Master Notes

Budget 2008

BUDGET NOTES

12 March 2008

Budget Notes contain technical information additional to the press notices issued by HM Treasury with the Budget. They are not the same as press notices, which are primarily used as brief explanations of new policy for the media, but rather contain additional, more detailed information on the changes to tax law announced in the Budget. As such they are designed to assist businesses that may be immediately affected by the changes, and to provide more technical information to those with a specialist interest such as tax consultants and advisers, City financial institutions and local HM Revenue and Customs offices. This information is also published on the Treasury and HM Revenue and Customs internet sites.

CONTENTS:

BN Budget Note Page 1 Modernising the Personal Tax System 5 2 Corporation Tax Main Rates 7 3 Corporation Tax Small Companies’ Rates 9 4 Simplification of Associated Companies Rules 11 5 Amendments to the Research & Development and

Vaccine Research Relief Schemes 13

6 Capital Allowances: Industrial Buildings Allowances, Enterprise Zone Allowances and Agricultural Buildings Allowances

15

7 Capital Allowances: Plant and Machinery Allowances: Integral Features and Thermal Insulation

19

8 Capital Allowances: Plant and Machinery: Rate Changes and New Special Rate Pool

21

9 North Sea Fiscal Regime 25 10 100 Per Cent First-Year Capital Allowances for Natural

Gas, Biogas and Hydrogen Refuelling Equipment 29

11 100 Per Cent First-Year Allowances for Expenditure on Cars with Low Carbon Dioxide Emissions

31

12 Capital Allowances: Plant and Machinery: Annual Investment Allowance

33

13 Enhanced Capital Allowances for Energy Efficient and Water Saving (Environmentally-Beneficial) Technologies

37

14 Capital Allowances: Introduction of First-Year Tax Credits 39 15 Capital Allowances: Small Plant and Machinery Pools 41 16 Venture Capital Schemes 43 17 Community Investment Tax Relief and Banking 45 18 Enterprise Management Incentives 47 19 Trading Stock 49 20 Leased Plant or Machinery: Anti-Avoidance 51 21 Financial Products Avoidance: Disguised Interest and

Transferring Rights to Lease Rentals 55

22 Controlled Foreign Companies: Anti-Avoidance 59

23 Corporate Intangible Assets Regime: Anti-Avoidance 63 24 Capital Allowances Buying and Acceleration: Anti-

Avoidance 65

25 Employment-Related Securities: Deductible Amounts 67 26 North Sea Management Expenses 69 27 Unclaimed Assets Scheme: Tax Changes 71 28 Investment Manager Exemption 73 29 Taxation of Personal Dividends 75 30 Funding Bonds 77 31 Offshore Funds: New Tax Regime 79 32 Timing of Income Tax Payments by Unauthorised Unit

Trusts 81

33 Funds of Alternative Investment Funds 83 34 Property Authorised Investment Funds 85 35 Repeal of Obsolete Anti-Avoidance Provisions 87 36 Life Insurance Companies: Consultation Outcomes and

Simplification 91

37 Life Insurance Companies: Interest Apportionment 95 38 Insurance Premium Tax (IPT): Changes relating to

Overseas Insurers 97

39 Stamp Duty: Alternative Finance: Sukuk 99 40 Alternative Finance Arrangements 101 41 Overseas Pension Schemes 103 42 Pensions: Regulation Making Powers 105 43 Pensions: Technical Improvements 107 44 Approved Occupational Pension Schemes 109 45 Pension Savings and Inheritance Tax 111 46 Inheritance Tax: Transitional Serial Interests 113 47 Inheritance Tax (IHT) Nil-Rate Band 115 48 Capital Gains Tax: Relief on Disposal of a Business

(Entrepreneurs’ Relief) 117

49 Child Trust Fund: Voucher Requirement 121 50 Individual Saving Accounts and Northern Rock Bank 123 51 Individual Saving Accounts and other Savings Accounts:

Reducing the Administrative Burden 125

52 Gift Aid: Transitional Relief 129 53 Income of Beneficiaries Under Settlor-Interested Trusts 131 54 Stamp Duty: Changes to Loan Capital Exemption 133 55 Reduction of Stamp Duty Administrative Burden 135 56 Stamp Duty Land Tax (SDLT) Relief for New Zero-Carbon

Flats 137

57 Stamp Duty Land Tax (SDLT): Notification Thresholds for Land Transactions and Rate Thresholds for Leasehold Property

139

58 Stamp Duty Land Tax (SDLT): Anti-Avoidance Legislation Affecting Partnerships

143

59 Stamp Duty Land Tax: Group Relief: Anti-Avoidance 145 60 Stamp Duty Land Tax (SDLT): Alternative Finance: Anti-

Avoidance 147

61 Greater London Authority Severance Pay 149 62 Armed Forces Council Tax Relief 151 63 Restrictions on Trade Loss for Individuals 153 64 Double Taxation Relief: Income Tax 155

65 Avoidance of Income Tax Using Manufactured Payments 157 66 Double Taxation Treaty Abuse 159 67 Tax Avoidance Disclosure Regime: Scheme Reference

Number System 161

68 Income Tax Exemptions for the Return to Work Credit, In- Work Credit, In-Work Emergency Discretion Fund and In-Work Emergency Fund

163

69 Company Car Benefit Tax 165 70 Employer Provided Vans: Fuel Benefit Rules 167 71 Hydrocarbon Oils: Duty Rates Changes and Rates

Simplification 169

72 New Aviation Duty Replacing Air Passenger Duty (APD) 173 73 VAT: Increased Turnover Thresholds for Registration and

Deregistration 175

74 VAT: Amendment to the Exemption for Fund Management 177 75 Indirect Tax Returns: Correction of Errors 179 76 VAT: Changes in Fuel Scale Charges 181 77 VAT: Reduced Rate for Smoking Cessation Products 185 78 VAT: Transitional Period for Claims 187 79 VAT: Option to Tax Land & Buildings 189 80 Landfill Tax: Exemption for Waste from Cleaning Up

Contaminated Land 191

81 Landfill Communities Fund 193 82 Landfill tax: Standard Rate 195 83 Aggregates Levy: Rate 197 84 Climate Change Levy: Rates 199 85 Climate Change Levy (CCL): Electricity from Coal Mine

Methane 201

86 Climate Change Levy (CCL): Climate Change Levy Accounting Documents (CCLADs): Simplification

203

87 Energy Products Directive: Expiry of Derogations 205 88 Amusement Machine Licence Duty (AMLD): Gaming

Machines 207

89 Gaming Duty: Revalorisation of Duty Bands 209 90 Tobacco Products Duty: Rates 211 91 Alcohol Duty: Rates 213 92 Calculation of Alcohol Duty 215 93 Excise Reviews and Appeals 217 94 Waiving Interest and Surcharges for those Affected by

National Disasters 219

95 Power to Give Statutory Effect to Existing Concessions 221 96 HMRC Review of Powers, Deterrents and Safeguards:

Penalties for Incorrect Returns & Failure to Notify a Taxable Activity

223

97 HMRC Review of Powers, Deterrents and Safeguards: Compliance Checks

227

98 HMRC Review of Powers, Deterrents and Safeguards: Payments, Repayments and Debt

231

99 Changes to Customs Powers 233 100 Tribunal Reform: Simplifying HMRC’s Approach to

Appeals 235

101 Tax Law Rewrite: Remittance Basis and Foreign Dividend Income

237

102 Residence & Domicile: The Residence Test and Day Counting Rules

239

103 Residence & Domicile: Personal Allowances and the Remittance Basis

241

104 Residence & Domicile: Closing Loopholes in the Remittance Basis

243

105 Residence & Domicile: Remittance Basis and Art for Public Display

249

106 Residence & Domicile: Changes for Employment-Related Securities

251

107 Residence & Domicile: Annual £30,000 Charge for Some Users of the Remittance Basis

253

HM REVENUE AND CUSTOMS PRESS OFFICE Press enquiries: 020 7147 0798 / 2324 / 2328 (Business Tax Desk)

020 7147 2318 / 2333 / 2319/ 0051/ 0394 (Personal Tax Desk)

020 7147 2314 / 2331 / 0052 (Law Enforcement Desk) 07860 359544 (Out of hours) GOVERNMENT DEPARTMENT INTERNET SITES Further information and all published documents relating to the Budget may be found on the Internet at the following addresses: HM Treasury: www.hm-treasury.gov.uk HM Revenue and Customs: www.hmrc.gov.uk

Budget 2008 Notes Page 5 of 270

BN01

MODERNISING THE PERSONAL TAX SYSTEM Who is likely to be affected? 1. Income tax payers. General description of the measure 2. These changes are part of a package of measures announced at Budget

2007. 3. From 2008-09, the basic rate of income tax will be reduced to 20 per cent.

The 20 per cent savings rate will be merged with the basic rate. 4. The existing 10 per cent starting rate will be abolished. A new 10 per cent

starting rate for savings will be introduced. 5. These changes reduce the main rates of income tax to two: the basic rate

and the higher rate. 6. Age-related personal allowances for those aged 65 to 74 and 75 and over

will be increased by £1,180 above indexation. For 2008-09, the age-related allowance for someone aged 65 to 74 will be £9,030 and the age-related allowance for someone aged 75 or over will be £9,180.

7. A Treasury order was made on 10 December 2007 which increased the

basic personal allowance by indexation to £5,435 for 2008-09. 8. There is no change to the 40 per cent higher rate. There are no changes

to the 10 per cent dividend ordinary rate or the 32.5 per cent dividend upper rate.

Operative date 9. These changes have effect on and after 6 April 2008. Current law and proposed revisions 10. Legislation will be included in Finance Bill 2008 to make the necessary

changes to Income Tax Act 2007 (ITA) and the Income and Corporation Taxes Act 1988.

11. For 2007-08, the basic rate of income tax is 22 per cent. It is payable

between the starting rate and basic rate limits of £2,230 and £34,600. For 2008-09, the basic rate will be reduced to 20 per cent. It will be payable up to the basic rate limit of £36,000.


12. Savings income which falls within the basic rate band is taxable at the 20 per cent savings rate. From 2008-09, the savings rate will be abolished and savings income which falls within the basic rate band will be taxable at the 20 per cent basic rate.

13. For 2007-08, the first £2,230 of an individual’s income is taxable at the

10 per cent starting rate. 14. Legislation in Finance Bill 2008 will abolish the 10 per cent starting rate

and introduce a new 10 per cent starting rate for savings and starting rate limit for savings. For 2008-09, the starting rate limit for savings will be £2,320. ITA sets out different types of income and the order in which they are taxed. The first slice is non-savings income, which is not separately defined in ITA but broadly covers earnings, pensions, taxable social security benefits, trading profits and income from property. The next slice is savings income (broadly, bank and building society interest). Dividend income is the top slice. There are no changes to these rules for 2008-09.

15. Should an individual’s non-savings income exceed the new starting rate

limit for savings, then the starting rate for savings will not be available for the savings income. The individual’s savings income will be charged to tax at the 20 per cent basic rate up to the basic rate limit of £36,000. This is unchanged from the way in which savings income is currently taxed. However, should an individual’s non-savings income be less than the starting rate for savings limit, then the savings income will be taxable at the 10 per cent starting rate for savings up to the limit.

16. Legislation provides that the personal allowances are increased in line with

price inflation each year, unless overridden by the Finance Act. Finance Bill 2008 will increase the amounts for those aged 65 and over by £1,180 above indexation. There are three levels of personal allowance: the basic level for those aged under 65 (£5,435 for 2008-09), and higher levels for those aged 65 to 74 (£9,030 for 2008-09) and those aged 75 and over (£9,180 for 2008-09).

Further advice 17. If you have any questions about these changes to income tax, please

contact Paul Thomas on 020 7147 2479 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN02

CORPORATION TAX MAIN RATES Who is likely to be affected? 1. Companies with profits above the upper relevant maximum amount

(URMA) (currently £1.5m), companies that are part of a group with profits above the URMA, and companies with profits from oil extraction and oil rights in the UK and the UK Continental Shelf (‘ring fence profits’).

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to set the main rate of

corporation tax (CT) at 28 per cent on and after 1 April 2009. 3. The main rate of CT for companies’ ring fence profits will also remain at

30 per cent on and after 1 April 2009. Operative date 4. These rates will have effect on and after 1 April 2009. Current law and proposed revisions 5. The various CT rates are to be found in the Income and Corporation Tax

Act 1988 and are legislated annually in the Finance Act (FA). The current provisions for the charge of CT can be found at sections 2-3 of FA 2007.

6. The current rules at section 2 of FA 2007 provide that the main rate of CT

is chargeable at 28 per cent on profits (above £1.5 million) of companies other than ring fence profits, and 30 per cent on ring fence profits (above £1.5 million) of companies.

Further advice 7. If you have any questions about this change, please contact your local

HMRC office. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN03

CORPORATION TAX SMALL COMPANIES’ RATES Who is likely to be affected? 1. Companies with profits chargeable to corporation tax (CT) lower than the

lower relevant maximum amount (LRMA) (currently £300,000), companies with CT profits between LRMA and the upper relevant maximum amount (URMA) (currently £1.5m), and companies with profits from oil extraction and oil rights in the UK and the UK Continental Shelf (‘ring fence profits’)

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to set the small

companies’ rate for all profits, apart from ring fence profits, at 21 per cent from 1 April 2008 and set the fraction used in smoothing the difference between the main rate of CT and the small companies’ rate (marginal small companies’ rate) at 7/400. Profits limits will remain the same.

3. The small companies’ rate for ring fence profits will remain at 19 per cent

from 1 April 2008 and the marginal small companies’ relief fraction for ring fence profits will remain at 11/400.

Operative date 4. The measure will have effect on and after 1 April 2008. Current law and proposed revisions 5. The various CT rates are to be found in the Income and Corporation Taxes

Act 1988 (ICTA) and are legislated annually in the Finance Act (FA). The current provisions for the charge of CT can be found at sections 2 and 3 of FA 2007.

6. The current rules at section 13 of ICTA provide that, where a company is

not a close investment-holding company and its CT profits (other than ring fence profits) are lower than the LRMA (currently £300,000), those profits are taxed at the lower rate of CT, known as the ‘small companies’ rate’ (currently 20 per cent).

7. Legislation introduced in Finance Bill 2008 will amend the small

companies’ rate to 21 per cent for the non-ring fence profits. The small companies’ rate for ring fence profits will remain at 19 per cent for the financial year 2008-09.


8. Section 13 (2) of ICTA entitles companies with a profit of between

£300,000 and £1.5m to marginal relief (‘marginal small companies’ relief’) from tax computed at the main rate. The fraction used in calculating this relief is currently 1/40 for non-ring fence profits and 11/400 for ring fence profits.

9. The changes to the small companies’ rate mean that the fraction for non-

ring fence profits will be adjusted to 7/400 and for ring fence profits the fraction will remain at 11/400.

10. The upper and lower limits for small companies’ rate are set at section

13(3) of ICTA. These will remain unchanged. Further advice 11. If you have any questions about this change, please contact your local

HMRC office. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN04

SIMPLIFICATION OF ASSOCIATED COMPANIES RULES Who is likely to be affected? 1. Companies whose directors or shareholders are separately members of

business partnerships. General description of the measure 2. Simplification of associated companies rules as they apply to the small

companies rate (SCR) of corporation tax. Operative date 3. This measure will have effect on and after 1 April 2008. Current law and proposed revisions 4. The SCR rules are contained in section 13 of the Income and Corporation

Taxes Act 1988 (ICTA). The SCR has effect for companies whose annual rate of profits does not exceed the ‘lower relevant maximum amount’ (section 13(1)). If the rate is above this amount but does not exceed the ‘upper relevant maximum amount’ a marginal relief is due (section 13(2)).

5. The upper and lower maximum relevant amounts are set out in section

13(3). Section 13(3)(b) reduces the amounts if the company has one or more associated companies. ‘Associated company’ is defined at section 13(4) as one company controlling another or two companies being under common control, with section 416 of ICTA being used to determine control. In establishing control of a company, section 416(6) requires the attribution to a person of any rights or powers held by his associates.

6. Section 417(3) of ICTA defines the meaning of associate and section

417(3)(a) includes business partner within that definition. 7. Legislation will be introduced in Finance Bill 2008 to revise the definition of

‘control’, solely for the purposes of SCR, by amending the wording of section 13(2) of ICTA and inserting new subsections 4A, 4B and 4C into section 13 of ICTA.


8. The new wording and subsections will ensure that the rights or powers

held by business partners will be attributed only when “relevant tax planning arrangements have at any time had effect in respect of the taxpayer company”. “Relevant tax planning arrangements” will be defined as arrangements which involve the shareholder or director and the partner and secure a tax advantage by virtue of greater relief under section 13 of ICTA.

Further advice 9. If you have any questions about this change, please contact Simon

Moulden on 020 7147 2629 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN05

AMENDMENTS TO THE RESEARCH & DEVELOPMENT AND VACCINE RESEARCH RELIEF SCHEMES

Who is likely to be affected? 1. Companies making claims to relief under the Research & Development

(R&D) and the Vaccine Research Relief (VRR) tax relief schemes. General description of the measure 2. Budget 2007 announced a package of business tax reforms which

included an increase in the rate of R&D relief for all companies. Legislation will be introduced in Finance Bill 2008 to increase the rate of relief under the small and medium company (SME) scheme from 150 per cent to 175 per cent. The rate of relief under the large company scheme will be increased from 125 per cent to 130 per cent.

3. The UK’s SME R&D and VRR schemes are notified State aids and must

comply with European Commission (EC) Guidelines before approval will be granted for the rate increase, and other recent amendments. In order to achieve this, the UK is amending the schemes to prevent companies whose most recent accounts are not produced on a going concern basis from claiming relief. A cap is also being introduced to restrict the amount of relief available under the SME or VRR schemes to €7.5 million per R&D project. Large companies will have to make a declaration concerning the incentive effect of the relief they are claiming under the VRR scheme.

Operative date 4. This measure will have effect from a date to be appointed by Treasury

order. The Government is currently in discussions with the EC to ensure that the proposed amendments meet with EC State aid approval rules. The appointed date will be announced once approval has been received.

Current law and proposed revisions 5. Schedule 20 to the Finance Act (FA) 2000 provides for tax relief for small

and medium companies undertaking qualifying R&D activities. A 50 per cent enhancement of qualifying expenditure can be claimed under the scheme and in some circumstances this can lead to a payable credit.

6. Schedule 12 to FA 2002 provides for tax relief for large companies

undertaking qualifying R&D activities. Large companies can claim a 25 per cent enhancement of their qualifying expenditure under this scheme.


7. Schedule 13 to FA 2002 provides for tax relief for companies of all sizes

carrying out vaccine research (vaccine research relief). The relief is in the form of a 50 per cent enhancement of qualifying expenditure and in the case of small and medium companies can result in a payable tax credit.

8. Legislation to be introduced in Finance Bill 2008 will increase the rate at

which relief will be available under the R&D schemes. For SMEs the rate will increase from 150 per cent to 175 per cent and for large companies the rate will increase from 125 per cent to 130 per cent. New conditions will also be added to the SME and VRR schemes. The first of these will prevent companies whose most recent accounts have not been prepared on a going concern basis from claiming relief. The second introduces a cap of €7.5 million on the amount of relief available per R&D project under the SME and VRR schemes, and the third introduces a requirement that large companies claiming VRR make a declaration as to the incentive effect of the relief.

9. In order to ensure that the SME and VRR schemes remain consistent with

State aid requirements, the amount of relief available under the VRR scheme will be reduced for all companies from 50 per cent to 40 per cent.

Further advice 10. If you have any questions about this change, please contact Lynn Carroll

on 020 7147 2636 (email: [email protected]) or Peter Faherty on 020 7147 2700 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN06

CAPITAL ALLOWANCES: INDUSTRIAL BUILDINGS ALLOWANCES, ENTERPRISE ZONE ALLOWANCES AND

AGRICULTURAL BUILDINGS ALLOWANCES Who is likely to be affected? 1. Businesses claiming industrial buildings allowances (IBAs), enterprise

zone allowances (EZAs) and agricultural buildings allowances (ABAs). General description of the measure 2. Budget 2007 announced a business tax reform package including the

gradual withdrawal of IBAs and ABAs over four years. 3. On 17 December 2007, it was announced that the special IBAs commonly

known as enterprise zone allowances (EZAs) would also be withdrawn from April 2011, and that EZAs (which primarily provide a 100 per cent incentive allowance) will not be subject to the phasing-out rules applying to industrial and agricultural buildings allowances.

4. Legislation will be introduced in Finance Bill 2008 to give effect to these

changes. The legislation will also provide that balancing charges in respect of EZAs will be retained for a limited period.

Operative date 5. The phased withdrawal of industrial and agricultural buildings writing-down

allowances (WDAs) will have effect for chargeable periods ending on or after 1 April 2008 for businesses within the charge to corporation tax and 6 April 2008 for businesses within the charge to income tax.

6. The withdrawal of EZAs will have effect on and after 1 April 2011, for

businesses within the charge to corporation tax, and 6 April 2011, for businesses within the charge to income tax.

Current law and proposed revisions Industrial buildings allowances 7. IBAs are available under Part 3 of the Capital Allowances Act 2001 (CAA).

They were introduced in 1945. Their scope was subsequently increased to include buildings and structures like tunnels, bridges, foreign plantations, highway concessions, qualifying hotels, and commercial buildings in Enterprise Zones.


Enterprise zone allowances 8. Special rates of IBA, for a wider range of commercial buildings constructed

in enterprise zones were introduced by the Finance Act (FA) 1980. These allowances are known as enterprise zone allowances (EZAs).

Agricultural buildings allowances 9. ABAs are available under Part 4 of CAA and were introduced in 1946.

ABAs are generally very similar to IBAs, although not identical. For example, ABAs are only available where the first use of the building is for the purpose of husbandry and, subject to changes made in FA 2007, balancing adjustments only occurred when the parties to the transfer of a relevant interest made an election.

