We will track here amendments to this resource that reflect changes in law and practice.
The Budget contained very few surprises from a tax perspective: most of the measures had been pre-announced or result from consultations. This relative predictability will please businesses struggling to cope with the financial crisis, as will the small number of "new" measures, such as the one year 40% plant and machinery allowance. The Chancellor is banking on the tax rises for the wealthy yielding around £3 billion in 2010-11 and 2011-12: however, this figure may prove over-optimistic, particularly if individuals accelerate income into the current tax year or realise returns in capital form in later years.
This Budget also signals a much tougher line on tax compliance: along with the customary list of anti-avoidance measures, we are promised details of schemes which HMRC considers ineffective to save tax, the public naming of serious tax evaders, more stringent compliance rules for those subject to tax penalties and personal tax accountability for senior accounting officers of large companies. HMRC will also publish shortly the draft code of practice on taxation for the banking sector, along with a consultation document.
This update summarises and analyses all the key business tax announcements in the 2009 Budget. PLC has also produced a range of Budget updates tailored to specific practice areas, see Practice note, Pre-Budget, Budget and Finance Bill: Budget 2009 (www.practicallaw.com/5-376-3630).
HMRC will shortly publish a list of avoidance schemes that it believes to be ineffective, to discourage potential users of these schemes, and has said that it will challenge these schemes when encountered. It will also commence discussions with interested parties about extending the hallmarks used to identify avoidance schemes and increasing penalties for the non-compliant (for background, see Practice note, Direct tax disclosure regime (www.practicallaw.com/1-107-4933). This summer the government will consult on improvements to the transactions in securities rules (see Practice note, Tax clearances: transactions in securities (www.practicallaw.com/5-367-3998)) and publish a consultation document on greater alignment of the purpose tests in tax law.
(See Budget 2009 - Press Notice 3 and Budget Report, paragraph 4.53.)
Legislation will be introduced to reduce the scope for avoidance schemes which involve routing loans and other financial transactions through an investment subsidiary, where the income is taxed differently from the parent. HMRC is currently involved in a dispute with at least one major banking group over the application of the Finance Act 2005 anti-avoidance legislation to artificial structures that are avoiding millions of pounds of tax. The measures, the draft legislation for which has not yet been released, will take effect from 22 April 2009.
The Finance Bill 2009 will include provisions relating to the corporate intangible fixed asset regime. For more detail on the taxation of intangible assets see Practice note, Intangible property: tax (www.practicallaw.com/1-107-5008).
The provisions are intended to clarify the existing regime with a view to preventing tax avoidance. Specifically, they will confirm that, for the purposes of the corporate intangible fixed asset regime:
Intangible assets (such as goodwill) include internally-generated assets (such as internally-generated goodwill).
All goodwill is treated as created in the course of carrying on the business in question. Further, goodwill is treated as created before 1 April 2002 where the business was carried on at any time before 1 April 2002 by the company or a related party (and that otherwise goodwill is treated as created on or after 1 April 2002).
All assets representing non-qualifying expenditure are subject to the provisions contained in section 885 of the Corporate Tax Act 2009 (Certain other internally-generated assets: time of creation), and that these assets are treated as created before 1 April 2002 where the asset was held by the company (or a related party) at any time before 1 April 2002.
The legislation will have effect on and after 22 April 2009 and will be treated as always having had effect.
The Finance Bill 2009 will deny or withdraw double taxation relief (www.practicallaw.com/0-107-6150) for a UK company, where foreign tax is repaid to the company or a permanent establishment or subsidiary of it.
The legislation will take effect from 22 April 2009.
The Finance Bill 2009 will deny relief for employment-related liabilities and losses where the liability or loss results from arrangements the main purpose or one of the main purposes of which is the avoidance of tax.
HM Treasury announced that it would introduce legislation to counteract these schemes on 12 January 2009 and 1 April 2009 and HMRC published draft legislation on 1 April 2009. For further details, see Legal update, More schemes that seek to generate losses from employment income blocked (www.practicallaw.com/9-385-5779) and Legal update, HMRC moves to block a tax deduction scheme in respect of employment-related liabilities (www.practicallaw.com/0-384-6044).
The legislation will apply to employment-related liabilities and losses arising on or after 12 January 2009. However, in view of the retroactive nature of the anti-avoidance measures, provisions will be included to prevent penalties and surcharges arising in certain circumstances.
The Finance Bill 2009 will counter two avoidance schemes notified to HMRC under the tax avoidance disclosure rules. Draft legislation has not been published but the essence of the proposed anti-avoidance legislation is as follows:
Where convertible debt is issued to a connected company (part of the same consolidated group) and the debtor has larger tax deductions in respect of the debt than the creditor has corresponding credits, legislation will require additional credits to be brought into account by the creditor company to match the debtor debits. This can be seen as an attempt to impose a tax symmetry where there is no accounting symmetry and this approach has potentially far-reaching implications for any provisions of the UK tax code that rely on accounting treatment to determine profits and losses for tax purposes.
Where a derivative contract is derecognised in a company's accounts with the result that profits on that contract fall out of account, a company will still be required to recognise profits and losses on that contract for tax purposes. This also represents an inroad into the supremacy of accounting treatment in the taxation of derivatives, see Practice note, Derivatives: tax (www.practicallaw.com/6-204-7955).
A targeted anti-avoidance rule will be introduced to counteract schemes which exploit the foreign exchange (forex) matching rules for avoidance purposes.
Broadly, the forex matching rules allow companies to "match" non-sterling shares with, for example, a loan or derivative (www.practicallaw.com/0-107-6094) in the same non-sterling currency. Once matched, exchange gains and losses on the loan or derivative are ignored for corporation tax purposes until the shares are sold. (For further detail, see Practice note, Derivatives: tax (www.practicallaw.com/6-204-7955).)
The new measure will prevent matching of exchange gains or losses on derivative contracts in the two following circumstances:
If the arrangement results in an allowable foreign exchange loss if the foreign currency moves in one direction but does not give rise to a taxable foreign exchange gain if the currency moves in the opposite direction. However, matching will not be denied if this asymmetry does not give rise to a tax advantage or if the asymmetry does not result from the forex matching.
Where the exchange gain or loss is not computed by reference to spot rates of exchange.
The legislation will apply to accounting periods beginning on or after 22 April 2009. Where an accounting period straddles 22 April 2009, the new measures will apply to exchange gains or losses arising between 22 April 2009 and the end of the accounting period.
The Finance Bill 2009 will restrict tax relief for interest payments on loans used to invest in partnerships and close companies and which are guaranteed to produce a post-tax profit.
The measure was announced by HM Treasury on 19 March 2009 and HMRC published draft legislation and an explanatory memorandum shortly after. For further details, see Legal update, Draft legislation counteracting avoidance involving interest relief (www.practicallaw.com/2-385-3825). The draft legislation has been amended since then with a view to ensuring that the normal commercial transactions are not affected.
The legislation will apply to interest payments made on or after 19 March 2009.
The 2009 Budget confirmed that legislation will be introduced in the Finance Bill 2009 to counter avoidance involving the leasing of plant and machinery with effect from 13 November 2008. For details, see Legal update, Pre-Budget Report 2008: key business tax announcements: Leasing: anti-avoidance measures confirmed (www.practicallaw.com/7-383-9988).
In addition, for sales on or after 22 April 2009, changes are proposed to the definition of sale and leaseback in sections 216 and 221 of the Capital Allowances Act 2001 to cover a sale and leaseback to a person connected with the seller and unspecified changes are proposed "to reduce avoidance opportunities" (the latter will be assessed once draft legislation is available).
Legislation will be introduced in the Finance Bill 2009 to counter a scheme which enables groups to use the manufactured overseas dividend (MOD) rules in schedule 23A of ICTA 1988 to convert a pre-tax loss on an intra-group repo (www.practicallaw.com/9-107-7145) transaction into a post-tax profit (for background on the tax treatment of repos, see Practice note, Repos: tax (www.practicallaw.com/2-202-0991)).
The scheme relies on the recipient of the MOD claiming a deduction for foreign withholding tax on an overseas dividend that is treated under the MOD rules as suffered by the recipient of the MOD even though under the the terms of the repo the recipient does not economically suffer the cost of the withholding tax and receives the full amount of the overseas dividend. The legislation, which has not been published yet, will deny a deduction for foreign tax where the economic cost of the tax has not been borne by the recipient of the MOD. The measure will have effect on and after 22 April 2009.
The Finance Bill 2009 will include legislation relating to transfers of income streams and disguised interest. These provisions are the result of a long period of consultation focusing on a principles-based approach to financial products avoidance.
The initial consultation was launched on 6 December 2007 (see further Legal update, Consultation on principles-based approach to financial products tax avoidance (www.practicallaw.com/2-379-8570)).
The original intention was to include the legislation in the Finance Act 2008. However, as part of the 2008 Budget, the introduction of this legislation was deferred until 2009 (see Legal update, Budget 2008: Financial products avoidance: disguised interest (www.practicallaw.com/8-380-9405)).
As part of the 2008 Pre-Budget Report, HM Treasury and HMRC published a new consultation document on the rules (see Legal update, Pre-Budget Report 2008: key business tax announcements: Principles-based approach to financial products avoidance: further consultation (www.practicallaw.com/7-383-9988)).
Draft legislation on the transfer of income streams was subsequently published on 6 March 2009 (see Legal update, Transfers of income streams: revised draft legislation published (www.practicallaw.com/1-385-3307)).
The legislation is intended to ensure that receipts derived from a right to receive income (and which are an economic substitute for income) are taxed as income for the purposes of corporation tax and income tax.
The legislation will have effect for transfers of income taking place on or after 22 April 2009.
The Finance Bill 2009 will contain legislation that provides, broadly, that returns from arrangements that produce amounts economically equivalent to interest will be treated in the same way as interest for the purposes of corporation tax.
There will be an exclusion where:
the return arises to a company purely from an increase in the value of shares that it holds in a connected company; and
it is reasonable to assume that securing that the return is taxed as income is not a main purpose of the arrangements.
The legislation will apply generally to arrangements to which a company becomes party on or after 22 April 2009. It will also apply to certain arrangements in place before that date that are within the scope of existing disguised interest legislation which is to be repealed.
The foreign profits package will be introduced in the Finance Bill 2009. The package consists of four elements as follows:
A new corporation tax charge on UK and overseas source dividends and other distributions, subject to exemptions. The vast majority of dividends and distributions are expected to be exempt.
A cap on the finance expense of companies that is allowable for corporation tax purposes, determined by reference to the consolidated (that is, external) gross finance expense of the worldwide group (the debt cap).
