Following intense speculation in the media about the content of this year's Budget, many of the measures came as little of a surprise. Reduced rates of corporation tax, the reduction of the 50 pence individual income tax rate and the introduction of a general anti-avoidance provision had been widely expected. However, the scope of the measures affecting the wealthy involved in tax planning were perhaps even more significant than expected. Residential properties valued at more than £2 million held through corporates are subject to almost punitive rates (15 per cent on acquisition, and a possible annual charge) of SDLT, and may also be subject to capital gains tax in future. There may also be a knock on effect in inheritance tax planning for non-doms. Wealthy taxpayers and their advisers may also complain about the restriction of tax reliefs to £50,000 or 25 per cent of their income. The Government’s calculations suggest this outweighs the cost of the reduction in the top income rate.
Banks and energy companies continue to contribute to the Chancellor's coffers through an increase in bank levy and a restriction in decommissioning relief respectively. The surprise withdrawal of the age related personal allowances will also be controversial.
As is now the practice, many measures had been pre-announced, and many others have been highlighted in the Budget, but will not be introduced until 2013, and will be the subject of consultation between now and then.
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Corporates, banks, insurance, technology and pharma
Corporates - general
Controlled foreign companies reform
The controlled foreign company (CFC) rules are designed to prevent UK tax resident companies from artificially diverting UK income to subsidiaries located in jurisdictions where those profits would be subject to a lower level of tax. In general terms, a CFC is a non-UK company controlled by UK resident companies whose local tax liability is less than three quarters of the amount that would be chargeable on its profits if it were UK resident. The basic effect of the CFC rules is to charge UK resident companies with a 25 per cent or more interest in a CFC to corporation tax in respect of a proportion of the CFC’s profits.
Background to the reform
The legality of the CFC rules has been challenged before the European Courts and they have been cited as a key deterrent to multinational groups choosing to locate their headquarters in the UK. The Government has been consulting on the reform of the CFC rules for some time now and those participating in the consultations or following the reforms closely will have seen significant developments in the past year. A consultation document was published on 30 June 2011, which set out in detail the proposals for the new CFC regime to be introduced in the Finance Bill 2012. This was followed by draft legislation published on 6 December 2011. A policy update and further draft legislation was published on 31 January 2012 and was followed by a further policy update and further draft legislation on 29 February 2012.
Detail of the reforms
The revised CFC regime will represent a significant change in the approach to determining whether UK residents should be subject to tax on the profits of their non-UK subsidiaries. The new regime includes a number of “gateway” provisions, which are intended to identify profits that have been artificially diverted from the UK. If a non-UK subsidiary’s profits do not pass the gateway, they will fall outside the scope of the CFC rules. When these gateway provisions were originally published in the draft legislation released on 6 December 2011 they were met with a lot of criticism. The gateway had been intended as a simple, principles-based test that groups could easily self-assess. However, the tests were widely regarded as too difficult to apply and did not act as a gateway for entry into the CFC rules, but rather by defining the CFC’s chargeable profits. The revised legislation published on 29 February 2012 introduced changes to the gateway provisions that were designed to alleviate these concerns by including additional “entry tests”. However, these entry tests only apply in respect of one of the gateways and so do not address the concerns for the other gateways.
The new regime also contains a number of “safe harbours” that will apply to exclude specific profits from the CFC rules and so-called entity-level exemptions that will exclude all of a CFC’s profits from the CFC rules provided the relevant conditions are met.
Companies will be able to choose the order in which to apply the gateway test, the safe harbours or the entity-level exemptions to establish whether or not any profits of their overseas subsidiaries are subject to apportionment under the CFC rules.
The gateway provisions are structured as a number of distinct gateway tests. The separate gateway tests include gateways for general business profits, non-trading finance profits and finance profits. The general business profits gateway provisions are preceded by an entry test containing three conditions. If any of these conditions is met, the CFC’s profits will be excluded from the general business profits gateway test. However, the profits could fall within a different category and so it may still be necessary to look at another gateway.
Broadly speaking, the three entry conditions focus on:
- the extent to which the control or management of the CFC’s assets or risks is carried on in the UK
- the capability of the CFC to carry on its business without the UK activities referred to above
- whether there are arrangements in place that have a main purpose of achieving a reduction in UK tax.
Where the entry conditions cannot be relied on for exclusion from the CFC charge, it would be necessary to consider the more detailed provisions of the gateway. In practice, many groups will prefer to consider first the entity level exemptions and mechanical safe harbours before returning to the detailed provisions of the gateway, which require an attribution of the CFC’s profits in accordance with principles contained in the Organisation for Economic Co-Operation and Development’s report on the attribution of profits to permanent establishments.
Entity level exemptions
The entity level exemptions relate to the circumstances or characteristics of the CFC, rather than the nature of its profits. They comprise:
- a lower level of tax exemption (which exempts an entity from the CFC regime where the CFC’s local tax is at least three quarters of the UK tax that would be chargeable on its profits)
- a low profits exemption (for profits up to £500,000, with a separate limit on investment income of £50,000). This exemption does not apply to certain managed service companies
- a low profit margin exemption (where profits do not exceed 10 per cent of operating expenditure, excluding certain related party expenditure)
- an excluded territories exemption (where the CFC is resident in a territory with a headline tax rate of at least three quarters of the UK main corporation tax rate and a number of additional conditions are satisfied).
Whilst the list of relevant territories is quite long, the detailed conditions have been widely criticised and are likely to make it complicated to assess whether this exemption applies.
Certain profits of a CFC can also be excluded from the CFC charge where the conditions of a safe harbour are met. The safe harbours include:
- a trading income exclusion (where conditions relating to business premises, trading income, expenditure, exploitation of intellectual property and export of goods are met)
- a property business exclusion (whereby all profits from a property business will be excluded)
- an incidental finance income exclusion (whereby non-trading finance profits can be excluded provided they meet the conditions for being incidental to an exempt trade or property business)
- an arm’s length exclusion (where arrangements have been entered into that would have been entered into by independent companies).
Finance company rules
Where a CFC derives non-trading finance profits from qualifying loans, only one quarter of those profits will be subject to a CFC charge. With the proposed reduction in the main rate of corporation tax in the UK, this will result in an effective rate of tax of 5.75 per cent on such profits by 2014. The rules will also provide for full exemption in certain circumstances, including where a qualifying loan has been made without reliance on wider group funds (for example, as a consequence of a share for share exchange or rights issue).
Legislation will be introduced in Finance Bill 2012 to repeal the current legislation and replace it with the new CFC regime. The new CFC regime will become effective for accounting periods ended on or after 1 April 2013.
There are a number of outstanding issues to be resolved before the introduction of the new CFC rules. In particular, members of the banking and insurance sectors are awaiting details of a safe harbour that is proposed to apply where minimum regulatory capital requirements are met. Draft regulations dealing with this are expected shortly. The Government is also looking at the anti-avoidance provisions contained in the current draft legislation, following criticism of the number and scope of the provisions.
Changes to the taxation of discounted or impaired debt
On 27 February 2012 the Government announced that it will introduce specific legislation aimed at countering arrangements, which at least one bank had implemented, to prevent a tax charge on buying back its debt at a discount. In addition it will introduce a targeted anti-avoidance rule which is intended to prevent similar structures from having effect. In a highly unusual move, a further change will be made which has retrospective effect from 1 December 2011. Although the arrangements in question were disclosed to HMRC by the bank, any company wishing to buy in its debt could have implemented these arrangements.
The arrangements seek to circumvent the rules which require a debtor company to recognise a taxable profit if its debt is acquired by a related party from a third party, or if it becomes related to an existing creditor. In the first case, the tax charge only arises if the related party creditor acquires the debt for less than the carrying value of that debt in the debtor's accounts. In the second case, the tax charge only arises if the creditor would have impaired the debt if it had drawn up accounts immediately before becoming related to the creditor. This left it open for an unrelated party (eg, an orphan special purpose vehicle) to be established to acquire debt which was trading at a discount to its face value. As that unrelated party acquired the debt at a discount, it would not recognise any impairment of the debt on becoming connected to the debtor. Accordingly, the debtor would not have to recognise a taxable profit either on the acquisition of its debt at a discount, or on subsequently acquiring the special purpose vehicle.
This is not the first time that companies have exploited perceived loopholes in these rules, which were amended by Finance Act 2010 to block similar arrangements. In part, the Government's willingness to introduce retrospective legislation seems to have been prompted by concern that taxpayers had not heeded previous warnings that profits made on buying back debt should be taxed.
This specific scheme is to be countered by changing the way in which the tax charge which arises on an unrelated third party creditor becoming related to a debtor is calculated. Instead of being limited to the impairment which the creditor would recognise upon becoming related to the debtor, the taxable profit will be the higher of that amount and the difference between the carrying value of the debt in the accounts of the creditor and the debtor. This change will not have retrospective effect, only applying where the creditor becomes connected to the debtor on or after 27 February 2012.
This will be accompanied by a targeted anti-avoidance rule which will disregard any arrangements which have a main purpose of avoiding (or reducing) the tax charge which would arise in either of the two cases described above. This will apply to arrangements entered into on or after 27 February 2012. It will also apply to arrangements entered into before then, but only if the event which would have given rise to the profit (eg, the acquisition of debt for less than its face value) occurs on or after 27 February.
The proposal which will have retrospective effect imposes a tax charge at the time that the unrelated party acquires debt at a discount. At this point, the debtor will recognise a taxable profit equal to that discount, but only if both the acquisition of that debt and the parties becoming connected occur between 1 December 2011 and 27 February 2012 and do so in consequence of, or in connection with, any arrangement (whether or not legally binding). In view of its retrospective effect, some effort has been taken to reduce the risk of it applying to arrangements other than those which were specifically designed to take advantage of what seems to have been a loophole in the legislation; not withstanding this, there is concern that other arrangements may be caught.
Convertible debt - impact on group relief
Companies which issue convertible debt risk being excluded from their parent company's group relief group, thereby restricting their ability to claim, or surrender, tax losses. This is because the holder of the convertible is treated not as the holder of a normal commercial loan but as an equity holder in the issuer, for the purposes of determining whether the issuer is a 75 per cent (or more) subsidiary of its parent company.