Writing-down allowances (WDAs) and initial allowances 10. In general, the annual rate of WDAs for a person who constructs either an

industrial or agricultural building, or buys it unused, is 4 per cent of the qualifying expenditure (the construction cost or purchase price) on a straight-line basis. There is an exception for qualifying expenditure on buildings in enterprise zones (EZA expenditure) which attracts an initial allowance of 100 per cent and, where the full initial allowance has not been claimed, a WDA of 25 per cent per annum, on a straight-line basis. In all cases, the allowances are given to the holder of the “relevant interest” who has incurred the qualifying expenditure on the building.

Balancing adjustments and recalculated WDAs 11. Prior to Budget 2007, when a person ceased to have the relevant interest

in an industrial or agricultural building within 25 years of first use (typically when the building was sold or a leasehold interest came to an end) there was a balancing adjustment (giving rise to either a balancing charge or a balancing allowance) based on any difference between the residue of qualifying expenditure (RQE) and the proceeds from the event. The person acquiring the building would then be entitled to a recalculated WDA, based on the expenditure that had not yet been written off (taking into account the balancing adjustment) divided by the remainder of the 25-year period. For example, if the remainder of the 25-year period was 10 years and the RQE after the sale was £10,000, the buyer would be entitled to a recalculated WDA of £10,000/10 = £1,000 p.a.

12. To prepare the way for final abolition, Budget 2007 announced the

withdrawal of balancing adjustments and the recalculation of WDAs. Broadly speaking, this meant that the person acquiring the relevant interest in the building would effectively “stand in the shoes” of the person who had disposed of his interest, and so would effectively be entitled to the same amount of WDAs as the previous owner.


Proposed revisions 13. This measure:

• provides that Parts 3 and 4 of CAA are repealed with effect from 1 April 2011 for corporation tax purposes and 6 April 2011 for income tax purposes;

• gives the detailed rules on the phasing out of the WDAs for expenditure on industrial and agricultural buildings for the transitional periods to 31 March or 5 April 2011;

• withdraws EZAs in part 3 through the repeal of Part 3 with effect from 1 April 2011 for corporation tax purposes and 6 April 2011 for income tax purposes, but balancing charges, in respect of qualifying enterprise zone expenditure, under sections 314 or section 328 of CAA, will be retained for a limited period;

• introduces an anti-avoidance provision, counteracting disclosed schemes aimed at exploiting the legislation withdrawing balancing adjustments and the recalculation of balancing allowances in FA 2007, in order to claim multiple WDAs.

Phasing-out rules 14. For the transitional periods

• between 1 April 2008 and 31 March 2011 (for businesses within the charge to corporation tax) or

• between 6 April 2008 and 5 April 2011 (for businesses within the charge to income tax)

the basic calculation of the amount of IBA and ABA WDAs will be unchanged (subject to the effective withdrawal of balancing adjustments and the recalculation of WDAs in respect of balancing events occurring on or after 21 March 2007: see paragraphs 11 and 12). The amount of the WDA (whether original or recalculated) is to be stepped down by 25 per cent for each financial or tax year.

15. For those transitional chargeable periods the amount of WDA is the

percentage of the WDA shown in column 3 of the following table:

Financial year beginning 1 April 2007

and earlier financial years

Tax year 2007-08 and earlier tax years 100 per cent

Financial year beginning 1 April 2008 Tax year 2008-09 75 per cent





16. Where the chargeable period of a business falls in more than one financial or tax year, the WDA is to be apportioned on a strict time basis between the financial or tax years in order to determine the amount of the writing-down allowance that may be set-off against profits.

Enterprise zone allowances 17. The amount of any initial allowance will not be restricted provided it relates

to qualifying capital expenditure incurred by the EZA claimant on or before 31 March 2011 (for corporation tax) or on or before 5 April 2011 (for income tax). However, where a business’s chargeable period spans the relevant date and the claimant claims a WDA, the amount of the WDA will be restricted on a time basis.

18. For EZAs, the measure will also provide that where a business disposes of

a building within seven years of first use, in respect of which either an initial allowance or WDA(s) have been claimed, then the business will potentially be liable to a balancing charge, notwithstanding the repeal of Part 3 of CAA with effect from 1 April 2011 (corporation tax) or 6 April 2011 (income tax). Furthermore the special rules in sections 327 to 331 of CAA relating to certain capital value realisations will continue to have effect on after 1 or 6 April 2011.

Anti-avoidance rule 19. Finance Bill 2008 will also include an anti-avoidance rule that will limit the

amount of a WDA on a time-apportioned basis, where property qualifying for IBAs is transferred or sold between connected parties and the purpose, or one of the main purposes, of the sale or transfer is the obtaining of a tax advantage.

Draft legislation 20. Draft legislation and explanatory notes have been published today on the

HM Revenue & Customs website. Further advice 21. If you have any questions about this change, please contact Joy Guthrie

on 020 7147 2610 (email: [email protected]) or Malcolm Smith on 020 7147 2555 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN07

CAPITAL ALLOWANCES: PLANT AND MACHINERY ALLOWANCES: INTEGRAL FEATURES AND THERMAL

INSULATION Who is likely to be affected? 1. Businesses investing in certain assets. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to provide a new

classification of “integral features” of a building, expenditure on which will be allocated to the new special rate pool (BN08) and will attract writing down allowances (WDAs) at 10 per cent a year. This new classification will be effected by means of a short list of the integral features affected. The legislation will also provide that when the whole or the majority of a defined “integral feature” is replaced, that expenditure will also be allocated to the special rate pool. This change is part of the business tax reform package announced at Budget 2007.

3. The new classification will also include two features of a building that have

environmentally beneficial qualities, which would not normally qualify for plant and machinery allowances. In addition, allowances for the thermal insulation of existing industrial buildings will be extended to expenditure on the thermal insulation of all existing buildings, used for any qualifying business purpose, other than residential property businesses. However, allowances on all such thermal insulation will, in future, be restricted to the new 10 per cent rate, in place of the 25 per cent rate that currently applies to the thermal insulation of existing industrial buildings.

Operative date 4. These changes will have effect in respect of expenditure incurred on or

after 1 April 2008 for businesses within the charge to corporation tax and 6 April 2008 for businesses within the charge to income tax.

Current law and proposed revisions 5. Capital allowances allow business to write off the costs of capital assets,

such as plant and machinery, against their taxable income. They take the place of commercial depreciation, which is not allowed for tax. On and after 1 April 2008 (for corporation tax), or 6 April (for income tax), the rate of WDA will be 20 per cent per annum for general plant and machinery, and 10 per cent per annum for “special rate” plant and machinery (BN08), both on a reducing balance basis.


6. From 1 April 2008 (for corporation tax), or 6 April 2008 (for income tax), expenditure on certain “integral features”, as described in a short list, will attract the 10 per cent “special rate” of WDAs. These assets are: • electrical systems (including lighting systems); • cold water systems; • space or water heating systems, powered systems of ventilation, air

cooling or air purification, and any floor or ceiling comprised in such systems;

• lifts, escalators, and moving walkways; • external solar shading; and • active facades.

7. The legislation will also provide that, on and after the operative date (in

paragraph 4) the 10 per cent “special rate” of WDAs will have effect for both initial and replacement expenditure on the designated integral features, preventing a revenue deduction in those cases where this might otherwise have been claimed. For this purpose, “replacement expenditure” is defined as expenditure incurred where either the whole, or more than 50 per cent of the integral feature is replaced in a 12-month period. The “more than 50 per cent” test will be determined by reference to the replacement cost of the asset when expenditure is first incurred within the 12-month period in question.

8. Currently, WDAs at 25 per cent a year are available for expenditure on

adding thermal insulation to an industrial building. From 1 April 2008 (corporation) tax or 6 April 2008 (income tax) WDAs will be extended to expenditure on the thermal insulation of all existing buildings, used for any qualifying business purpose, other than residential property businesses. However, allowances on all such thermal insulation will, in future, be restricted to the new 10 per cent rate.

9. The detailed design of the new integral features classification was included

in a formal consultation launched in July 2007 and draft legislation was published in a technical note in December 2007. The draft legislation relating to replacement expenditure on integral features will be included in Finance Bill 2008.

Further advice 10. If you have any questions about this change, please contact Joy Guthrie



BN08

CAPITAL ALLOWANCES: PLANT AND MACHINERY: RATE CHANGES & NEW SPECIAL RATE POOL

Who is likely to be affected? 1. Businesses investing in plant and machinery. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to reduce the main rate

of writing-down allowances (WDAs) for new and unrelieved expenditure on general plant and machinery (including cars) allocated to a pool from 25 per cent to 20 per cent. This change is part of the business tax reform package announced at Budget 2007.

3. The legislation will also increase the rate of WDA on long-life assets from

6 per cent to 10 per cent. Any unrelieved expenditure in the long-life asset class pool will, for chargeable periods starting on or after the operative date, be allocated to a new, 10 per cent “special rate” pool. Long-life asset pools will cease to exist for all accounting periods starting on or after the operative date.

Operative date 4. The measure has effect for the calculation of WDAs for chargeable periods

ending on or after 1 April 2008 for businesses within the charge to corporation tax and on or after 6 April 2008 for businesses within the charge to income tax.


such as plant and machinery, against their taxable income. They take the place of commercial depreciation, which is not allowed for tax. The general rate of plant and machinery WDA is currently 25 per cent per annum on a reducing balance basis. For expenditure on long-life assets the rate of plant and machinery WDA is currently 6 per cent per annum on a reducing balance basis.

Main rate of writing-down allowance (WDA) 6. The main rate of WDA will be reduced from 25 per cent to 20 per cent from

1 April 2008 (corporation tax) or 6 April 2008 (income tax). The rate changes have effect from a fixed date, so for those businesses where the chargeable period spans the change date a hybrid rate will have effect for the whole of that transitional chargeable period.


New special rate pool WDA 7. On and after 1 April 2008 (corporation tax) or 6 April 2008 (income tax) a

new special rate pool will be introduced. With effect from those dates, expenditure on long-life assets, thermal insulation and integral features (see BN07) will be allocated to the new special rate pool and the rate of WDA applicable to that pool will be 10 per cent per annum on a reducing balance basis.

Long-life asset pool: transitional provisions 8. Where the chargeable period of a business begins on 1 April 2008

(corporation tax) or 6 April 2008 (income tax) any unrelieved expenditure in the long-life asset pool immediately before those dates will be transferred to the new special rate pool and will qualify for 10 per cent WDAs. However, when the chargeable period of a business spans those operative dates, the following transitional provisions will have effect - • no new expenditure incurred on or after 1 (or 6) April 2008 is to be

allocated to the long-life asset pool – it must be allocated to the special rate pool;

• a hybrid rate will have effect for existing expenditure in the long-life asset pool for the whole of the that transitional chargeable period and

• at the start of the next chargeable period, all unrelieved expenditure in the long-life asset pool will be transferred to the new special rate pool.

Hybrid rate 9. For businesses whose chargeable period spans 1 April (corporation tax) or

6 April 2008 (income tax) a hybrid rate will have effect for unrelieved expenditure in any pool, including single asset pools. There will be two hybrid rates: • one for any expenditure that qualifies for the current 25 per cent WDA;

and • the other for any expenditure that qualifies for the current 6 per cent

WDA. 10. The hybrid rate is arrived at by calculating the proportion of a chargeable

period falling before the change date and the corresponding proportion falling after the change date. For example, if a company’s chargeable period began on 1 January 2008 and ends on 31 December 2008, one quarter of that period would fall before the date of the change (on 1 April 2008) and three-quarters would fall after that date. The calculation of the hybrid rate on the main rate of WDAs would therefore be as follows:

91/366 x 25% = 6.22% Plus 275/366 x 20% = 15.03%

Therefore, hybrid rate for transitional period = 21.25% Ready reckoner 11. The calculation of the hybrid rate is intended to be straightforward, but to

further simplify the calculation, HMRC will provide a ready reckoner to assist businesses in calculating the hybrid rate for any chargeable period affected by the transitional provisions.






BN09

NORTH SEA FISCAL REGIME Who is likely to be affected? 1. Oil and gas companies that operate in the UK or on the UK Continental

Shelf. General description of the measure 2. Legislation will be included in Finance Bill 2008 to give companies greater

access to corporation tax (CT) and Petroleum Revenue Tax (PRT) relief for the costs of decommissioning North Sea infrastructure. This will be achieved by extending the period in which CT losses can be carried back, extending the post-cessation period in which costs can be claimed for CT purposes and extending the scope for PRT relief where companies are called upon to meet such costs as a result of a default by another company.

3. Fields that are never going to be liable for PRT will be able to elect to

come out of the PRT regime. There will also be a simplification of the PRT returns regime to reduce the level of information companies have to provide.

4. Capital allowances rules will change to provide 100 per cent first-year

allowances for new expenditure on long-life assets and mid-life decommissioning. Existing long-life assets will get the same 10 per cent writing down allowance as is proposed for non-oil and gas production assets (see BN08).

Operative date 5. As there are a number of proposed changes, there are range of operative

dates: • the decommissioning changes have effect respectively for CT losses

incurred in accounting periods beginning on or after 12 March 2008; for ring fence CT trades that cease on or after 12 March 2008; and for PRT default expenditure incurred on or after 30 June 2008;

• elections to come out of the PRT regime may be submitted on or after the date Finance Bill receives Royal Assent;

• the changes to the reporting requirements for simplified PRT returns will have effect for chargeable periods ending on or after 30 June 2008; and

• the capital allowances changes will have effect for expenditure incurred on or after 12 March 2008.


Current law and proposed revisions 6. Under the current law as it relates to decommissioning:

• companies can carry decommissioning losses back three years; • after their ring fence trade has ceased, companies can only get tax

relief for decommissioning costs incurred within three years of the trade ceasing; and

• where a company is liable to meet decommissioning costs in respect of a field and defaults on its obligation, companies that have previously operated in that field can be held liable for the costs. In such a situation, no relief is available for PRT purposes for those companies meeting the cost because of the default of others.

7. Under the current law as it relates to the operation of PRT:

• even if a field will never be liable to PRT, because of the allowances available to it, the field remains within the PRT regime and has certain reporting obligations; and

• companies are required to return to HM Revenue & Customs (HMRC) details of all sales of oil to enable HMRC to have sufficient information to calculate a market value for non-arm’s length sales.

8. Under the current law as it relates to the capital allowances regime for

assets used for the purposes of oil and gas production in the North Sea: • expenditure on long-life assets (those with a useful economic life of

25 years or more) and expenditure on decommissioning which is not part of a programme of abandonment of the field (so-called ‘mid-life decommissioning), do not qualify for the 100 per cent first-year allowances which applies to other capital spending in oil and gas production in the UK Continental Shelf; and

• long-life assets receive 24 per cent allowances in the first year and 6 per cent thereafter. Mid-life decommissioning receives 25 per cent allowances on a reducing balance basis.

9. The new rules for decommissioning will:

• allow companies to carry back decommissioning costs to 17 April 2002, the date of the introduction of the supplementary charge for profits from oil and gas production in the UKCS;

• provide for companies to claim the post-cessation costs of decommissioning fields for tax purposes until such time as the decommissioning has been properly completed; and

• provide PRT relief where an ex-participator in a field is obliged to meet decommissioning costs in a field because of default by a current participator.

10. The new rules for the operation of PRT will:

• allow companies to elect to come out of the PRT regime on the basis that such fields will not become liable to PRT, because of the level of allowances available, for the rest of the life of the field. Companies will have to provide information in support of the election with the final decision resting with HMRC; and

• only require companies to make returns to HMRC of details of sales of certain types of oil, what is referred to in the legislation as Category 2 oil.


11. The new rules for capital allowances for assets used for the purposes of oil

and gas production in the UKCS will: • extend the 100 per cent allowances regime to new expenditure on long

life assets and mid-life decommissioning; and • increase the rate of writing down allowances for existing long life

assets from 6 per cent to 10 per cent, in line with the wider capital allowances changes announced today (see BN08).

Further advice 12. If you have any questions about this change, please contact Mike Crabtree

on 020 7438 6576 (email: [email protected]) or Paul Philip on 020 7438 6993 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN10

100 PER CENT FIRST-YEAR CAPITAL ALLOWANCES FOR NATURAL GAS, BIOGAS AND HYDROGEN REFUELLING

EQUIPMENT Who is likely to be affected? 1. Businesses planning to purchase equipment for refuelling vehicles with

natural gas, biogas or hydrogen fuel. General description of the measure 2. The 100 per cent first-year allowance (FYA) for expenditure incurred on

natural gas and hydrogen refuelling equipment due to end on 31 March 2008 will be extended for an additional five years to 31 March 2013. Its scope has also been extended to include refuelling equipment for biogas.

Operative date 3. The measure will have effect for expenditure incurred on or after

1 April 2008. Current law and proposed revisions 4. Business expenditure on plant and machinery normally qualifies for tax

relief as capital allowances, which on and after 1 April 2008 are given at the rate of 20 per cent a year on a reducing balance basis.

5. A scheme exists that gives 100 per cent FYAs to businesses that

purchase equipment required to refuel natural gas and hydrogen powered vehicles. This scheme is due to end on 31 March 2008.

6. Legislation will be introduced in Finance Bill 2008 to extend this scheme

for five years, to 31 March 2013, and on and after 1 April 2008 extend its scope to include biogas refuelling equipment for vehicles. Biogas is a non-fossil fuel substitute for natural gas.

Further advice 7. If you have any questions about this change, please contact Nick Williams

on 020 7147 2541 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN11

100 PER CENT FIRST-YEAR ALLOWANCES FOR EXPENDITURE ON CARS WITH LOW CARBON DIOXIDE

EMISSIONS. Who is likely to be affected? 1. Businesses that purchase new, unused (not second hand) low carbon

dioxide (CO2) emission cars or lease low CO2 emission cars. General description of the measure 2. The 100 per cent first-year allowance (FYA) for expenditure on cars with

CO2 emissions not exceeding 120g/km is due to end on 31 March 2008. Legislation will be introduced in Finance Bill 2008 to:

• extend the scheme for an additional five years until 31 March 2013; • reduce the qualifying emissions threshold so that only expenditure

on cars with CO2 emissions not exceeding110g/km driven will attract the 100 per cent FYA; and

• introduce a transitional rule to ensure that any leasing contracts entered into before 1 April 2008 involving cars which qualified as low emissions cars under the old rules are unaffected by the reduction of the qualifying CO 2 emissions limit to 110g/km and below.

Operative date 3. This measure will have effect for expenditure incurred on or after

1 April 2008. Current law and proposed revisions 4. Capital allowances allow business to write off the costs of capital assets,

such as plant and machinery, against their taxable income. They take the place of commercial depreciation, which is not an allowable deduction in computing profits for tax purposes. On and after 1 April 2008 the general rate of plant and machinery writing down allowance (WDA) will be 20 per cent per annum on a reducing balance basis.

5. 100 per cent first-year allowances (FYAs) bring forward the time tax relief is available by enabling a business to claim relief on the full cost of an asset against its profits for the year in which the investment is made. 6. A scheme exists that gives 100 per cent FYAs to all businesses that

purchase new cars with CO2 emissions not exceeding 120g/km driven. The scheme is due to end on 31 March 2008. This measure will extend the scheme for an additional five years to 31 March 2013.


7. The definition of a qualifying low CO2 car will also be amended. For expenditure incurred on or after 1 April 2008 the applicable CO2 emissions threshold will be reduced from not exceeding 120g/km driven to not exceeding 110g/km driven.

8. Low emission cars are not subject to the special rules for cars costing over

£12,000. So it has been necessary to introduce a transitional rule to ensure that lessees who have entered into contracts to lease cars that currently qualify as low CO2 emission cars do not find mid lease, that as a result of the change to the definition of a low CO2 emissions car, their cars no longer qualify as such.

9. This rule will ensure that payments on leases in existence on

31 March 2008 for cars costing over £12,000 with CO2 emissions above the new threshold but below the current threshold (i.e. between 110g/km and 120g/km) are not subject to the LRR for the period on and after 1 April 2008 until the expiry of the lease.

Further advice 10. If you have any questions about this change, please contact Annie Carney



BN12

CAPITAL ALLOWANCES: PLANT AND MACHINERY: ANNUAL INVESTMENT ALLOWANCE

Who is likely to be affected? 1. Businesses investing in plant and machinery. General description of the measure 2. Legislation will be included in Finance Bill 2008 to introduce a new annual

investment allowance (AIA) for the first £50,000 of a business’s expenditure on most plant and machinery each year. This change is part of the business tax reform package announced at Budget 2007.

3. The new AIA will be available to:

• any individual carrying on a qualifying activity (this includes trades, professions, vocations, ordinary property businesses and individuals having an employment or office);

• any partnership consisting only of individuals; and • any company (subject to the limitations described below).

Operative date 4. The measure will have effect for expenditure incurred on or after

1 April 2008, for businesses within the charge to corporation tax, and on or after 6 April 2008, for businesses within the charge to income tax.


such as plant and machinery, against their taxable income. They take the place of commercial depreciation, which is not allowed for tax. On and after 1 April 2008 (for corporation tax), or 6 April (for income tax), the rate of writing down allowances (WDAs) will be 20 per cent per annum for general plant and machinery, and 10 per cent per annum for “special rate” plant and machinery, (see BN08), both on a reducing balance basis.

6. On or before 31 March 2008 (for companies) or 5 April 2008 (for

unincorporated businesses), small and medium-sized enterprises (SMEs) can continue to claim a first-year allowance (FYA) on certain expenditure on plant or machinery. For expenditure incurred on or before those dates, the FYA rate for small enterprises is 50 per cent and for medium-sized enterprises the rate is 40 per cent of the expenditure incurred. The SME first-year allowance will no longer be available for any expenditure incurred on or after 1 April (corporation tax) or 6 April 2008 (income tax).


7. On and after 1 April 2008 (corporation tax) or 6 April 2008 (income tax) most businesses, regardless of size, will be able to claim the new AIA on the first £50,000 spent on plant or machinery (subject to the exclusions set out in paragraphs 18-19). Businesses will be able to claim the AIA in respect of expenditure on long-life assets and integral features (see BN07), as well as on general plant and machinery.

8. Where businesses spend more than £50,000 in any chargeable period,

any additional expenditure will be dealt with in the normal capital allowances regime, entering either the special rate or main pool, where it will attract WDAs at the appropriate rate, (see BN08).