Changes to the controlled foreign company (CFC) (www.practicallaw.com/7-107-6340) regime (see Practice note, Controlled foreign companies and attribution of gains: tax: The CFC regime: attributing income to the UK (www.practicallaw.com/7-367-0989)), being the abolition of the acceptable distribution policy exemption and non-local holding company exemption, subject to transitional rules (the carve out for local holding companies is a change from the original proposal of 9 December 2008).
Abolition of the Treasury consent (www.practicallaw.com/3-107-7412) rules (see Practice note, Treasury consent (www.practicallaw.com/5-367-2970)) and the enactment of a post-transaction reporting regime for prescribed movements of capital in excess of £100 million.
For a background to these changes, see Legal update, Taxation of foreign profits of companies: analysis of 9 December 2008 draft legislation (www.practicallaw.com/1-384-4332) and Legal update, Foreign profits tax: details of proposed changes to the worldwide debt cap rules (www.practicallaw.com/2-385-7135).
HMRC has now published operative dates for each of the above changes as follows:
New distribution rules: distributions received on or after 1 July 2009.
Debt cap: finance expenses payable in accounting periods beginning on or after 1 January 2010.
CFC changes: accounting periods starting on or after 1 July 2009 (with provision for accounting periods which straddle this date) subject, where applicable, to transitional rules applying for holding companies until 1 July 2011.
Abolition of the Treasury Consent rules and the enactment of new reporting regime: transactions undertaken on or after 1 July 2009.
HMRC has announced certain additional modifications to the foreign profits package:
"Small companies" with a holding of 10% or more in a non-UK resident company will no longer be excluded from the dividend exemption regime as originally proposed in the draft legislation of 9 December 2008. This is a welcome simplification and a correction of an unjustified anomaly in the original draft legislation meaning that any company, regardless of size, may benefit from the exemption for overseas dividend income.
The regime replacing the Treasury Consent rules will include exclusions based on the existing general consent rules (although the details are not clear at present) and a report of the relevant transaction must be made to HMRC within six months instead of a quarterly reporting regime originally proposed.
The proposed changes to the loan relationship and derivative contract unallowable purpose rules proposed in the draft legislation of 9 December 2008 (see Legal update, Taxation of foreign profits of companies: analysis of 9 December 2008 draft legislation: Loan relationships and derivative contracts: extended unallowable purpose rules (www.practicallaw.com/1-384-4332)) will not form part of the Finance Bill 2009 although the position will be kept under review going forward. This is a welcome change of heart by HMRC given the uncertainties inherent in the draft legislation.
A first-year allowance of 40% will be available for expenditure incurred on plant and machinery in the 12 month period commencing 1 April 2009 (for the purposes of corporation tax) or 6 April 2009 (for the purposes of income tax) and will apply to expenditure that would otherwise qualify for a writing-down allowance in the general pool at the rate of 20%. As this temporary allowance will not be available for expenditure on long-life assets, integral features, cars, or assets for leasing, taxpayers may wish to allocate their £50,000 100% Annual Investment Allowance, to the extent possible, against those non-qualifying items.
For more detail on plant and machinery allowances, see Practice note, Capital allowances on property transactions: Plant and machinery allowances (PMAs) (www.practicallaw.com/6-362-6968).
The main rate of corporation tax for the year commencing 1 April 2010 will be 28% for companies and groups whose profit for the accounting period exceeds £1.5 million (apart from companies with ring-fenced profits from oil extraction in the UK and UK continental shelf; for which it will be 30%). As announced in the Pre-Budget Report 2008, the rate for companies paying tax at the small companies rate (those with profits of less that £300,000) will remain at 21% for the tax year 2009-10, except for ring-fenced profits: these will be taxable at 19%. Rates for marginal relief will similarly remain unchanged.
Legislation will be introduced in the Finance Bill 2009 to allow companies to carry unused losses back or forward in the company's functional currency, rather than in sterling. This will mean that the sterling value of the losses as compared with the profits against which they are set will not fluctuate in line with exchange rates.
The changes introduced by this measure were announced by HM Treasury on 18 December 2008. HMRC published drafted legislation and an explanatory memorandum on 23 March 2009. For further detail, see Legal update, Draft legislation on tax treatment of foreign-denominated losses (www.practicallaw.com/0-385-3826).
The new measure is intended to take effect for accounting periods beginning on or after 29 December 2007, although companies are to have the option of irrevocably electing to defer this date to the first accounting period beginning on or after the date the Finance Bill 2009 receives Royal Assent.
The Finance Bill 2009 will include provisions to ensure that companies are not degrouped solely because they issue certain types of preference share.
The UK group relief rules set out rules for determining whether two companies are in the same group for tax purposes. For further detail see Practice note, Groups of companies: tax (www.practicallaw.com/6-107-3728). The existing provisions ignore certain fixed rate preference shares when determining the group relationship.
HM Treasury announced on 18 December 2008 that it would introduce a measure to ensure that companies are not degrouped solely because they issue non-cumulative preference shares. For further detail on the announcement, see Legal update, Tax grouping rules and losses carried forward where sterling is not the functional currency (www.practicallaw.com/8-384-3268). Draft legislation was subsequently published on 10 March 2009 (see Legal update, Draft legislation on effect of preference share issues on tax grouping (www.practicallaw.com/3-385-3033)). The draft legislation extended this treatment to preference shares whose dividends fluctuate by reference to a market interest rate or the retail price index and preference shares the dividends on which may be reduced if the issuer is in severe financial difficulties or for regulatory reasons.
The Budget announcement confirms that this legislation will be included in the Finance Bill 2009. The changes will apply to all accounting periods commencing on or after 1 January 2008, unless an election is made to retain the existing treatment of shares issued before 18 December 2008 (or shortly after where a commitment to issue the shares was entered into before that date).
Legislation will be introduced in the Finance Bill 2009, with effect from Royal Assent, to facilitate the matching of chargeable gains and losses within groups of companies.
Where a company elects, section 171A of the Taxation of Chargeable Gains Act 1992 deems an asset to have been transferred from one group company to another group company before a disposal outside the group. However, an election cannot be made unless there is a disposal to a third party. For further detail on the existing rules, see Practice note, Groups of companies: tax: Chargeable gains (www.practicallaw.com/6-107-3728).
The government intends that new provisions will amend section 171A so as to disapply the existing restrictions. Instead of deeming a transfer of an asset from one group company to another before the disposal, the provision will transfer a gain or loss from the company making the disposal to one or more other specified companies within the group when they jointly elect. This is a welcome extension of this role as it will apply to deemed disposals, including negligible value claims.
HMRC will publish a discussion document before the summer on further simplification of the group aspects of corporate gains and will consult this summer on further simplification of the associated companies rules.
(See Budget 2009 - BN28 - Groups: reallocation of chargeable gains and Budget Report, paragraph 4.53.)
It was announced in the 2008 Pre-Budget Report that, as a temporary measure only, businesses would be able to carry back trading losses against the profits of the three preceding years and obtain a repayment of tax see, Legal update, Pre-Budget Report 2008: key business tax announcements: Extension of trading loss carry-back for business (www.practicallaw.com/7-383-9988). In the 2009 Budget, the Chancellor has doubled the length of the period in which losses arising may benefit from the extended carry-back.
For corporation tax purposes, the rule will apply to losses for accounting periods ending in the period 24 November 2008 to 23 November 2010 and for unincorporated businesses it will apply to trading losses made in 2008-09 and 2009-10 (the periods previously ended on 24 November 2009 and 6 April 2009 respectively). In both cases, the carry-back to the previous year remains unlimited. There is now a separate £50,000 cap for each of the two 12-month accounting periods ending in the relevant period, so that a total of £100,000 of losses can be carried back. (For accounting periods of less than 12 months, the £50,000 limit will apply pro-rata).
The Finance Bill 2009 will ensure that where a company agrees with HM Treasury or another government department or agency to surrender its right to tax losses or other reliefs in connection with arrangements such as the Asset Protection Scheme or similar arrangements designated by the HM Treasury, such an agreement overrides the effect of those statutory provisions which would otherwise confer a tax relief automatically without a claim having to be made.
This is a technical amendment to the Corporation Tax Acts to deal with provisions such as section 393(1) of ICTA 1988 which provide for the automatic carry forward of trading losses from one accounting period to the next without a claim being required. The legislation will also clarify that there will be no tax relief for expenses or losses arising out of any relief forgone under such arrangements. The legislation will apply to qualifying arrangements entered into on or after 22 April 2009.
The application of the mixer cap (www.practicallaw.com/1-107-6852) is to be amended, with effect from 1 April 2008, to ensure that the reduction in the corporation tax rate to 28% does not unjustly affect the amount of double taxation relief (www.practicallaw.com/0-107-6150) applying to foreign dividends by reference to the rate of corporation tax. Draft legislation was published on 8 April 2009 (see Legal update, Double tax relief on foreign income: draft legislation published (www.practicallaw.com/8-385-7057)).
The government will review the balance of taxation of innovative activity in the UK, including intellectual property. The review will consider the relative attraction of the UK to global firms when they consider where to locate research and development activity and the possible impact of any tax reforms on location of investment and employment (and the place where IP assets are held). The government will publish its proposed approach before the 2009 Pre-Budget Report.
(See Budget Report, paragraph 4.34.)
Following the merger of the Inland Revenue with HM Customs & Excise, HMRC launched a review of its powers, deterrents and taxpayer safeguards with a view to modernising and, where possible, aligning them. As part of the review, HMRC consulted on a package of measures dealing with:
Payments, repayments and debt.
A taxpayer's charter.
For a table showing the progress of the various elements of the review, see Penalties, compliance and powers reforms: legislation tracker (www.practicallaw.com/7-385-1046).
The government has announced that it will introduce three new measures in the Finance Bill 2009, which will allow HMRC to:
Establish a voluntary managed payment scheme for income tax and corporation tax self-assessed taxpayers.
Under the managed payment scheme, the taxpayer would pay tax monthly, half in advance of the due date and half in arrears of the due date. HMRC's preference is for payment to be made by direct debit but it is exploring the possibility of payment being made by standing order. HMRC is also exploring how taxpayers who file paper tax returns could be brought within the scheme and the consequences if taxpayers miss a single payment under the scheme.
(HMRC will also extend the current budget payment plan to corporation tax but this will not require legislation.)
Collect small debts through the PAYE (www.practicallaw.com/4-200-3405) system.
Trace missing debtors.