Not all convertibles have this effect, but there are only limited types of convertible which do not prejudice the issuer's ability to claim group relief. These exceptions are strictly circumscribed, and restrict the scope for debt instruments to be used to allow unrelated parties access to group relief. HMRC has become aware of concerns about a particular type of convertible, which they acknowledge should not prejudice group relief. The convertibles in question are loan notes (typically issued by financial institutions) which give the holder the right to convert into the shares of a listed company which is not connected to the issuer; there could be interesting questions as to the definition of “connection” for these purposes. In the current low interest environment, such a conversion right makes the loan more attractive. There is no reason why such a commercial feature should prejudice the issuer's ability to claim group relief, and the Government has announced that the Finance Bill 2012 will include legislation to treat such convertibles as normal commercial loans rather than equity for group relief purposes.
The Government has announced it will consult on introducing a rule to allow companies which operate with a non-sterling functional currency to compute their capital gains and losses in that currency which, would bring calculations into line with the calculation of corporation tax on income for non-sterling functional currency companies.
Currently, companies which operate with a non-sterling functional currency compute their income profits and capital allowances claims using that functional currency. They then translate the resulting profit into sterling to calculate the corporation tax due. The current rule is that capital gains and losses must be calculated in sterling with the foreign currency acquisition cost and disposal value being translated into sterling at the respective dates of acquisition and disposal to calculate any gain or loss. The current rule results in foreign exchange movements being reflected in the gain or loss which may create unfairness and distortion.
If the change is introduced, legislation will be included in the Finance Bill 2013.
VAT groups - enactment of extra statutory concession
It has been confirmed in Budget 2012 that a long standing extra statutory concession, concerning UK VAT groups that include non-UK members, will be given effect by legislation contained in the Finance Bill 2012. Draft legislation was published on 6 December 2011 and is intended to preserve the effect of the concession.
The concession applies to reverse charge supplies made between members of a VAT group by limiting the value of an anti-avoidance VAT charge that would otherwise arise in a UK VAT group that receives services from a non-UK member of its VAT group. It allows the charge to be based on the external cost of the services (ignoring intra-group expenditure) rather than the full value of the supply, thereby preventing excessive charges arising.
Following the House of Lords decision in R (on the application of Wilkinson) v IRC, in which it was held that HMRC did not have the power to make extra statutory concessions to relieve taxpayers from the strict application of tax law, HMRC have been reviewing their concessions. In order to ensure that all concessions continued to apply, legislation was introduced to allow HMRC’s extra statutory concessions to become law by Treasury order.
The Bank Levy was introduced in Finance Act 2011 and imposes a charge based on the relevant assets and liabilities of UK banks or their groups or a bank operating in the UK through a branch or permanent establishment. The stated aim was that this should raise £2.5 billion per annum. In order to maintain this yield, the rate is to increase to 0.105 per cent from 1 January 2013. This follows an increase announced last autumn for the 2012 accounting period.
In part, the increased charge is likely to be offset by the reduction in the corporation tax rate. But, this is only in part; many UK banking operations will have losses so that the benefit of the reduction in the rate of corporation tax is minimal. Further, much of their income will be exempt from UK tax, either because it is in the form of tax-exempt dividends or because it represents profits from non-UK branches, which are potentially exempt from UK tax, as a result of changes made in Finance Act 2011. Some of the banks affected may therefore question whether this Bank Levy increase can be justified by the reduction in the rate of corporation tax.
Basel III capital instruments - result of consultation
In Budget 2011 the Government confirmed that it would begin a consultation on the tax issues associated with certain forms of capital instruments issued by banks. The particular concern is how capital instruments issued in response to the Basel III proposals should be taxed. The nature of such instruments is typically somewhere between debt and equity, and the tax treatment of some of these instruments is currently uncertain. For example, there may be a question over whether income payments under the instrument should be treated as tax deductible interest or non-deductible distributions.
In May 2011, HMRC issued a discussion document on these tax issues and held meetings with a working group of interested parties. Following that consultation, the Government has announced that these issues will be addressed in regulations. Finance Bill 2012 will contain the power to make such regulations, but as yet there is no public indication of what the regulations will contain.
The Chancellor has brought in two anti-avoidance rules in the life insurance industry, one affecting the life companies themselves, the other life insurance policies.
The rules for the taxation of UK life insurance companies are to change radically from 1 January 2013, with their tax treatment to be based on their financial statements, rather than their regulatory returns. Prompted by the EU “Solvency II” Directive, this change has been the subject of much discussion and consultation over the last few years. In particular, detailed draft legislation was published in December 2011. That legislation set out the transitional arrangements. Within those rules was an anti-avoidance rule, aiming to prevent life companies taking advantage of the change. A revised version of that rule has been published, and is to apply to arrangements entered into on or after 21 March 2012 - i.e. in advance of the main rules coming into effect. Because of this, HMRC have confirmed that an informal clearance process will apply in the interim.
The other anti-avoidance measures are to counter personal tax planning with life insurance policies. This has been a fertile area for the tax planning industry recently; the life insurance policy legislation is lightly drawn and prescriptive in its application and a high profile tax case (Mayes v HMRC) was recently upheld in the taxpayer’s advantage by the Court of Appeal. One area where there appeared to be potential for planning was where there were a number of connected policies, such that it was possible to avoid a chargeable event occurring by shifting from one policy to another. This has now been blocked. In working out what the amount of the gain was on the chargeable event, credit was also previously available for gains realised off-shore (so that no UK tax was payable). This has now been amended so that credit is only available if the previous gain was taxable in the UK.
Other life insurance changes include the introduction in 2013 of a £3,600 limit on the amount of premiums that can be paid into Qualifying Policies and consultation on the apportionment rules in the chargeable event regime, where a policyholder has been resident outside the UK.
The changes to the life policy rule will apply to policies made or arranged on or after 21 March 2012. It will also apply were policy holders to pay further premiums after that date.
The tax treatment of Lloyds Members is governed by a particular regime, which relies in part on the way in which they are regulated. One of the features of the regime to date has been the existence of claims equalisation reserves, payments into which were deductible and payments out are taxed. The requirement to keep these reserves will disappear, when Solvency II comes into force (expected, but this is not final, to be in January 2014). As a result, the Government is to introduce provisions to tax the accumulated reserves over a six year period, when Solvency II becomes live.
One of the features of that regime is that profits are recognised only after the underwriting year closes, which is after three years. By contrast, tax relief for a premium paid under a member-level stop-loss policy is currently available in the year in which that premium is incurred. On 6 December 2011, the Government issued draft legislation to defer that tax relief (and tax relief under certain quota share contracts) so that it will not be available until the profits of the underwriting year in question are recognised. The Government has confirmed that this legislation will be included in Finance Bill 2012.
Technology and pharma
One measure that has been anticipated for some time is the proposed introduction of the Patent Box regime that is intended to make the UK a more attractive holding location for intellectual property. From 1 April 2013 qualifying companies that elect for the regime can benefit from a tax deduction that will, in effect, mean that, once the regime has been fully brought in, profits derived from certain patent interests are subject to a 10 per cent rate of tax. This benefit is to be phased in over four years.
Budget 2012 provides the latest update on this proposal, and follows the publication on 6 December 2011 of draft legislation for Finance Bill 2012 and the completion of a further consultation process that ended in February 2012.
The draft legislation published in December 2011 provided detail on a number of important features:
- qualifying conditions - for patents to qualify they must be UK patents or patents registered at the European Patent Office (or certain other rights specified by Treasury Order), although the Government is considering this further. A company can qualify for the regime if it owns or holds an exclusive licence for such patents; cost-sharing participation may also qualify a company for the regime. A ‘development condition’ - the creation or significant contribution to the creation or development of a patented invention - must also be satisfied in certain circumstances, and companies within a group must also satisfy an ‘active ownership’ condition
- computational rules - there are detailed provisions to determine the profits that are to be subject to the regime. Broadly, qualifying profits will include profits arising from licensing, disposals of patent rights, sales of products that include patented inventions, income arising from infringements of qualifying IP and a notional arm’s length royalty income for using qualifying IP in a process or services. A qualifying company is required to determine the proportion of its gross income that is attributable to ‘relevant IP income’. This percentage is then applied to taxable trading profits and is subject to a number of further adjustments: the deduction of a ‘routine return’ equal to 10 per cent of certain costs; and the deduction of profits attributable to brand rights based on a notional brand royalty (subject to the making of a small claims election in which case a formula is applied in place of the need to calculate a notional brand royalty). The resulting amount qualifies for the Patent Box
- other provisions - a number of other relevant provisions are included in the draft legislation. For example it is possible, in certain circumstances, to apply a different method of calculation based on income streaming on a just and reasonable basis. There are also provisions designed to deal with Patent Box losses and targeted anti-avoidance rules are also included.
No significant changes to this proposal were announced at Budget 2012. The structure of the rules and the timing of its implementation remains the same. There is an indication that, as a result of the consultation process, clarifications will be made to:
- make it clear that worldwide income from sales of inventions covered by a qualifying patent are covered
- set out in more detail those expenses that are required to be subject to the 10 per cent ‘routine return’ deduction
- tighten up the category of companies that can make the small claims election to avoid having to calculate - and remove from the Patent Box – a notional royalty attributable to brands (and instead adopt a formulaic approach).
Research and development tax credits reform
In Budget 2010 the Government announced a consultation with business to review the support that research and development (R&D) tax credits provide for innovation and the proposals contained in Sir James Dyson’s report “Ingenious Britain, making the UK the leading high tech exporter in Europe”. This consultation ran from 29 November 2010 to 22 February 2011. Following from this, a number of announcements were made in Budget 2011 regarding reforms to the R&D tax credits schemes and a further consultation was launched, which closed on 2 September 2011. On 6 December 2011, the Government published their response to this further consultation and published draft Finance Bill legislation amending the R&D tax credits regime.
One of the most significant of the proposed amendments to the R&D tax credits regime was the introduction of an “above the line” credit for the distinct scheme applying for large companies. Currently, large companies incurring expenditure on R&D are entitled to an enhanced deduction at a rate of 130 per cent, but (unlike for smaller companies) any resulting losses cannot be surrendered to HMRC in return for payment. This has meant that the R&D relief has been reflected in the tax line of the company’s accounts, meaning that the benefit has been recorded within the finance or tax department rather than within the results for which the R&D team were responsible. This inability to record the benefit of the R&D relief within the R&D team has resulted in it often being ignored in investment calculations by the R&D team. In order to address this issue, large companies needed to have more certainty as to the timing and value of the relief. Where a claimant company has insufficient corporation tax liabilities to utilise the relief immediately, certainty as to the timing and value of the relief would only be possible if the relief could be surrendered for a payable sum (as is the case for smaller companies). This would enable the value of the relief to be booked to the R&D cost centre in the claimant company’s accounts (as an “above the line credit”), which should make the relief more effective as a driver for large companies to invest in R&D. The Government has confirmed in Budget 2012 that it intends to introduce this above the line credit in the Finance Bill 2013 and that it will consult on the detail.