9. Where a business has a chargeable period which is more or less than a

year, the maximum allowance is proportionately increased or reduced. However, where a business has a chargeable period that spans 1 April 2008 (corporation tax) or 6 April 2008 (income tax) the maximum allowance is calculated as if the chargeable period began on either 1 or 6 April 2008 (as the case may be) and ended at the end of the chargeable period. So, for example, a company with a chargeable period from 1 January 2008 to 31 December 2008 would calculate its maximum entitlement to an AIA for that chargeable period based on the period from 1 April 2008 to 31 December 2008. Its maximum allowance for the transitional period would therefore be 9/12 x £50,000 = £37,500.

10. The AIA complements and does not replace any of the existing

100 per cent FYA schemes. Similarly, expenditure that qualifies for 100 per cent allowances under separate capital allowances codes (for example, Research & Development Allowances or Business Premises Renovation Allowances) will be unaffected by the introduction of the AIA.

Targeting the AIA Companies 11. Companies that fall within the company law definition of a group are legally

and economically inter-dependent and will therefore receive a single allowance per group. Where a person, or persons together, control a singleton company, but do not control any “related” company each such company will be entitled to its own AIA.

Individuals and partnerships 12. Where an individual or individuals control(s) an unincorporated business or

more than one unincorporated business, but he/she/they do not control a “related” unincorporated business, each separate and distinct business will be entitled to its own AIA.

“Related” companies and businesses 13. The rules on “related” companies and businesses under common control

will only have effect for a very small minority of businesses. Most people do not control a multiplicity of related businesses, and so will not be affected by these rules. The rules will only have effect where a person (or


persons) control(s) a company or unincorporated business in their own right. The wider “connected persons” and “associated company” rules are not relevant for the purposes of determining an entitlement to AIA.

14. Where a person or persons control(s) one or more unincorporated

businesses or companies, (but not a combination of the two, as the entitlement to an AIA for companies is considered totally separately from that for unincorporated businesses, and vice versa) then the entitlement to one or more AIA will depend on whether either “the shared premises” or “similar activities” condition is met. If either of the conditions is met then the companies, or as the case may be, the unincorporated businesses will be “related” and so only entitled to a single AIA between them.

15. For businesses under common control, the two conditions are considered

on a financial year basis for companies and on a tax year basis for unincorporated businesses: • The “shared premises” condition has effect, if in a tax or financial year

(as the case may be), at the end of the chargeable period for one or both of the businesses the activities are carried on from the same premises.

• The “similar activities” condition has effect, if in a tax or financial year (as the case may be), at the end of the chargeable period for one or both of the businesses, more than 50 per cent of each business’s activities (measured by turnover) are within the same “NACE classification”.

16. The “NACE classification” is the common statistical classification of

economic activities in the European Union established by Regulation (EC) No 1893/2006 of the European Parliament and the Council of 20 December 2006 and is generally accepted as a convenient way of classifying activities into a common structure. Some general background and a description of the first level of statistical classification that will have effect for AIA purposes is available on the Office of National Statistics’.

Freedom of allocation for groups and “related” businesses 17. In addition to the freedom to allocate the AIA between different types of

plant and machinery expenditure mentioned in paragraph 7, groups of companies and “related” companies, individuals and partnerships will be free to allocate their AIA between businesses as they see fit.

Exclusions 18. The AIA will have effect for most plant and machinery expenditure, but

certain exceptions that apply to FYAs (SME FYAs are mentioned earlier at paragraph 6) will continue to have effect for the purposes of the AIA. The main exception is expenditure on cars. However, unlike SME FYAs, the AIA will be available for expenditure on long-life assets and assets for leasing.


19. Furthermore the AIA will not be available where transactions are entered into where the main purpose or one of the main purposes is to enable a person to obtain an annual investment allowance to which they would not otherwise have been entitled.




BN13

ENHANCED CAPITAL ALLOWANCES FOR ENERGY EFFICIENT AND WATER SAVING

(ENVIRONMENTALLY-BENEFICIAL) TECHNOLOGIES Who is likely to be affected? 1. Businesses purchasing designated plant and machinery which is energy

efficient, reduces water use or improves water quality. General description of the measure 2. The Energy Efficient and Water Saving (environmentally-beneficial)

Enhanced Capital Allowance (ECA) schemes allow businesses investing in designated technologies that reduce energy consumption, save water or improve water quality to write off 100 per cent of the cost against the taxable profits of the period during which the investment was made.

3. This measure will add to the List of technologies covered by the schemes. Operative date 4. The changes to the schemes will have effect on and after a date to be

appointed by Treasury order to be made prior to the Summer 2008 Parliamentary recess.

Current law and proposed revisions 5. Capital expenditure by business on plant and machinery normally qualifies

for tax relief by way of capital allowances, which on and after 1 April 2008 will be given at the rate of 20 per cent a year on a reducing balance basis.

6. Two schemes exist that give 100 per cent first year allowances for

expenditure on certain energy-saving and water technologies. Following the annual review of the qualifying technologies, the schemes will be revised. These revisions will be made by Treasury order.

7. The qualifying technologies are published in Lists: the Energy Technology

Criteria List and the Water Technology Criteria List which every year are reviewed by Defra to ensure that the qualifying technologies, and the criteria that technologies must meet if they are to qualify for the relief, are still relevant.

8. Following this year’s review, the Water Technology Criteria List will be

revised to include one new technology: waste water recovery and reuse systems. The Energy Technology Criteria List will be revised to include four additional sub-technologies: compressed air master controllers; compressed air flow controllers; heat pump dehumidifiers and white LED lighting. Housekeeping changes will also be made to existing criteria.


9. At Budget 2007, the Government announced that it would review the

qualifying criteria for the good quality Combined Heat and Power technology within the Energy Efficient Technologies scheme, to ensure that it included all the necessary equipment to enable such facilities to use solid refuse waste as a fuel. That work is now complete and steps will be taken to revise the qualifying criteria at the same time as the other changes.

10. All revisions will be incorporated in new Lists which will be published later

in 2008. Once these have been published a Treasury Order will link them to the schemes. The lists are available on the internet at www.eca.gov.uk

Further advice 11. If you have any questions about this change, please contact Nick Williams,



BN14

CAPITAL ALLOWANCES: INTRODUCTION OF FIRST-YEAR TAX CREDITS

Who is likely to be affected? 1. Companies within the charge to corporation tax that make a loss in a

period in which they invest in certain designated energy-saving or environmentally-beneficial plant & machinery.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to enable loss-making

companies to surrender losses attributable to 100 per cent first-year allowances (enhanced capital allowances) on designated energy-saving or environmentally-beneficial plant and machinery in exchange for a cash payment (a first-year tax credit) from Government. This change is part of the business tax reform package announced in Budget 2007.

Operative date 3. Companies will be able to claim first-year tax credits in respect of

qualifying expenditure incurred on or after 1 April 2008. Current law and proposed revisions 4. Section 52 of the Capital Allowances Act 2001 (CAA) entitles a person to

claim a first-year allowance (FYA) in respect of qualifying expenditure on plant and machinery, the rate of which depends on the type of expenditure. Enhanced capital allowances (ECAs) are 100 per cent FYAs available to businesses that invest in certain qualifying ‘green’ plant and machinery.

5. The effect of a 100 per cent FYA is that the full cost of the plant and

machinery incurred in a period may be deducted in computing the taxable profits of a business for that period. The new rules will expand this ECA regime and allow companies within the charge to corporation tax to surrender tax losses attributable to certain ECAs for a cash payment from Government (a first-year tax credit).

6. A company will be able to surrender tax losses from a trade, an ordinary

property business, an overseas property business, a furnished holiday lettings business or from managing the investments of a company with investment business. The losses that may be surrendered will be those attributable to ECAs claimed on energy-saving (as defined in section 45A of CAA) or environmentally-beneficial plant and machinery (as defined in section 45H of CAA). Plant and machinery attracts ECAs if it appears on one of the product or criteria lists issued and maintained by the Secretary of State for Department for Environment, Food and Rural Affairs (Defra).


7. A company will receive a first-year tax credit of 19 per cent of the loss

surrendered, although this is subject to an upper limit. The upper limit of the tax credit will be the greater of:

• the total of the company’s PAYE and National Insurance Contributions (NICs) liabilities for the period for which the loss is surrendered; or

• £250,000. 8. A loss may only be surrendered for a first-year tax credit if it has not been

otherwise relieved. Where the loss could be used by the company to off-set its own other taxable profits in the same period or surrendered as group relief then it may not be surrendered for a first-year tax credit. Any losses available to carry forward will be reduced by the amount of the loss that has been surrendered under the new rules.

9. A company must claim first-year tax credits in a return or amended return.

As part of the claim a company must provide: • a description of the ECA qualifying plant and machinery; and • the amount of expenditure on this plant and machinery; and • the date on which the expenditure was incurred.

Where the plant and machinery is of a type that requires certification by Defra under section 45B or 45I of CAA in order to qualify for ECAs then the certificate must also be enclosed with the claim.

10. The new rules will contain a mechanism for clawing back first-year tax

credits when the ECA qualifying plant and machinery is sold within the claw-back period. This period begins on the date the expenditure was incurred and ends four years after the end of the period for which the tax credit was paid.

11. A Payable Enhanced Capital Allowances technical note was issued on

17 December 2007 and is available on HM Revenue & Customs website. Further advice 12. If you have any questions about this change, please contact Sue Pennicott

on 020 7147 2627 (e-mail: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN15

CAPITAL ALLOWANCES: SMALL PLANT AND MACHINERY POOLS

Who is likely to be affected? 1. Businesses investing in plant and machinery, particularly small and micro

businesses whose future expenditure on plant and machinery may be fully relieved by the annual investment allowance (AIA) (see BN12), but which have small historic pools of unrelieved expenditure, or businesses that may acquire such small pools in future.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to allow businesses to

claim a plant and machinery writing-down allowance (WDA) of up to £1,000 where the unrelieved expenditure in the main pool or the new special rate pool (see BN08) is £1,000 or less. This is in response to comments made by business in consultation on the proposal to introduce the new AIA (see BN12) which is part of the business tax reform package announced at Budget 2007.

3. The measure will be a permanent feature of the plant and machinery code

and will have effect for both the main 20 per cent pool and the special rate 10 per cent pool. It will provide a significant administration burden saving, especially to small and micro businesses, as businesses will no longer have to calculate WDAs on very small balances for many years, as would have been required under the current rules.

4. However, the measure will not have effect for any expenditure in ‘single

asset’ pools as they have special rules that bring them to an end at a specified time.

Operative date 5. The measure will have effect for chargeable periods beginning on or after

1 April 2008 for businesses within the charge to corporation tax and on or after 6 April 2008 for businesses within the charge to income tax.


such as plant and machinery, against their taxable income. They take the place of commercial depreciation, which is not allowed for tax. On and after 1 April 2008 (for corporation tax), or 6 April (for income tax), the rate of WDA will be 20 per cent per annum for general plant and machinery, and 10 per cent per annum for “special rate” plant and machinery (BN08), both on a reducing balance basis.


7. In general, WDAs are calculated on the amount by which the “available

qualifying expenditure” (AQE) exceeds the total disposal receipts (TDR) to be brought into account in that pool for that period. When calculating WDAs there is no de minimis rule so, for example, businesses with £1,000 of unrelieved expenditure and no new expenditure or disposal receipts would have to carry on calculating the annual writing down allowance for many years, even if the business may, for example, have scrapped the asset that gave rise to the allowances in the first place.

8. Legislation to be introduced in Finance Bill 2008 will enable businesses to

claim a WDA of up to £1,000 in the case of each pool, once the unrelieved expenditure (or AQE minus TDR) in either the main rate pool and/or the special rate pool is £1,000 or less. Businesses do not have to claim the maximum allowance in respect of the balance in their small pools. Businesses with a main or special rate pool of £1, 000 or less can claim less than the whole residue if they prefer. This ensures that very small unincorporated businesses will not be disadvantaged by being required to take the full allowance immediately.




BN16

VENTURE CAPITAL SCHEMES Who is likely to be affected? 1. Investors under the Enterprise Investment Scheme (EIS), the Corporate

Venturing Scheme (CVS) and the Venture Capital Trust (VCT) scheme, companies which qualify to attract investment under those schemes, and venture capital trusts themselves.

General description of the measure 2. Subject to State aid approval of this change by the European Commission,

the limit on the amount invested on which an investor can claim EIS income tax relief in any one year will be increased from £400,000 to £500,000.

3. In addition, the activities of shipbuilding and coal and steel production will

be excluded from all three schemes. Companies whose trade consists to a substantial extent of those activities will not qualify under the schemes. As a result, investors will not be able to receive tax relief under these schemes for investments in companies carrying on any of those activities.

Operative date 4. For EIS, the changes to qualifying activities will have effect for shares

issued on or after 6 April 2008, but the change to the investment limit can only have effect once the European Commission has given approval. When State aid approval is received, the new limit will be brought into force but will have effect on and after 6 April.

5. For CVS, the changes to the qualifying activities will have effect for shares

issued on or after 6 April 2008. 6. For VCTs, the changes to the qualifying activities will have effect for

money raised on or after 6 April 2008 (but not for money derived from the investment of money raised before that date).

Current law and proposed revisions EIS income tax relief and investment limit 7. The limit on the amount on which an individual can receive EIS income

tax relief is currently in section 158(2) of Income Tax Act 2007 (ITA). 8. Legislation will be introduced in Finance Bill 2008 to raise this limit, but the

changes will only have effect when a Treasury order is laid, following State aid approval of the change.


Qualifying activities 9. The venture capital schemes are intended to support investment in

smaller, higher-risk, trading companies. Most trades qualify under the schemes, but not those that consist to a substantial extent of listed ‘excluded activities’.

10. These excluded activities are listed in the relevant legislation (for EIS –

section 192 of ITA; for VCTs – section 303 of ITA and for CVS – paragraph 26 of Schedule 15 to Finance Act 2000). Where necessary, more detailed explanation and definitions follow the list.

11. The proposed changes would, in each case, add three new activities –

shipbuilding, coal production and steel production – to the list, together with definitions. The definitions are based on those provided by the European Commission, for State aid purposes.

Further advice 12. If you have any questions about these changes, please contact David

Harris on 020 7147 2562 (email: [email protected]), or Richard Kent on 020 7147 2635 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN17

COMMUNITY INVESTMENT TAX RELIEF AND BANKING Who is likely to be affected? 1. Banks and Community Development Finance Institutions (CDFIs). General description of the measure 2. This measure will have effect for banks that invest in an accredited CDFI

under the Community Investment Tax Relief (CITR) scheme (‘the scheme’) and that also act as banker to the CDFI.

3. Legislation will be introduced in Finance Bill 2008 to ensure that any

deposits from the CDFI to the bank that are made in the ordinary course of its banking arrangements will not reduce the amount of CITR available to the bank in respect of its investment.

Operative date 4. The change will be treated as always having had effect. Current law and proposed revisions 5. CITR is a tax relief given to individuals and companies that invest in CDFIs

that are accredited under the scheme. The amount of relief is linked to the amount invested in the CDFI.

6. The scheme includes anti-avoidance rules such that, if the CDFI makes

payments, or otherwise returns value, to the investor during the year preceding the investment, or the five years following it, the amount of relief due to the investor is reduced.

7. These anti-avoidance rules are widely drawn. They apply to most

payments or transfers of value from CDFI to investors, with the exception of specified “qualifying payments”.

8. Deposits by a CDFI into a bank with which it runs an account are not

“qualifying payments”. So if a bank invests in a CDFI under the scheme, and the CDFI operates an account(s) with that same bank, deposits represent a return of value under the value-received rules. Each deposit effectively reduces the amount of the investment on which the bank can claim CITR.


9. Legislation introduced in Finance Bill 2008 will carve out of the anti-avoidance rules any deposits made by a CDFI in the course of its ordinary banking arrangements to an investor that is a bank.

10. The change will be treated as always having had effect. This retrospection

is wholly relieving in its effect. It is intended to ensure any banks that have previously invested in CDFIs under the scheme get the full benefit of that investment.

Further advice 11. If you have any questions about this change, please contact Richard Kent



BN18

ENTERPRISE MANAGEMENT INCENTIVES Who is likely to be affected? 1. Companies who wish to offer Enterprise Management Incentive (EMI)

share options to their employees. General description of the measure 2. To ensure compliance with EU State aid guidelines, legislation will be

introduced in Finance Bill 2008 to make two changes: • EMIs will be limited to qualifying companies with fewer than 250

employees; and • companies involved in shipbuilding, coal and steel production will no

longer qualify for EMI. 3. Regulations will be made to increase the individual employee limit on

grants of EMI qualifying options from £100,000 to £120,000. Operative date 4. The EMI option grant limit increase will have effect in respect of options

granted on or after 6 April 2008 and the qualifying company changes will have effect in respect of options granted on or after the date Finance Bill 2008 receives Royal Assent.

Current law and proposed revisions 5. EMIs are tax and National Insurance Contributions (NICs) advantaged

share options available to small companies with gross assets not exceeding £30 million, to help them recruit and retain employees. In addition to the gross assets test, EMI is limited to companies or groups which are independent and are not in one of the excluded trading activities listed in Paragraphs 16 to 23 of Schedule 5 to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). Furthermore, employees have to satisfy a working time requirement to be granted an EMI share option. Currently, employees cannot hold qualifying EMI options, taking into account Company Share Option Plan options also granted to them, with a total market value of more than £100,000 at date of grant.

6. To ensure EMI continues to meet the EU State aid guidelines, legislation

to be included in Finance Bill 2008 will make two changes to the EMI legislation in Schedule 5 to ITEPA. Firstly, it will insert an additional test to limit EMI to companies with fewer than 250 full-time employees. If a company has part-time employees, the full-time equivalent number of these can be calculated by adding to the number of full-time employees a just and reasonable fraction for each part time employee.


7. Secondly, the legislation will add shipbuilding, coal and steel production to

the list of excluded trades in the EMI legislation in Schedule 5 to ITEPA. 8. The qualifying company changes will have effect in respect of EMI share

options to be granted on or after the date Finance Bill 2008 receives Royal Assent. The changes will not have effect in respect of qualifying EMI share options already granted under the existing rules.

9. The change to the individual EMI option grant limit will have effect in

respect of options granted on or after 6 April 2008. This will allow qualifying companies to grant new or additional qualifying EMI options to their employees up to the new limit of £120,000.

Further advice 10. If you have any questions about this change, please contact Chris

Murricane on 020 7147 2818 or Ellie Mayor on 020 7147 2822 or by email to [email protected]. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN19

TRADING STOCK Who is likely to be affected? 1. Businesses that dispose of or appropriate goods from trading stock other

than in the course of trade and businesses that acquire or appropriate goods into trading stock other than in the course of a trade.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to put on a statutory

basis a long established rule which has effect where goods are appropriated into or from trading stock other than by way of trade. In such circumstances, the profits of the trade for tax purposes should be adjusted to replace the cost of the stock or the actual proceeds with their market value.

Operative date 3. The measure will have effect for all transactions whereby goods are

appropriated into or from trading stock other than in the course of trade on or after 12 March 2008.

Current law and proposed revisions 4. Business profits for tax purposes are generally calculated in line with

Generally Accepted Accounting Practice (GAAP). This has a statutory basis in section 42 of the Finance Act (FA) 1998 as amended by section 103(5) of the FA 2002.

5. However, section 42(1) of FA 1998 makes clear that this basic principle is

subject to ‘any adjustment required or authorised by law in computing profits for those purposes’. In other words, tax law, either in statute or case law, will take precedence in situations where it differs from accountancy practice.

6. One example in which GAAP differs from tax law in this way is where

business stock is disposed of other than by way of a trading transaction. Under GAAP, such a transaction should be credited to the accounts at either the cost price of the stock or at the price actually paid on the disposal. However, for tax purposes, the GAAP treatment is overridden and the tax computation needs to be adjusted to reflect the appropriation from stock at market value (the market value rule’). This rule has been in place for many years.


7. The market value also has effect where goods are acquired or appropriated into trading stock other than in the course of a trade.

8. Legislation will be introduced in Finance Bill 2008 to put the market value

rule on a statutory basis. Its effect will be to preserve the current tax treatment of non-trade appropriations of goods into and from trading stock.

9. Draft legislation and explanatory notes have been published today on the

HM Revenue & Customs website. Further advice 10. If you have any questions about this measure, please contact Craig Mason

on 020 7147 2599 (email: [email protected]) or Fiona McRobert on 028 9093 9722 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN20

LEASED PLANT OR MACHINERY: ANTI-AVOIDANCE

Who is likely to be affected? 1. Businesses leasing plant or machinery. General description of the measure 2. This measure will counter avoidance by businesses who lease in and

lease out the same plant or machinery to exploit differences in the way in which lease rentals paid and received are taxed in order to generate a tax loss where there is no commercial loss.

3. The measure will also counter avoidance involving leases of plant or

machinery which are granted in return for a capital payment, often described as a premium, and similar arrangements, in circumstances where the capital payment currently escapes taxation.

4. Minor changes will be made to the leased plant or machinery anti-

avoidance measure which was announced on 9 October 2007. The changes will clarify the operation of the rules in a sale and finance leaseback and introduce new rules to ensure that lease and finance leaseback arrangements are treated in a similar way.

Operative date 5. The measure will generally have effect for transactions entered into on or

after 13 December 2007. Some aspects of the measure, as explained below, will have effect on and after 12 March 2008.

Current law and proposed revisions Mismatched lease chains 6. A business may act as an intermediate lessor, leasing in plant or

machinery under one lease and leasing it out under another. Such leases may be broadly similar but be designed to exploit differences in the way in which leases are taxed. The avoidance involves arrangements which allow the business, as lessee, to deduct all the lease rentals payable under the lease but, as lessor, to be taxed on only a small portion of the rentals receivable. This creates a tax loss where there is no commercial loss.


7. Legislation to address this will be included in Finance Bill 2008. This will ensure that rentals received by intermediate lessors will be taxed on the same basis as rentals paid and that intermediate lessors are taxed on their commercial profits.