This measure will require certain third parties to provide address and contact details of corporate debtors. However, HMRC has dropped the proposal that a third party should provide information which it could "reasonably obtain" and has excluded certain voluntary bodies giving advice from the definition of "third parties".
The measures are part of a package of proposals consulted on in November 2008 (for further details, see Legal update, Modernising Powers, Deterrents and Safeguards: Next stage: Payments, repayment and debt (www.practicallaw.com/8-384-1410)). In addition, HMRC published draft legislation for implementing the managed payment scheme and for tracing missing debtors in December 2008 (see Legal update, Interest, penalties, payment services and debt management: draft legislation published (www.practicallaw.com/2-384-3068)). The following two proposals mentioned in the November 2008 consultation document will not be implemented in the Finance Bill 2009 but HMRC will continue to consider them:
Recovering costs when HMRC is the successful litigant in court proceedings.
Financial security and tax clearance certificates.
The government has indicated that managed payment plans will not be introduced before April 2011 and the collection of small debts through PAYE is likely to begin from April 2012. Power to trace missing debtors, however, will have effect from the date the Finance Bill receives Royal Assent.
(See 2009 Budget - BN88 - Review of HMRC powers, deterrents and safeguards: payments, repayments and debt; Modernising Powers, Deterrents and Safeguards: Responses to consultations and explanations; Impact assessment for Payments, Repayments and Debt.)
The Finance Bill 2009 will extend the new compliance checking framework set out in Schedules 36 (information-gathering powers), 37 (record-keeping obligations) and 39 (alignment of time limits) to the Finance Act 2008 to:
Insurance premium tax.
Petroleum revenue tax (PRT).
This measure was consulted on in November 2008 (for further detail, see Legal update, Modernising Powers, Deterrents and Safeguards: Next stage: Compliance checks (www.practicallaw.com/8-384-1410)). Draft legislation on record-keeping obligations and alignment of time limits was published in February 2009 (see Legal update, Record-keeping and time limits: draft legislation published (www.practicallaw.com/2-384-9428)).
HMRC has indicated that, as a result of the responses to the consultation, a number of changes to the draft legislation will be reflected in the Finance Bill 2009, including:
There will be no statutory record-keeping requirement for IHT, SDRT and PRT.
Where HMRC needs to inspect private property for valuation purposes, this must be authorised by the tribunal (if not agreed with the occupier). Further, where the occupier cannot be readily identified, the tribunal may direct to whom notice of the visit must be given.
The measure introducing HMRC's information-gathering powers and taxpayers' record keeping obligations will be brought into effect by Treasury Order (expected to be from 1 April 2010). The alignment of time limits is not expected to become fully operative until 1 April 2011.
(See 2009 Budget - BN89 - Review of HMRC powers, deterrents and safeguards: compliance checks; Modernising Powers, Deterrents and Safeguards: Responses to consultations and explanations and Impact assessment: compliance checks.)
Legislation will be included in the Finance Bill 2009 to reform the penalties regimes for late filing of returns and late payment of tax.
HMRC consulted on the proposed reforms in November 2008 (see Legal update, Modernising Powers, Deterrents and Safeguards: Next stage: Penalties for late filing and late payment (www.practicallaw.com/8-384-1410)). Despite concern from respondents about the increased administrative burden on employers, the reforms will include penalties for late payment of in-year PAYE.
The new regime will require changes to HMRC's computer systems, and so will be phased in over a number of years. Penalties for late payment of in-year PAYE will be introduced first, in April 2010.
Under the new regime for in-year penalties for late payment of PAYE, penalties will depend on the number of defaults in any 12 month period:
The initial default will not trigger a penalty.
There will be a penalty of 2% of the tax unpaid for a second late payment, rising to up to 5% for any subsequent late payments in the default period.
There will be a penalty of 5% of any tax which is more than 6 months late, and a further penalty of 5% if tax is more than 12 months late.
The consultation proposed a number of methods for determining employers' compliance in this area, including possibly requiring employers to complete monthly returns, or expanding the annual PAYE return (form P35) to include information to break down the tax liability by month. Respondents to the consultation were concerned about the additional administrative burden of the proposals, particularly for small companies. HMRC therefore proposes initially to apply the new penalty regime for PAYE on a "risk assessment basis targeting the worst offending late payers", and that publicity for the new regime should help improve compliance rates.
Penalties for late filing where the obligation is annual or "occasional" will be as follows:
A £100 fixed penalty immediately after the due date for filing (regardless of whether the tax due has been paid).
For annual returns, a daily penalty of £10 if the return is more than three months late (running for a maximum of 90 days).
A penalty of 5% of the tax due if the return is more than six months late, and a further 5% penalty if the return is more than 12 months late.
A penalty of 70% of the tax due if the return is more than 12 months late and the taxpayer has deliberately withheld information necessary to enable HMRC to assess the tax liability (increased to 100% if the information was deliberately concealed by the taxpayer).
Penalties for late payment where the obligation is annual or "occasional" will be as follows:
A penalty of 5% of the tax unpaid, generally imposed one month after the due date for payment (or following the filing date, for corporation tax and inheritance tax).
A penalty of 5% of the tax unpaid for more than six months, and a further 5% penalty if the tax is unpaid for more than 12 months.
Penalties for late filing of construction industry scheme returns will be as follows:
A £100 fixed penalty immediately after the due date for filing and an additional fixed penalty of £200 if the return is more than three months late.
A penalty of 5% of the deductions due for the return period if the return is more than sixmonths late, and a further 5% penalty if the return is more than 12 months late.
A penalty of 70% of the deductions due if the return is more than 12 months late and the taxpayer has deliberately withheld information necessary to enable HMRC to assess the liability (increased to 100% if the information was deliberately concealed by the taxpayer).
Penalties for late payment of tax will be suspended where the taxpayer has agreed a "time to pay" arrangement with HMRC.
Penalties will not be imposed where the taxpayer has a "reasonable excuse", and HMRC is considering expanding its guidance on the meaning of this phrase to take into account responses to its consultation document. Taxpayers will also have a right of appeal against all penalty decisions.
The government intends to introduce legislation in Finance Bill 2010 to align penalties for the remaining taxes and duties administered by HMRC (VAT, climate change levy, aggregates levy, landfill tax, air passenger duty, excise duties and insurance premium tax).
(See 2009 Budget - BN90 - Review of HMRC powers, deterrents and safeguards: penalties for late filing of returns and late payment of tax; Modernising Powers, Deterrents and Safeguards: Responses to consultations and explanations and Impact assessment: Working towards a harmonised regime for interest and meeting the obligations to file returns and pay tax on time.)
The Finance Bill 2009 will create a harmonised interest regime for most taxes and duties, with the exception of corporation tax and petroleum revenue tax.
Current provisions provide for a range of interest regimes with a number of differences adding unnecessary complexity. The new provisions will replace the different regimes with a single legislative framework. HMRC consulted on proposals for harmonising interest in November 2008 (see Legal update, Modernising Powers, Deterrents and Safeguards: Next stage: Interest (www.practicallaw.com/8-384-1410)) and published draft legislation in December 2008 (see Legal update, Interest, penalties, payment services and debt management: draft legislation published (www.practicallaw.com/2-384-3068). HMRC has indicated that it proposes to pursue interest on late paid employers' in-year PAYE on a risk assessment basis.
Rates will be aligned by a series of Treasury Orders to have effect shortly after the date that the Finance Bill 2009 receives Royal Assent.
(See 2009 Budget - BN91 - Interest harmonisation; Modernising Powers, Deterrents and Safeguards: Responses to consultations and explanations and Impact assessment: Working towards a harmonised regime for interest and meeting the obligations to file returns and pay tax on time.)
The government has announced a new disclosure opportunity (NDO) for UK residents holding offshore accounts. The NDO is described as a final opportunity and will run from autumn 2009 to March 2010. It will allow account holders to make voluntary disclosures of unpaid tax. They will be expected to pay the tax that they owe plus interest and penalties. The level of penalty will be announced before the scheme opens and is likely to be lower than under normal rules. HMRC will also ask the permission of the First tier Tribunal to issue notices requiring financial institutions to provide information about offshore account holders.
The NDO was mentioned in the 2008 Pre-Budget Report (see Pre-Budget Report 2008: key business tax announcements: Offshore disclosure (www.practicallaw.com/7-383-9988)). For details of the previous disclosure procedure, see Legal update, Income Tax: Offshore bank accounts: disclosure procedure for taxpayers (www.practicallaw.com/9-364-5994).
(See 2009 Budget - HMRC: Compliance Proposals. This information is confirmed in paragraph 5.97, Chapter 5, Economic and Fiscal Strategy Report; paragraph A.163, Chapter A, Financial Statement and Budget Report; and page 16, PN01 - Building Britain's future.)
The Finance Bill 2009 will include provisions intended to ensure the adequacy of accounting systems in large companies for the purposes of accurate tax reporting.
The new obligations will apply to large companies (defined as companies that are not "small" or "medium sized" for the purpose of the Companies Act 2006) and their senior accounting officers. The legislation will require:
Senior accounting officers to establish and monitor adequate accounting systems.
Such officers to certify the systems are adequate or specify the nature of any inadequacies and confirm they have been notified to the company's auditors.
Companies to notify to HMRC the identity of the senior accounting officer.
The regime will be supported by penalties imposed on both the company and the senior officers personally in the case of non-compliance. The new legislation will apply to returns due to be made for accounting reference periods beginning on or after the date on which the Finance Bill 2009 receives Royal Assent. An Impact Assessment has also been published. This measure is almost certainly a response to recent high profile press reports about tax planning by large corporates and is likely to prove controversial in that sector. Companies affected will need to ensure that they have in place measure to monitor the adequacy of tax reporting functions.
(See 2009 Budget - BN62 - Corporate transparency: personal tax accountability of senior accounting officers of large companies and 2009 Budget - Final stage impact assessment: Corporate transparency: personal tax accountability of senior accounting officers of large companies.)
HMRC has launched a consultation on working with tax agents. This forms a part of its continuing review of Powers, Deterrents and Safeguards. The consultation considers HMRC's relationship with tax agents, including their wider role in terms of tax compliance. It also considers what changes can be made to improve and monitor agent performance.
It is estimated that there are 130,000 agents working in the UK, the majority of which are compliant. However, HMRC has concerns that changes in the market for tax advice and service, combined with the use of software, can lead to a deterioration in standards and poor practices. It continues to have concerns about volumes of mass marketed schemes by agents in the tax avoidance industry.