The Finance Bill 2012 has also confirmed the increase in the rate of the enhanced deduction for smaller companies, which will rise from 200 per cent to 225 per cent from April 2012.
Corporation tax reliefs for the creative sector
The Government has stated that it will introduce corporation tax reliefs for the production of culturally British video games, television animation programmes and high end television productions. This is intended to be introduced in the Finance Bill 2013 and, subject to State aid approval, will take effect from 1 April 2013.
In the Chancellor’s statement he announced an intention to introduce a scheme that is similar to that currently applicable to film productions. Under current rules, film production companies can, in certain circumstances, be entitled to Film Tax Relief that can increase the amount of expenditure that is allowable as a deduction for tax purposes or, if the company makes a loss, can be surrendered for a payable tax credit. It seems likely that a relief along these lines will be extended to companies engaged in the production of certain prescribed video games, television animation programmes and high end television productions. However, the exact nature of this proposal will not be apparent until the consultation papers are released, which is expected to happen in the summer. This will be a boost for the video game industry in particular, which was expecting such a scheme two years ago, only for it to be scrapped, and has the aim of retaining programming expertise in the UK.
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Land, green economy, energy, oil and gas, transport
Stamp Duty Land Tax (SDLT)
Residential property where consideration over £2 million
Where a residential property is sold for more than £2 million, the rate of SDLT is to be 7 per cent; at present the top rate is 5 per cent where the consideration is more than £1 million. This will apply to all sales where the “effective date” (usually completion of the sale) is on or after 22 March 2012 but transitional provisions will ensure that the charge will not apply where an unconditional contract was entered into before that day (provided that it is not varied). It appears from the draft legislation that this 7 percent rate will apply to purchases of five or fewer residential properties where a total consideration exceeds £2 million.
“Enveloping” of high value properties
Where residential property is acquired by a company or other “non-natural person” for more than £2 million, the rate of SDLT will be 15 per cent. This will apply to all transfers where the effective date (usually completion of the transfer) is after 21 March 2012 but again there is relief for properties transferred after that date pursuant to unconditional contracts entered into earlier (provided they are not varied).
Non-natural persons will include collective investment schemes such as unit trusts and also partnerships unless all of the partners are individuals. There will be exclusions for property developers provided that they are acquiring the property for bona fide purposes with the sole intention of developing and selling the land. Also they must have been carrying on the property development business for at least two years.
A “residential property” is basically a dwelling and the charge will apply on a “per dwelling” basis so that, for example, the simultaneous purchase of a number of dwellings for a combined price of more than £2 million should not trigger the charge (unless one or more of the properties is worth more than £2 million).
Residential property will not include accommodation for students or the armed forces, nor will it apply to homes providing accommodation with personal care being provided due to old age or ill health.
This measure is clearly designed to deter individuals from acquiring their homes via non-UK companies which can be sold free of stamp duty, SDRT and SDLT. However, people who already own their houses via such vehicles cannot breathe a sigh of relief. As well as the potential charge to CGT (see below) it has been announced that an annual charge will be introduced in 2013 where such dwellings are owned by non-natural persons. The indications are that the annual charge will start at £15,000 for properties with a value between £2 million and £5 million, increasing gradually to £140,000 for properties worth more than £20 million.
A technical change has been made to the rules relating to the SDLT “sub-sale” relief which makes it clear that one particular SDLT saving scheme does not work. In simple terms, the scheme operated so that when a person bought a property he would immediately grant an option to a third party (not a relative but someone he trusted not to exercise the option) to acquire the property at some time in the future. It was then argued that this potential sale of the property pursuant to the option disapplied the SDLT charge on the purchase of the property.
The relevant legislation is to be changed with effect for options granted or assigned on or after 21 March 2012 to make it clear that the grant or assignment of an option will not trigger the operation of the sub-sale relief provision so as to disapply the SDLT charge on the related acquisition. HMRC have commented, however, that they do not believe that the scheme works (even without this change to the law) and say that “users of this scheme will be challenged”.
The Government has announced that it is to look at ways of simplifying the SDLT provisions that relate to certain aspects of leases. For example, SDLT is usually payable by reference to the rent that is to be paid in the first five years of the life of the lease, with increases in rent after that period only triggering a charge to SDLT if they are “abnormal”. This provision is to be considered for simplification as are the rules relating to leases which continue beyond their fixed term. The relevant legislation is expected to be introduced in 2013.
CGT on residential property owned by non-UK residents
It has been announced that the Government will consult on the introduction of capital gains tax on gains arising from the disposal of UK residential property by non-UK resident companies and other non-natural persons such as offshore unit trusts. The legislation is expected to come into effect in April 2013.
Although this consultation is expressed to be “in conjunction with” the consultation on the new annual charge for residential property costing more than £2 million (where it is held by non-UK, non-natural persons) there is no indication at present that the CGT charge will be restricted to such high value properties. If it is intended to cover all residential property, this would have far-reaching consequences for UK property funds or holding vehicles which are non-UK resident. Apart from vehicles which own portfolios of residential property as investments, there are many commercial buildings which include residential parts, for example apartments above shops or offices, and many such buildings are owned by overseas companies or funds.
It is hoped that the intention of HMRC is only to apply this charge to either high value properties or to dwellings where there is a connection between the ultimate owner and the intended occupier of the property.
Site restoration payments
Forthcoming anti-avoidance legislation will prevent costs relating to site restoration being deducted from profits where the main purpose or one of the main purposes of the arrangements entered into is to obtain a site restoration deduction. If the arrangement does not have a main purpose of obtaining a reduction, deductions are still available for the period of account in which payments were made, unless they are to a connected party, where relief is not available until the work is completed. The changes impact upon all payments made on or after 21 March 2012.
Real estate investment trusts (REITs)
The Government has announced that it will consult on the role that REITs can play in supporting the social housing sector. It will also consult on whether to change the treatment of income received by a REIT when it invests into another REIT. It is expected that following the consultation any legislation that is needed will be included in the Finance Bill 2013. The potential for introducing social housing REITs is welcome news, although there is disappointment that there will be no consultation on mortgage REITs. Investment in REITs by another REIT is currently not treated as part of a REIT’s tax-exempt business, even though in reality that is what it is. Property authorised investment funds, the unlisted open-ended equivalent of a REIT, are already able to invest in this way and a change to these rules for REITs could help to improve liquidity in the property sector.
This announcement follows from a consultation launched in 2011 which led to the changes to the REIT legislation to be contained in the Finance Bill 2012. The aim of these changes is to broaden the appeal of, and reduce barriers of entry into, the REIT regime. One of the key changes is to abolish the conversion charge for companies joining the REIT regime. In addition, the listing requirement is to be relaxed so that trading of the REIT’s shares on AIM and PLUS markets, or their foreign equivalent, will now be allowed. A diverse ownership rule for institutional investors will be introduced as well as a grace period for meeting the non-close company requirement. Other changes, which are likely to be in the Finance Bill 2012, include redefining finance costs for the interest cover test.
Budget 2011 announced changes to the rules in relation to claiming capital allowances on fixtures. Since Budget 2011, the Government has consulted on the proposals and, following the consultation, changes have been made to the proposals to try to ensure a fair application of the new rules. Legislation in the Finance Bill 2012 will amend the capital allowances fixtures rules with effect for capital expenditure incurred on or after 1 April 2012 (for companies) or 6 April 2012 (for individuals). The main effect of these changes is to impose conditions on the availability of capital allowances to a purchaser of an interest in land containing a fixture.
The Government had been concerned that buyers and sellers of fixtures would apportion different amounts to those fixtures resulting in allowances being available to both the buyer and the seller on the same expenditure. In addition, it was concerned that claims for allowances could be made at a time when HMRC did not have sufficient information available to determine whether the previous owner had already claimed allowances on the same fixture and written-off that cost. Responses to the consultation were published on 6 December 2011 along with a first draft of the Finance Bill 2012 which contains the new rules.
The new rules will only apply if there has been a past owner who was entitled to claim capital allowances, even if it was not that person who sold the building to the current owner. Where there has been more than one such owner who is entitled to claim the allowances, references to the past owner are to the most recent one.
Where the rules apply, proposed new legislation provides that if a buyer wishes to claim capital allowances on fixtures in a property:
- the past owner must have allocated its expenditure on the fixtures to a capital allowance pool prior to its sale of the property or must have claimed a first year allowance in respect of its expenditure (the Pooling Requirement)
- an election to allocate part of the purchase price of the property to the fixtures (“a section 198 election”) must be entered into within two years of the buyer’s acquisition of the interest in the property or, on application of either the buyer or the seller within two years of the buyer’s acquisition of the interest in the property, the First-Tier Tax Tribunal must determine an amount of the purchase price to be apportioned to the fixtures (the Fixed Value Requirement).
The revised legislation will contain a transitional period so that where expenditure is incurred on or after 1 April 2012 but before 1 April 2014, the Pooling Requirement does not need to be met. However, it will be necessary for the Fixed Value Requirement to be met in order for buyers to be able to claim capital allowances going forward.
The practical effect of these changes is to make both the pooling of capital expenditure and a section 198 election mandatory if a buyer wishes to claim capital allowances on fixtures. Concerns have been raised in circumstances where a seller who was entitled to claim capital allowances but chose not to and did not therefore pool its capital expenditure will mean that a buyer would not be able to claim capital allowances unless it negotiates with the seller to require it to pool its expenditure prior to the sale of the property. The new legislation is likely to result in additional due diligence being undertaken by people buying from persons that are unable to claim capital allowances, such as a pension fund or charity, in order to ensure that the requirements have been met and the capital allowances will be available.