Lease premiums 8. Businesses have been granting leases on plant or machinery for a

premium plus a small amount of annual rentals. The premium, which is commercially broadly equivalent to the sale of the asset, escapes tax because it is not brought in as a disposal receipt for capital allowances purposes and little or no tax would be payable under the chargeable gains regime.

9. This measure will ensure that, with the exceptions described below,

payments will be taxed as income of the lessor where they are not otherwise taxable as income or as a capital allowances disposal receipt, and which either: • are made by or on behalf of the lessee to the lessor or to another

person on the lessor’s behalf and are paid in connection with the grant of a lease or in other specified circumstances; or

• reduce the rentals otherwise payable under the lease. 10. Where payments are made on or before 11 March 2008, the new rules will

have effect only for payments made in respect of leases of plant or machinery that are not leased with other assets.

11. Where payments are made on or after 12 March 2008 the rules will also

have effect for plant or machinery (other than fixtures) leased with other assets but only to the extent that: • it is reasonable to attribute the capital payment to that plant or

machinery; and • if the payment were income, it would not be taxable under Schedule A.

12. These rules are designed to ensure that payments associated with typical

real property leases will not be affected by the measure. 13. In addition, the rules will not have effect for:

• payments made in connection with long funding leases where the lessor is not entitled to claim capital allowances because of the effect of section 34 of the Capital Allowances Act 2001 (CAA);

• contributions made by the lessee that reduce the lessor’s qualifying expenditure for capital allowances purposes;

• indemnity payments made by the lessee to the lessor to compensate the lessor for a loss arising as a result of damage to, or damage caused by, the leased asset.

14. The measure will also counter attempts to reduce or avoid a disposal

value for capital allowances and chargeable gains purposes on the granting of a long funding finance lease.


15. In each case, the disposal value is based on the value of the leased asset as shown in the lessor’s balance sheet. This value can be reduced where rentals are payable on the day the lease is entered into or where the leased asset is linked to a corresponding liability, requiring the asset and liability to be netted off.

16. This measure will ensure that the disposal value is not reduced where

rentals are receivable on the day on which the lease is granted. In addition, where the lease is granted on or after 12 March 2008, the measure will ensure that the disposal value is not reduced by matching the leased asset with liabilities in a way that means the lessor’s net investment in the lease is reduced or eliminated. From that date, the disposal value will be determined on the basis that the lessor has no liabilities.

Sale and finance leaseback 17. The draft legislation published on 9 October 2007 provided that, in the

case of a sale and finance leaseback, the finance lease should not be treated as a short lease. In most cases, this means it will be treated as a long funding lease. There may be more than one finance lease in the leaseback arrangements and, with effect on and after 12 March 2008, it will be made clear that none of these finance leases should be treated as a short lease, so no lessor in the leaseback arrangements is entitled to claim capital allowances.

Lease and finance leaseback 18. The draft legislation published on 9 October 2007 made no special

provision for the taxation of the finance lease (or leases) in the leaseback part of a lease and finance leaseback. With effect on and after 12 March 2008, it will be made clear that each finance lease in the leaseback should not be treated as a short lease, so no lessor in the leaseback arrangements is entitled to claim capital allowances.

19. Following the introduction of this measure, section 228B of CAA, which

restricts the amount that a lessee may deduct in a lease and finance leaseback, only has effect in exceptional circumstances. Nevertheless, with effect from 12 March 2008, an amendment will be made that will ensure the rules have effect where the leaseback is to a person connected to the head lessor.

Further advice 20. Draft legislation, covering mismatched lease chains and lease premiums,

was published on 13 December 2007. 21. If you have any questions about this change, please contact Paul Lane on

020 7147 2637 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN21

FINANCIAL PRODUCTS AVOIDANCE: DISGUISED INTEREST AND TRANSFERRING RIGHTS TO LEASE RENTALS

Who is likely to be affected? 1. Large companies who enter into arrangements to avoid tax on returns

from investments that are economically equivalent to interest. 2. Companies leasing plant or machinery that sell the right to lease rental

income. General description of the measure 3. These measures address a number of avoidance schemes that have been

notified to HM Revenue & Customs under the disclosure rules introduced in Finance Act (FA) 2004. Most involve arrangements that give rise to amounts that in substance are interest but which are designed not to be taxable as interest (“disguised interest”). One involves an arrangement which aims to exploit existing legislation on disguised interest so as to generate artificial losses.

4. Work will continue to develop a “principles-based”, or generic, approach to

ensuring that all such arrangements are taxed in the same way as interest, with the intention of legislating in Finance Bill 2009. However, in order to tackle immediate avoidance, legislation will be introduced in Finance Bill 2008 to block the following schemes:

a) Arrangements to avoid corporation tax by receiving interest in the form of non-taxable distributions;

b) Arrangements as a result of which the charge to tax on interest is reduced or eliminated by credits for overseas tax in circumstances where no such tax is ever suffered;

c) Avoidance of corporation tax by the adoption of differing accounting treatments within a group for convertible debt;

d) Arrangements where companies acquire partnership rights in advance for an amount equal to the discounted value of the rights so as to generate disguised interest;

e) Arrangements (previously dealt with by section 131 of FA 2004) where companies that are members of partnerships obtain disguised interest on partnership contributions by altering profit-sharing ratios;

f) Schemes where attempts are made to exclude from the derivative contracts legislation transactions that are designed to produce disguised interest.

Legislation will also be introduced to stop schemes that are intended to avoid or exploit the 2005 “shares as debt” rules in sections 91A and 91B of FA 1996 by means of:


g) Depreciatory transactions intended to create artificial losses; h) Rates of interest said to be “uncommercial”; i) Spreading disguised interest between two or more companies; j) “Falsifying transactions” that without affecting the overall return are

said to prevent the legislation from applying; k) Use of exit strategies that do not amount to exit arrangements for

the purpose of the shares as debt rules. 5. In addition, the measure will counter notified schemes that are intended to

allow lessors of plant or machinery to dispose of the right to taxable income in exchange for a tax-free sum. The changes will ensure that where the right to receive rentals is transferred the value receivable will be taxed as income.

Operative date 6. The changes have effect in relation to the countermeasures on disguised

interest: • for schemes (a), (b) and (f), credits that relate to any time on or

after 12 March 2008; • for scheme (c) credits and debits that relate to any time on or after

12 March 2008; • for schemes (d) and (e), returns that relate to any time on or after

12 March 2008; • for scheme (g) debits that relate to any time on or after 12 March

2008; • for schemes (h) to (k) shares held on 12 March 2008, but so that no

amounts are brought into account unless they relate to times on or after 12 March 2008;.

7. Where the right to receive rentals under a lease of plant or machinery is

transferred, the measure will have effect where the arrangements to transfer are entered into on or after 12 March 2008.

Current law and proposed revisions Disguised interest 8. In outline, the proposed changes will block the schemes as follows:

a) a company that receives interest which is treated for tax purposes as a distribution will be taxable on the distribution if it arises in connection with tax avoidance;

b) the entitlement to the tax credit under section 807A(3) of the Income and Corporation Taxes Act 1988 (ICTA) will be removed by its repeal;

c) where tax asymmetry arises because different accounting treatment is adopted by holder and issuer in relation to intra-group convertible debt, then the holder will be required to bring into account additional credits to match the issuer’s debits;

d) and e) where the relevant conditions are met a company deriving disguised interest from an interest in a partnership will be charged to corporation tax on that return;

f) the derivative contract rules will be amended to ensure that where


derivative contracts whose underlying subject matter is shares are designed to produce disguised interest, then that return will be charged to tax under the derivative contract rules.

The shares as debt rules (sections 91A to 91G of FA 1996) will be amended so that: g) no debits of any kind may be brought into account in respect of

shares to which those rules apply; h) the special tax definition of commercial rate of interest is repealed; i) the rules can apply where the disguised interest is spread between

two or more companies; j) falsifying transactions are ignored in a wider range of circumstances

than currently; k) exit arrangements include any case where it is reasonable to

assume that the investing company will become entitled to receive amounts equivalent to redemption proceeds.

Leases of plant or machinery 9. Section 785A Income and Corporation Taxes Acts 1988 is intended to

ensure that a person is taxed on the consideration received when the right to receive rental under a lease of plant or machinery is transferred to another person. Arrangements have been entered into that attempt to avoid that section by arranging for the transfer to take place –

• for value that is claimed not to amount to consideration received; • in such a way that it is not ‘to another person’; • shortly before the lessor migrates from the UK and before the

consideration is received. 10. Changes will be made to ensure that section 785A applies:

• where the right to rental is transferred for a value that may not amount to consideration;

• where the transferee is a partnership of which the transferor is a member or a trust of which it is a beneficiary;

• when the transfer takes place. 11. Draft legislation and explanatory notes are available on HMRC’s website. Further advice 12. If you have any questions about the changes regarding disguised interest,

please contact Richard Rogers on 020 7147 2625 (email: [email protected]) or Richard Thomas on 020 7147 2558 (email: [email protected]). If your question relates to the transfer of a right to lease income, please contact Paul Lane on 020 7147 2637 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN22

CONTROLLED FOREIGN COMPANIES: ANTI-AVOIDANCE Who is likely to be affected? 1. UK owned groups of companies with subsidiaries and activities outside the

UK, which are participating in any of the avoidance schemes described below.

General description of the measure 2. The purpose of the Controlled Foreign Companies (CFC) legislation is to

counter the artificial diversion of profits from the UK so as to avoid UK tax. It taxes those profits that arise to low-taxed foreign companies that are controlled by UK persons and which would have been subject to UK corporation tax as income had they not been artificially diverted from the UK. It does not have effect if the controlled foreign company qualifies for one of five exemptions.

3. Legislation will be introduced in Finance Bill 2008 to block a number of

artificial avoidance schemes that rely on the use of a partnership or a trust to escape a CFC charge either by misusing one of the exemptions from the CFC rules or by arranging for profits to be earned in such a way that they purportedly fall outside the scope of the rules.

4. HM Revenue & Customs (HMRC) does not believe that these schemes

work but these measures will put the question beyond doubt and close off opportunities for other similar avoidance schemes.

Operative date 5. The changes will have effect on and after 12 March 2008. For changes

that are relevant to an accounting period, the measure will provide that, for accounting periods that straddle that date, the accounting period will be split into periods before and from that date with the changes only having effect to the second part of that accounting period.

Current law and proposed revisions 6. To be treated as a CFC, a foreign company must be controlled by UK

residents. Section 755D of the Income and Corporation Taxes Act 1988 (ICTA) defines control for the purposes of the CFC rules.

7. In one avoidance scheme, an offshore trust owns more than 50 per cent of

the shares in an overseas company. The users of the scheme claim that the company is not controlled by UK residents even though the UK residents who hold the remaining shares retain the right to receive all of the company’s profits.


8. This measure will amend the definition of control for CFC purposes so that rights to income and assets will be taken into account in determining whether UK residents control the foreign company.

9. A foreign company is exempt from the CFC rules if it satisfies one of five

exemptions. One exemption is the exempt activities test. This exemption is made on the basis that a company that carries on genuine trading activities from a business establishment in the territory in which it is resident overseas can reasonably be assumed not to exist to artificially divert profits from the UK. The test is set out in paragraphs 5 to 12A of Schedule 25 to ICTA. Paragraphs 6, 12 and 12A provide that for holding companies to qualify, a minimum of 90 per cent of their gross income must come, generally by way of dividends, from companies they control that are carrying out exempt activities.

10. In a further avoidance scheme, the users seek to circumvent the test for

holding companies by arranging for non-dividend income (usually interest) to accrue in a partnership in which the holding company has a major interest. They claim that this income does not form part of the gross income of the company.

11. This measure will put beyond doubt that the gross income of a CFC

includes any income to which it is entitled (including the CFC’s share of any partnership income) and any trust income in respect of which the CFC is either settlor or beneficiary.

12. In order to compute the CFC charge, the chargeable profits of the CFC

have first to be calculated and those chargeable profits are then apportioned to the UK resident companies with an interest in the CFC. Chargeable profits are computed under section 747(6) of ICTA which broadly applies the rules of corporation tax to the CFC, except that chargeable gains are excluded.

13. An avoidance scheme is designed to ensure that income arises under a

trust arrangement in which assets have been settled by the holding company of a CFC. Users of the scheme claim that, for a number of reasons, the chargeable profits of CFCs linked to the trust cannot include income arising in the trust. This measure will ensure that such income will be included in the chargeable profits of the scheme participants for CFC purposes.

14. A CFC may pay a dividend to its UK shareholders under an acceptable

distribution policy (ADP) to avoid apportionment of its profits and a charge to UK tax under the CFC rules. This exemption is made on the basis that a dividend received by a UK company is taxable in the UK. But scheme users claim to be able to pay an ADP dividend out of profits other than those that have been diverted within the avoidance schemes.

15. Whether a CFC has arranged for income to accrue in a partnership or to a

trustee of a trust in relation to which it is a settlor or beneficiary, the measure will ensure that a dividend can only be paid under an ADP if it is paid out of the diverted profits within the avoidance schemes.


16. Draft legislation has been published today on the HM Revenue & Customs

website, together with a draft Explanatory Note. 17. HMRC is aware that a number of businesses (especially in the financial

sector) use foreign trusts and special purpose vehicles (SPVs) for wholly commercial purposes. Although the SPV’s shares are owned by the foreign trust, in many cases the SPV is nonetheless controlled by UK residents within the meaning of the CFC rules. But, since they exist for wholly commercial purposes, such SPVs are exempt from the CFC rules under the motive test. Where this measure newly brings SPVs that exist for wholly commercial purposes within the scope of the CFC rules, they will similarly be exempt from the rules by virtue of the motive test.

18. Any business, whether in the financial sector or otherwise, that would like

the certainty of comfort that the motive test will effect may seek an advance clearance from HMRC. More information about the clearance procedure and how to apply may be found in the HMRC International Manual at: www.hmrc.gov.uk/manuals/intmanual/INTM214120.htm

Further advice 19. If you have any questions about this change, please contact Ian Wright on




BN23

CORPORATE INTANGIBLE ASSETS REGIME: ANTI-AVOIDANCE

Who is likely to be affected? 1. Companies undertaking transactions in respect of intangible assets. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to clarify that the effect

of the ‘related party’ rules in the corporate intangible assets regime is unaffected by any administration, liquidation or other insolvency proceedings or equivalent arrangements that any company or partnership may be involved in.

Operative date 3. The measure will have effect for transactions made in respect of intangible

assets (including royalties becoming payable) on and after 12 March 2008. Current law and proposed revisions 4. Schedule 29 to the Finance Act (FA) 2002 provides, broadly, for a

particular tax treatment to have effect for companies’ intangible fixed assets created on or after 1 April 2002 when the Schedule came into force, or (if created prior to 1 April 2002) transferred between ‘unrelated parties’ on or after that date. Assets created before 1 April 2002 and transferred between ‘related parties’ on or after this date are subject to different tax rules. These assets are termed ‘existing assets’.

5. There are four tests in paragraph 95 of Schedule 29 to FA 2002 for

identifying related parties. Legislation will be introduced in Finance Bill 2008 to clarify that the results of these tests are not affected by any company or partnership being subject to any insolvency arrangements (e.g. liquidation, administration or other insolvency proceedings) or equivalent arrangements.

6. This means that, for the purposes of paragraph 95, all the various rules

which are relevant to the tests set out in that paragraph must have effect disregarding any insolvency proceedings involving a company or partnership, or equivalent arrangements. Equivalent arrangements include those where any company or partnership is the subject of a procedure in another law or territory which is equivalent to insolvency arrangements in the United Kingdom. Such proceedings or arrangements must be disregarded whether the company or partnership subject to them is solvent or insolvent, and whether the company or partnership is one of the related parties, or another company or partnership whose circumstances could be


relevant to any of the tests in paragraph 95 (such as another member of a group of companies).

Further advice 7. If you have any questions about this change, please contact Kerry Pope

on 020 7147 2617 (email: [email protected]) or Grusheka Lowton 020 7147 2573 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN24

CAPITAL ALLOWANCES BUYING AND ACCELERATION: ANTI-AVOIDANCE

Who is likely to be affected? 1. Companies selling trades where the market value of the plant or

machinery used in the trade is substantially less than its tax written down value.

General description of the measure 2. Legislation will be included in Finance Bill 2008 to prevent avoidance of

corporation tax through schemes that use arrangements intended to crystallise a balancing allowance on plant or machinery used for the purposes of the trade to make it available to a profitable group not intending to carry on the trade for the long term.

3. The measure will have effect, for example, where a loss-making company

is sold to an unconnected profitable group prior to the trade (rather than the company) being sold to a third party a short time later. The measure will prevent the sale of the trade leading to a balancing allowance in the hands of the profitable group.

Operative date 4. The measure will have effect where a company sells its trade, and so

ceases to carry it on, on or after 12 March 2008. Current law and proposed revisions 5. As a general rule, where a company ceases to carry on a trade, and where

the market value of the plant or machinery used in the trade is less than its tax written down value, the company becomes entitled to a balancing allowance equal to the difference between the market value of the plant or machinery and its tax written down value. However, section 343 of the Income and Corporation Taxes Act 1988 (ICTA) provides that this general rule does not apply where a company (the predecessor) ceases to carry on a trade and the same trade begins to be carried on by another trader (the successor) where the two companies are under common control.

6. The avoidance that this measure is designed to counter relies on a trading

company being acquired by a profitable group and, as part of the arrangements, the trading company selling its trade to an unconnected buyer a short time later. When the company is acquired by the profitable group capital allowances are unaffected. However, when the trade is sold, and if the market value of the plant or machinery is substantially less than its tax written down value, the existing rules can lead to a substantial


balancing allowance that becomes available to the profitable group. This can accelerate the rate at which expenditure is written off for tax purposes.

7. The overall effect is that, as well as allowing the capital allowances to be

used by a profitable group that has no long-term interest in the trade, they are available sooner than they would have been had the trading company simply been sold by the original owner to the ultimate buyer.

8. The measure will counter this avoidance. It will have effect where a trade

ceases to be carried on by one company and begins to be carried on by another company where the cessation: • would generate a balancing allowance; and • is part of arrangements the main purpose, or one of the main purposes

of which, is to create that balancing allowance. 9. The measure will also have effect where the transfer of part of a trade

would create a balancing allowance. 10. Where the measure has effect the transfer of the trade will be treated as

falling within section 343(2) of ICTA. This will mean, for capital allowances purposes, treating the trade as if it had been continuously carried on. No balancing allowance will be generated and the capital allowances will become available to the person buying the trade for the long term.

11. This measure will not affect the transfer of a trade, even where a balancing

allowance arises, unless it is part of wider arrangements designed to create a balancing allowance.


HM Revenue & Customs website. Further advice 13. If you have any questions about this change, please contact Paul Lane on



BN25

EMPLOYMENT-RELATED SECURITIES: DEDUCTIBLE AMOUNTS

Who is likely to be affected? 1. Employers who provide, and employees who acquire, employment-related

securities (ERS). General description of the measure 2. Legislation will be included in Finance Bill 2008 to amend the wording of

the rules affecting the taxation of ERS that were rewritten from the Income and Corporation Taxes Act 1988 (ICTA) into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) to put beyond doubt the intention of the affected parts.

3. Users of avoidance schemes have argued that deductions for ‘amounts

that constitute earnings’ can include earnings which were exempt income and therefore not charged to income tax, thereby reducing amounts which count as employment income under Part 7 of ITEPA, reducing chargeable gains under the Taxation of Chargeable Gains Act 1992 (TCGA), and increasing corporation tax relief available under Schedule 23 to the Finance Act (FA 2003). The wording will be amended to ensure that this is not the case.

Operative date 4. The measure will have effect for all relevant events and transactions

occurring on or after 12 March 2008. Current law and proposed revisions 5. The following parts of the legislation contain provisions that refer to

‘amounts that constitute(d) earnings’: • Part 7 of ITEPA - income tax rules for ERS; • Section 149AA of TCGA - rules for calculating the gain from ERS that

is chargeable to capital gains tax (CGT); • Schedule 23 to FA 2003 - rules for corporation tax relief for ERS.

6. In all of the above provisions, the use of the phrase ‘amounts that

constitute(d) earnings’ might be interpreted to cause a lower amount than intended to be chargeable to income tax, CGT or corporation tax. The use of this phrase was part of the rewriting of ICTA into ITEPA, which was not intended to change the meaning of the source legislation in ICTA.


7. The phrase ‘amount that constitute(d) earnings’ will be amended to put

beyond doubt the intention of the legislation. The revision will make clear that the amounts referred to in this phrase are amounts that have been subjected to income tax.

8. The measure will have effect for all relevant events and transactions

occurring on or after 12 March 2008. Changes to be made to section 149AA of TCGA applying to restricted and convertible securities; section 428 of ITEPA (as originally enacted), applying to conditional interests in shares; section 428 of ITEPA, applying to restricted securities; and section 480, applying to employment-related securities options will also have effect for ERS acquired before 12 March 2008 where the relevant event and transaction occurs on or after that date.


HM Revenue & Customs website. Further advice 10. If you have any questions about this change, please contact Claire Talbot

on 020 7147 2867 or Jon Clarke on 020 7147 2157 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN26

NORTH SEA MANAGEMENT EXPENSES Who is likely to be affected? 1. Companies that produce oil and gas in the UK and on the UK Continental

Shelf (UKCS) and have relieved expenses of management against ‘ring fence’ profits.

General description of the measure 2. Legislation will be included in Finance Bill 2008 to close a loophole in the

rules governing the taxation of oil and gas production in the UK / UKCS. It does so by disallowing expenses of managing an investment business as a deduction against a company’s ring fence oil and gas profits.

Operative date 3. The measure will have effect on or after 12 March 2008. Current law and proposed revisions 4. Current tax law operates a ring fence around the profits of a company’s oil

and gas production in the UK and on the UKCS. The profits are set apart from any other activities the company undertakes and losses arising outside the ring fence cannot be used to reduce ring fence profits.

5. In 2004, as part of the Corporation Tax Reform programme, the rules

regarding expenses of managing an investment business were relaxed to allow such expenses to be relievable against a company’s total profits from all its activities.