The consultation asks whether tax agents should be subject to an additional form of registration in order to assist in the monitoring of their performance. It also examines HMRC's existing powers to inspect information and documents from third parties. There is also consideration as to what sanctions (in the form of a new penalty regime) can be applied to agents who make mistakes or fail to take reasonable care.
Provisions in the Finance Bill 2009 will permit the publication of details of taxpayers penalised for deliberate tax defaults of more than £25,000. This measure will not apply to taxpayers who make a full unprompted disclosure or full prompted disclosure within the required time.
In addition, those who incur a penalty of £5000 or more for deliberate evasion of tax will be required to submit returns for up to the following five years showing more detailed information and detailing the nature and value of any balancing adjustments within the accounts.
(See 2009 Budget - BN63 - Publishing the names of deliberate tax defaulters. and Budget Report, paragraph A.162.)
HMRC's Business Payment Support Service (BPSS) was launched in November 2008, following the 2008 Pre-Budget Report, to assist viable businesses that, as a result of the credit crunch, were having difficulty in paying their tax. Taxpayers have been permitted to spread the payment of their VAT, PAYE and NIC, corporation tax and income tax liabilities over an agreed period.
As a result of the economic downturn, many businesses foresee a current year loss which, once agreed, will significantly reduce or eliminate the unpaid corporation tax or income tax liability for the earlier year. The BPSS is inviting viable businesses which find themselves in that position and which are genuinely unable to pay immediately to contact the service and discuss the position. HMRC is prepared to agree payment schedules for the outstanding corporation tax or income tax liability which extend beyond the date on which the current year loss will be ascertained.
The Finance Bill 2009 will make it easier for taxpayers to reclaim overpaid tax. In particular, the requirement that the overpayment must be the result of a mistake in a return and that it must be made under as assessment, will be removed.
The legislation will take effect for claims made on or after 1 April 2010.
The Finance Bill 2009 will require HMRC to prepare and maintain a charter. The charter will set out standards of behaviour and values to which HMRC will aspire in dealing with taxpayers and others. The legislation will require the charter to be in place by 31 December 2009.
The income tax and pensions tax relief changes (see Top income tax rate for individuals increases to 50% from 2010-11 and Higher-rate relief restricted for pension contributions from April 2011) will clearly have a significant impact on high earners. There is likely to be even greater emphasis on structuring returns as capital, rather than income, although anti-avoidance rules, including those relating to transfers of income streams will make this is a challenge in many cases. For analysis and comment on how employees are affected, see PLC Share Schemes & Incentives, Legal update, Budget 2009: a changed tax environment for remuneration planning (www.practicallaw.com/3-385-8361).
Entrepreneurs may want to consider taking out dividends in the current tax year, where cashflow permits, and possibly lending the funds back to the company.
The improvements to the enterprise investment scheme (www.practicallaw.com/9-107-6532), announced in the 2008 Pre-Budget Report (as to which, see Legal update, Pre-Budget Report 2008: key business tax announcements: Enterprise Investment Scheme: making it more attractive (www.practicallaw.com/7-383-9988)) are confirmed. Accordingly, the following changes will be included in Finance Bill 2009:
The expenditure requirement will be simplified so that 100% of the money subscribed must be employed within two years.
The carry back rules will be amended so that relief for 100% of the investment can be carried back against income of the preceding tax year (subject to the annual investment limit).
An anomaly between the EIS and capital gains tax rules will be rectified. Accordingly, when there is a share-for-share exchange in respect of shares on which EIS deferral relief has been claimed, deferral relief will be recovered but any gain arising on the disposal of the shares exchanged, will not be charged.
Two further changes have been announced, which will be effected in the Finance Bill 2009:
Currently, money raised from the issue of non-EIS shares, which are issued on the same day and are of the same class as the EIS shares, must also be employed for the same purpose and within the same time limit as the EIS shares (section 175(1)(a)(ii), Income Tax Act 2007). This link is to be removed so that there will be no restriction on the use of monies raised from non-EIS shares.
The expenditure requirement for the corporate venturing scheme and the venture capital trust scheme will be changed so that 100% of the money subscribed must be employed within two years.
These changes will take effect broadly from 22 April 2009 (the carry back change will apply from the tax year 2009/10).
For details of the venture capital schemes, see Practice note, Enterprise Investment Scheme (www.practicallaw.com/2-375-9154), Practice note, corporate venturing scheme (www.practicallaw.com/9-375-9155) and Practice note, Venture capital trusts (www.practicallaw.com/8-375-8156).
The Finance Bill 2009 will include legislation to set the rates of company car tax for tax year 2011-12 and following years and make other changes to the taxation of company cars.
A car which is available for the employee's private use is a taxable benefit. The tax charge is calculated by reference to the list price of the car, and its carbon dioxide emissions (see Practice note, Taxation of employees: Cars (www.practicallaw.com/6-200-2122)).
The changes to taxation of company cars include:
The removal of the £80,000 cap on the list price used to determine the taxable benefit.
The removal of various discounts applied to cars propelled by alternative fuels.
The simplification of the rules relating to electric cars.
Reforms to tax relief for business expenditure on cars come into effect on 1 April 2009 for businesses within the charge to corporation tax and 6 April 2009 for businesses within the charge to income tax.
The proposed changes to capital allowances rules applicable to cars have been the subject of a lengthy consultation process, which was announced in the 2006 Budget. Draft legislation was published at the time of the 2008 Pre-Budget Report, and following further consultation, revised draft legislation was published on 1 April 2009 (see Legal update, Tax relief for business expenditure on cars: revised draft legislation published (www.practicallaw.com/8-385-6109)).
The reforms are intended to simplify the capital allowances rules for cars, and align them with the government's environmental objectives by linking the tax reliefs to carbon dioxide emissions. The revised draft legislation also includes provisions to block two specific tax avoidance schemes.
The Finance Bill 2009 will contain legislation to stop a scheme for avoidance of tax on the benefit of living accommodation using lease premiums.
The benefit of living accommodation provided by an employer to an employee is generally taxable (see Practice note, Taxation of employees: Living accommodation (www.practicallaw.com/6-200-2122)). If the employer pays the rent on a property, the taxable benefit is based on the amount of rent actually paid by the employer. The scheme HMRC proposes to block involves an upfront payment by the employer, described as a lease premium, and payment of a much lower rent, to avoid tax on the benefit.
Under the proposed legislation, a lease premium paid by the employer on a lease of up to ten years will be subject to the same tax treatment as rent, with the lease premium spread over the duration of the lease. The new legislation will apply to leases entered into or extended on or after 22 April 2009.
Following HMRC consultations which began in November 2008, the 2009 Budget announced changes to the administration of the savings arrangements linked to HMRC-approved SAYE option schemes:
Responsibility for setting and changing savings contract bonus rates and authorising savings providers will pass from HM Treasury to HMRC.
The minimum notice period for changes in SAYE bonus rates will be reduced from 28 days to 15 days.
HMRC will be able to specify that savings contracts may be entered into under the old rates, within a certain period after the change becomes effective. This will be done in the notice of the changes to savings providers.
At the same time, the method by which HMRC will set rates by reference to market swap rates is expected to change, although this does not require any legislative amendments.
The changes are expected to take effect on 29 April 2009, the day after the Budget Resolutions are passed. For further information see,PLC Share Schemes & Incentives, Legal update, Budget 2009: changes to SAYE option scheme administration (www.practicallaw.com/7-385-8364).
The government has decided not to proceed with the options outlined in the 2008 Pre-Budget Report, see Legal update, Pre-Budget Report 2008: key business tax announcements: Company tax simplification review (www.practicallaw.com/7-383-9988). Instead, BERR will consider whether there is scope for simplifying the accounting requirements for micro companies and HMRC will consider whether the tax calculations for micro companies can be simplified.
(See Budget Report, paragraph 4.53.)
For environmental announcements, including tax measures, see PLC Environment, Legal update, Budget 2009: environmental announcements (www.practicallaw.com/2-385-8253).
The government is to introduce legislation in the Finance Bill 2009 to provide relief from SDLT and the chargeable gains for persons wishing to raise finance by issuing alternative finance bonds secured using UK land assets. Further provisions will also entitle the person obtaining the finance to capital allowances whilst the land is held by the bond issuer.
These measures are intended to place alternative finance investment bonds backed by UK land assets on a level playing field with normal bond issuances by removing SDLT charges and capital gains tax on the transactions involved in setting up the bonds and preserving entitlements to capital allowances.
For background information, see Legal update, HMRC response to consultation on commercial sukuk and SDLT (www.practicallaw.com/0-385-0856) and Legal update, Islamic finance: HM Treasury and FSA publish discussion papers (www.practicallaw.com/6-384-4396).
The Finance Bill 2009 will implement the proposed tax disregard for profits and losses on a derivative contract entered into to hedge foreign exchange risk on the proceeds of a rights issue. For details of this proposal, see Legal update, Government announces measures to counteract exchange rate fluctuations during rights issues (www.practicallaw.com/6-385-2391).
The Finance Bill 2009 will amend the loan relationship rules affecting connected companies in relation to late paid interest and releases of trading and property business debts. Draft legislation has already been published (see Legal update, Late paid interest and releases of trade debts: draft legislation published (www.practicallaw.com/9-384-4521) and Legal update, Loan relationships: late paid interest rules: revised draft legislation published (www.practicallaw.com/1-385-4793)). It should be noted, however, that the change to releases of trade or property business debt will apply to releases taking place on or after 22 April 2009 (in contrast to the previously announced commencement date). As previously announced, the changes to the late paid interest rules will apply for accounting periods beginning on or after 1 April 2009.
As announced on 27 January 2009, legislation will be introduced to prevent the DCC Holdings decision on deemed payments of manufactured interest from affecting the tax treatment of real manufactured interest payments, commonly made under stocklending and repo transactions. The new legislation is intended to align the tax treatment of real and deemed manufactured interest payments with the accounting treatment in accordance with Generally Accepted Accounting Practice (GAAP) and will protect the government from "excessive" claims for tax relief in respect of real payments of manufactured interest.
The legislation will be retrospective in that it will apply not only to real and deemed payments of manufactured interest made on or after 27 January 2009 but also to past real payments where the tax return is still open (see Legal update, Manufactured interest rules: draft legislation published following DCC Holdings judgment (www.practicallaw.com/2-384-8377)).
Legislation will be introduced in the Finance Bill 2009 to amend schedule 10 to the Finance Act 2006 relating to transactions involving partnerships and consortia and extend the period over which losses triggered by the operation of Schedule 10 may be used by the purchasing group.