As announced in the Autumn Statement 2011, companies investing in plant or machinery for use in designated assisted areas in Enterprise Zones will qualify for 100 per cent first year allowances. A full list of current zones and maps will be published on the Treasury website. New areas announced in the Budget include the London Royal Docks Enterprise Zone, three Scottish Enterprise Zones in Irvine, Nigg and Dundee and Deeside in North Wales. These enhanced allowances will be introduced through the Finance Bill 2012 and will have effect for expenditure incurred in the five-year period between 1 April 2012 and 31 March 2017 inclusive. In order to comply with the State aid rules, a number of additional conditions will also apply to this new first year allowance. In particular, the expenditure must be on plant or machinery which is unused and is not second-hand and must not exceed a total of €125 million for each investment project.
Extension of business premises renovation allowances
As announced in the Autumn Statement 2011, the Business Premises Renovation Allowances scheme which was due to end on 10 April 2012 will be extended for a further 5 years to April 2017. Secondary legislation to extend this scheme will be introduced by April 2012 along with changes which are needed to ensure continuing compliance with the State aid rules. The scheme enables businesses that own or lease property that has been vacant for at least a year in certain disadvantaged areas of the UK to claim 100 per cent tax relief on capital spending on renovating or converting that property to bring it back into business use. As such, the scheme is intended to encourage investment in the UK’s most deprived areas.
The scheme will be extended until 31 March 2017 for businesses within the charge to corporation tax and 5 April 2017 for businesses within the charge to income tax. The further changes necessary to ensure that the scheme remains State aid compliant will take effect for qualifying expenditure incurred on or after 11 April 2012 and will restrict the amount of expenditure that can qualify for relief under the scheme to €20 million per project.
Climate change levy and carbon floor support
In 2011, the Government introduced a carbon price floor mechanism to support the carbon price and to some extent reduce the differential in price between energy generated in a low carbon fashion as against high carbon generation. The overall aim is to help reduce the UK’s carbon production by 2020. These measures were to come into force on 1 April 2013. In December 2011, further changes were announced to the regime and these have been consulted on. In Budget 2012, the final revised version of these changes was announced. New carbon price support (CPS) rates for 2013/14 and 2014/15 as well as indicative CPS rates for 2015/16 and 2016/17 were announced. These are set out below. The other measures that were introduced include:
- a change to make it clear that supplies of fossil fuels to Combined Heat and Power (CHP) stations that are intended to be used to generate “good quality” non-electricity output (which would usually be heat) will be exempt from the CPS rates of climate change levy or fuel duty. This measure is subject to State aid approval and so will not be introduced formally until that has been achieved
- supplies of fossil fuels intended for generating non-electricity outputs in a CHP that are not “good quality” will continue to be liable to the ordinary CPS rates
- a new provision will be introduced to make it clear that supplies of fossil fuels to generation stations fitted with carbon capture and storage technology will be entitled to proportionately reduced rates of CPS to reflect the percentage of carbon dioxide captured
- there will be an exemption from the CPS regime for generators who do not have a combined generation capacity of more than 2 MW. This is intended to reduce the burden on smaller generators and reduce the administrative burden on the CPS system generally
- amendments will be made to the CPS regime to remove coal with a low calorific value (under 15 gigajoules per tonne) from the regime. The intention of this is to encourage more low quality coal to be used in generation rather than be dumped in landfill
- an amendment will be made to make it clear that, for CPS purposes, coal will be taxed on its heat or calorific value rather than on its weight
These changes help to clear up some of the anomalies that remained around the carbon price floor and CHP generation; CHP generation is generally seen as a good thing, but this was not always reflected in the manner in which the climate change levy and CPS system was applied to it, in particular in so far as its output was non-electricity. The stated CPS rates for 2013/14 and 2014/15 are as set out in the table below
|Supplies of commodity||Indicative CPS rate||Unit|
|of CCL 2013-14||of CCL 2014-15|
|Gas||£0.00091||£0.00175||per kilowatt hour (kWh)|
|Liquefied petroleum gas||£0.01460||£0.02822||per kilogram (kg)|
|Coal||£0.44264||£0.85489||per kilogram (kg)|
| ||of fuel duty 2013-14||of fuel duty 2014-15|| |
|Fuel oil; other heavy oil; rebated light oil||£0.01568||£0.03011||per litre|
|Gas oil; rebated bioblend||£0.01365||£0.02642||per litre|
Environmentally friendly equipment
The Chancellor has announced a number of measures which are to take effect from the financial year 2013. These generally relate to the availability of beneficial capital allowances and other tax credits for environmentally friendly equipment. In particular, enhanced capital allowances will continue to be available on gas refuelling equipment used in gas, biogas and hydrogen refuelling stations and low emission cars until March 2015 (availability of these allowances was scheduled to expire in 2013). It should be noted that this extension will not extend to low emission cars that are leased. At the same time, it is proposed to introduce legislation in the Finance Bill 2013 to reduce the emissions threshold for a main rate car to 130 grams per kilometre. This is part of the Government’s ongoing commitment to meet EU emissions targets by 2020. Finally, the availability of first year tax credits for companies surrendering losses attributable to expenditure on designated energy saving or environmentally beneficial plant or machinery will be extended for a further five years from 1 April 2013.
Energy saving technologies
The Chancellor has announced the intention, subject to State aid approval, to include a new category of environmentally friendly technology that qualify for enhanced capital allowances. The new category is to be heat-pump driven air curtains. These are the hot air blowers that sit above the doorways of shops and which help prevent hot air from escaping from open shop doors. Various other minor amendments will be made to the technologies qualifying for the enhanced capital allowance.
Aggregates levy rate
The rate of aggregates levy will increase from £2.00 to £2.10 per tonne from 1 April 2013. This matches the previously announced change to defer this increase from 2012 to 2013.
Various minor amendments are to be made to the landfill tax regime to adjust the rates chargeable and to correct some anomalies that have become apparent. The standard rate of landfill tax will increase by £8 per tonne to £72 per tonne for disposals of landfill made or treated as made on or after 1 April 2013. The lower rate will remain £2.50 per tonne for 2013-14.
Because of amendments to the landfill tax regime made in 1999, arguably, Scottish landfill sites fell outside the scope of the regime owing to a glitch in the implementation of the changes in Scotland. Notwithstanding this oversight it appears that the regime has continued to be operated in relation to Scottish landfill sites and the Government is now acting to change the law retrospectively to make it clear that this was always the intention, notwithstanding the technical objection that the commencement of the new regime had not been properly implemented in Scotland. This amendment therefore has no real effect on the practical administration of the landfill tax.
The maximum credit that landfill site operators will be able to claim against their annual landfill tax liability as a result of the Landfill Communities Fund Scheme is to be reduced from 6.2 per cent to 5.6 per cent from 1 April 2012. This scheme allows landfill operators to contribute amounts to enrolled environmental bodies to carry out projects that meet certain environmental objectives set out in the landfill tax regulations.
Oil and gas taxation - North Sea
West of Shetland deep fields
A £3 billion field allowance will be introduced for deep (more than 1,000 metres) fields with sizeable reserves (between 25 million tonnes and 55 million tonnes). The relief is aimed at fields west of Shetland, and will taper between 40 million tonnes and 55 million tonnes. Fields with development authorisation given on or after 21 March 2012 will qualify.
Small field allowance
Small field allowance will be increased to £150 million, and the size of field qualifying for the maximum allowance increased to 6.25 million tonnes, with the relief tapering between 6.25 million tonnes and 7 million tonnes. Fields with development authorisation given on or after 21 March 2012 will qualify.
Brown fields and HPHT fields
Finance Bill 2012 will contain the power to legislate (by statutory instrument) for investment in brown fields, and the Government will consult with industry on this. High Pressure, High Temperature field allowance will remain under review.
Decommissioning relief - supplemental charge
As already announced, decommissioning expenditure will only qualify for relief at a rate of 20 per cent against supplemental charge. The extended loss carry back rules will, however, be adjusted to enable losses from mineral extraction allowances for decommissioning expenses to be carried back.
Decommissioning relief - contractual assurance
An area of concern for the industry is how they can obtain certainty that the decommissioning regime cannot be amended. The Government proposes to introduce legislation in 2013 giving it the power to sign contracts with UK Continental Shelf operators to assure the relief they will receive when decommissioning assets. Consultation on this will be held to determine the form and details of such contracts. This will be a welcome development in a long-running saga.
Other offshore activities
The Government is to engage with industry on the tax regime for offshore non oil and gas activity outside UK territorial waters but within the UK Exclusive Economic Zone (200 nautical miles from the coast). The expressed aim is to ensure a level playing field for the taxpayer involved, but the scope of what is intended is not clear.
VAT treatment of small cable-based transport
It has been announced that, from 2013, the carriage of passengers on small cable-based transport will be reduced from a standard rate of 20 per cent to 5 per cent. This measure will only apply where the vehicle in question carries fewer than 10 people. VAT on transport in cable-based vehicles carrying more than 10 people is zero-rated.
The concession is designed specifically to encourage use of the planned new cable car which is to cross the River Thames between the Greenwich Peninsula and the Royal Victoria Docks and is scheduled to be completed by summer 2012 in time for the London Olympic Games connecting the O2 and EXCEL facilities.
Air passenger duty
Legislation will be introduced in the Finance Bill 2013 to increase the rates of air passenger duty (APD) in line with the retail prices index from 1 April 2013. This increase will follow an increase in rates of APD of around 8 per cent from 1 April 2012 and will coincide with the previously announced extension of APD to flights on private jets and smaller aircraft from April 2013. This is despite lobbying from the UK’s travel industry for APD to be scrapped altogether or at least maintained at its current level. Airlines had argued that a higher rate of APD would have a detrimental effect on Britain’s tourism industry at a time where the environmental impact of the aviation industry is also being targeted by the expansion of the EU Emissions Trading Scheme to include aviation.
VAT: freight transport services
It has been announced that in autumn 2012 the Government will introduce secondary legislation, the effect of which will be that a supply of freight transport and related services taking place wholly outside the EU will not be liable to UK VAT, when performed for UK businesses and charities.
From 1 January 2010, the place of supply for business to business supplies of freight transport (and associated services) has been determined by the country where the business customer belongs, regardless of the place of physical performance. For a UK business customer, the place of supply is the UK even if the supply takes place outside the EU. As a result, the UK customer is either subject to a reverse charge on the supply (if the supplier is outside the UK) or the supplier must account for standard rate VAT on the supply; only intra-EU supplies of freight transport are zero-rated, whereas supplies outside the EU are standard rated. Accordingly, this has resulted in either an administrative burden (with no revenue impact for the UK) or a VAT cost for UK business customers.