6. Some oil and gas companies have arranged their affairs in order to offset

expenses of managing an investment business against their ring fence profits. These arrangements seek to undermine the integrity of the ring fence rules.

7. With effect on and after 12 March 2008, no deduction for expenses of

management of investment business will be allowed against ring fence profits.


HM Revenue & Customs website.


Further advice 9. If you have any questions about this change, please contact Mike Crabtree

on 020 7438 6576 (email: [email protected]) or Paul Philip on 020 7438 6993 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN27

UNCLAIMED ASSETS SCHEME: TAX CHANGES Who is likely to be affected? 1. Banks and Building Societies, and customers whose accounts are

‘dormant’ (where the customer has not made contact for 15 years, except in certain circumstances).

General description of the measure 2. This measure makes tax changes to facilitate the Unclaimed Assets

Scheme (the “Scheme”), being introduced by the Dormant Bank and Building Societies Accounts Bill.

3. Legislation will be introduced in Finance Bill 2008 to make some legislative

changes and introduce powers to make secondary legislative changes that together will ensure that the operation of the Scheme is tax neutral and does not increase the tax administrative burden for the financial institutions.

Operative date 4. The power to introduce secondary legislation will have effect on and after

the date that Finance Bill 2008 receives Royal Assent. The capital gains tax changes in Finance Bill (set out in paragraph 8 below) will have effect on and after a date to be appointed by Treasury order, which will be the same date as when the Scheme comes into effect. The tax changes made by secondary legislation will also have effect on and after the date that the Scheme comes into effect.

Current law and proposed revisions 5. Section 851 of the Income Tax Act 2007 requires banks or building

societies to deduct income tax at 20 per cent when a payment of interest on deposits is made. This measure will introduce a power to make a secondary legislative change to ensure that the obligation to deduct tax in respect of interest on dormant account balances within the ambit of the Scheme only has effect if, and when, a customer reclaims their dormant account balance.

6. Section 17 of the Taxes Management Act 1970 requires banks and

building societies to make a return to HM Revenue and Customs of all interest paid or credited on customers’ accounts in each tax year. This measure will introduce a power to make secondary legislative changes to ensure that this requirement in respect of interest on dormant account balances within the ambit of the Scheme only has effect if, and when, a customer reclaims their dormant account balance and the interest on it.


7. Section 370 of the Income Tax (Trading and Other Income) Act 2005

charges non-corporate recipients to income tax on the full amount of interest arising in the tax year. This measure will introduce a power to make secondary legislative changes to ensure that a customer only has an income tax liability in respect of interest arising on their dormant account balances within the ambit of the Scheme if, and when, they reclaim their deposit.

8. Disposals of certain types of bank and building society accounts can give

rise to capital gains liability for the account holder. This measure will introduce a primary legislative change to the Taxation of Chargeable Gains Act 1992 to ensure that where dormant accounts within the ambit of the Scheme are transferred to the body that will administer them under the Scheme there will not be a disposal for capital gains tax purposes. A disposal will only occur if, and when, the customer makes a reclaim of such deposits.

Further advice 9. If you have any questions about this change, please contact Aidan Reilly



BN28

INVESTMENT MANAGER EXEMPTION Who is likely to be affected? 1. UK-resident investment managers and non-residents trading in the UK

through those investment managers. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to make changes to the

legislation underpinning the Investment Manager Exemption (IME) to: • simplify the approach to defining transactions that are within the

scope of the IME; and • remove one of the conditions that must be met in order for a

transaction to come within the IME. 3. Following these changes, there will be a single list of transactions

qualifying for the IME and the process for updating the list will be simpler. There will also be a more proportionate outcome where not all of the transactions carried out in the UK by an investment manager on behalf of a non-resident meet the qualifying conditions.

Operative date 4. The first change listed in paragraph 2 above will have effect on or after the

date that Finance Bill 2008 receives Royal Assent, but with a saving provision to ensure that the existing definition of an “investment transaction” has effect until replaced by an order to be made after that date. The second change will have effect for the tax year 2008-09 and subsequent tax years and accounting periods ending on or after the date that Finance Bill 2008 receives Royal Assent.

Current law and proposed revisions 5. The IME enables non-residents (companies, individuals and funds) to

appoint UK-based investment managers to carry out transactions on their behalf without the risk of exposure to UK tax, provided certain conditions are met.

6. The legislation underpinning the IME is at section 127 of, and Schedule 23

to, the Finance Act (FA) 1995, section 152 of, and Schedule 26 to, FA 2003 and sections 818 to 828 Income Tax Act 2007. This primary legislation is supplemented by secondary legislation in four sets of Regulations: Statutory Instruments 2003/2172, 2003/2173, 2007/963 and 2007/964.


Simplifying the approach to defining transactions 7. The IME only has effect for transactions meeting the statutory definition of

an “investment transaction”. The types of transaction coming within that definition are currently listed in different parts of the primary and secondary legislation, and there is a statutory power to add to those lists by making new Regulations.

8. This measure replaces that approach with by allowing HM Revenue &

Customs (HMRC) to make an order designating transactions as “investment transactions” for the purposes of the IME. After the change, there will be a single list of transactions coming within that definition and there will be no need to refer to the current range of different statutory provisions, which will be repealed.

9. The list of eligible transactions will be available on the HMRC website, so

that all interested parties can see which transactions are covered. Achieving proportionality 10. At present, where an investment manager carries out, on behalf of a

non-resident, a transaction that does not qualify for the IME, one of the qualifying conditions can operate in a way that means that no other transactions carried out by that investment manager for that non-resident are capable of qualifying for the IME, even where those other transactions would themselves meet the qualifying conditions. This can result in the non-resident being exposed to UK tax on all of the transactions carried out through the investment manager.

11. This measure will remove that condition and produce a more proportionate

outcome. All transactions that meet the qualifying conditions will qualify for the IME and if there are any non-qualifying transactions it will only be those transactions that will be exposed to UK tax.

Further advice 12. If you have any questions about this change, please contact Lee Harley on

020 7147 2597 (email: [email protected]), Mike Hogan on 020 7147 2655 (email: [email protected]), or Andrew Martyn on 020 7147 3342 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN29

TAXATION OF PERSONAL DIVIDENDS Who is likely to be affected? 1. Individuals in receipt of dividends from non-UK resident companies. General description of the measure 2. Legislation will be introduced in Finance Bills 2008 and 2009 to make

changes to the system of taxation for individuals who own foreign shares. 3. UK resident individuals and non-resident Commonwealth and EEA

nationals in receipt of dividends from UK resident companies are entitled under current law to a non-payable dividend tax credit. From 2008, UK resident individuals and UK and EEA nationals with small shareholdings in non-UK resident companies will also be entitled to a non-payable tax credit.

4. From 2009, other such individuals in receipt of dividends from non-UK

resident companies will become entitled to a non-payable tax credit, subject to certain conditions.

Operative date 5. These changes will have effect on and after 6 April 2008 and 6 April 2009

respectively. Current law and proposed revisions 6. Dividends received by individual shareholders are taxed at rates of

10 per cent and 32.5 per cent for basic rate and higher rate taxpayers respectively.

7. When dividends from UK resident companies are charged to tax,

shareholders are entitled to a non-payable tax credit of one ninth of the distribution under the provisions of section 397(1) of the Income Tax (Trading and Other Income) Act 2005. Because tax is charged on the gross dividend received, including the tax credit, this lowers the effective rates of tax on these dividends at the personal level to 0 per cent and 25 per cent.

8. The legislation in Finance Bill 2008 will extend the non-payable tax credit

of one ninth of the distribution to UK resident individuals and UK and other EEA nationals in receipt of dividends from non-UK resident companies, if they own less than a 10 per cent shareholding in the distributing non-UK resident company. The other previously announced condition, that in total the individual must receive less than £5000 of dividends a year from non-UK resident companies, will not be introduced.


9. The legislation in Finance Bill 2009 will further extend eligibility for the

non-payable tax credit to individuals in receipt of dividends from non-UK resident companies where the individual owns a 10 per cent or greater shareholding in the distributing non-UK resident company. The tax credit will not be available if the source country does not levy a tax on corporate profits similar to corporation tax. There will be anti-avoidance measures to ensure that these new rules are not subject to abuse.

Further advice 10. If you have any questions about this change, please contact Andrea

Pierce on 020 7147 2591 (email [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN30

FUNDING BONDS Who is likely to be affected? 1. Companies and individuals claiming repayments of tax deducted from

interest, which has been paid to them in the form of funding bonds, and where the tax deducted from the interest was originally paid to HM Revenue & Customs (HMRC) in the form of funding bonds.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to provide rules to

confirm that HMRC can satisfy such repayment claims by using all or part of the funding bonds used to pay the tax deducted.

3. The legislation will allow HMRC to request that the bond issuer divides, if

necessary, any funding bond held by HMRC so that the repayment claim can be satisfied using part of the funding bond.

Operative date 4. The measure has effect for funding bonds issued on or after

12 March 2008. Current law and proposed revisions 5. The current law does not address how a repayment claim in respect of tax

treated as paid to HMRC by a funding bond should be handled and this has led to uncertainty. In practice, HMRC has satisfied the repayment claim using a funding bond where this has been feasible.

6. The legislation will introduce a new subsection to section 939 of the

Income Tax Act 2007 (ITA). It will have effect only where the interest on the loan or debt is paid by funding bonds, and the tax deducted from that interest is also paid to HMRC using funding bonds. Where a repayment claim for the tax deducted is subsequently made new subsection 4A allows the Commissioners for HM Revenue & Customs to give to the claimant funding bonds in satisfaction of the claim.

7. The legislation will also insert a new section, section 940A into ITA. If the

Commissioners do not hold funding bonds in denominations suitable for satisfying the repayment claim, this measure will allow the Commissioners to request that the funding bond issuer divides the funding bonds as required so that the repayment claim can be satisfied


Further advice 8. A technical note, including the draft legislation, was published on

13 February 2008. Draft guidance on this measure will also be published on the HM Revenue and Customs website shortly after the publication of the Finance Bill.

9. If you have any questions about this change, please contact Lesley

Hamilton on 020 7147 2564 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN31

OFFSHORE FUNDS: NEW TAX REGIME Who is likely to be affected? 1. Managers of, and investors in, overseas based funds such as open-ended

investment companies, unit trust schemes and similar arrangements. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to provide powers to

make regulations dealing with the taxation of investors in offshore funds and the rules for allowing certain funds to be classed as ‘reporting funds’.

3. The definition of what constitutes an offshore fund will not be changed in

Finance Bill 2008. The Government intends to continue its discussions with industry on this point and will legislate for a revised definition in Finance Bill 2009.

Operative date 4. The measure will have effect on a date to be appointed by Treasury order. Current law and proposed revisions 5. An ’offshore fund’ is any type of fund that is resident outside the United

Kingdom or established under foreign law and would, if it were established in the United Kingdom, constitute a collective investment scheme for the purposes of the Financial Services and Markets Act 2000 (FISMA).

6. Where a fund is certified by HM Revenue & Customs (HMRC) as a

qualifying fund, which is a test that must be satisfied each year, then the fund is required to distribute at least 85 per cent of its income and any investor disposing of their interest in the fund is subject to a more favourable tax treatment than if the fund is non-qualifying. This is because on disposal of their interest they are liable to capital gains tax (CGT) or corporation tax on chargeable gains, instead of being chargeable to income tax or corporation tax on income, as they would be if the fund was a non-qualifying offshore fund.

7. This measure will mean that, in order to retain CGT treatment for investors

disposing of an interests in the fund, an ‘offshore fund’ will no longer have to make a distribution but will instead be able to ‘report’ income to investors who will then be subject to tax on the reported income.


8. Draft regulations will be published shortly after the Finance Bill, which set out the conditions that an offshore fund must fulfil in order to ensure that a disposal of an interest in the fund is subject to CGT treatment.

9. It is expected that the conditions for obtaining the new qualifying fund

status will be less onerous, and the test required for this will only be applied at the outset (instead of, as now, annually). It is also envisaged that minor failures to keep to the conditions will not result, as they do at present, in the fund being removed retrospectively from the more favourable regime.

Further advice 10. If you have any questions about this change, please contact John

Buckeridge on 020 7147 2560 (e-mail: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN32

TIMING OF INCOME TAX PAYMENTS BY UNAUTHORISED UNIT TRUSTS

Who is likely to be affected? 1. Trustees of unauthorised unit trusts. General description of the measure 2. Legislation will be included in Finance Bill 2008 to amend unintentional

changes introduced in the Income Tax Act 2007 (ITA), which altered the time at which tax deducted from distributions made by unauthorised unit trusts to their unit holders is payable to HM Revenue & Customs (HMRC).

Operative date 3. The changes will have effect on and after the date that Finance Bill 2008

receives Royal Assent. Current law and proposed revisions 4. Under section 964(5) of ITA, trustees of unauthorised unit trusts are only

required to pay to HMRC the income tax they deduct from their unit holders in any year at the end of the following tax year (so for example, for tax deducted in the tax year 2007-08 need only be paid at the end of January 2009).

5. This measure will repeal section 964(5). With effect from the tax year

2008-09 and all subsequent tax years, trustees of unauthorised unit trusts will be required to make payments on account of the tax due to HMRC on the 31 January and 31 July of one year, with a balancing payment or claim made on 31 January the following year. (For example, for the tax year 2008-09 payments on account will be due on 31 January 2009 and 31 July 2009, with a balancing payment on 31 January 2010). This will reinstate the position that existed prior to the unintentional changes introduced by ITA.

Further advice 6. If you have any questions about this change, please contact Liz Foster on

0114 2969 377 (email: [email protected]) or Sandra Whyman on 0114 2969 688 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN33

FUNDS OF ALTERNATIVE INVESTMENT FUNDS Who is likely to be affected? 1. Authorised investment funds (AIFs) that take advantage of proposed new

Financial Services Authority rules for Funds of Alternative Investment Funds (FAIFs) to invest mainly in non-qualifying offshore funds, particularly those with exempt or corporate investors; and investors in those funds which enter the “Tax FAIFs” regime.

General description of the measure 2. Regulations will be laid to provide an additional tax regime for AIFs which

invest into non-distributing offshore funds. The regulations have been drafted to remove tax as a barrier to the introduction of the new Financial Services Authority (‘FSA’) regulatory regime titled ‘Funds of Alternative Investment Funds’. The changes will enable certain funds to elect for a tax treatment as “Tax FAIFs”, which will move taxation on offshore income gains from the fund to its investors.

Operative date 3. The changes will have effect on and after a date to be set by Treasury

order, the date to be determined by the date the FSA regulatory changes become effective.

Current law and proposed revisions 4. Under the current regulations:

• a gain made by an authorised investment fund on disposal of an interest in a non-qualifying offshore fund is an offshore income gain and will be subject to corporation tax in the fund; and

• when an investor realises a gain by disposing of units in the fund then they may also be taxable on a capital gain.

5. Under the proposed new regulations:

• in the case of an authorised investment fund electing for the new tax treatment, the fund will be exempt from tax on offshore income gains; and

• an investor in a FAIF that had so elected would then be chargeable solely to income tax on any gain made on disposal of units in the fund.

6. A Tax Framework document was published on the HM Treasury website

on 22 February 2008 and draft regulations have been published today on the HM Revenue & Customs website.


Further advice 7. If you have any questions about this change, please contact John



BN34

PROPERTY AUTHORISED INVESTMENT FUNDS Who is likely to be affected? 1. Authorised investment funds (AIFs) that invest mainly in property, UK-Real

Estate Investment Trusts (UK-REITs) or similar foreign companies. 2. Investors in AIFs that enter the Property AIF tax regime. General description of the measure 3. New regulations for AIFs will be introduced, providing a tax regime for

investment into real property and certain property companies, which will enable certain AIFs to elect for a tax treatment that will move the point of taxation from the fund to its investors.

4. The new regulations will enable a Property AIF to provide an open-ended

fund alternative to the existing closed-ended UK-REITs. Operative date 5. The regulations will have effect on and after 6 April 2008. Current law and proposed revisions 6. Under the current regulations:

• an AIF pays corporation tax (CT) on rental profit or other property income such as property income distributions from UK-REITs or their foreign equivalents;

• any other taxable income received by an AIF investing in property is treated in a similar way to property income;

• the income is distributed by the AIF, along with any other income the AIF may accrue, as a dividend carrying a tax credit;

• exempt recipients (such as pension funds and charities) cannot reclaim the tax credit; and

• dividends received from UK companies are not taxable in the AIF. 7. Under the new regulations, laid before Parliament on 12 March 2008:

• an AIF that invests mainly in property and certain related securities will be able to elect for the Property AIF regime to have effect;

• in a Property AIF rental profit and certain other property related income will be exempt from taxation in the fund. It will normally be distributed to investors under deduction of tax. Basic rate taxpayers will have no further tax liability, non-taxpayers and exempt bodies will be able to reclaim this tax, while higher rate taxpayers and some corporates will have a further tax liability to pay;


• other taxable income of the Property AIF will also be distributed to investors under deduction of tax. Investors will similarly be able to either reclaim the tax or incur a further charge as appropriate; and

• UK dividends which are currently not taxable in the fund will remain exempt, as they are for all corporate recipients and will fund dividend payments carrying a tax credit to investors as at present.

8. To qualify for the new regime Property AIFs will have to meet certain

conditions, including: • incorporation as an open-ended investment company (subject to

Financial Services Authority regulation); • carry on a property investment business (amounting to at least

60 per cent of the business); • a ‘genuine diversity of ownership’ condition, so that the fund is not

limited to or targeted at only a few specified investors; and • limits on the holdings of corporate investors and on the type and

amount of loan financing in the fund. 9. The regulations and explanatory memorandum have been published today

on the HM Revenue & Customs website. Further advice 10. If you have any questions about this change, please contact John



BN35

REPEAL OF OBSOLETE ANTI-AVOIDANCE PROVISIONS Who is likely to be affected? 1. Financial concerns, particularly insurance companies (non-life) and

exempt bodies such as charities and pension schemes; and employees who acquired and employers who awarded Employment-Related Securities before October 1987.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to repeal anti-avoidance

legislation relating to shares and securities which is no longer of any practical use.

Operative date 3. This measure will have effect for individuals and exempt bodies on and

after 6 April 2008, and for companies for accounting periods beginning on or after 1 April 2008.

Current law and proposed revisions Dividend buying 4. Legislation to prevent “dividend buying” by, in particular share dealers and

exempt bodies, is in sections 731 to 735 of the Income and Corporation Taxes Act 1988 (ICTA). It was introduced in 1955. At that time if a company whose business included buying and selling shares bought a share shortly before the declaration of a dividend, received the dividend and then sold the share, it would suffer a loss as a result of the reduction in value of the share caused by the payment of the dividend. At that time the dividend itself would not be taxable and so the share-dealer could set the loss on disposal of the shares against the dividend and reclaim income tax treated as suffered (up to 5 April 1966), actually suffered (6 April 1966 to 5 April 1973) or paid as a tax credit (from 6 April 1973 to 2 July 1997).

5. Similarly, exempt funds such as charities and pension schemes could

“buy” dividends and claim the tax back. 6. There have been a number of developments in tax law since 1955 which

have meant that share-dealers are no longer exempt from tax on dividends and exempt bodies cannot reclaim any tax or tax credits in relation to dividends.


7. The position now is that exempt bodies with large portfolios of shares and perhaps more than one fund management company involved have to spend a lot of time and money to determine whether the terms of sections 731 to 735 ICTA are met and, if they are, to work out the tax that may be due. But it has been found that even the largest exempt funds have little or no liability under the rules but a high compliance burden. As far as share dealers are concerned the only type of company currently affected by the legislation is insurance companies but only in relation to their non-life business.

8. The same considerations also apply to another piece of legislation, section

736 of ICTA, which deals with “dividend buying” where a share-dealer has more than 10 per cent of the shares in a company. Again changes in legislation mean that this provision can in practical terms have effect now only to an insurance company with non-life business, and it is extremely uncommon for such a company to hold more than 10 per cent of another company as part of its “trading stock”.

9. Accordingly, sections 731 to 736 and associated provisions will be

repealed in their entirety. For insurance companies with non-life business a new provision, section 95ZA of ICTA, will be introduced, which will only have effect where the distribution concerned exceeds £50,000.

Transactions in securities 10. In 1960, an anti-avoidance rule was introduced in relation to transactions

in securities, provisions which now appear for companies as sections 703 to 709 ICTA and for individuals as Chapter 1 Part 13 of Income Tax Act 2007 (ITA).

11. One of the specified circumstances in which the legislation applies,

Circumstance B, has effect for dealers in securities and shares, but for the same reasons that sections 731 to 735 ICTA are no longer effective, section 704 paragraph B and Circumstance B in section 687 ITA are no longer of any effect.

12. This Circumstance together with associated provisions will be repealed. Employment securities 13. In 1972 the first legislation relating to employment related shares was

introduced. This legislation was replaced from October 1987 by legislation in Finance Act 1988, but became sections 138 and 139 of ICTA in relation to shares, etc., acquired before October 1987.


14. Sections 138 and 139 were repealed generally by Schedule 7 to the Income Tax (Earnings and Pensions) Act 2003 but were retained for shares acquired between 1972 and 1987. It is now believed that there are no remaining shares to which sections 138 and 139 have effect in issue and accordingly those sections will be finally repealed in their entirety together with associated provisions.

Further advice 15. If you have any questions about this change please contact Richard

Thomas on 020 7147 2558 (email: [email protected]) in relation to all the above measures apart from employment securities. If you have questions about the employment securities change, please contact Claire Talbot on 020 7147 2867 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN36

LIFE INSURANCE COMPANIES: CONSULTATION OUTCOMES AND SIMPLIFICATION

Who is likely to be affected? 1. Companies and friendly societies carrying on life insurance business and

societies carrying on non-life business. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to:

• simplify the tax law relating to financing arrangements (contingent loans and financial reinsurance) used by life insurance companies;

• align the tax treatment of transfers of tax exempt “other” business, between friendly societies with transfers of such business between a friendly society and a life insurance company;

• change the definition of foreign currency assets introduced by Finance Act (FA) 2007, remove a requirement to certify the amount of these assets and allow companies to use the revised version for 2007;

• remove the power to modify the computation of chargeable gains in respect of structural assets held by life insurance companies; and

• repeal spent provisions and clarify the effect of provisions. 3. These changes are further products of the consultation on how to simplify

certain aspects of the tax law relating to life insurance companies launched by HM Revenue & Customs (HMRC) in May 2006.