Schedule 10 applies to sales of leasing companies on or after 5 December 2005. It seeks to prevent profitable groups from extracting, by way of group relief, for example, the benefit of capital allowances on plant and machinery owned by group companies which carry on leasing activities and then selling the leasing companies to loss-making groups when the leasing companies begin to make taxable profits as capital allowances amortise away.
Schedule 10 operates, very broadly, to recapture (on the day of a "qualifying change of ownership" of the lessor company), some of the capital allowances given to the lessor company. This is done by treating the lessor as receiving an amount of income broadly equal to the difference between the balance sheet value of the plant or machinery and the tax written down value of the plant or machinery. An accounting period ends on the date of the change of ownership. The amount of the deemed income is then allowed as a "matching expense" which is treated as incurred on the day after the change in ownership of the lessor company. This matching expense cannot be carried back (paragraph 5 of Schedule 10). In this way, capital allowances are effectively recaptured from the selling group and are transferred to the buying group. This blocks the effectiveness of sale of lessor schemes.
Broadly, where the matching expense creates a loss (a schedule 10 loss) which cannot be used by the lessor company in the new accounting period which begins when it joins the purchasing group, the loss may be treated under paragraph 39, as an expense that is deductible for an accounting period starting within 12 months of the date of the change of ownership (instead of being a carried forward loss). This means that the schedule 10 loss is available for surrender by way of group relief on a current year basis (by contrast, carried forward losses cannot be surrendered by way of group relief). The proposed change will extend this treatment to allow a schedule 10 loss to be treated as an expense that is deductible for an accounting period starting within five years of the date of the change of ownership. This will assist purchasing groups which are generating tax losses in the current economic climate in the utilisation of schedule 10 losses. To augment the value of the losses, the amount of the losses will also be increased at the interest rate payable on overpaid tax for a (limited) period equating to the length of the new accounting period for which the schedule 10 loss arises.
Other changes will:
Ensure that companies carrying on a leasing business in partnership will obtain the full amount of relief due if they increase their partnership share.
Ensure that certain changes of ownership in a consortium company do not trigger a change of ownership for schedule 10 purposes.
Prevent a schedule 10 charge arising when a partnership is dissolved or ceases its leasing business resulting in a market value disposal value being brought into account.
The Finance Bill 2009 will provide relief from stamp duty and SDRT charges that would arise if a stock lending or repo arrangement terminates and the stock is not returned to the originator under the terms of the stock lending or repo owing to the insolvency of one of the parties. These proposed changes were announced in the 2008 Pre-Budget Report. See Legal update, Pre-Budget Report 2008: key business tax announcements: Stock lending and repos: disapplication of tax charges (www.practicallaw.com/7-383-9988)). If collateral is used by a stock lender to acquire replacement securities following the insolvency of the borrower, a parallel relief will apply for the purposes of the tax on chargeable gains to avoid the charge which would otherwise arise under section 263B of the TCGA 1992 (stock lending).
The changes will apply where the insolvency of the borrower or lender occurs on or after 1 September 2008.
From April 2011, the availability of higher-rate relief on contributions to registered pension schemes (www.practicallaw.com/5-201-6474) will be restricted for those earning more than £150,000 a year. Tapering will operate so that for those earning above £180,000 a year, relief will be available only at the basic rate. A full consultation on these provisions will be announced in due course.
Anti-forestalling measures to be enacted in the Finance Bill 2009 have been published in draft. These are designed to prevent individuals likely to be affected by the change making pension contributions outside their regular pattern in the run-up to April 2011. The anti-forestalling measures will in turn be subject to anti-avoidance provisions.
The core of the anti-forestalling measures will be the introduction of a "special annual allowance", which will apply in the 2009/10 and 2010/11 tax years in addition to the standard annual allowance (www.practicallaw.com/6-201-6478). The special annual allowance will apply to an individual who:
Has "relevant income" of more than £150,000 a year in the 2009/10 or 2010/11 tax year (or in either of the two tax years before each of those years). "Relevant income" means earnings within the charge to income tax, less allowable deductions and relief.
Changes his or her normal pattern of regular pension contributions, or the normal way in which pension benefits are accrued, after 22 April 2009 (in either of the tax years 2009/10 or 2010/11); and
Makes total pension contributions each year that exceed £20,000 (including any increases after 22 April 2009).
For 2009/10, the special annual allowance charge will be levied at 20% of the amount by which total contributions taken into account exceed the special annual allowance. In other words, the effect of the charge will be to restrict the available tax relief to the basic rate.
In assessing liability for the special annual allowance charge, an individual's "total pension input amounts" (as used for testing against the standard annual allowance) will be adjusted by deducting "protected pension input amounts". There will be two types of protected deduction: normal ongoing pension saving and contributions to new (or reactivated) schemes set up on or after 22 April 2009.
The draft legislation contains detailed provisions relating to what counts as normal ongoing pension saving. Broadly, for defined benefit schemes (www.practicallaw.com/0-107-7545), further accrual will be protected provided there has been no material change to the way that benefits are calculated under the arrangement on or after 22 April 2009. Material changes could include changes in the calculation of pensionable salary or an increase in the accrual rate.
For money purchase schemes (www.practicallaw.com/0-107-6857), contributions are protected provided that on or after 22 April 2009, the rate at which contributions are being paid under the arrangement does not increase otherwise than in accordance with an increased rate which was expressly agreed before 22 April 2009. Note that individuals whose regular savings exceed £20,000 for 2009/10 or 2010/11 will only be liable for the special annual allowance charge on the amount by which their contributions exceed their regular savings. So an individual with a pattern of contributions in excess of this sum can continue to make them without incurring the charge, and attract higher-rate relief until April 2011.
As the new measures have immediate effect, special provisions will allow an individual who has inadvertently become liable for the special annual allowance charge to take a "contributions refund lump sum" if scheme rules allow this. Contributions made to schemes between 6 April and 22 April 2009 will not be liable for the special annual allowance charge, but will reduce the amount of the allowance available for the 2009/10 year.
HMRC says that if an individual were to become liable for the special annual allowance charge in addition to the standard annual allowance charge, the special charge would be reduced to prevent double charging. A test against the special annual allowance will be made in the year in which a member retires, even though this does not trigger a test against the standard annual allowance.
Anti-avoidance measures contained in the draft legislation will provide that protection from the special allowance charge will be lost if an individual participates in a scheme or arrangement which has as its main purpose (or one of its main purposes) the avoidance of liability to the special annual allowance charge, the current annual allowance charge or the lifetime allowance (www.practicallaw.com/8-201-6477) charge by reducing either the total adjusted pension input amount or the protected pension input amount.
Likewise, HMRC seems keen that salary sacrifice should not be used to circumvent the new restriction: for individuals in these arrangements, an amount equal to the employer's pension contribution corresponding to the salary sacrifice will count as "relevant income". Indeed, in the case of any "scheme" which has as its main purpose (or one of its main purposes) to secure that an individual's income is less than £150,000, his or her income is deemed to be £150,000 in any event.
For further analysis and comment, see PLC Share Schemes & Incentives, Legal update, Budget 2009: a changed tax environment for remuneration planning (www.practicallaw.com/3-385-8361).
Provisions in the Finance Bill 2009 will ensure that compensation payable by two public bodies will be treated on the same footing as payments by registered pension schemes:
FAS. Legislation will be amended to provide that lump-sum commutations payable by the Financial Assistance Scheme (www.practicallaw.com/3-207-8953) (FAS) will be tax free, as is the case with authorised lump-sum payments made by registered pension schemes. This move follows the government's December 2007 announcement that it was extending the FAS to provide compensation comparable to that provided by the Pension Protection Fund (www.practicallaw.com/7-205-4059). The extension is being implemented in several phases: most recently, draft regulations were published for consultation in February 2009. Further regulations which will allow the FAS to pay lump-sum compensation are due to be published later in 2009 (see Legal update, DWP consults on latest FAS amendment regulations (www.practicallaw.com/7-384-9478)).
In anticipation of these changes, the Finance Bill 2009 will contain a regulation-making power to adjust the tax treatment of FAS compensation. As a result, individuals will be entitled to take a tax-free lump sum on the same basis afforded to members of registered pension schemes.
FSCS. The Finance Bill 2009 will provide that compensation payable by the Financial Services Compensation Scheme (FSCS) in relation to tax-relieved pension saving will continue to benefit from the pension tax regime, as if the FSCS were not involved.
The FSCS can either pay compensation itself to individuals or transfer an individual's rights to another insurer. In either case, the compensation payments currently do not count as payments by registered pension schemes. The amendments will broadly correct this, ensuring that individuals are not disadvantaged following the FSCS's involvement. This measure will be relevant for individuals with personal pensions and members of occupational schemes whose benefits have been bought out with an insurance company.
From 6 April 2010, there will be new top rates of income tax for individuals with taxable income over £150,000. The dividend additional rate will be 42.5% and the additional rate for other income will be 50%. The new rates are 5% higher, and take effect one year earlier, than those announced in the 2008 Pre-Budget Report. In addition, on 6 April 2010, the trust rate of income tax will increase from 40% to 50%, and the dividend trust rate will increase from 32.5% to 42.5%.
From 2010, the basic personal allowance for income tax will be reduced for individuals with adjusted net income over £100,000. The reduction will be £1 for every £2 over the income limit until the allowance is reduced to nil. This replaces the reduction that was due to take effect from 2010-11 in two stages, for individuals with income over £100,000 and over £140,000.
This change, together with the restriction on tax relief for pension contributions (see Pensions) will clearly have a significant impact on high earners. For analysis and comment, see PLC Share Schemes & Incentives, Legal update, Budget 2009: a changed tax environment for remuneration planning (www.practicallaw.com/3-385-8361). As the differential between effective tax rates on capital gains and income widens, it is inevitable that there will be greater interest in structuring returns as capital rather than income, although anti-avoidance rules, such as those relating to transfers of income streams, will pose a challenge.
For the earlier announcements, see Pre-Budget Report 2008: key business tax announcements: Tax rates and allowances (www.practicallaw.com/7-383-9988). For more information about income tax, see Practice note, Direct taxes: Taxation of income: general principles (www.practicallaw.com/5-107-3724).
Following changes in the Finance Act 2008 to the remittance rules (which affect individuals who are either not domiciled, or not ordinarily resident, in the UK, see Practice note, Residence, ordinary residence and domicile: UK tax implications: Remittance basis of taxation (www.practicallaw.com/3-385-8059)), the Chancellor announced that the Finance Bill 2009 will contain further minor changes to the rules, in order to correct some anomalies and drafting errors in the original legislation.