The announcement in the Budget 2012 will be welcomed by UK businesses and charities. The legislation will replace the temporary HMRC concession currently in place (pursuant to Revenue & Customs Brief 13/10) which was introduced on 15 March 2010 and which provides that business to business supplies of freight transport (or associated services) which are physically performed outside the EU are outside the scope of UK VAT.
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Employees and individuals
Review of tax-advantaged employee share schemes
On 6 March 2012, the Office of Tax Simplification (OTS) (a department of HM Treasury established to advise the Government on ways in which the UK tax system can be simplified) published its report on the four types of tax-advantaged employee share scheme. The report contained more than 25 recommendations of changes to the law and administrative procedures relating to these schemes.
The OTS expected the Chancellor to respond to the report in the Budget. In fact, the only reference to the report is the following paragraph in the summary of proposed future tax changes:
“The Government will consider the recommendations of the Office of Tax Simplification’s review of tax advantaged share schemes and will consult shortly on how to take a number of these proposals forward. Legislation will be in future Finance Bills.”
Clearly, there is nothing useful to be said, at least until the consultation is published, and even then it will be some time before the shape of any future legislation emerges.
Enterprise Management Incentives (EMIs)
Small trading companies can grant tax-favoured share options to their employees in the form of EMIs. Currently, each employee can hold options over shares worth up to £120,000 (value calculated at the time of grant), though options granted under a tax-advantaged Company Share Option Plan held by that employee have to be taken into account. Furthermore, if an employee’s EMI options reach this limit, he cannot be granted another EMI option for three years (even if one of his original options lapses or is exercised). In order “to help small and medium enterprises recruit and retain high calibre employees”, this limit is to be increased to £250,000 as soon as a statutory instrument can be made (which one would normally expect to be well before the Finance Bill receives Royal Assent but in this case may be delayed by the need to get confirmation that EU rules on State aid will not be breached).
When the individual limit was £100,000, the Government commissioned Ipsos MORI to conduct a survey on the use of EMIs and its perceived impact. Their findings were published in 2008 (HMRC Research Report 41). If we assume that the use of EMIs has remained relatively stable, some employers and their employees will be very pleased to see this increase. Of the companies surveyed, 39 per cent were at least “quite close” to any single employee hitting the £100,000 limit, with 13 per cent already having done so. The Government’s current changes anticipate the amount of options will increase by around 15 per cent.
To encourage further use of EMIs the Government will:
- by the end of 2012, develop the guidance and resources available to start-up companies wishing to grant EMIs
- in Finance Bill 2013, provide that gains made on shares acquired following exercise of an EMI option on or after 6 April 2012 will be eligible for entrepreneurs’ relief
- following consultation, allow academics who are employed by a “qualifying” company (but presumably do not meet the 25 hour per week working time requirement) to be granted EMI options.
The application of entrepreneurs’ relief (ER) to shares acquired on exercised EMI options is by far the most significant proposal. Where the relief is available, it reduces the rate of CGT from 28 per cent (for higher-rate taxpayers) to 10 per cent (within a lifetime limit of £10 million). Most employees who acquire shares under EMI options will fail to qualify for ER because they will hold less than 5 per cent of the company’s shares. Though the Budget announcement does not spell this out, it is to be hoped that the Government intends to waive the 5 per cent requirement for EMI participants but it is unclear whether the 12 month holding requirement will be waived, measured from the date of option grant or left unchanged.
Personal Service Companies and IR35
As a means of reducing the overall tax rate on the provision of personal services, it has long been the practice for workers to supply their services through a company set up and managed by the worker, a “personal service company”. In the 1999 Budget Press Release IR35, the Government announced the introduction of provisions which would bring such workers into the PAYE and NIC nets when services were provided in this way if, had the worker provided them directly to the end-user, there would have been a contract of employment.
After the 2011 Budget, the Government established the IR35 Advisory Forum “to advise on improvements in the administration of IR35”, having rejected the Office of Tax Simplification’s recommendation to repeal the legislation. HMRC confirmed to the first meeting on 6 May 2011 that “the reference to ‘administration’ was intended to be construed in the widest sense of the word”. The minutes of the Forum meetings prepared readers for the Budget announcement that the Government will make the legislation easier to understand, simplify its administration and strengthen HMRC’s compliance teams. The announcement of a consultation to tighten up avoidance by requiring “office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source” was not so presaged. Presumably, the Government intends to move away from the test of whether a worker would have been an employee of the end-user in light of how difficult it is to predict whether a court will or will not find that a worker was “an employee”.
Integration of Income Tax and NICs
In March 2011 the Office of Tax Simplification (OTS) recommended the amalgamation of income tax and NICs as part of its suggestions to simplify tax for small businesses. Full integration was rejected by the Government but it has continued to consult on integrating the operation of income tax and NICs. After publishing a Next Steps report in November 2011, the Government established two working groups to take this issue forward. It has now announced a further consultation “on a broad range of options for employee, employer and self-employed NICs”. Whilst tinkering with the rules so that income tax and NICs apply to the same benefits and their operation is brought closer into line will save some costs for employers, following the OTS's original recommendation is likely to be a political step too far.
Company car fuel benefit charge
From 6 April 2012, employees with company cars who receive free fuel from their employers, and who do not reimburse their employers for the private use element of that fuel, will see an increase in the fuel benefit charge. The multiplier that is used to calculate the cash equivalent of the benefit of free fuel for company cars will be increased from £18,800 to £20,200 for the tax year 2012-13. This does not apply to zero emission cars.
In the autumn, the Government will produce legislation to increase the multiplier by two per cent above the rate of inflation for the tax year 2013-14.
The van fuel benefit charge multiplier will be frozen at £550, and will increase by inflation in 2013-14.
Company car tax rates
Company car tax is calculated by applying “the appropriate percentage” to the list price of the car. The appropriate percentage is related to the carbon dioxide emissions of the car. From 6 April 2014, company car tax will be increased. The appropriate percentage of the company car's list price subject to tax will be increased by one percent, to a maximum of 35 per cent. This excludes zero emission vehicles and vehicles emitting 75 grams or less of carbon dioxide per kilometre.
The Government also intends to introduce legislation in a later Finance Bill to increase the company car tax by two percentage points, to a maximum of 37 per cent, in both 2015-16 and 2016-17. From April 2016, it will remove the three percentage point diesel supplement so that diesel cars will be subject to the same level of tax as petrol cars.
From April 2015, as legislated for in the Finance Act 2010, the five-year exemption for zero carbon cars and the lower rate for ultra low emission cars will come to an end. The Government will introduce legislation to provide that the rates for zero emission cars and low carbon cars emitting less than 95g of carbon dioxide per kilometre will be 13 per cent in 2015-16, and will increase by two percentage points in 2016-17.
VAT: revalorisation of fuel scale charges
Businesses that pay for fuel which is then used for private motoring may choose to reclaim all of the VAT and pay the appropriate fuel scale charge. The Government has announced that it will revalorise the VAT fuel scale charges with effect from 1 May 2012. A statutory instrument is being laid before Parliament. Businesses must use the new VAT fuel scale charges from the start of their next prescribed accounting period beginning on or after 1 May 2012.
The Government also announced that it will consult on legislation to be introduced in Finance Bill 2013, to give effect to extra statutory concessions relating to fuel scale charges (such as that which provides that the scale charge will not apply if input VAT is not claimed on purchases of road fuel) and a proposal that the revalorised fuel scale charges be set out in an annual public notice with the force of law instead of an annual statutory instrument.
Residence and domicile
Statutory residence test
Davies/Gaines-Cooper and other recent cases have demonstrated that there is a wide degree of uncertainty about the current UK rules on determining if, and when, a person is UK tax resident. Since this is a fundamental aspect of establishing liability to UK tax, certainty is required. Following consultation, legislation will be introduced in 2013, taking effect from 6 April 2013. Further details will be published following the Budget 2012. In general, the proposals consulted on previously were favourably received, with a combination of a day test and other attributes connecting the person to the UK being considered so that the more connections the person has to the UK, the fewer days can be spent there before the person becomes resident.
Ordinary residence as a concept has reduced in importance over the years, and is even more difficult to define than residence. Following consultation, the decision has been made to abolish the concept from April 2013. However, a relief relating to days spent working overseas will be retained and become statutory. Further consultation will occur following Budget 2012.
Inheritance tax: spouses and civil partners domiciled outside the UK
The Government intends to consult on legislation to be included in Finance Bill 2013, to increase the amount of inheritance tax-exempt transfers that a UK domiciled individual can make to their non-UK domiciled spouse or civil partner. At present, transfers between UK domiciled spouses or civil partners are exempt, but the exempt amount which can be transferred to a non-UK domiciled spouse or civil partner is restricted to £55,000. The Government also intends to consult on proposals to enable non-UK domiciled individuals who have a UK domiciled spouse or civil partner, to elect to be treated as domiciled in the UK for inheritance tax purposes.
Reform of the taxation of non-domiciled individuals
Further to the Government's stated intention in Budget 2011 to reform the taxation of non-domiciled individuals, and the consultation document that it issued in June 2011, the Government has now announced detailed proposals which will take effect from 6 April 2012. There are three main changes:
- in order to encourage investment in the UK, there will be no charge to UK tax on overseas income or capital gains remitted by a non-domiciled individual to the UK for the purpose of making a commercial business investment in a qualifying business (an unlisted company or a company listed on an exchange regulated market). This is subject to specific anti-avoidance provisions
- there will be two ‘bands’ of annual charge to retain the remittance basis in a tax year: £30,000 for those who have been resident in the UK for at least 7 of the last 9 years and £50,000 for those non-domiciles who have been resident in at least 12 of the previous 14 tax years
- changes will be made to reduce the complexity of certain aspects of the existing remittance basis rules; the nominated income rules and the rules governing the taxation of exempt property (such as works of art) remitted to and sold in the UK will be amended.
These changes were expected; the Government's intention to change the rules governing the taxation of non-domiciled individuals in order to remove barriers to investment, and to ensure a greater tax contribution from those non-domiciles who have been resident in the UK for many years, has been widely known for some time. Concerns have been raised that the increased remittance charge will make the UK less attractive, but the changes to rules to encourage inward investment have been widely welcomed.