Operative date 4. The new financing rules will have effect for periods of account beginning

on or after 1 January 2008. 5. The rules for transfers of tax exempt other business between different

types of friendly society will have effect for transfers taking place on or after the date that Finance Bill 2008 receives Royal Assent.

6. The changes to the foreign asset rules will have effect for periods of

account beginning on or after 1 January 2008 and ending on or after 12 March 2008, subject to the ability to elect for these rules to have effect for 2007.

7. The power to modify the computation of chargeable gains in respect of

structural assets will be repealed from the date that Finance Bill 2008 receives Royal Assent.


Current law and proposed revisions 8. Life insurance companies have requirements for capital which cannot

normally be met by straightforward borrowing. Instead they have used a variety of more complex financing arrangements including contingent loans and financial reinsurance contracts to meet these requirements. In many cases the arrangements do not give rise to any tax issues. However, HMRC has seen examples of financing arrangements which have been used to generate profits without tax being paid on them, instead of contributing to working capital. Legislation introduced in FA 2003 sought to give an appropriate tax treatment for contingent loans, but the legislation, in section 83ZA of FA 1989, is complex and mechanical in seeking to distinguish cases where there is tax avoidance from those where there is not, and until amendments made by FA 2007, was also seriously flawed.

9. Revised legislation will be introduced in Finance Bill 2008 to deal with

financing arrangements. The revised legislation will impose a tax charge only when the financing arrangements are used to generate surplus which is transferred to shareholders and which would not have existed without the arrangements. It will not affect financing designed simply to provide working capital or improve solvency. The legislation will also give relief for repayments of loans or recapture of reinsured liabilities to the extent that surplus has been taxed.

10. Friendly societies are entitled to a tax exemption in respect of long-term

health and other sickness business, commonly known as “other” business, which is not available to other companies writing insurance business. A more generous exemption is available to “old” societies, ones registered before 1 June 1973, compared to the exemption available to “new” societies. As the tax exemption depends on the nature of the society, a transfer of previously tax exempt other business from an old society to a new society would result in the loss of tax exemption. However, as a result of changes made in FA 2007, an old society can transfer its tax exempt other business to a life insurance company which remains entitled to the tax exemption for business in force at the time of the transfer. Therefore the law will be changed to allow the transfer of tax exempt other business between old and new friendly societies on the same basis as those between a friendly society and an insurance company. Accordingly the tax exemption will only be retained by the society in relation to business in force at the time of transfer. Any attempt by the transferee to write new tax exempt business or to increase the scale of existing tax exempt business will result in the loss of the exemption.

11. The term “foreign currency assets” (FCAs) was introduced by FA 2007 to

describe assets backing overseas business, the income and gains from which are directly referable to gross roll-up business. To qualify as FCAs, there is a requirement that relevant assets must be certified as FCAs within 3 months of the company’s year end. Operational experience in dealing with FCAs has brought to light some difficulties arising from applying the rules in practice. Legislation will be introduced in Finance Bill 2008 to amend the definition of FCAs (which will become “foreign business


assets”) and to improve the operation of the rules by removing the certification requirement. In addition the 3 month time limit having effect for 2007 will be changed to 12 months, and all companies will be allowed, but not required, to use the new rules for their 2007 tax return.

11. FA 2007 introduced a definition of “structural assets”, which are assets

that are treated as part of the capital structure of a life insurance company’s business, rather than assets on a disposal of which a trading profit should arise. Accordingly gains on disposal of structural assets are only treated as chargeable gains. FA 2007 also included a power to modify the computation of chargeable gains from the disposal of structural assets, particularly where the assets were held in 1989 when there were major changes in the law. It has now been agreed that this power is unnecessary and will be repealed. Discussions continue about a possible extension (using another power) of the list of assets that will count as “structural assets”.

Further advice 12. If you have any questions about these changes, please contact Richard

Thomas on 020 7147 2558 (email: [email protected]) or Colin McHardy on 020 7147 2614 (email [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN37

LIFE INSURANCE COMPANIES: INTEREST APPORTIONMENT Who is likely to be affected? 1. Companies carrying on life insurance business. General description of the measure 2. The measure will ensure that interest paid by insurance companies on

amounts deposited back with them by re-insurers will be apportioned appropriately between different categories of business for corporation tax purposes.

Operative date 3. The measure will have effect for periods beginning on or after

1 January 2008 and ending on or after 12 March 2008. Current law and proposed revisions 4. It is common practice for life insurance companies to reinsure large blocks

of pension annuities in payment to specialist providers who are better able to manage the longevity risk attached to such business. Because pension annuities are long-term contracts, such reinsurance arrangements can result in a substantial credit risk for the insurer. To manage that credit risk, it is normal practice for the re-insurer to deposit back all or a substantial portion of the premium paid with the original insurer. It is also normal practice for the original insurer to pay interest to the re-insurer on that deposit back. As the deposit back liability replaces the reinsured liability in the insurer’s apportionment computations, any income arising from the deposit-back will be allocated to a company’s gross roll-up business (GRB), the category which includes pension business.

5. Even though the deposit back is entirely related to GRB, interest paid on

the deposit back is apportioned between GRB and basic life assurance and general annuity business (BLAGAB). This means that a significant proportion of the deposit back interest may be relieved against BLAGAB income and gains. For a variety of reasons this may result in an unintended tax advantage for companies.

6. Finance Bill 2008 will introduce legislation to provide that interest paid on

deposits back from re-insurers will be wholly allocated to the category or categories of business reinsured by the contract giving rise to the deposit back.


Further advice 7. If you have any questions about this change, please contact Richard

Thomas on 020 7147 2558 (email: [email protected]) or Colin McHardy on 020 7147 2614 (email [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN38

INSURANCE PREMIUM TAX (IPT): CHANGES RELATING TO OVERSEAS INSURERS

Who is likely to be affected? 1. Overseas insurers with no business establishment in the UK who write

taxable risks located in the UK, and their UK customers. General description of the measure 2. This measure will remove the compulsory requirement for overseas

insurers to appoint a tax representative and additionally, will restrict the ability of HM Revenue & Customs (HMRC) to assess the insured party for tax due from an overseas insurer to circumstances where the insurer is located outside of the EU and not covered by the Mutual Assistance Directives or any such similar arrangements on exchange of information and recovery of tax due.

3. Overseas insurers writing taxable risks located in the UK will still need to

register for insurance premium tax (IPT), but will be able to choose whether or not to appoint an agent to act for them in the UK. This agent will not be jointly and severally liable for the tax due by the insurer.

Operative date 4. The changes will have effect on and after the date that Finance Bill 2008

receives Royal Assent. Current law and proposed revisions 5. Sections 57 and 58 of the Finance Act (FA) 1994 requires an overseas

insurer who is liable to be registered for IPT, but who has no business or other fixed establishment in the UK, to appoint a tax representative. That tax representative is jointly and severally liable for the discharge of the insurer’s obligations and liabilities in the event of failure to comply by the insurer. Also, section 65 sets out that where an overseas insurer does not have any business or other fixed establishment in the UK, and does not have a tax representative, then the insured party may be assessed for the tax due from the insurer.

6. Legislation will be included in Finance Bill 2008 to delete sections 57 and

58 of FA 1994. It will no longer be compulsory for an overseas insurer to appoint a tax representative. Any representative will no longer have the requirement to be jointly and severally liable. The legislation will also amend section 65 of FA 1994 so that the insured party cannot be assessed for tax due from their insurer unless the insurer is located in a


country outside the EU and not covered by mutual assistance, or similar, provisions.

7. A consultation document published in July 2007, summary of responses to

the consultation, and the Impact Assessment are available on the HMRC website. Public Notice IPT1 will be updated to reflect the changes to the tax representative requirements and the changes to the liability of the insured. The guidance in V2-01 will also be updated to reflect the changes.

Further advice 8. If you have any questions about this change, please contact the National

Advice Service on 0845 010 9000. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN39

STAMP DUTY: ALTERNATIVE FINANCE: SUKUK Who is likely to be affected? 1. Individuals and companies wishing to invest in alternative finance

investment bonds which are similar to debt securities (“sukuk”). General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to classify alternative

finance investment bonds as loan capital for stamp duty purposes. These products replicate the economic effect of debt securities which carry a right to interest and the measure will ensure that they are treated on a par with equivalent debt securities falling within the definition of loan capital.

Operative date 3. These changes will have effect for transfers of loan capital on or after the

date that Finance Bill 2008 receives Royal Assent. Current law and proposed revisions 4. Finance Act 2005 classified alternative finance investment bonds as debt

securities for the purpose of tax, excluding stamp duty. These changes bring the treatment of alternative finance investment bonds in line with other taxes by classifying them as debt securities.

5. The proposed changes classify alternative finance investment bonds as

loan capital and the return as a right to interest so that the bonds may benefit from the loan capital exemption.

Further advice 6. If you have any questions about this change, please contact Nicky Rass




BN40

ALTERNATIVE FINANCE ARRANGEMENTS Who is likely to be affected? 1. Individuals and companies who are party to alternative finance

arrangements. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to amend the power to

make provision relating to alternative finance arrangements by secondary legislation.

Operative date 3. The amended power will have effect on and after the date that Finance Bill

2008 receives Royal Assent. Current law and proposed revisions 4. Section 98 of Finance Act (FA) 2006 permits amendments to the tax rules

on alternative finance arrangements in Chapter 5 of Part 2 to FA 2005 to be made by order. This power allows for the introduction of provisions relating to new arrangements, but does not allow for amendments to the rules on existing arrangements. This measure will introduce a further power to permit amendments to existing tax rules on alternative finance arrangements to be made by secondary legislation.

Further advice 5. If you have any questions about this change, please contact Tony Sadler

on 020 7147 2608 (e-mail: [email protected]) or Sue Davies on 020 7147 2565 (e-mail: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN41

OVERSEAS PENSION SCHEMES Who is likely to be affected? 1. Internationally mobile workers in the UK who are members of a non-UK

pension scheme, their employers and the managers of those non-UK schemes.

General description of the measure 2. The measure will ensure those funds in non-UK pension schemes that

have received UK tax relief are appropriately identified for the purposes of UK tax limits and charges on benefits equivalent to those for registered UK pension schemes having effect.

Operative date 3. For non-UK money purchase pension schemes, the measure will have

effect for employer contributions paid on or after 12 March 2008. 4. For non-UK defined benefit (i.e. final salary) pension schemes the

measure will have effect on and after 6 April 2008. Current law and proposed revisions 5. Migrant workers in the UK and their employers can obtain tax relief on

contributions to non-registered pension schemes based outside the UK. In order to apply appropriate UK tax controls on reliefs equivalent to those for registered pension schemes, it is necessary to work out how much UK tax relief has been received on the individual’s pension fund.

6. Under the law, the larger the employer contribution the lower the

proportion of an individual’s pension fund is treated as having received UK tax relief.

7. This measure will ensure that the amount of the employer’s contribution

will not affect the calculation of the proportion of the fund that is subject to UK tax rules.

Further advice 8. If you have any questions about this change, please contact Pensions

Helpline on 0845 600 2622. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN42

PENSIONS: REGULATION MAKING POWERS Who is likely to be affected? 1. Pension scheme administrators, members of registered pension schemes

and their dependants. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to provide for existing

regulation making powers to be amended to: • allow certain payments from pensions schemes to be taxed in the

same way as other authorised payments made by pension schemes instead of as unauthorised payments; and

• simplify the administration of certain trivial commutation payments. 3. The provisions will enable regulations to define payments to be treated as

authorised. Operative date 4. This measure will have effect on and after the date that Finance Bill 2008

receives Royal Assent. However the regulations made under this power may have retrospective effect where this will not disadvantage anyone affected.

Current law and proposed revisions 5. The simplified tax regime for registered pension schemes was introduced

in Finance Act 2004 and has effect on and after 6 April 2006. The Act lists what payments a registered pension scheme is authorised to make to a member of a scheme. All other payments to a member are unauthorised and taxable at a rate of up to 70 per cent of the payment.

6. Regulations can be made to deem certain payments to be authorised but

not to provide for their taxation treatment. This means some payments covered will not be chargeable to income tax at all.

7. Finance Bill 2008 will provide for changes to the existing power to enable

these payments to be taxed in the same way as other authorised payments made by a registered pension scheme. Provision will also enable retrospective treatment where this will not disadvantage anyone affected.


8. Additionally, some easements will be made to the rules for ‘trivial commutation’ – the circumstances in which pension rights giving rise to very small pension entitlements can be commuted into a lump sum up to 25 per cent of which would be tax free. Regulations under the widened power set out above will provide that it will be possible to commute some small ‘stranded pots’ as well as pension savings below £2,000 in occupational pension schemes. These will have effect in addition to the current rule that restricts the aggregate of an individual’s pension savings to £16,000 for trivial commutation.

Further advice 9. If you have any questions about these changes, please contact Pensions

Helpline on 0845 600 2622. Information about Budget measures is available on the HM Revenue & Customs website at HM Revenue & Customs website at www.hmrc.gov.uk


BN43

PENSIONS: TECHNICAL IMPROVEMENTS Who is likely to be affected? 1. Pension scheme providers, pension scheme administrators, members of

registered pension schemes and their dependants, and financial advisers. General description of the measure 2. Draft legislation was published alongside the 2007 Pre-Budget Report

(PBR), together with PBR Note 14, setting out changes to simplify the way the pension tax rules operate when testing pension increases against the lifetime allowance.

3. Legislation will be included in Finance Bill 2008 to provide:

• an exemption from the lifetime allowance test for small annual increases in pensions, and rounding; and

• greater flexibility in the choice of the Retail Price Index (RPI) reference month including pension increases awarded within the first year of the pension commencing.

Operative date 4. The amendments for small annual increases in pensions and rounding will

be backdated to have effect on and after 6 April 2006 (A Day). The change to the RPI reference month will have effect on and after 6 April 2008.

Current law and proposed revisions 5. The tax rules for pension savings are set out in Part 4 of Finance Act

2004.

6. Three small changes will be made to the draft legislation published at 2007 PBR following representations. These will provide further easements to the rules for how the lifetime allowance test benefit crystallisation event 3 (BCE3) operates for pension increases, whilst maintaining the integrity of the test: • A change to allow pension increases of £250 per annum or less to be

exempt from the BCE3 test; • A provision for rounding so that once the pension increase has been

awarded (irrespective of the size of increase or whether it is paid monthly or weekly) it can be increased to the nearest whole number without the need for a further test; and

• A change to the RPI reference month to allow schemes to use the figure for RPI for any month which is within 12 months before the increase in pension.


Further advice 7. If you have any questions about this change, please contact Pensions



BN44

APPROVED OCCUPATIONAL PENSION SCHEMES Who is likely to be affected? 1. Employers who contribute to occupational pension schemes. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to confirm that in

calculating its corporation tax liability the amount a company was permitted to deduct in respect of pension costs between 1 April 2004 and 5 April 2006 was limited to the pension contributions paid in the year.

Operative date 3. This measure is wholly retrospective and has effect for employer

contributions to registered pension schemes relating to accounting periods starting on or after 1 April 2004 and ending on or before 5 April 2006.

Current law and proposed revisions 4. Tax relief for employer contributions to pension schemes is given on cash

contributions and not on amounts shown by company accounts. This policy was maintained when the taxation of pension schemes was modernised from 6 April 2006 (A Day).

5. Following changes in the legislation on and after 1 April 2004 which had

effect on and before 5 April 2006, the express provision preventing a tax deduction for expenses shown in the profit and loss account was removed. This deletion did not reflect a change of Government policy and had no practical impact, as the overall effect and application of the legislation was still to allow only cash contributions.

6. For the prevention of doubt, legislation will be included in Finance Bill 2008

which will confirm that during the period between 1 April 2004 and 5 April 2006, tax relief for employer contributions to registered pension schemes is restricted to the cash paid in the relevant accounting year.

Further advice 7. If you have any questions about this change, please contact Martyn

Rounding on 020 7147 2821 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN45

PENSION SAVINGS AND INHERITANCE TAX Who is likely to be affected? 1. Pension scheme providers, pension scheme administrators, members of

pension schemes, insurance companies and financial advisers. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to:

• ensure that tax-relieved pension savings diverted into inheritance using scheme pensions and lifetime annuities are subject to unauthorised payment tax charges and, where appropriate, inheritance tax (IHT); and

• restore IHT protection to savings in overseas pension schemes. 3. This measure was announced at the 2007 Pre-Budget Report (PBR). Draft

legislation for the measure was published at that time, to which there have been minor amendments.

Operative date 4. Operative dates are outlined for the various measures in the paragraphs

below. Current law and proposed revisions Inheriting tax-relieved pension savings

5. Finance Bill 2008 will include provisions to implement the proposals on

scheme pensions and annuities. Details of this are set out in PBR Note 15 and the subsequent changes are set out below.

6. The rules preventing unused tax-relieved funds being passed as increased

pensions after death to other family members, other than dependants, do not currently have effect for schemes where there are 20 or more members and all members have their rights increased at the same rate. A change to the draft legislation published at PBR will ensure that the unauthorised payment charges and IHT will not have effect so long as there are at least 20 scheme members, who have their rights increased at the same rate because another member has died. This will have effect in relation to a member who dies on or after 6 April 2008.


7. Finance Bill 2008 will also provide that an IHT charge will arise as a result of an unauthorised lump sum payment in respect of a pension scheme member who dies aged 75 or older and who was in receipt of an annuity or scheme pension. Any IHT nil-rate band that has not already been set against the estate of the deceased may be set against this IHT charge. A change will be made to the draft legislation published at PBR to provide for the situation where the estate has not used all of the nil-rate band and more than one of the IHT charges in respect of a scheme pension or an annuity arises. This will ensure that the remaining nil-rate band can be used only once against the IHT charges. The measure, including this change, will have effect when the member dies on or after 6 April 2008.

8. Sections 151A to 151C of the Inheritance Tax Act 1984 (IHTA) give effect

to similar provisions on ‘alternatively secured pension’ (ASP) funds to those set out in paragraph 7 above. Again, any nil-rate band that has not been set against the estate may be set against the IHT charges on ASP funds. To bring these provisions into line with those for scheme pensions and annuities, Finance Bill 2008 will ensure that any remaining nil-rate band may be used only once against the IHT charges arising on ASP funds. This change will have effect when a member dies on or after 6 April 2008.

Inheritance tax on overseas pension schemes 9. PBR Note 14 sets out details of changes that will be made to restore IHT

protection to UK tax-relieved pension savings in overseas pension schemes. The provisions in Finance Bill 2008 will give IHT protection to pension savings which have had UK tax relief and also to all savings in certain overseas pension schemes. The IHT protection will apply to funds in overseas pension schemes that are tax-recognised and regulated in the country in which they are established. Or, if there is no system for tax recognition or regulation in that country, then the funds must be used to provide a pension income for life.

10. The change to the IHT rules for overseas pension schemes will have effect

on or after 6 April 2006. Further advice 11. If you have any questions about the IHT changes in paragraphs 6 to 10

above, please contact the Inheritance Tax & Probate Helpline on 0845 3020900. If you have any questions about the other pensions change in paragraph 6 above, please contact the Pensions Helpline on 0845 600 2622. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN46

INHERITANCE TAX: TRANSITIONAL SERIAL INTERESTS Who is likely to be affected? 1. Trustees and beneficiaries of “interest in possession” (IIP) settlements set

up on or before 21 March 2006. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to clarify the inheritance

tax (IHT) rules where trusts in place on or before 21 March 2006 on IIP terms come to an end on or after 22 March 2006 and are replaced with new IIP trusts for the same beneficiary. In addition, the transitional period will be extended by six months to 5 October 2008.

Operative date 3. The measure has effect on and after 22 March 2006. Current law and proposed revisions 4. Schedule 20 to the Finance Act 2006 changed the IHT rules for IIP trusts.

It included a transitional period from 22 March 2006 to 5 April 2008 to enable trustees to reorganise trusts set up on or before 21 March 2006 without being subject to the new rules.

5. The effect of those transitional provisions is unclear where pre-

22 March 2006 IIP trusts are replaced with a “transitional serial interest” as defined in sections 49C, D and E of the IHT Act 1984 for the same beneficiary. This measure will ensure that the new rules will not have effect where this kind of change is made in the transitional period.

6. The legislation will also ensure that the new rules will have effect as

intended where an IIP trust is replaced after the transitional period with a new IIP trust for either the same or a different beneficiary.

7. In addition, this measure extends the transitional period so that it will now

end on 5 October 2008. 8. Draft legislation and explanatory notes have been published today on the

HM Revenue & Customs website.


Further advice 9. If you have any questions about this change, please contact the

Probate/IHT Helpline on 0845 3020 900. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN47

INHERITANCE TAX (IHT) NIL-RATE BAND Who is likely to be affected? 1. Individuals, executors and personal representatives of estates of people

who have died. General description of the measure 2. The 2007 Pre-Budget Report (PBR) announced that legislation would be

introduced in Finance Bill 2008 to allow any IHT nil-rate band unused on a person’s death to be transferred to the estate of their spouse or civil partner who dies on or after 9 October 2007. More details can be found in PBR Note 16.

3. This Note sets out details of a consequential amendment to capital gains

tax (CGT) provisions to prevent the revision of the valuation of the base cost of an asset for CGT purposes where the valuation of that asset is subsequently ascertained for IHT purposes.

Operative date 4. The change to the CGT provision will have effect on and after 6 April 2008. Current law and proposed revisions 5. Section 274 of the Taxation of Capital Gains Act 1992 (TCGA) provides

that where the value of an asset in a deceased person’s estate has been ascertained for IHT purposes, that value also has effect for CGT purposes. The value of an asset transferred from a deceased’s estate will not be determined for CGT purposes until a subsequent disposal of that asset. So generally, where the value of an asset needs to be ascertained for IHT purposes, this will occur on the death of the individual and so before the value of that asset is ascertained for CGT purposes.