Remittance basis users employed in the UK will not have to file a tax return where, in a tax year:
Their overseas employment income is less than £10,000;
Their overseas bank interest is less than £100; and
Both the above are subject to foreign tax.
This change will take effect as from 6 April 2008.
Certain types of exempt property (for example clothing, footwear, jewellery and watches for personal use) purchased from relevant foreign income (www.practicallaw.com/8-382-7112) may be brought into the UK without triggering a liability to UK tax (section 809X Income Tax Act 2007 (ITA 2007)). The Finance Bill 2009 will extend the scope of these exemptions to include property purchased out of foreign employment income and gains.
This change will take effect as from 6 April 2008.
The Finance Bill 2009 will clarify that a formal claim for the remittance basis to apply is not required where the individual has:
Unremitted foreign income and gains of less than £2,000 in any tax year; or
Taxed UK income or gains of no more than £100 in any tax year, provided they make no remittances to the UK in that tax year.
Unless HMRC is notified otherwise, it will in effect assume that the individual with unremitted foreign income and gains of less than £2,000 in a tax year has chosen to use the remittance basis.
The changes will take effect as from 6 April 2008.
The Finance Bill 2009 will contain provisions to extend transitional provisions (which prevent certain income that arises before 6 April 2008 from being taxed as a remittance if it is brought to the UK on or after that date) to ensure they work as intended for individuals taxed under the settlements legislation (chapter 5 of Part 5 of the Income Tax (Trading and Other Income) Act 2005). The changes will take effect as from 6 April 2008.
In addition, the legislation will clarify the interaction between the remittance basis regime and the tax rules that apply to settlor-interested settlements. These changes will come into force on 22 April 2009.
The Finance Bill 2009 will clarify that the £30,000 remittance basis charge will be treated in the same way as other types of income tax or capital gains tax, for the purposes of Gift Aid.
The change will take effect as from 6 April 2008.
Draft legislation will be introduced in the Finance Bill 2009 to firm up a number of anti-avoidance provisions in ITA 2007:
Section 809M (meaning of "relevant person") will be amended to define participator and make it clear that references to a close company include subsidiaries.
Section 809P (amount remitted) will be amended to clarify the scope of the statutory rule in section 809Z5 for determining the value of a remittance, where individual items (which form part of a larger set) are remitted to the UK.
On 18 March 2009, HMRC published a statement of practice (SP 1/09), which sets out how it will treat transfers made from an offshore account which contains only the income relating to a single employment contract and how earnings should be apportioned between UK and non-UK employment when the employee is taxed on the remittance basis (see Legal update, Remittance of employment income: new Statement of Practice published (www.practicallaw.com/7-385-3724)).
SP 1/09 will be enacted in Finance Bill 2010, to allow for a period of consultation.
Following advice that the current rules do not comply with the Human Rights Act 1998, the Chancellor has announced that non-resident individuals who currently qualify for personal allowances and reliefs from income tax solely because they are Commonwealth citizens, will no longer be entitled to the allowances and reliefs, with effect from 6 April 2010.
The Chancellor announced an increase in the savings limit for individual savings accounts (www.practicallaw.com/7-107-6260) (ISAs) to £10,200, of which up to £5,100 can be saved in cash. The new limits will apply:
To 2009-10 ISAs for people who are aged 50 and over, with effect from 6 October 2009.
To ISAs from 2010-11 onwards for all ISA investors, with effect from 6 April 2010.
The new limits will be introduced by statutory instrument (see Draft Legislation, The Individual Savings Account (Amendment) Regulations 2009).
Under the current regulations on ISAs (The Individual Savings Account Regulations 1998 (SI 1998/1870)), the existing overall annual subscription limit is £7,200, of which £3,600 can be saved in a cash ISA with one provider. Savers can invest the balance of their ISA in stocks and shares with either the same or a different provider.
In the 2008 Pre-Budget Report, the Chancellor extended the range of investments eligible for ISAs (see Legal update, Pre-Budget Report 2008: Qualifying ISA investments to include multilateral institution bonds (www.practicallaw.com/6-384-2104)).
Following the European Commission's formal request to the UK to amend its legislation on inheritance tax (IHT) reliefs for agricultural property and woodlands (see Legal update, European Commission asks UK to amend inheritance tax legislation (www.practicallaw.com/0-384-8043)), the Chancellor announced that these reliefs will be extended in the Finance Bill 2009 to cover property within the European Economic Area (EEA). The extension will take effect from 22 April 2009, and will also apply retrospectively for:
Agricultural property within an EEA state where IHT is due (or paid) on that property on or after 23 April 2003.
Woodlands located within an EEA state, where the relief is claimed in relation to a death before 22 April 2009.
In both cases the earliest deadline for reclaiming tax overpayments will be 21 April 2010.
Agricultural property and woodlands within the EEA that qualify for the extended IHT reliefs will also qualify for capital gains tax hold-over relief (www.practicallaw.com/5-383-4741) for business assets under section 165 of the Taxation of Chargeable Gains Act 1992 (see Tax on chargeable gains: general principles: gifts of business assets (www.practicallaw.com/1-205-7008).) The extension will apply retrospectively to past disposals, subject to the usual time-limits for making claims (five years from 31 January following the tax year to which the claim relates, reducing to four years from 1 April 2010).
The threshold of tax relievable donations that a person can make to a charity without becoming a substantial donor to that charity is to be increased.
The substantial donors rules are intended to prevent the abuse of tax reliefs by "substantial donors" and those connected with them. The rules are based on the premise that all transactions between a substantial donor and a charity potentially have the effect of returning value from the charity to the donor. So certain transactions between a charity and a substantial donor, or a person connected with a substantial donor, result in the charity being treated as incurring "non-charitable expenditure". As a result, the charity is taxed on an amount of income or gains equivalent to the non-charitable expenditure, whereas it would normally be exempt from tax. (For more information, see Legal update, Substantial donors to charity: HMRC publishes consultation responses document: Background (www.practicallaw.com/0-384-5902).)
The current rules define a substantial donor as a person who makes tax relievable donations to a charity of £25,000 or more in 12 months or £100,000 or more in a six year period. The latter threshold is being increased to £150,000 by statutory instrument (see Draft legislation, The Substantial Donor Transactions (Variation of Threshold Limits) Regulations 2009).
The government also announced that it would consult further with the charitable sector about the anti-avoidance rules relating to substantial donors to charity before amending the existing legislation. It aims to bring forward the proposals at the 2009 Pre-Budget Report, with amended legislation to follow in 2010.
The existing legislation on substantial donors addresses abuse of tax reliefs for charities and donors by substantial donors (and those connected with them) and has met with criticism since its introduction in 2006. Legislative reform was anticipated, following HMRC's publication of the summary of the responses to its consultation on the legislation in January 2009. However, the Government has indicated the need for further consultation before making substantial legislative changes.
The Finance Bill 2009 will change the definition of an offshore fund for UK tax purposes. In particular, the existing definition, based on the regulatory definition of a "collective investment scheme" will be replaced by a characteristics-based definition. In addition, the primary legislation governing the offshore funds regime will be amended so that changes to the regime can be made by regulations. Transitional measures will also be put in place for existing investors.
Originally it was intended that the new definition of an offshore fund would take effect from 1 October 2009. This date has been revised to 1 December 2009.
For background to the offshore funds regime, and for details of the offshore funds consultations, see Legal update, Offshore funds: "further steps" paper and draft legislation published (www.practicallaw.com/8-384-4550).
Legislation will be introduced in the Finance Bill 2009 to treat an interest in a transparent offshore fund that satisfies the new definition of an offshore fund (as to which, see, Offshore funds: revised definition) as an asset for capital gains tax purposes. The government is exploring making a similar change for corporate investors.
The new treatment will apply to investments made on or after 1 December 2009 but investors may make an irrevocable election for the new treatment to apply retrospectively from to the tax year 2003/04.
The government has confirmed that legislation will be introduced, the aim of which is to provide legislative certainty on the distinction between trading and investment transactions undertaken by Authorised Investment Funds (AIFs) and equivalent offshore funds.
The legislation will set out a "white list" of transactions that will be treated as non-trading transactions provided the AIF or equivalent offshore fund meets a "genuine diversity of ownership" condition. In addition, a measure will be introduced to ensure that financial traders cannot gain an advantage by routing transactions through AIFs and equivalent offshore funds. The new measure will ensure that financial traders recognise profits or losses on movements in the value of their interests in AIFs and bring them into account when computing the profits of their financial trade.
For background, see Legal update, Pre-Budget Report 2008: key business tax announcements: Asset management (www.practicallaw.com/7-383-9988) and Legal update, Authorised Investment Funds: HM Treasury proposes statutory white list of non-trading transactions (www.practicallaw.com/8-384-4833).
The legislation will take effect from 1 September 2009 (for AIFs) and from 1 December 2009 (for equivalent offshore funds) and will bring welcome certainty in this area.
With effect from 1 September 2009, a UK AIF will be able to elect to be treated as a tax elected fund (TEF). The effect of this election will be that the TEF will distinguish between its dividend and interest income and, corrrespondingly, make two types of distribution. Amounts distributed by way of non-dividend (interest) distribution will be deductible from the TEF's profits and will be received without deduction of tax by the investor. Dividend distributions will continue to carry a tax credit. For more background on this change, see Legal update, Authorised Investment Funds: Tax Elected Funds response paper (www.practicallaw.com/7-384-3320).
A new elective framework will be introduced to enable investment trust companies (ITCs) to invest in interest bearing bonds in a tax efficient way.
Under the new framework, interest income will remain taxable in the ITC. However, the ITC will be entitled to a tax deduction for any distribution to its investors, which the ITC designates as an interest distribution. The tax deduction will remove the corporation tax liability arising on the interest income. The interest distribution will be treated as yearly interest in the hands of the ITC's shareholders so that withholding tax (www.practicallaw.com/8-107-7508) may apply.
For the background to the new measure, see Legal update, Pre-Budget Report 2008: key business tax announcements: Asset management (www.practicallaw.com/7-383-9988) and for the draft legislation intended to implement the new measure, see Legal update, New tax regime for investment trusts investing in bonds: draft regulations published (www.practicallaw.com/2-384-3247).
The legislation will apply to interest distributions made on or after 1 September 2009.
Individual investors whose shareholding in a non-UK company or fund is 10% or more will, for dividends received on or after 22 April 2009, have the benefit of a non-refundable tax credit (equal to one-ninth of the amount received) provided that the distributing company is resident in a country which has a double tax treaty with the UK that contains a non-discrimination article. HMRC has previously consulted on the draft legislation (see Legal update, HMRC publishes draft legislation on personal dividend tax credits (www.practicallaw.com/4-384-7348).) Anti-avoidance measures will be added to the legislation to tackle the use of conduct structures designed to secure a credit for dividends originating from a territory that does not qualify for the credit.