Income tax rules on interest
The Government announced that it will consult on whether to make changes to the income tax rules on the taxation of interest and interest-like returns, and the rules on the deduction of tax at source for such amounts. The stated intention is to legislate for any changes arising from the consultation process in Finance Bill 2013.
The Budget press releases offer no further guidance on exactly what aspects of the current rules are to be consulted on. The current income tax rules are a mix of rules that have been introduced at different times for different purposes (such as the accrued income scheme and the rules on discounted securities) and it may be that this would be an opportunity to rationalise those rules into one coherent scheme. Similarly, it is likely that consideration will be given to the withholding tax rules dealing with payments of interest (there are numerous other provisions that create withholding obligations for certain other payments). For example, to be subject to a withholding obligation, the payment must legally constitute a payment of interest and the interest must be “yearly interest”. Alternative debt arrangements - for example debt issued at a discount - can provide an interest-like return without an obligation on the payer to make a withholding on account of income tax. It is possible that the consultation process may explore this type of arrangement as well. However, it will be necessary to review the consultation papers when released before we can understand the exact intention behind this statement.
Pensions and age allowances
- The State Pension Age will be reviewed automatically in future to take account of longevity
- The existing age-related allowances will be frozen from 6 April 2013 at 2012/2013 levels until they align with personal allowances. From April 2013, age-related allowances will no longer be available except to those born on or before 5 April 1948. The higher age-related allowance will only be available to those born before 6 April 1938. A new single personal allowance irrespective of age will be introduced, and the Chancellor has stated that no pensioner will lose “in cash terms”
Age Related Allowances
|Year||Allowance (up to age 65)||Allowance (age 65 to 75)||Allowance (age 75 and above)|
- Instead of the Basic State Pension and State Second Pension, there will be a new single tier pension of about £140 per week, based on contributions, for future pensioners. More detail on this proposal will be published at a later date
- The Government is working with a number of the UK’s largest private pension funds with a view to attracting their investment in infrastructure projects. No additional detail has yet been released.
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General Anti-Abuse Rule
The Government has announced that it has accepted the recommendation of the Aaronson Report that a General Anti-Abuse Rule (GAAR) should be introduced.
The report prepared by a group chaired by Graham Aaronson QC was commissioned in late 2010 to consider whether it would be beneficial for the UK tax system to introduce a general anti-avoidance rule.
The key conclusions of the report delivered in November 2011 were that introducing a broad spectrum general anti-avoidance rule would not be beneficial because it would undermine the ability of business and individuals to carry out sensible and responsible tax planning in response to the complexities of the UK tax system.
However a rule targeted at artificial and abusive arrangements and which protected the centre ground of responsible tax planning would have a number of benefits. It would:
- deter wholly artificial schemes which could never have been intended by Parliament
- level the playing field between businesses carrying out responsible tax planning and those seeking to exploit abusive schemes
- relieve judges from the temptation to stretch the bounds of purposive interpretation to breaking point where that was their only tool to counter abusive schemes
- inhibit the growth in an overly complex tax code.
The report set out a suggested rule with a number of important safeguards to protect taxpayers from arbitrary application of the new rule.
The main operative provision is to give HMRC wide-ranging powers to counteract the effects of abnormal arrangements contrived to achieve an abusive tax result. Whilst the language of this part of the proposal is broad, there are a number of key safeguards. The new rule will not apply to reasonable tax planning, that is to say, arrangements which can reasonably be regarded as a reasonable exercise of choices offered by the legislation. A further safeguard is that following notification of a proposed counteraction, the affected taxpayer can require the decision be referred to an independent Advisory Panel who will advise whether they consider it reasonable for counteraction to apply. Whilst their view will not be binding, it will be admissible in evidence and it is expected to carry considerable weight in determining whether the arrangements are protected by the reasonable planning safeguard.
A final safeguard is that the burden of proof is placed on HMRC to show that the arrangement is abnormal and not reasonable tax planning and to show that the counteraction proposed is reasonable and just.
A consultation will take place over the summer which will consider draft legislation, the creation of the Advisory Panel and the development of comprehensive guidance. The intention is that the legislation will be introduced in the Finance Bill 2013. The Government has also announced that it will extend the GAAR to cover stamp duty land tax.
Disclosure of Tax Avoidance Schemes (DOTAS)
The DOTAS regime has been successful for HMRC in allowing the swift introduction of anti-avoidance legislation to counteract schemes notified to them. Informal consultations took place in 2011 to consider extending the range of hallmarks which identified disclosable schemes for the purpose of income tax, corporation tax and capital gains tax. The Budget 2012 confirms that formal consultation on extending the hallmarks will take place over the summer.
Income Tax Reliefs
Draft legislation will be published for consultation later this year that will introduce a cap on income tax reliefs claimed by individuals from 6 April 2013. The cap will apply only to reliefs which are currently unlimited, which will exclude capped reliefs like the Enterprise Investment Scheme or pension contributions. Uncapped reliefs include loss reliefs which can be set against total income, qualifying loan interest, gift aid and charitable gifts of land and shares. For individuals seeking to claim more than £50,000 in reliefs, a cap will be set at 25 per cent of income (or £50,000, whichever is greater).
Transfer of assets abroad and gains of foreign companies
Two specific areas of existing anti-avoidance legislation are to be the subject of consultation. At present there are widely drafted provisions which could apply where UK residents transfer assets abroad; for example the sections could apply where a UK resident invests in a fund which is set up overseas. The other provision (section 13 Taxation of Chargeable Gains Act 1992) applies where a non-UK company would be a “close” company if it was UK resident, i.e. basically where it is controlled by five or fewer persons. This section deems any chargeable gain which is made by the company to be apportioned to the shareholders in certain circumstances so that any UK resident who owns 10 per cent or more of the shares could be taxed on his share of the gain.
These provisions are to be consulted on but it is stated that the changes “are unlikely to be to a taxpayer’s disadvantage”. The changes will apply retrospectively to 6 April 2012 but a taxpayer may elect for the new rules to apply from 6 April 2013.
Use of trusts to avoid the higher and additional rates of income tax
HMRC has become aware of various schemes which seek to avoid the higher and additional rates of income tax by using the special regime for taxing trust income (the settlements legislation).
The settlements legislation requires income arising under certain trusts to be taxed as the income of the settlor of the trust, rather than of its beneficiaries. By creating a trust which is subject to this regime, the schemes seek to produce a situation where income which is actually received by an individual is instead treated, for tax purposes, as the income of a company. As companies are subject to a more favourable tax treatment than individuals in respect of dividends, the scheme would typically involve a company transferring shares in a subsidiary to the trust. Those shares would be held on trust for an individual but the individual would not be taxed on the dividends from those shares. Instead those dividends would be treated, for tax purposes only, as the income of the company which established the trust.
With effect from 21 March 2012, the settlements legislation will be amended to provide that it will not apply to income which originated from a settlor who was not an individual. As such income will no longer be taxed as if it is the income of the corporate settlor, the individual who is the beneficiary of the trust will be taxed on that income (at the higher and additional rates, as applicable).
The schemes in question were disclosed to HMRC under the Disclosure of Tax Avoidance Scheme (DOTAS) Regulations.
Corporate investors in Authorised Investment Funds (AIFs)
The Government announced on 27 February 2012 that it would introduce regulations with immediate effect to tackle a tax avoidance scheme under which corporate investors created repayable tax credits with distributions received from AIFs where no underlying tax had been paid. The regulations are intended to ensure that corporate investors cannot use holdings in AIFs to obtain credit for tax that has not been suffered or to reduce their tax liability below that which would apply if the underlying assets were held directly by the investor.
The regulations, which amend the Authorised Investment Funds (Tax) Regulations 2006, make the following changes:
- the method of calculating the amount of the dividend distribution which is treated as an annual payment made under deduction of income tax has been amended so that deemed tax deductions will not arise on amounts derived from income on which the AIF has not been subject to corporation tax
- when a corporate investor treats a holding in an AIF as a creditor loan relationship, dividend distributions are no longer left out of account
- when arrangements are designed to achieve or increase deemed tax deducted then the deeming will not apply
The regulations come into force at 1:30 pm on 27 February 2012 and have effect in relation to any distribution made at or after that time.
Sale of leasing companies
The Budget announced two changes to the sale of leasing company rules.
The sale of leasing company rules impose a tax charge on a leasing company on the day that it is sold and deem the sold company’s accounting period to end. The tax is charged on an amount of deemed income arising on the day of sale broadly equal to the amount by which the book value of leased assets exceed their tax written down value. The leasing company will then receive a tax deduction on the day following the sale which should be equal to the deemed income arising on the date of sale. The rules expressly state that it is not possible to offset this tax deduction against the tax income arising on the date of sale.
The first announcement prevents a leasing company using other trading losses to carry back against the sale of leasing company income. This change will be introduced with effect for sales of leasing companies which take place on or after 21 March 2012.
The second change provides that where a company enters tonnage tax on or after 21 March 2012, this will trigger a change in ownership of the company for the purpose of the sale of leasing company rules. This will be deemed to have occurred on the day before the company entered tonnage tax. The tax charge will therefore arise in the period before the lessor enters tonnage tax whereas the tax deduction will arise on the same day as the company enters tonnage tax and consequently will be lost.
A consequential amendment has also been made to the transfer of trade rules. Where a company transfers a leasing trade to a related company, it is not required to bring a disposal value into account where the two companies have the same principal company. In order to prevent companies from transferring part of their leasing trade to a related company within tonnage tax without triggering a disposal value, draft legislation has been published which requires the transferring company to bring a disposal value into account. This disposal value will be, broadly, equal to the higher of the unencumbered value of the leased equipment and the present value of the lease rents. The draft legislation will take effect where the transfer to the tonnage tax company takes place on or after 21 March 2012, regardless of when the company entered into tonnage tax.
Budget 2012 confirmed that the previously announced anti-avoidance rules for plant and machinery will be contained in Finance Act 2012.