6. In some cases the changes announced at 2007 PBR will mean that, to

calculate how much nil-rate band can be transferred from the first deceased spouse’s estate, the value of assets in that estate will need to be determined when the second spouse dies. In these circumstances, if the value of the asset differs from any already agreed for CGT purposes, section 274 of TCGA would require CGT to be recalculated on the basis of the value agreed for IHT purposes.


7. This measure will ensure that the requirement under section 274 of TCGA to use the IHT valuation for CGT purposes will not have effect where the valuation of an asset does not have to be ascertained for IHT purposes on the death of an individual. So, for example, if the IHT valuation of an asset does not have to be ascertained until the death of the surviving spouse in order to establish the nil-rate band that may be transferred, then section 274 of TCGA will not require that value to be used for any CGT calculation.

Further advice 8. If you have any questions about this change, please contact the Inheritance

Tax & Probate Helpline on 0845 3020900. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN48

CAPITAL GAINS TAX: RELIEF ON DISPOSAL OF A BUSINESS (ENTREPRENEURS’ RELIEF)

Who is likely to be affected? 1. Individuals and trustees who dispose of the whole or part of a trading

business, or of shares in a trading company in which they have a qualifying interest.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to establish a new

entrepreneurs' relief, which will complement the capital gains tax (CGT) reform package announced at the 2007 Pre-Budget Report (PBR). Entrepreneurs’ relief may be available in respect of gains made by individuals on the disposal of: • all or part of a trading business the individual carries on alone or in

partnership; • assets of the individual’s or partnership’s trading business following

the cessation of the business; • shares in (and securities of) the individual’s “personal” trading

company (or holding company of a trading group); • assets owned by the individual and used by his / her “personal” trading

company (or group) or trading partnership. 3. The first £1 million of gains that qualify for relief will be charged to CGT at

an effective rate of 10 per cent. Gains in excess of £1 million will be charged to CGT at the rate of 18 per cent.

4. An individual will be able to make claims for relief on qualifying disposals

made on or after 6 April 2008. Claims may be made on more than one occasion up to a ‘lifetime’ limit of £1 million. Disposals on or before 5 April 2008 do not affect the lifetime limit. The £1 million limit will only begin to diminish when the relief is claimed.

5. Trustees will be able to claim relief on certain disposals of business

assets and company shares and securities where a “qualifying beneficiary” has a qualifying interest in the business in question. Trustees must make claims jointly with the “qualifying beneficiary”. Any relief given on the trustees’ gains will reduce a beneficiary’s £1 million lifetime limit on relief.


Operative date 6. This measure will have effect for qualifying disposals made on or after

6 April 2008. Transitional provisions will also allow relief to be claimed in certain circumstances where gains that have been deferred from disposals made on or before 5 April 2008 become chargeable after that date.

Current law and proposed revisions 7. Section 4 of the Taxation of Chargeable Gains Act 1992 (TCGA) provides

that an individual is chargeable to CGT at the rates for income tax on savings income (10 per cent, 20 per cent or 40 per cent in the tax year 2007-08). His or her net chargeable gains (after deduction of allowable losses, taper relief, any other reliefs, and the annual exempt amount (AEA)) are treated as the top slice of his or her income. Most trustees and personal representatives are currently chargeable at the trust rate (40 per cent for 2007-08).

8. For the tax year 2008-09, there will be a single rate of capital gains tax set

at 18 per cent as announced at 2007 PBR. The rate will have effect for individuals, trustees and personal representatives. PBR Note 17 sets out details of the proposals.

9. In addition on and after 6 April 2008, where the new entrepreneurs’ relief

is available it will reduce by 4/9ths the gains for which relief is due. Where a number of gains and losses arise on the disposal of a business, the reduction is applied to their aggregate. The net amount of gains after relief will then be liable to CGT at the new 18 per cent single rate, resulting in an effective 10 per cent rate (5/9ths x 18 per cent). An individual will be entitled to entrepreneurs’ relief on gains of up to £1 million on qualifying disposals. This £1 million limit is a “lifetime” limit. It will be necessary to keep a record of the amount of gains in respect of which the relief is claimed to work out the relief due on any later qualifying disposals.

10. There will be no minimum age limit for entrepreneurs’ relief. And

entrepreneurs’ relief will be available where the relevant conditions are met throughout a qualifying period of one year.

Sole traders and partnerships 11. The relief will have effect for gains arising on the disposal by an individual

of the whole or part of a qualifying business. A business qualifies if it is a trade, profession or vocation (including the commercial letting of furnished holiday accommodation in the UK, but not other types of property letting business). The individual must have owned the business, or be a member of a partnership that owns the business, throughout the one-year period ending with the disposal.

12. A disposal by a member of a partnership of the whole or part of his / her

interest in the partnership will also qualify if the partnership carries on a qualifying business and the individual meets the ownership test throughout the year ending with the disposal.


13. Where a qualifying business is not disposed of but simply ceases, relief

will be available on gains on assets in use in the business at the time it ceased where the assets are disposed of within three years of the date of cessation.

14. Gains on disposals by sole traders and partners of shares or securities or

on assets held as investments will not qualify for relief. But there are circumstances in which relief will be available on the disposal of shares and securities in a trading company and on “associated disposals”. Details of these are set out below.

Shares and securities 15. The relief will have effect for gains on disposals of shares in (and

securities of) a trading company (or the holding company of a trading group) provided that throughout a one-year qualifying period the individual making the disposal: • is an officer or employee of the company, or of a company in the same

group of companies; and • owns at least 5 per cent of the ordinary share capital of the company

and that holding enables the individual to exercise at least 5 per cent of the voting rights in that company.

16. Where the company (or group) does not cease to trade, the one-year

qualifying period is the year ending on the date the shares or securities are disposed of. Where the company (or group) ceases to trade before the disposal of the shares or securities, the one-year qualifying period ends on the date trading ceased, and the disposal must be made within three years of the date of cessation.

17. The terms “trading company”, “holding company” and “trading group” will

have the same meaning as they do for the purposes of taper relief on business assets. There will be no requirement to restrict the gains qualifying for relief by reference to any non-trading assets held by the company (or group).

“Associated disposals” 18. Where an individual qualifies for entrepreneurs’ relief on a disposal of

shares or securities under paragraphs 15-17 above, relief will also be available if the individual makes an “associated disposal” of an asset which was used in the company’s (or group’s) business. For example, if a company director who owns the premises from which the company carries on its business sells the premises as well as selling his shares in the company, the sale of the premises may count as an “associated disposal” and the gain on the disposal may attract entrepreneurs’ relief. The relief due on an associated disposal will be restricted in certain circumstances, for example, where the asset in question is not wholly in business use or where the individual is not involved in carrying on the business (as an officer or employee of the company with a qualifying interest in it) throughout the period during which the asset was owned.


19. A similar rule will allow relief on an “associated disposal” of an asset used

in a partnership’s business and owned separately by a member of the partnership who is entitled to relief on disposal of his interest in the assets of the partnership. Again, relief will be restricted in circumstances equivalent to those indicated in the previous paragraph.

Deferred gains 20. It will be possible to claim relief where, on or after 6 April 2008:

• shares or securities are exchanged for other shares or securities (including qualifying corporate bonds (QCBs)); and

• gains on disposal of the original shares or securities would meet the qualifying conditions for relief; but gains do not arise at the time of the exchange under the normal CGT rules for such exchanges.

21. Where QCBs are received in the exchange, entrepreneurs’ relief will be

claimable in determining the amount of gain to be deferred until the QCBs are disposed of. In other cases people may elect to disapply the normal CGT rules, so that gains will arise at the time of the exchange and the relief will be claimable on those gains.

22. Similarly, where gains are deferred on or after 6 April 2008 as a result of

an investment in qualifying shares under the Enterprise Investment Scheme (EIS), entrepreneurs’ relief will be claimable in determining the amount of gains to be deferred.

23. Transitional rules will also allow entrepreneurs’ relief to be claimed where

gains that have been deferred on or before 5 April 2008 under the rules for exchanges of shares, etc., for QCBs, or on investment under the EIS or in a Venture Capital Trust (VCT) become chargeable on or after 6 April 2008. The relief will be claimable if the disposal giving rise to the gain that has been deferred would have qualified for the relief if the relief had been in force at the time of that disposal.

24. A further document has been published today on the HMRC website

containing examples of how the relief will work. Detail about the relief can be found in the draft legislation and explanatory note available on the HMRC website. Draft legislation relating to the changes to CGT announced at Pre-Budget Report is also available on the HMRC website.

Further advice 25. If you have any questions about this change, please contact the Capital

Gains Tax Team on 020 7147 2764 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk.


BN49

CHILD TRUST FUND: VOUCHER REQUIREMENT Who is likely to be affected? 1. Child Trust Fund (CTF) providers, CTF distributors and parents/guardians

who have received or will receive a CTF voucher. General description of the measure 2. Regulations will be laid in due course to remove the requirement for

providers and distributors to collect the CTF voucher from parents in order to open a CTF account.

Operative date 3. The new account opening rules will have effect on and after 6 April 2009. Current law and proposed revisions 4. Under the current CTF Regulations (S.I. 2004/1450 as amended), the

applicant (parent) must give the voucher relating to the named child to the account provider or distributor not later than 7 days after the expiry date on the voucher. This allows the provider or distributor to open a CTF account.

5. This measure will remove the need for the voucher to be collected by CTF

providers and distributors as part of the account opening process. 6. Instead of the parent handing over the voucher, CTF providers and

distributors will be able to open accounts using essential information from the CTF voucher provided by the customer, such as the unique reference number, the child’s date of birth and the voucher expiry date. This change will allow, for example, telephone and internet applications for CTF accounts to be made in a single paperless transaction without the need for the customer to post the voucher separately.

7. This change will apply to all applications processed by providers or

distributors from 6 April 2009. 8. The measure allows those CTF providers and distributors who wish to

continue collecting the vouchers from parents to do so. 9. A public consultation paper was published on 24 October 2007 and a

summary of the consultation responses has been published today.


Further advice 10. If you have any questions about this change, please contact Anna Caffyn



BN50

INDIVIDUAL SAVING ACCOUNTS AND NORTHERN ROCK BANK

Who is likely to be affected? 1. Investors who withdrew monies from their Northern Rock Individual

Savings Account (ISA) between 13 and 19 September 2007 inclusive; and ISA providers.

General description of the measure 2. Legislation will be included in Finance Bill 2008 to allow individuals who

withdrew cash from their Northern Rock ISAs between 13 and 19 September 2007 to reinvest them in a new ISA. This measure was announced on 18 October 2007.

Operative date 3. Investors can make the re-investment between 18 October 2007 and

5 April 2008. Current law and proposed revisions 4. Under the powers in sections 694 to 701 Income Tax (Trading and Other

Income) Act 2005 (ITTOIA), The Individual Savings Account Regulations 1998 (SI 1998 No 1870 as amended) provide the rules and regulations for the ISA scheme.

5. The existing ISA Regulations stipulate that an investor cannot subscribe

more than £3,000 to a cash ISA in any one tax year. And they do not, except in the limited circumstances of in-year self transfers by investors, allow for any re-investment of withdrawn funds with another ISA manager other than as a subscription and subject to the annual subscription limit. They stipulate that a transfer can only be made directly between one ISA account manager and another.

6. As part of this measure, the ISA Regulations will be amended so that:

• Qualifying Northern Rock investors can re-invest their withdrawn funds with the same or a different ISA provider; and

• The re-investment does not count towards that investor’s annual ISA subscription limit.


7. Any re-investment of monies withdrawn from Northern Rock will not have any impact upon an investor’s annual ISA investment limit, which is subject to the normal ISA subscription rules. Furthermore, any re-investment made with a new ISA provider is to be treated as a transfer to that provider rather than a subscription.

8. The new rule will apply only to people who withdrew funds from their

Northern Rock ISA between 13 and 19 September 2007, and the re-investments have to be made no later than 5 April 2008. This means that the changes to the ISA regulations described above will need to have retrospective effect, but the existing powers in ITTOIA do not explicitly provide for this.

9. So, in order to make the necessary changes to the ISA Regulations the

powers in ITTOIA will need to be amended, and legislation will be introduced in Finance Bill 2008 to provide for this. The retrospective power being introduced in the Finance Bill is to have effect only if the use of the power is to the benefit of the taxpayer.

10. The amending ISA Regulations, will be laid as soon as possible after the

date that Finance Bill 2008 has received Royal Assent. 11. Details of the Government announcement made on 18 October 2007 can

be found on HM Treasury’s website at www.hm-treasury.gov.uk Further advice 12. If you have any questions about this change, please contact David Ensor



BN51

INDIVIDUAL SAVING ACCOUNTS AND OTHER SAVING ACCOUNTS: REDUCING THE ADMINISTRATIVE BURDEN

Who is likely to be affected? 1. This measure will affect:

• Individual Saving Account (ISA) managers who make quarterly statistical ISA reports to HM Revenue & Customs (HMRC);

• financial institutions that receive applications from: o ISA investors; o UK non-taxpayers for payment of interest gross; and o individuals not ordinarily resident in the UK for payment of

interest gross. General description of the measure Quarterly statistical reports 2. This measure will remove the requirement for ISA managers to submit

quarterly returns of statistical information to HMRC (detailing subscriptions received) on and after 6 April 2008. Instead, ISA managers will make an annual statistical return detailing subscriptions received after the end of each tax year. The requirement on ISA managers to make an annual ‘market value’ return will remain.

Retention of application forms 3. The requirement for ISA managers to retain the copy of an investor’s

application for an ISA will also cease. Similarly, financial institutions who operate the Tax Deduction Scheme for Interest (TDSI) will no longer have to retain applications from investors for: • gross payment of interest by UK non-taxpayers (Form R85); and • gross payment of interest by not-ordinarily resident individuals

(Form R105). 4. Instead, ISA managers and financial institutions that choose not to retain

forms will be required to record the information contained in the application and a send a written copy of confirmation to the customer. The original application can then be destroyed.

Changes to Regulations 5. The existing regulations which cover the operation of the TDSI will be

consolidated. 6. A number of changes to the ISA Regulations will be made to remove

obsolete references and update other references.


Operative date 7. For ISAs, these changes will have effect on and after 6 April 2008. For

TDSI, the changes will have effect later in the year on and after a date to be determined in regulations made by the Commissioners for HM Revenue and Customs.

Current law and proposed revisions ISA Returns of Statistical Information 8. Under the ISA Regulations, managers are required to make a quarterly

return of statistical information to HMRC’s Savings Schemes Office within one month of 5 July, 5 October, 5 January and 5 April in each tax year. The returns are made on form ISA 25(Stats) and provide cumulative details of ISA subscriptions.

9. Managers also have to make an annual return of statistical information

within 60 days of the end of the tax year. The annual return (made on the form ISA 14(Stats)) provides details of the market values of the qualifying investments held in ISAs. This type of return is described as a ‘market value’ return.

10. The ISA Regulations will be amended so that on and after 6 April 2008

HMRC will cease collecting quarterly statistics and will, instead, collect a single ‘subscription return’ at the end of the tax year, which HMRC will use to publish annual subscription statistics. Managers will still be required to make an annual ‘market value return’ within 60 days of the end of the tax year.

Removing the requirement to retain copies of applications 11. Under the ISA Regulations, managers are required to retain either paper

forms or electronically scanned copies of an investor’s written ISA application. On and after 6 April 2008, ISA managers will have the option of treating a written application in the same way as they would a non-written one. The manager would transfer all of the details from the written application form onto their systems, send a written confirmation of the declaration to the investor and retain a record that the confirmation has been sent. The ISA manager could then destroy the signed application.

12. Financial institutions that operate TDSI are required to retain either paper

forms or electronically scanned copies of the application to receive gross payment of interest from UK non-taxpayers or not-ordinarily resident individuals. Financial institutions will be given the option of treating a written application in the same way as they would a non-written one (for example, an application by telephone or via the internet). The financial institution would transfer all of the details from the written application form onto their systems, send a written confirmation of the declaration to the saver and retain a record that the confirmation has been sent. The financial institution could then destroy the signed application.


Consolidation of the regulations that cover the TDSI 13. The existing regulations which cover the operation of the Tax Deduction

Scheme for Interest (1990/2231 (Building Society Regulations), 1990/2232 (Deposit-taker Regulations), 1992/10 (Building Society Audit Regulations) and 1992/12 (Deposit-taker Audit Regulations)) will be consolidated into a single set of regulations to be laid later in the year. These regulations will include the change to give financial institutions who operate TDSI the option of treating a written application in the same way as they would a non-written one.

Minor drafting changes to the ISA regulations 14. There are a number of minor drafting changes being made to the ISA

regulations. These changes are to remove obsolete references and to update legislative references following the Tax Law Rewrite Acts. These changes will have no impact on individuals or providers.

Further advice 15. If you have any questions about these changes, please contact David

Ensor on 020 7147 2838 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN52

GIFT AID: TRANSITIONAL RELIEF Who is likely to be affected? 1. UK Charities and Community Amateur Sports Clubs (CASCs) that claim

repayments of tax in respect of qualifying Gift Aid donations, and charitable intermediaries making claims on their behalf.

General description of the measure 2. Charities and CASCs making Gift Aid repayment claims will be entitled to

a transitional relief relating to qualifying Gift Aid donations made in the tax years 2008-09 to 2010-11. The transitional relief will be paid by HM Revenue & Customs (HMRC) when a claim for repayment of tax made within specific timescales is allowed.

Operative date 3. The relief will have effect for Gift Aid repayment claims that relate to

qualifying donations made on and after 6 April 2008 until 5 April 2011. 4. Gift Aid claims for donations made on and after 6 April 2008 will continue

to be processed as previously but using the new 20 per cent basic rate of income tax.

5. For Gift Aid claims allowed on or after the date that both the Finance Bill

2008 and the Appropriation Bill 2008 receive Royal Assent, HMRC will pay the transitional relief at the same time as the related Gift Aid repayment. For claims allowed before both these pieces of legislation receive Royal Assent, HMRC will pay the Gift Aid repayment as usual, and will pay the transitional relief after Royal Assent.

Current law and proposed revisions 6. Legislation will be introduced in Finance Bill 2008 to supplement current

Gift Aid legislation for charities and CASCs, as a consequence of the reduction of the basic rate of income tax from 6 April 2008.

7. This legislation will require HMRC to pay a transitional relief supplement to

charities and CASCs based on qualifying Gift Aid donations shown on claim form R68 if the claim is allowed. The relief for claims made before the date of Royal Assent of the Finance Bill and Appropriations Bill will be paid separately by HMRC without the need for an additional claim by charities or CASCs.


8. The rate of the transitional relief supplement will be 2 per cent and will be applied to qualifying donations made in the years 2008-09, 2009-10 and 2010-11.

9. The relief will be calculated by grossing up the donation by the sum of the

basic rate and the rate of supplement. The amount of relief due will be the difference between that figure and the amount of the donation grossed up at the basic rate of tax.

10. Charities and CASCs will be eligible to receive payments of the Gift Aid

transitional relief in respect of Gift Aid repayment claims allowed by HMRC providing that the claim on form R68 is made: • for charitable trusts, up to two years after the end of the tax year to

which the claim relates; and • for charitable companies or CASCs, up to two years from the end of

the accounting period to which it relates. 11. The amount of the transitional relief will be limited by the amount of

qualifying donations, so will increase or decrease as levels of qualifying Gift Aid donations received by a charity increase or decrease.

12. Information about responses to the recent Gift Aid consultation is available

on the HM Treasury website at www.hm-treasury.gov.uk. Further advice 13. If you have any questions about this change, please contact John Neale



BN53

INCOME OF BENEFICIARIES UNDER SETTLOR-INTERESTED TRUSTS

Who is likely to be affected? 1. Individuals who receive discretionary income payments from a

settlor-interested trust and who also receive savings or dividend income. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to rectify an unintended

consequence of the Trusts Modernisation legislation in Finance Act 2006. Operative date 3. The measure will have effect on or after 6 April 2006 (the date on and after

which this part of the Trusts Modernisation legislation has effect). Current law and proposed revisions 4. The income of a ‘settlor-interested’ trust is deemed, for the purposes of

income tax, to be the settlor’s income. Tax paid by the trustees of such trusts is treated as paid on behalf of the settlor. This is in contrast to other trusts where the tax paid by trustees is available to the beneficiaries. To avoid the double taxation which would otherwise result, section 685A of the Income Tax (Trading and Other Income) Act 2005 provides that income paid by trustees of a settlor-interested trust to (non-settlor) beneficiaries comes with a non-repayable ‘notional’ tax credit equal to the higher rate of tax (currently 40 per cent) which covers all the tax liability on that income.

5. However, under current statutory ordering rules income from a trust is

charged before savings and/or dividend income. The result is that a beneficiary of such a trust who also has savings and/or dividend income may find that the non-trust income is pushed into higher rates so that more tax is due overall.

6. The measure amends this ordering rule, such that income from a

settlor-interested trust is treated within section 1012 of the Income Tax Act 2007 as one of the highest slices of income.


Further advice 7. If you have any questions about this change, please contact Kyri

Souppouris on 020 7147 2760 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN54

STAMP DUTY: CHANGES TO LOAN CAPITAL EXEMPTION Who is likely to be affected? 1. Individuals and companies wishing to invest in debt securities on the

capital markets. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to provide exemption

from stamp duty on transfers of loan capital, which are subject to a capital market arrangement on limited recourse terms.

Operative date 3. These changes will have effect for transfers of loan capital on or after the

date that Finance Bill 2008 receives Royal Assent. Current law and proposed revisions 4. Section 79(4) of the Finance Act 1986 currently exempts from stamp duty

most forms of loan capital. But where the right to interest on a loan capital instrument is determined to any extent by the results of a business or value of any property, the exemption does not apply and transfers of that loan capital are subject to ad valorem stamp duty.

5. This measure will provide that where the loan capital instrument does not

meet the exemption criteria for the reasons described above, it will nevertheless qualify for exemption from stamp duty if it is also (a) party to a capital market arrangement and (b) the right to interest is on limited recourse terms.