Holders of less than 10% of the shares in a non-UK company have, since 6 April 2008, been entitled to such a tax credit on dividends, but the corresponding entitlement was withdrawn on distributions from funds because of abuse by bond funds (see, Legal update, Finance Bill 2008: Public Bill Committee Proceedings (20 May, morning) (www.practicallaw.com/6-381-9900).)
. With effect from 22 April 2009, a tax credit will be available in respect of distributions from offshore funds that are largely invested in equities. If an offshore fund holds 60% or more of its assets in bonds and other interest-bearing assets, distributions will be treated as interest in the hands of investors and will not carry a tax credit. Exactly how and when the fund valuation will be carried out so as to give certainty to investors as to the nature of the distribution they are likely to receive could, for a mixed fund, present a challenge for the draftsmen.
After a lengthy consultation (see Legal update, HM Treasury discussion paper on SDRT and investment funds (www.practicallaw.com/9-378-9483)), the government has decided not to proceed with changes to the stamp duty reserve tax rules for dealings in units in unit trusts (Schedule 19 of the Finance Act 1986).
(See Box 3.10 of the 2009 Budget Report.)
The government has announced that the Finance Bill 2009 will include provisions to ensure that individuals who receive a payment in respect of accrued interest from the Financial Services Compensation Scheme (FCSC) will be in the same tax position as if the accrued interest had been paid by the defaulting financial institution.
Payments by the FCSC may include an element in respect of accrued interest. However, the legal nature of this provision was unclear. As a result it was not possible to apply the normal rules relating to the taxation of interest. Amendments to be made by the Finance Bill 2009 will address this issue. The new provisions will apply in relation to income tax only; for companies the taxation of bank deposits is addressed by the loan relationships legislation.
The new provisions will apply to payments made by the FSCS on or after 6 October 2008.
The Finance Bill 2009 will introduce legislation to stop schemes intended to obtain income tax loss relief using offshore life insurance policies, as announced in a statement by HM Treasury on 1 April 2009 (see Legal update, Draft legislation to counteract avoidance using life insurance policies (www.practicallaw.com/9-385-5760)).
When gains are made on chargeable events (www.practicallaw.com/5-384-0817) relating to life policies, such as the assignment or surrender of a policy, income tax is charged on the gains under the rules in Chapter 9 of Part 4 of the Income Tax (Trading and Other Income) Act 2005. HMRC has identified avoidance schemes that purport to create losses from offshore life insurance policies that can be set against other income. The HM Treasury's announcement stated that the government does not accept that the schemes work. However, it has introduced the proposed legislation to put beyond any doubt that income tax loss relief is not available where a chargeable event calculation produces a negative result.
The draft legislation amends section 152 of the Income Tax Act 2007 (ITA 2007), which allows for loss relief against miscellaneous income, to make it clear that the loss relief cannot be claimed.
The legislation will apply where chargeable events occur on or after 6 April 2009, removing any scope to claim income tax loss relief for losses relating to 2009-10 and subsequent years.
In addition, the legislation includes transitional provisions that:
Remove any scope to claim income tax loss relief for 2008-09:
in relation to new policies made on or after 1 April 2009 or policies varied on or after that date so as to increase the policy benefits;
where all or part of the rights are assigned on or after 1 April 2009 to the person claiming loss relief; or
where all or part of the rights conferred by the policy or contract become held, on or after 1st April 2009, as security for a debt.
By amending section 153 of ITA 2007, prevent a deduction for income tax loss relief in 2009-10 and later years, regardless of when the chargeable event occurred.
For details of all property related announcements in the Budget, see PLC Property, Legal update, 2009 Budget: implications for property (www.practicallaw.com/5-385-8360).
The temporary increase in the residential SDLT threshold (from £125,000 to £175,00) will be extended so that it will now apply to property acquisitions with effective dates (www.practicallaw.com/3-107-6200) (normally completion) falling on or before 31 December 2009.
When the temporary threshold increase was introduced in September 2008, it was apply to transactions with an effective date after 2 September 2008 and before 3 September 2009 (see Legal update, SDLT exemption for residential property transactions of up to £175,000 from 3 September 2008 (www.practicallaw.com/1-383-2089)). The temporary increase was introduced by way of regulations (see Legal update, £175,000 SDLT exemption: implementing regulations made (www.practicallaw.com/7-383-1567)). Those regulations will be revoked and replaced by new provisions in the Finance Bill 2009.
The measure will benefit buyers of residential property, where the chargeable consideration is not more than £175,000, for an extended period (previously, this measure was only available for acquisitions with an effective date falling before 3 September 2009).
For more information on SDLT and residential property, see Practice note, SDLT reliefs for residential property (www.practicallaw.com/6-107-4822).
Legislation will be introduced in Finance Bill 2009 to change the SDLT relief for leasehold enfranchisement by removing the requirement that the relief can only be claimed by a statutory "Right to Enfranchise Company". This change will apply to land transactions with effective dates (www.practicallaw.com/3-107-6200) falling on or after 22 April 2009.
Until this change, although the relief was provided for in the legislation, it could not be claimed because statutory provision for Right to Enfranchise Company has never been brought into force (see Practice note, SDLT reliefs for residential property: The reliefs (www.practicallaw.com/6-107-4822) and Legal update, SDLT: collective enfranchisement relief (High Court) (www.practicallaw.com/3-384-9480)).
This is a welcome measure because it means that the relief can now be claimed by leaseholders exercising statutory rights of leasehold enfranchisement.
Legislation will be introduced in the Finance Bill 2009 to:
Extend favourable SDLT treatment to purchasers under shared ownership schemes operated by profit-making Registered Providers of Social Housing (RPSH), where the scheme is assisted by public subsidy.
Extend the existing SDLT relief for purchases by Registered Social Landlords (RSLs) to profit-making RPSH where the purchase is assisted by public subsidy.
Simplify the SDLT treatment of purchasers under rent to shared ownership ("Rent to HomeBuy") schemes.
These measures will apply to transactions where the effective date (www.practicallaw.com/3-107-6200) of the grant under a shared ownership lease, or the declaration of the shared ownership trust, falls on or after 22 April 2009. The other measures will apply to transactions with an effective date on or after the date of Royal Assent to the Finance Bill 2009.
RSLs, which can currently claim SDLT relief (see Practice note, SDLT reliefs for residential property: The reliefs (www.practicallaw.com/6-107-4822)) are to be replaced in England with a new system of RPSH, which is inclusive of profit-making companies. The new measures will widen the relief to make it available to RPSH where the purchase is fund by public subsidy.
In addition, SDLT relief will be extended to individuals buying homes under shared ownership schemes operated by profit-making RPSH.
The new Rent to HomeBuy scheme will help individuals to purchase homes using shared ownership schemes by allowing them initially to occupy the property under an assured shorthold tenancy, so that they can save for a deposit to buy. Under current rules, the SDLT treatment of these schemes can be complex, therefore the provisions in the Finance Bill 2009, intended to simplify the SDLT rules for these schemes, should be welcomed.
The government has published a consultation document and impact assessment considering possible amendments to the disclosure of tax avoidance schemes rules as they relate to stamp duty land tax (SDLT).
The government announced in April 2008 that the SDLT disclosure rules would be extended to residential property where the value of the property is greater than £1 million (see Practice note, SDLT disclosure regime: Extending the SDLT disclosure regime for high value residential properties (www.practicallaw.com/6-201-2437)). It was subsequently announced as part of the 2008 Pre-Budget Report that this would include a mechanism for identifying users of schemes which are disclosed (see Legal update, Pre-Budget Report 2008: key business tax announcements: SDLT disclosure regime and residential property: identification of scheme users (www.practicallaw.com/7-383-9988)).
The consultation document published as part of the 2009 Budget includes draft legislation effecting the proposed amendments
PLC Tax will publish an update considering the consultation document in more detail shortly.
HMRC has announced measures to simplify the VAT option to tax process where previous exempt supplies (www.practicallaw.com/1-107-6588) of the land over which the option is to be exercised have been made (see Practice note, VAT and property: the option to tax: Where previous exempt supplies have been made (www.practicallaw.com/4-107-4229)). The VAT option to tax is important to landowners because it allows them to recover their input tax (www.practicallaw.com/8-107-6716).
Currently, if prior exempt supplies have been made, unless one of four automatic permission conditions is met, the option to tax cannot take effect without express HMRC consent. The measures replace one of the conditions with effect from 1 May 2009 (with a condition that it is thought will apply to more taxpayers) and withdraws two related extra-statutory concessions. The informal concessions will continue to apply until 30 April 2010, after which, one will continue in part whilst that area of VAT law is reviewed and the remainder will be withdrawn.
HMRC has announced that it will publish shortly legislation and guidance on the new automatic permission condition, in an HMRC Information Sheet.
Simplifying the current process of exercising an option to tax is a welcome improvement, especially if the new automatic permission condition is as easily met as suggested. However, the two concessions allow taxpayers to recover more input tax than a strict interpretation of the law would permit: their withdrawal may therefore disadvantage taxpayers.
This decision has been taken as part of a package of measures designed to stimulate the recovery of the residential construction sector.
(See Budget Report, paragraph 5.80.)
The government will consult with a view to future legislation to ensure that construction workers and those they work for are taxed appropriately.
(See Budget Report, paragraph 5.114.)
As part of the 2009 Budget, the government has published a Technical note on Furnished Holiday Lettings (FHL) in the European Economic Area (EEA).
Landlords with income from furnished holiday accommodation in the UK are currently treated as if they are trading for certain tax purposes, as long as they satisfy certain tests set out under the FHL rules. Landlords with income from furnished holiday lettings outside the UK but elsewhere in the EEA do not qualify for this treatment.
It has been recognised that this divergence in treatment may not be compliant with European law. As a result, the government has decided to repeal the FHL rules with effect from 2010-11.
Until then HMRC will treat the FHL rules as applying to landlords with furnished holiday accommodation outside the UK but within the EEA. This Technical note addresses in more detail how HMRC will apply these rules.
The government has confirmed, as previously announced in the 2008 Pre-Budget report, that legislation will be introduced in the Finance Bill 2009 to amend the conditions to be met by a company or group in the UK Real Estate Investment Trusts (REIT) regime. The changes are to ensure that those conditions cannot be circumvented by the artificial creation of new group structures. Changes to the legislation will also exclude all owner-occupied property from a REIT's the tax exempt business. For more detail on the prior announcement, see Legal update, Pre-Budget Report 2008: key business tax announcements: Real Estate Investment Trusts regime: anti-avoidance (www.practicallaw.com/7-383-9988).