These anti-avoidance rules seek to:
- restrict a person’s entitlement to capital allowances where he has entered into a “relevant transaction” and the wider transaction has a main purpose of obtaining a tax advantage under the capital allowances code. This provision will replace the existing provision which restricts capital allowances where the sole or main benefit arising from the transaction is obtaining allowances, which has had limited effect following the taxpayer victory in BMIF v Melluish in 1990
- where the main purpose test applies, the taxpayer will not be entitled to an annual investment allowance or first-year allowance
- where the tax advantage sought is obtaining allowances at a higher rate or at an earlier date, capital allowances will be calculated at the lower rate or arising at the later date, as appropriate
- to the extent a different tax advantage is sought, the taxpayer’s qualifying expenditure will be reduced to cancel out the tax advantage sought. The reduction in a taxpayer’s qualifying expenditure can be higher if it has entered into a transaction with a connected person or a sale and leaseback and the seller’s disposal value is less than the taxpayer’s new qualifying expenditure
- the exception from the anti-avoidance rules for assets acquired directly from manufacturer’s will be repealed in part
- the definition of “relevant transaction” (sale, purchase, assignment of a contract) will be amended to make it clear that the novation of a contract is a relevant transaction.
All of these changes will be introduced with effect from 1 April 2012 for corporation tax purposes.
Long funding leases
Draft legislation has been published amending the disposal value to be brought into account by lessees under long funding leases. This change is being introduced to counteract disclosed transactions which sought to ensure that lessees brought in a low disposal value thereby preventing tax benefits from being recouped at the end of the lease.
Capital allowances are available to lessees under long funding leases. Lessees calculate the disposal value they need to bring into account using a formula, namely (QE-QA) + R, where QE is equal to the lessee’s qualifying expenditure for capital allowances, QA is broadly equal to the capital payments under the lease.
Prior to the announced changes, R was broadly equal to the rental rebate which is payable on a lease termination, or would be payable if the lease had terminated and the equipment was sold for its market value.
For disposals which take place on or after 21 March 2012, R will also include any other “relevant lease related payment”. This is a payment which is payable (or other benefit given) for the benefit of the lessee or a person connected with the lessee where that payment is connected with the lease. For these purposes, payment is extended to include any benefit or other transfer of money’s worth. The draft legislation specifically excludes initial payments under the lease or payments under a guarantee of any residual amount being relevant lease-related payments. In addition, where the amount of any relevant lease related payment is payable between parties who are not acting at arm’s length, and so is less than it might otherwise be, the relevant lease-related payment will be the market rate.
Co-operation with other jurisdictions
The UK/Switzerland agreement
Countering offshore tax evasion by UK residents has been a key HMRC objective for the last few years. They have mainly concentrated on measures to force individuals and banks to disclose details of non-UK bank accounts; a UK resident and domiciled individual is liable to tax on his worldwide income and gains, even if made or held offshore. One key jurisdiction which is perceived to offer offshore banking services to UK individuals is Switzerland. In October 2011, an agreement was signed between the UK and Switzerland, which is intended to come into force in January 2013. The scope of this agreement is unprecedented in containing not only information gathering powers but also imposing tax charges on Swiss assets and income. The charges are both one-off, a charge imposed to “regularise the past” if disclosure has not been made, and then a future withholding tax of up to 48 per cent on income and gains made subsequently. In addition, as a result of changes agreed in March 2012, a levy of 40 per cent designed to match the UK inheritance tax charge will apply to Swiss assets on the death of a person who is UK domiciled or deemed domiciled for inheritance tax purposes.
The Finance Bill 2012 will contain measures to enact these changes into UK law subject to ratification by both countries.
Exchange of information powers
On 8 February 2012 the Government issued a joint statement with France, Germany, Italy, Spain and the US expressing the intention for those countries to escalate the reporting aspect of the US Foreign Account Tax Compliance Act (FATCA) to state level using the existing exchange of information treaties between the various tax authorities. FATCA aims to stop US persons avoiding or evading taxes by keeping undeclared accounts outside the US. The joint statement was welcomed by foreign (ie, non-US) financial institutions (FFIs) who had been concerned about the difficulty in providing the information requested by the IRS, whether by cause of confidentiality laws, contractual provisions or simple lack of information.
It has been announced in the Budget 2012 that HMRC will consult with the FFIs affected about how this exchange of information between the financial institutions and the IRS can be done. We will see a discussion document before summer 2012 on information powers to enable cooperation with the IRS with a view to legislation in the Finance Bill 2013.
VAT - correcting anomalies and closing loopholes
The Government announced a number of measures in the Budget 2012 to address long-standing VAT anomalies (in the areas of listed buildings and self storage) and perceived loopholes (on a range of issues including hot food, sports drinks, hairdressing salons and caravans). The Finance Bill 2012 will contain anti-forestalling legislation in relation to the changes to the VAT anomalies and will take effect from 21 March 2012 (as a result of a written Ministerial statement) to target artificial pre-payment arrangements aimed at avoiding the impact of the changes. Other legislation, clarifying the law to reflect HMRC’s view as well as recent case law, will take effect from 1 October 2012. In addition, a consultation on the draft legislation has been published today.
The aim behind the new legislation is to simplify the VAT rules, which are undoubtedly complex in some of these areas, in order to ensure a consistent approach to VAT. The range of anomalies and loopholes covered by this legislation and consultation is diverse.
The changes aimed at addressing anomalies are:
- removing the zero rate of VAT from the approved alteration of a protected building and instead making such alterations standard rated, in line with alteration work on all other types of building; transitional arrangements will provide continuing relief until 20 March 2013 for approved alteration work under contracts entered into before 21 March 2012
- adding VAT to self storage facilities to provide consistency of treatment between self-storage and other forms of storage; currently, providers of self storage allocate each customer a discrete area of land so that the supply of self storage is exempt from VAT unless the supplier opts to tax the land. However, suppliers of other types of storage (such as traditional removal companies) charge VAT on their rental charges.
The changes will also close a number of “loopholes” including:
- making it explicit in legislation that the rental of a chair by a hairdressing salon to a hairdresser is taxable at the standard rate of VAT
- ensuring that sales of holiday and leisure caravans are taxed consistently at the standard rate, while preserving the zero rate on the sale of residential caravans
- ensuring that all sports drinks are taxed consistently at the standard rate of VAT
- clarifying the definition of “hot food” and “premises”, to confirm that the sale of all hot food, with the exception of freshly baked bread, is taxed at the standard rate of VAT.
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Investments (and other speculation)
Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs)
The purpose of the EIS and VCTs regime is to encourage investment in the ordinary shares of unquoted trading companies by offering income and capital gains tax relief and exemptions where certain conditions are satisfied.
In order to encourage further investment in EIS companies, legislation will be introduced in the Finance Bill 2012 (with effect for shares issued on or after 6 April 2012) introducing the changes outlined below. This follows legislation already introduced with effect for shares issued on or after 6 April 2011 to increase the rate of income tax relief available under the EIS from 20 to 30 per cent of the amount subscribed for qualifying shares.
The changes are as follows:
- a removal of the £500 de minimis investment in a company before an investor may benefit from EIS relief
- a relaxation of the rules concerning the permitted connection between the qualifying investor and the company by removing the requirement for the investor to hold less than 30 per cent of the loan capital of a company
- a widening of the definition of shares which may qualify for the EIS relief by removing the requirement for shares not to be entitled to any present or future preferential rights to dividends (as long as their amount and the date they are payable is not dependent on a pending decision and the dividends are not cumulative)
- an increase in the threshold for the size of the qualifying company under both schemes so that companies with up to 250 employees will now be potentially eligible
- an increase in the maximum permitted value of the relevant company's assets immediately before the relevant share issue from £7 million to £15 million and after the share issue from £8 million to £15 million
- an increase in the annual amount that an individual may invest in a single company through EIS alone from £500,000 to £1 million
- an increase in the aggregate annual amount from any EU state aided risk capital measure (including both EIS and VCTs) in an individual company from £2 million to £5 million.
In order to encourage further investment in VCTs, legislation will be introduced in the Finance Bill 2012 (with effect for shares issued on or after 1 April 2012) to remove the £1 million limit for investment in single companies (ie, excluding companies in a partnership or joint venture where the £1 million limit will remain divided between the members).
The above measures will serve to encourage individuals to invest in smaller, riskier UK companies (including new start-ups) and will be particularly welcomed by small companies still facing difficulty in raising external equity finance in the current economic conditions. The increases to the company size limits and the combined annual amount of investment that a company may receive in a year are, however, still subject to EU state aid approval.
To ensure both EIS and VCTs are targeted at genuine risk capital investments, the Government will also introduce a new “disqualifying arrangements” test to exclude companies set up for the purpose of accessing relief and will exclude investment in some feed-in tariff businesses (which are likely to be already receiving the benefit of a subsidy and hence which may be regarded as less risky).
Seed enterprise investment scheme
As announced in the Autumn Statement 2011, the Government will also introduce in the Finance Bill 2012 (with effect for investments made on or after 6 April 2012) a new tax-advantaged venture capital scheme called the Seed Enterprise Investment Scheme (SEIS). The scheme will be focused on investment into smaller, early stage companies carrying on a new business in a qualifying trade which is a genuinely new investment for the company.
Whilst the SEIS will be based on the existing EIS rules, key features of the SEIS are as follows:
- it will give income tax relief worth 50 per cent of the amount invested to individual investors with a stake of less than 30 per cent in such companies
- it will apply to investments in companies with 25 or fewer employees and gross assets of up to £200,000
- relief will apply to an annual investment limit of £100,000 per investor (with unused annual amounts able to be carried back to the previous year, as under EIS)
- relief will apply to an overall maximum investment limit of £150,000 for each company
- it will provide for an exemption from capital gains tax on chargeable gains arising on shares within the scope of SEIS and on gains realised from the disposals of assets in the tax year 2012-2013, where the gains are reinvested through the new SEIS in the same year.
Since draft legislation was published on 6 December 2011, the Government has consulted on the proposals and in the Budget 2012 has outlined further relatively minor changes to the legislation which will appear in the Finance Bill 2012. Some of the changes are as follows:
- when the SEIS shares are issued, the trade rather than the company must be less than two years old
- qualifying companies can have subsidiaries
- in calculating the asset and employee tests, the reference to holdings of other entities is to be removed
The SEIS will provide even more generous tax reliefs than is available under the existing EIS and VCTs. It is intended that the new scheme will raise finance for the smallest start up companies.
Tax transparent funds
Legislation will be introduced in the summer of 2012 to enable tax transparent fund vehicles to be established. Draft regulations, which will be made under the powers of the Finance Bill 2012, will be published after taking into account responses to the HM Treasury Consultation which closed on 19 March 2012.
