellants operate caravan parks in the United Kingdom containing pitches,
some of which are let to caravan owners. The owners keep their caravans an
average of about 8 years, although they have a right of termination of their
agreement upon giving 2 months’ notice. A 6-month notice the other way can also
be given. The appellant’s customers are given no interest in land.
There are restrictions as to what the owners can do on the sites. In particular
they may not live in their caravan as a permanent address and may not stay
overnight the 3 months December to February. During those 3 months they can have
access to their caravans but not stay. The caravan sites have the sort of
amenities one would expect of a holiday site. What is provided for the customers
is a place to keep their caravans
for holiday use and not permanent residential use. The customers are free
(during the permitted times only) to let their caravans for use by others.
The appellants argued that the services they provide are not chargeable to VAT.
The Tribunal held that the services provided were subject to VAT.
If you may be effected by the decision and require further advice please contact
us.
Vat Notes
A number of new VAT notices have been issued, including recent tax changes
affecting:
Private welfare agencies
Prosthetists and orthotists – VAT exemption reminder
Dispensing doctors and personally administered drugs
Toll charges
If you require a copy of the notices or would like to discuss the potential
effects of any changes please contact us.
UK/US Double Tax Treaty
The new UK/US Double Tax Treaty came into force on 31 March 2003. There are a
number of potentially wide ranging changes under the new treaty for example some
corporate structures that gave protection from withholding taxes will not be
effective under the new treaty.
For the first time a UK Treaty contains a Limitation of Benefit article. The UK
has the Limitation of Benefit provision is targeted at entities and is designed
to ensure that the benefits of the treaty go only to genuine residents of the
treaty countries and not to residents of third countries who have arranged their
transactions in such a way as to obtain treaty benefits to which they would
otherwise be entitled.
The changed introduced are quite complex if you would like to discuss in more
detail please contact us.
Dual resident companies and Controlled Foreign Companies (“CFC”)
This provision treats companies that are dual resident and which would be
treated as non UK tax resident under the terms of the relevant Double Tax
Agreement as remaining UK resident for the purposes of the CFC legislation.
It was decided in the Groupe Schneider Electrics SA case that French double tax
treaties may override French domestic legislation. In addition the European
Commission has written to both France and Finland asking then to justify their
respective CFC regimes.
The European Court of Justices Advocate General has also indicated that the
French personal tax emigration toll charge is contrary to the freedom of
establishment of the EC treaty. It is being suggested that the British
Government should consider removing the dual resident companies provision from
the CFC legislation.
Ireland no longer a CFC
Exempt Country
Ireland’s removal as an exempt company has removed if from the list of
countries, which are automatically exempt from the CFC legislation. This was the
response to the reduction in the general rate of Irish Corporation Tax.
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