The REIT legislation will also be amended so that the "tied premises" legislation in ICTA 1988 is disapplied for companies or groups of companies seeking to join the REIT regime.
The changes, which affect companies or groups joining the REIT regime, will have effect on and after 22 April 2009.
The government has also announced that it will introduce legislation in the Finance Bill 2009 to make the existing legislation clearer and more consistent.
Under the new provisions, which will have effect on and after 22 April 2009 and affect both current and future REITs:
REITs will be permitted to raise funds by issuing convertible shares.
A new accounting based definition of "assets" for all REITs will be introduced. Currently, different definitions apply to group and single company REITs.
The method of apportionment of disposal proceeds when an asset, partly used for the property rental business and partly used for the non-rental business, is sold will be clarified.
Two REIT conditions do not have to be met on joining the regime but are currently linked (listing and non-close company status). The two conditions will be separated so that a company or group may join the REIT regime where either or both conditions are not satisfied.
This is a new development so details will not be available until the draft legislation is published.
For more information on REITs generally, see Practice note, UK REITs: questions and answers (www.practicallaw.com/7-201-8033).
The following increases in the VAT registration thresholds were announced in Budget 2009:
The taxable turnover registration threshold (which triggers the obligation to register for VAT) will increase from £67,000 to £68,000.
The taxable turnover deregistration threshold (which triggers a right to apply for deregistration) will increase from £65,000 to £66,000.
Otherwise the existing conditions for VAT registration and deregistration are unchanged (see Practice note, Value added tax: Taxable persons and VAT registration (www.practicallaw.com/2-107-3725)).
The increases have been implemented by a statutory instrument made on 22 April 2009 and will take effect for supplies made on and after 1 May 2009.
(See 2009 Budget - BN70 - VAT: Increased Turnover Thresholds for Registration and Deregistration, The Value Added Tax (Increase of Registration Limits) Order 2009 (SI 2009/1031) and Explanatory memorandum to The Value Added Tax (Increase of Registration Limits) Order 2009 (SI 2009/1031).)
Provisions in the Finance Bill 2009 will return the standard rate (www.practicallaw.com/7-107-7306) of VAT (from the current rate of 15%) to 17.5% with effect from 1 January 2010.
The cut in the standard rate of VAT was intended to last only until 31 December 2009. This measure, which implements the final month of the VAT cut, was previously announced in the 2008 Pre-Budget Report (see Legal update, Pre-Budget Report 2008: key business tax announcements: Temporary reduction to the standard rate of VAT (www.practicallaw.com/7-383-9988)) and is necessary because the secondary legislation implementing the rate cut has effect only for 12 of the 13 months for which the reduced rate applies.
As previously announced in the 2008 Pre-Budget Report and reiterated by the Financial Secretary to the Treasury in two Written Ministerial Statements of 25 November 2008 and 31 March 2009, the Finance Bill 2009 will also include anti-avoidance provisions to prevent the exploitation of the temporary reduction to the standard rate of VAT beyond 31 December 2009.
For details of the draft legislation as previously exposed on 31 March 2009, see Legal update, Standard rate VAT cut: anti-avoidance legislation published (www.practicallaw.com/4-385-5753).
The main provisions will apply to supplies made on or after 25 November 2008 and the supplementary charge for pre-payments exceeding £100,000 will have effect for supplies made on or after 31 March 2009.
The government has confirmed four previously announced changes to the VAT rules governing the supply of cross-border services and that they will be enacted as part of the Finance Bill 2009 and in secondary legislation. The changes are necessary to implement new EC legislation as part of the EC VAT package measures aimed at simplifying and modernising the VAT system for cross-border trading and to counter fraud.
For general background information, see Practice note, Cross-border transactions and VAT: supply of services (www.practicallaw.com/4-383-2361).
HMRC will include further information on the changes in a Revenue & Customs Brief which it will make available from 1 May 2009 and also conduct seminars on the changes.
Changes to the place of supply rules, which govern where output tax (www.practicallaw.com/3-107-6950) is charged and by who, for cross-border supplies of services will take effect on or after 1 January 2010.
The new rules distinguish between those supplies made to business customers and those made to non-business customers. For cross-border supplies of services to business customers, the new rules broadly ensure that VAT is charged in the country in which a service is consumed, that is, where the customer is established, rather than where the supplier is established. UK business customers will therefore be liable to account for UK VAT on most services provided by overseas suppliers under the reverse charge (www.practicallaw.com/2-107-7163) provisions. The current basic rule provides that the place of supply of services is where the supplier is established so this reverses the current position. The place of supply of cross-border services to non-business customers remains broadly unchanged, that is the place where the supplier is established.
For background information, see Legal update, Council adopts new VAT place of supply rules (www.practicallaw.com/7-380-8430) and Legal update, HMRC consults on changes to VAT place of supply of services rules (www.practicallaw.com/6-384-5027).
The changes will be phased in to have effect on 1 January 2010, 1 January 2011 and 1 January 2013.
From 1 January 2010, the time of supply (or tax point (www.practicallaw.com/7-107-7373)) rules for cross-border supplies of services will change so that the tax point will be when a service is performed. The new rules will distinguish between single and continuous supplies.
A supplier becomes liable to account for output tax by reference to the tax point. The timing of credit for input tax (www.practicallaw.com/8-107-6716) is also referable to the tax point (see Practice note, Value added tax: Time of supply (www.practicallaw.com/2-107-3725)).
For background information, see Legal update, VAT invoices and time of supply of cross-border sales of goods (www.practicallaw.com/4-384-9979).
From 1 January 2010, UK businesses that supply cross-border services where the place of supply is where the customer's country and the reverse charge is operated will be required to complete EC Sales Lists (ESLs) for each calendar quarter. ESLs must detail the VAT registration number of each business customer and the total net value of supplies to each customer.
For background information, see Legal update, HMRC publishes advice on EC sales lists (www.practicallaw.com/4-383-6665).
These changes will be introduced via secondary legislation. Further secondary legislation will be implemented later in 2009 to facilitate the exchange of information between EU member states as an anti-fraud measure.
From 1 January 2010, a new electronic VAT refund procedure replacing the current paper-based system will operate across the EU. Businesses established in the UK will submit their claims for overseas VAT directly to HMRC using an electronic standard form.
Changes to the place of supply rules are expected to reduce the volume of claims under the refund procedure.
There are a considerable number of administrative changes and legitimate concerns were raised in the HMRC consultation, including those regarding:
Whether taxpayers would be able to get accounting systems in place in time to meet the implementation date of 1 January 2010.
The cost of implementing the changes, including staff training and additional administration time.
Whether the additional administration burden would discourage cross-border trade in already tough economic times.
The lack of a formal dispute resolution procedure between Member States on the tax treatment of transactions and whether this might increase cross-border trading costs for businesses.
Legislation will be introduced in the Finance Bill 2009 that will:
Allow relief for ring-fence corporation tax and petroleum revenue tax purposes for the decommissioning costs of North sea assets that have been the subject of a change of use and are no longer used for ring fence or PRT purposes.
Prevent chargeable gains arising when UK/UKCS licences in respect of developed assets are swapped (to the extent the value of the respective licences are matched) to align with the relief allowed in respect of undeveloped assets (see section 194 of the Taxation of Chargeable Gains Act 1992).
Exempt any gain arising on the disposal of a ring fence asset that is reinvested in another ring fence asset (instead of the current hold over regime). It is not clear whether the exemption will result in a corresponding reduction in the base cost in the replacement asset but the Impact Assessment suggests that the effect of this proposal will be similar to a roll-over regime.
Allow companies decommissioning relief if they cease to be a licence holder because of expiry of the licence.
Remove the claw-back PRT relief, where the asset has been wholly put to use for a qualifying change of use purpose and remove income from change of use activities from the scope of PRT.
Make certain changes to simplify PRT rules and align the associated company definition in so far as it relates to a consortium company (see section 502(3A) of ICTA 1988) as it applies for corporation tax ring fence purposes with the general corporation tax definition.
Prevent companies from claiming tax relief for infra-structure decommissioning costs too far in advance of actual decommissioning being undertaken by allowing tax relief only for costs that relate to work actually carried out in the accounting period in question.
Introduce a new "field allowance" in respect of "challenging new developments" so that when the field is producing the allowance may be off-set against the corporation tax supplementary charge (currently 20% of adjusted ring fence profits (see Practice note, Oil taxation: Supplementary charge (www.practicallaw.com/2-200-9267)). The field allowance will apply to small fields (fields with oil reserves or gas equivalent of 2.75 million tons or less), ultra heavy oil fields (as defined) and ultra high temperature/pressure fields (as defined).
Most of the proposed changes were announced in the 2008 Pre-Budget Report (see Legal update, Pre-Budget Report 2008: key business tax announcements: North Sea tax regime: tax changes to maximise recovery of oil and gas (www.practicallaw.com/7-383-9988)).
(See 2009 Budget - BN09 - North Sea Fiscal Regime, 2009 Budget - BN10 - Incentivising production, Draft legislation: Capital Allowances for Oil Decommissioning Expenditure and 2009 Budget - BN 34 - accelerated decommissioning relief.)
Following the case of R (on the application of Wilkinson) v Inland Revenue Commissioners  UKHL 30  STC 270, HMRC has been reviewing its extra statutory concessions to make sure they are within the scope of its administrative discretion (see Legal update, Order enacting extra-statutory concessions made (www.practicallaw.com/1-385-5009)).
Following the review, HMRC determined that some of the concessions can remain as they are, some can be enacted to preserve their effect, and the remainder will need to be withdrawn. HMRC has identified ten concessions which need to be withdrawn, with effect from 1 April 2010:
Use of margin scheme for vehicle sales when incomplete records have been kept (3.08 VAT).
Insurance premium tax: special accounting scheme (4.1).
Insurance premium tax: home contents insurance (4.4).
Excise: hydrocarbon duty: duty paid deliveries for bonded users/distributors (6.01).
Income tax: agricultural workers board and lodgings (A60).
Corporation tax: close companies: loan creditors (C8).
Corporation tax: agricultural co-operative associations "second and third tier" associations (C13)
Capital gains tax/income tax: temporary loss of charitable status (D47).
Income tax/corporation tax: grants and subsidies: highlands and islands enterprise.
Income tax/corporation tax: equitable liability.