The new regulated tax transparent fund facilitates pooled master funds under the UCITS IV Directive. The primary objective for introducing contractual schemes is to ensure that the UK funds industry remains competitive following the implementation of UCITS IV, which enables UCITS funds to establish master-feeder arrangements. For such structures to be attractive to investors on a cross-border basis, the master fund must be tax transparent; under current law it is not possible to have a tax transparent UCITS domiciled in the UK. The HM Treasury Consultation set out the proposed measures that would allow the authorisation of UK domiciled contractual schemes in the form of co-ownerships or limited partnerships. New regulations will provide the establishment and authorisation of these contractual schemes so that tax transparent funds will be regulated in a similar way to an authorised unit trust.
The tax transparent fund will not be subject to tax although it may incur stamp duty, stamp duty reserve tax (SDRT) or stamp duty land tax charges on the acquisition of certain assets. Limited relief on stamp duty or SDRT may be available if the fund acquires either:
- shares or securities in exchange for issuing units in a fund
- shares or securities and the fund only has charitable investors.
Stamp duty and SDRT will not be chargeable on transfers of interests in the fund itself. Investors will be taxed on any income as it arises as if they had invested directly in the underlying assets. However, legislation will be introduced to ensure that a co-ownership scheme will not be look-through for capital gains tax purposes, so that a tax charge only arises on sale by the investor of its interest. No similar provision will be introduced for partnership schemes, which is consistent with the current UK tax treatment of limited partnerships.
It is anticipated that the tax transparent fund will be treated as look-through for tax purposes in all jurisdictions and it is intended that it will constitute a “special investment fund” for VAT purposes so that management fees will be exempt from VAT.
It was announced in Budget 2012 that in order to clarify the position going forward for all investors in collective investment schemes, including the new tax transparent fund, the capital gains rules for mergers and reconstructions of collective investment schemes will be simplified and re-written in regulations and changes may be made to what constitutes a disposal.
Review of taxation of unauthorised unit trusts
On 30 June 2011, HMRC published a consultation document entitled “High-risk areas of the tax code: The taxation of unauthorised unit trusts”. The consultation sought suggestions for improving the rules governing the taxation of unauthorised unit trusts with the aim of removing tax avoidance opportunities and reducing administrative complexity. It has been announced in the Budget 2012 that the Government will issue a further consultation in April 2012 setting out details of the proposals for change. Legislation will be included in the Finance Bill 2013.
Machine games duty
Further to its announcement in Budget 2011 and a subsequent consultation, the Government is reforming the taxation of gaming machines. Machine Games Duty (MGD) will be introduced and charged on the net takings from playing machine games where the customers hope to win a cash prize which is greater than the cost to play.
Where MGD is payable, it will replace both Amusement Machine Licence Duty (AMLD) and VAT. There will be two rates of MGD: a lower rate of 5 per cent will apply to machines with maximum stakes of 10 pence and maximum cash prizes of £8, and the standard rate of 20 per cent will apply to all other dutiable machine games. MGD will be introduced from 1 February 2013, with transitional arrangements for AMLD taking effect from when the Finance Bill 2012 receives Royal Assent.
The policy aim behind the change is to create fairer taxation of machine games: AMLD liability is the same regardless of profit, which results in a wide range of effective tax rates with the most profitable machines having the lowest rates. Further, exempting the playing of machine games from VAT will ensure that it has the same VAT treatment as other gambling activities.
Notwithstanding the above changes, AMLD rates will be increased in line with inflation. Licence applications received by HMRC after 4pm on 23 March 2012 will be subject to the new AMLD rates. For example, the 12 month rates on Band A machines will be increased from £6,110 to £6,296, and Band C from £905 to £935.
Furthermore, from 1 April 2012, the gross gaming yield (GGY) bandings which are used to calculate the amount of gaming duty chargeable will also be increased in line with inflation. For example, the rate of duty will be 15 per cent on the first £2,175,000 (up from £2,067,000).
The Government has announced its intention to introduce a place of consumption based taxation regime for remote gambling. This follows various announcements last year, in which the Government indicated that it was looking to amend the Gambling Act so that all operators, whether from the UK or abroad, will be required to hold a Gambling Commission licence to enable them to transact with British consumers, and they will required to pay tax on the gambling profits generated from consumers in the UK. A consultation on the detailed design characteristics of the proposed changes will commence shortly. Legislation will be included in a future Finance Bill, with an expected implementation date of December 2014.
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Tax and allowances 2012-13
The main rate of corporation tax for 2012-2013 has been reduced by 2 per cent to 24 per cent for companies with profits (other than ring-fence profits) of more than £1.5 million. The main rate for ring-fenced profits1 remains at 30 per cent. The rate will be reduced for non-ring-fenced profits to 23 per cent on 1 April 2013, with further reductions to 22 per cent planned for 1 April 2014.
Small companies’ rate
The small companies’ rate of corporation tax which currently applies for all company profits, apart from ring-fence profits, below £300,000 will remain at 20 per cent and the small companies’ rate for ring-fence profits will remain at 19 per cent for 2012-2013. The small companies’ rate from April 2013 has not yet been announced.
Income tax rate
The additional rate of income tax will drop in the tax year 2013-2014 from 50 per cent to 45 per cent. No specific anti-forestalling legislation has been proposed and fact that the Government have factored the impact of forestalling into their calculation of the benefits of changing the rate indicates that specific anti-forestalling legislation may not follow.
There are no changes to the main rates of income tax for 2012-2013, although the personal allowance for those aged under 65 at the start of the tax year is increased to £8,105. To ensure that higher rate taxpayers do not benefit disproportionately from this increase in personal allowance, however, the basic rate limit has been reduced to £34,370. Thus the higher rate threshold will remain at £42,475. The 20 per cent basic rate of income tax will apply to taxable income up to £34,370, the 40 per cent rate will apply to taxable income of £34,371 up to £150,000 and the 50 per cent additional rate will apply to taxable income over £150,000. The 10 per cent, 32.5 per cent and 42.5 per cent dividend ordinary, dividend upper and dividend additional rates continue to apply to dividends otherwise taxable at the basic, higher and additional rates above.
There has been no change in the basic personal allowance for income tax which gradually reduces to nil for individuals with “adjusted net incomes” above £100,000. The personal allowance of those with an adjusted net income above £100,000 is tapered on a £1 of allowance per £2 in excess of the limit, so the personal allowance of those with an adjusted net income above £116,210 will be tapered to zero.
Income tax rates
|Rate||Taxable bands 2011/2012||Taxable bands 2012/2013||Taxable bands 2013/2014|
|10 per cent (savings income only)2||£0 - £2,560||£0 - £2,710||TBA|
|20 per cent||£0 - £35,000||£0 - £34,370||£0 - £32,245|
|40 per cent||£35,001 - £150,000||£34,370 - £150,000||£32,245 - £150,000|
|50 per cent||Over £150,000||Over £150,000||Over £150,000|
Income tax allowances
|Allowance type||Amount 2011/2012||Amount 2012/2013|
|Personal allowance||£7,475||£8,1053 4|
|Personal allowance for those aged 65 to 745||£9,940||£10,5003 4|
|Personal allowance for those aged 75 and over6||£10,090||£10,6603 4|
Value Added Tax
|Registration and deregistration thresholds||Amount 2011/2012||Amount 2012/2013|
|Rates of VAT||4 January 2011 - April 2011||April 2011 - 2012||April 2012 - 2013|
|Standard rate||20 per cent||20 per cent||20 per cent|
|Reduced rate||5 per cent||5 per cent||5 per cent|
Capital gains tax rate
| ||23 June 2010 - 5 April 2011||2011 - 2012||2012 - 2013|
|Standard rate||18 per cent||18 per cent||18 per cent|
|Higher rate||28 per cent||28 per cent||28 per cent|
|Entrepreneurs’ relief rate||10 per cent||10 per cent||10 per cent|
|Entrepreneurs’ relief lifetime limit of gains||£5,000,000||£10,000,000||£10,000,000|
Capital gains tax allowances
|Annual exempt threshold for individuals||£10,600||£10,600|
Inheritance tax rates
| ||Rate 2011/2012||Amount 2012/2013|
|IHT rate||40 per cent||40 per cent|
Inheritance tax allowances
| ||Amount 2011/2012||Amount 2012/2013|
|Married couples and civil partners||£650,000||£650,000|
Corporation tax rates
| ||Rate 2011/2012||Rate 2012/2013||Rate 2013/2014|
|Small profits rate (profits below £300,000)||20 per cent||20 per cent||TBA|
|Small profits rate - ring-fence profits||19 per cent||19 per cent||TBA|
|Marginal relief fraction (profits between £300,000 and £1.5 million)||3/200||1/100||TBA|
|Marginal relief fraction - ring-fence profits7||11/400||11/400 11/400||TBA|
|Main rate (profits above £1.5 million)||26 per cent||24 per cent||23 per cent|
|Main rate - ring-fence profits7||30 per cent||30 per cent||TBA|
Bank levy rate
| ||1 Jan 2011 - 28 Feb 2011||1 Jan 2011 - 28 Feb 2011||1 May 2011 - 31 Dec 2011||1 Jan 2012 - 31 December 2012||1 Jan 2012 - 31 December 2012|
|Short-term chargeable liabilities||0.05%||0.1%||0.075%||0.088%||0.105%|
|Long-term chargeable equity and liabilities||0.025%||0.05%||0.0375%||0.044%||0.0525%|
- Ring-fence profits means companies with profits from oil extraction and oil rights in the UK and the UK Continental Shelf.
- This rate will not be available if an individual’s non-savings income exceeds £2,710.
- The amount of the personal allowance is gradually withdrawn for all individuals (regardless of age) with incomes of above £100,000. The rate of reduction is £1 of personal allowance for every £2 of income above the £100,000 threshold.
- The amount of the personal allowance is gradually withdrawn when the individual’s income is above the income limit (£24,000 for 2011-12, £25,400 for 2012-13) by £1 for every £2 of income above the limit until they reach the level of the personal allowance for those aged under 65, or from 2013-14, the level of the personal allowance for those born after 5 April 1948.
- People born after 5 April 1938 but before 6 April 1948 for the tax year 2012-13.
- People born before 6 April 1938 for the tax year 2012-13.
- Ring-fence profits means companies with profits from oil extraction and oil rights in the UK and the UK Continental Shelf.
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