Further advice 6. If you have any questions about this change, please contact Nicky Rass




BN55

REDUCTION OF STAMP DUTY ADMINISTRATIVE BURDEN Who is likely to be affected? 1. Any person who executes stock transfer forms or other written instruments

to transfer ownership of stock or marketable securities. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to provide that

instruments transferring stocks and shares that were previously chargeable with £5 stamp duty will in future be exempt and will not need to be presented to HM Revenue & Customs (HMRC) for stamping.

Operative date 3. The measure will have effect for instruments executed on or after

13 March 2008. Current law and proposed revisions 4. Under Schedule 13 to the Finance Act 1999, where a transfer of

ownership of stocks or marketable securities is effected by a written instrument, the instrument must first be presented to HMRC for stamping with the appropriate amount of stamp duty. Company registrars are not allowed to amend share registers to reflect a change of owner unless the instrument has either been stamped or bears a certificate that it is not chargeable with duty.

5. The law provides for ad valorem stamp duty to be charged on an

instrument transferring shares on sale, at the rate of 0.5 per cent of the amount of the consideration given for the shares, rounded up to the nearest £5. Where the consideration is £1,000 or less, the duty payable is therefore limited to £5. There is also a fixed £5 stamp duty charge for instruments transferring shares otherwise than on sale.

6. 68 per cent of transfer instruments currently presented, attract the

minimum stamp duty charge of £5 and the cost to business of submitting them for stamping is high. Changes to be made by primary legislation will therefore exempt transfer instruments that would previously have attracted stamp duty of no more than £5, whether fixed or ad valorem. These instruments may therefore in future be sent direct to the company registrar without first being presented to HMRC.


7. Further guidance has been published today on the HMRC website. Further advice 8. If you have any questions about this change, please contact Miles

Harwood on 020 7147 2801 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN56

STAMP DUTY LAND TAX (SDLT): RELIEF FOR NEW ZERO-CARBON FLATS

Who is likely to be affected? 1. Buyers of new zero-carbon flats, and Government departments carrying

out assessments on whether a home qualifies for the relief. General description of the measure 2. A regulation making power was introduced in Finance Act 2007 which

brought in a time-limited relief from stamp duty land tax (SDLT) for new zero-carbon homes.

3. Legislation will be introduced in Finance Bill 2008 to extend this relief to

cover new zero carbon flats. As a result of this change, existing secondary legislation will have retrospective effect to extend the relief for any new flats.

4. The measure will also ensure that where a Government department

carries out an assessment of whether a home meets the zero-carbon standard it is to be permitted to charge a reasonable fee for providing such service. This part of the measure will have effect from later this year when regulations are laid.

Operative date 5. The relief for new flats will have effect on and after 1 October 2007. The

relief will be time-limited and will expire on 30 September 2012. 6. The provision allowing Government departments to charge a fee for

assessing whether a home meets the zero-carbon standard will have effect from a date to be appointed by Treasury order.

Current law and proposed revisions 7. Legislation for SDLT is in Finance Act (FA) 2003. Section 19 of FA 2007

introduced regulation making powers bringing a new relief to provide for zero-carbon homes.

8. Qualifying criteria for the relief are set out in the Stamp Duty Land Tax

(Zero-Carbon Home) Regulations 2007 (SI 2007/3437) and require the level of carbon emissions from energy use in the home to be zero over the course of a year. As with other homes, the vendor of a new zero-carbon flat should provide a certificate confirming that it qualifies for the relief.


9. The relief will be eligible only to new flats which are liable to SDLT on their first sale. The relief will not be available on second and subsequent sales or on existing flats even when converted to meet the zero-carbon criteria.

10. The relief will provide complete removal of SDLT liabilities for all new zero-

carbon flats up to a purchase price of £500,000. Where the purchase price of the flat is in excess of £500,000 then the SDLT liability will be reduced by £15,000. The balance of the SDLT liability will be due in the normal way.

11. The regulations –The Stamp Duty Land tax (Zero-Carbon Homes Relief)

Regulations 2007 – came into force on 7 December 2007. Legislation to be introduced in Finance Bill 2008 will amend section 19 of FA 2007 so that the power to make regulations extends to include new flats. Further regulations will be laid after Finance Bill 2008 receives Royal Assent to provide for a fee to be charged by a Government department and to clarify the position in respect of certificates for any qualifying flats brought prior to the amendments to the section 58B of FA 2003.

Further advice 12. More details about how the current relief for new zero-carbon homes

operates can be found on the HM Revenue & Customs website. 13. If you have any questions about this change, please contact Michael Lyttle

on 020 7147 2792 (e-mail: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN57

STAMP DUTY LAND TAX (SDLT): NOTIFICATION THRESHOLDS FOR LAND TRANSACTIONS AND RATE

THRESHOLDS FOR LEASEHOLD PROPERTY Who is likely to be affected? 1. Persons entering into land transactions (including linked land transactions)

where the chargeable consideration is less than £40,000. 2. Persons entering into transactions in respect of a lease for a period of

seven years or more where the grant, assignment or surrender of the lease is made for a chargeable consideration (other than rent) of less than £40,000 and the rent is less than £1,000.

3. Persons affected by the rules that HM Revenue & Customs (HMRC)

introduced to prevent manipulation of thresholds where both rent and premium are payable on a lease (the “£600 rule”).

General description of the measure 4. Legislation will be introduced in Finance Bill 2008 to change the rules for

persons notifying HMRC about land transactions. The “£600 rule” will also be changed and, from later this year, agents will be allowed to sign declarations in the certificate that no stamp duty land tax (SDLT) is due.

Operative date 5. The revised notification thresholds on land transactions and the changes

to the “£600 rule” will have effect for transactions on and after 12 March 2008.

6. The change to SDLT forms allowing agents to sign the declaration in the

certificate that no stamp duty land tax is due on behalf of their clients will be made by regulations in due course.

Current law and proposed revisions SDLT thresholds 7. SDLT is charged, at varying rates, on the consideration given for a land

transaction. At present, as a general rule, no tax is payable on transactions in residential property if the consideration does not exceed £125,000 (and on transactions in non-residential property if the consideration does not exceed £150,000). Tax is payable at 1 per cent if the consideration exceeds £125,000 for residential properties (or £150,000 for residential properties which can claim disadvantaged area relief, and


non-residential properties) but does not exceed £250,000. Tax is payable at 3 per cent if the consideration exceeds £250,000 but does not exceed £500,000, and at 4 per cent for consideration above £500,000.

8. HMRC must be notified about most transactions involving the acquisition

of a major interest in land for consideration unless specifically exempted. This measure will raise the threshold for when a person has to notify HMRC of a land transaction.

9. Leases must be notified if the lease is for a period of seven years or more

and the grant is made for a chargeable consideration. Leases should also be notified when they are granted for periods of less than seven years but tax is chargeable at a rate of 1 per cent or higher on either or both any premium or rent paid. This also applies in circumstances where there would have been tax chargeable at a rate of 1 per cent or higher but for the availability of a relief.

10. Since most transactions currently have to be notified to HMRC, many of

the transactions notified are ones where no SDLT is payable. 11. This measure will raise the current threshold for notification of non-

leasehold transactions from chargeable consideration of £1,000 to £40,000.

12. Transactions involving leases for a term of seven years or more will only

have to be notified where any chargeable consideration other than rent is more than £40,000 or where the annual rent is more than £1,000.

13. Moreover, further changes will mean that it will no longer be necessary to

complete either a stamp duty land tax return (HMRC form SDLT1) or certificate that no stamp duty land tax is due (HMRC form SDLT 60) if the transaction is below the notifiable threshold.

The “£600 rule” 14. Provisions in the Finance Act 2003 prevent the manipulation of lease

thresholds and apply to leases where payment is made by both rent and a premium when the lease is signed. The rule states that where the annual rent on a lease is more than £600, then the normal 0 per cent thresholds that would have effect, £125,000 for residential property and £150,000 for non-residential property, are withdrawn and SDLT is charged at 1 per cent. This measure will amend these rules as follows: • for non-residential properties where the annual rent on a lease is

£1,000 or more then the normal 0 per cent threshold that would have effect at £150,000 is withdrawn and SDLT is charged at 1 per cent; and

• for residential properties the rule will no longer have effect and, regardless of what rent is paid, the normal thresholds will have effect to any premium paid. This amendment will also have effect in respect of disadvantaged areas relief.


The certificate that no stamp duty land tax is due (form SDLT 60) 15. The HMRC form prescribed by regulations does not permit agents to sign

the certificate that no SDLT is due on behalf of their clients (form SDLT 60). The form can only be signed by the person making the transaction. HMRC will amend that form by regulations later in 2008 so that agents will be able to sign the declaration in the certificate on behalf of their clients.

Draft legislation 16. Draft legislation and explanatory notes have been published today on the

HM Revenue & Customs website. Further advice 17. If you have any questions about this measure, please contact the Stamp

Taxes Help Line on 0845 603 0135. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN58

STAMP DUTY LAND TAX (SDLT): ANTI-AVOIDANCE LEGISLATION AFFECTING PARTNERSHIPS

Who is likely to be affected? 1. Property investment partnerships that purchase interests in property in the

United Kingdom. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to amend provisions

inserted in Finance Act (FA) 2003 by FA 2007 to ensure that, where there is a transfer of an interest in a property within an investment partnership, there will be no charge to SDLT.

Operative date 3. The measure will be retrospective and have effect for transactions that

occurred on and after 19 July 2007 (the date that Finance Bill 2007 received Royal Assent).

Current law and proposed revisions 4. Legislation in FA 2007 tackled schemes which allowed payment of SDLT

to be avoided by using provisions in the then existing SDLT legislation intended to help the transfer of property between different partners within an investment partnership. The following parts of SDLT legislation within the Finance Act 2003 were amended: • the charge on transfers into partnerships set out in paragraphs 10-12

of Schedule 15; • the charge on transfers out of partnerships set out in paragraphs

18-20 of Schedule 15; and • the charge on transfers of an interest in a property-investment

partnership set out in paragraph 14 of Schedule 15. 5. The legislation in FA 2007 affected property investment partnerships by

ensuring that each time there was a change in the size of share held within the property investment partnership there was a charge for SDLT regardless of whether there was any consideration paid for the change and regardless of whether the parties involved in the transaction were connected to each other in any way. Previously, provisions in SDLT legislation to help ease the movement of property between partners had been used to relieve these transactions of the charge to SDLT that would have been due on transactions involving transfers between partners.


6. The legislation in Finance Bill 2008 will amend the provisions in FA 2003 inserted by FA 2007 in order to ensure that where there is a transfer of an interest in a property within an investment partnership, there will be no charge to SDLT.

Further advice 7. If you have any questions about this measure, please contact Michael

Lyttle on 020 7147 2792 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN59

STAMP DUTY LAND TAX (SDLT): GROUP RELIEF: ANTI-AVOIDANCE

Who is likely to be affected? 1. Groups of companies seeking to avoid payment of stamp duty land tax

(SDLT) on large commercial transactions. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to amend provisions that

enable groups to transfer assets within a group and then sell the purchasing company on to a third party without incurring SDLT.

Operative date 3. This change will have effect for any transaction the “effective date” of

which is on or after 13 March 2008. The effective date is normally the date of completion not the date of exchange of contracts. However, the effective date may be earlier than the date of completion if the contract is “substantially performed”, for example, if the purchaser takes possession or pays the purchase price in advance of completion. Most residential contracts will not be “substantially performed” in advance of completion.

Current law and proposed revisions 4. Paragraph 1 of Schedule 7 to the Finance Act 2003 allows companies to

claim group relief on transfers of assets between group members.

5. A restriction is placed on the relief where a property is transferred to a group company and the purchaser then ceases to be a member of the same group as the vendor. HM Revenue & Customs (HMRC) can then “claw back” any group relief.

6. HMRC have identified a number of avoidance schemes structured to avoid the “clawback” provisions in the legislation. The transactions are structured in such a way that it is the vendor who leaves the group first, thereby allowing the purchasing company to subsequently leave the group without there being any “clawback” of SDLT group relief.

7. This legislation will have effect where the vendor leaves the group and

there is then a subsequent change in the control of the purchaser within a period of three years of the asset having been transferred. The provision will enable HMRC to link these two events and treat the purchaser as having left the group first.


8. Group relief will not be clawed back where only the vendor leaves the group.


HM Revenue & Customs website. Further advice 10. If you have any questions about this change, please contact Yasmin Ali on



BN60

STAMP DUTY LAND TAX (SDLT): ALTERNATIVE FINANCE: ANTI-AVOIDANCE

Who is likely to be affected? 1. Parties to schemes designed to avoid payment of stamp duty land tax

(SDLT). General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to prevent abuse where

financial institutions assist parties to avoid payment of SDLT. Operative date 3. This change will have effect for any transaction the “effective date” of

which is on or after 12 March 2008. The effective date is normally the date of completion not the date of exchange of contracts. However, the effective date may be earlier than the date of completion if the contract is “substantially performed”, for example, if the purchaser takes possession or pays the purchase price in advance of completion. Most residential contracts will not be “substantially performed” in advance of completion.

Current law and proposed revisions 4. Sections 71A, 72, 72A and 73 of Finance Act 2003 were introduced in

2005 to encourage the use of alternative finance structures that did not use conventional mortgage schemes to buy property.

5. Section 71A (2) allows an exemption from SDLT where there is a

purchase by the lender from the borrower. Section 72 allows the equivalent exemption in Scotland. These equate to schemes where someone takes a mortgage out on what was a previously mortgage free property. The legislation also exempts a purchase by the lender from the borrower where there is a re-mortgage. (Sections 72A and 73 allow the Scottish equivalents of these types of exemptions.)

6. Some financial institutions have misused these two exemptions from SDLT

by colluding with vendors so that ownership of a property is placed in a subsidiary company of the financial institution. The subsidiary then claims that the transaction is intended for the purposes of allowing the equivalent of mortgaging on a mortgage free property or re-mortgaging.

7. Once ownership of the property has passed from the vendor to the

subsidiary, however, the financial institution can then sell the property without incurring any SDLT by selling shares in the subsidiary company.


8. New provisions will ensure that relief under sections 71A or 72 will not be

available if there are arrangements in place for a person to acquire control of the financial institution.


HM Revenue & Customs website. Further advice 10. If you have any questions about this change, please contact Michael Lyttle



BN61

GREATER LONDON AUTHORITY SEVERANCE PAY Who is likely to be affected? 1. Members of the Greater London Authority (GLA) and the Mayor of London. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to ensure that payments

under the new GLA severance pay scheme will be tax-exempt up to the first £30,000 thereby bringing their tax treatment into line with that of payments under similar schemes for Westminster MPs and members of the devolved administrations.

Operative date 3. The legislation will have effect on and after 6 April 2008. Current law and proposed revisions 4. Payments currently fall within section 62 of the Income Tax (Earnings and

Pensions) Act 2003 (ITEPA) and would be taxed in full. 5. Legislation in Finance Bill 2008 will ensure that the payments are treated

as termination payments by an amendment of section 291 of ITEPA. Further advice 6. If you have any questions about this change, please contact Peter

Seedhouse on 020 7147 2529 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN62

ARMED FORCES COUNCIL TAX RELIEF Who is likely to be affected? 1. Members of the Armed Forces serving in operational locations specified by

the Ministry of Defence. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to ensure that payments

under the new Armed Forces Council Tax Relief scheme will be tax-exempt.

Operative date 3. The legislation will have effect on and after 1 April 2008. Current law and proposed revisions 4. Payments currently fall within section 62 of the Income Tax (Earnings and

Pensions) Act 2003 (ITEPA) and would be taxed in full. 5. Legislation in Finance Bill 2008 will ensure that the payments will be

specifically exempt from tax by the insertion of a further exemption at Part 4 of Chapter 8 (Exemptions: Special Kinds of Employees) of ITEPA. Parallel disregards are being introduced in secondary legislation for National Insurance contributions and Tax Credits purposes.

Further advice 6. If you have any questions about this change, please contact the Employer




BN63

RESTRICTIONS ON TRADE LOSS RELIEF FOR INDIVIDUALS Who is likely to be affected? 1. Individuals who carry on a trade but spend an average of less than 10

hours a week on commercial activities of that trade. General description of the measure 2. Legislation will be introduced in Finance Bill 2008:

• to counteract the use of contrived arrangements that generate trade losses which may be claimed as sideways relief or capital gains relief (“sideways loss relief”) by an individual, other than a partner, carrying on a trade in a non-active capacity; and

• to amend the definition of a non-active partner for the purpose of restrictions to sideways loss relief.

Operative date 3. These changes will have effect on and after 12 March 2008. Current law and proposed revisions 4. Individuals who are carrying on a trade can, subject to certain restrictions,

set off their trading losses against other income and gains. This is commonly known as sideways loss relief.

5. Section 26 of and Schedule 4 to the Finance Act 2007 introduced

legislation to counteract the use of partnership arrangements that generate trade losses for use as “sideways loss relief” by a non-active or limited partner.

6. Since then HM Revenue & Customs has seen, through the tax avoidance

disclosure regime and otherwise, evidence of arrangements of a similar nature based on individuals acting as traders on their own account rather than as partners.

7. Legislation will be introduced in Finance Bill 2008 to restrict the amount of

sideways loss relief that can be claimed by an individual, other than a partner, carrying on a trade in a non-active capacity. Where a loss arises to an individual carrying on a trade in a non-active capacity as a result of tax avoidance arrangements made on or after 12 March 2008, no sideways loss relief will be available for that loss. Otherwise there will be an annual limit of £25,000 on the total amount of sideways loss relief that an individual may claim from trades carried on in a non-active capacity.


8. For these purposes an individual, other than a partner, carries on a trade in a non-active capacity where the individual spends an average of less than 10 hours a week, in a relevant period, personally engaged in activities of the trade carried on commercially and with a view to the realisation of profits from those activities.

9. The restrictions will not apply to losses that derive from qualifying film

expenditure, broadly losses that derive from film reliefs in sections 137 to 140 of the Income Tax (Trading and Other Income) Act 2005, or to losses of a Lloyd’s underwriting business.

10. Transitional rules will apply to the computation of losses subject to the

annual limit where these arise for an individual’s basis period which begins before 12 March 2008 and ends on or after that date.

11. Legislation will also be introduced to align the meaning of non-active

partner for the purposes of restrictions to sideways loss relief with the meaning of non-active capacity.


HM Revenue & Customs website. Further advice 13. If you have any questions about this change, please contact Peter Lees on



BN64

DOUBLE TAXATION RELIEF: INCOME TAX Who is likely to be affected? 1. Individuals who receive income as part of a trade or profession that is

subject to foreign tax. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to ensure that the credit

for any foreign tax paid on trade or professional earnings is no more than the UK income tax due in respect of the same earnings.

Operative date 3. The legislation will have effect for income arising on or after 6 April 2008

and for foreign tax paid on or after 6 April 2008. Current law and proposed revisions 4. The legislation will clarify the way that section 796 of the Income and

Corporation Taxes Act 1988 defines the maximum credit available against UK income tax in respect of foreign taxes.

5. This measure will confirm existing practice and is in keeping with the

changes made in 2005 to the corporation tax regime. It will remove doubts about the basis of foreign tax credit following recent case law.

Further advice 6. If you have any questions about this change, please contact Andrew Page




BN65

AVOIDANCE OF INCOME TAX USING MANUFACTURED PAYMENTS

Who is likely to be affected? 1. Individuals who pay manufactured payments as part of a scheme or

arrangements to gain a tax advantage. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to stop individuals

avoiding income tax by making manufactured payments. Manufactured payments are payments representative of interest or dividends payable on securities, such as gilts or shares, arising in the course of a sale and repurchase (‘repo’) or stocklending arrangements.

Operative date 3. The legislation was announced by Ministerial statement on

31 January 2008 and will have effect on and after that date. Current law and proposed revisions 4. Under current law, individuals who make manufactured payments are

generally able to obtain relief for the payments against their general income. This has given rise to a range of avoidance schemes whose object is to secure relief for the payments against their general income.

5. The legislation will introduce a targeted anti-avoidance rule that denies

relief for any manufactured payment paid as part of a scheme or arrangements where one of the main purposes is to secure a tax advantage.

Further advice 6. If you have any questions about this change, please contact Richard

Rogers on 020 7147 2625 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN66

DOUBLE TAXATION TREATY ABUSE Who is likely to be affected? 1. UK residents who are participating in the avoidance scheme described

below. General description of the measure 2. UK residents are taxable on their income wherever it arises. A wholly

artificial scheme seeks to avoid UK tax by artificially diverting income of a UK resident individual to a foreign partnership comprised of foreign trustees. The scheme is designed to ensure that the income nonetheless continues to belong to the UK resident as they will be a beneficiary of the foreign trust. Legislation will be introduced in Finance Bill 2008 to:

• clarify, retrospectively, legislation introduced in 1987, which itself was retrospective, so that it has effect as intended. This will ensure that, notwithstanding the wording of any double taxation treaty, UK residents pay UK tax on their profits from foreign partnerships; and

• prevent tax avoidance through the misuse of Double Taxation Treaties by UK residents.

Operative date 3. The first measure will be treated as having always had effect. The second

will have effect for income arising on or after 12 March 2008. Current law and proposed revisions 4. UK law taxes a UK resident beneficiary of certain trusts on the income to

which they are entitled under the trust arrangement as it arises. This means that, in cases exploiting the above avoidance scheme, the UK resident should be taxable in the UK on his or her share of the profits of the partnership comprised of the foreign trustees.

5. But the users of the scheme claim that a provision, known as the Business

Profits Article, common to most tax treaties, exempts the partnership profits from UK tax – not only in the hands of the foreign partners but also in the hands of the UK beneficiaries.

6. The first provision will make clear that (in line with retrospective legislation

introduced in Finance (No2) Act 1987) tax treaties do not exempt UK residents from UK tax on any profits of a foreign partnership to which they are entitled.


7. The second measure will ensure that the Business Profits Article in the UK’s tax treaties cannot be read as preventing income of a UK resident being chargeable to UK tax.


HM Revenue & Customs website. Further advice 9. If you have any questions about this change, please contact Martin Brooks

on 020 7147 2651 (email: [email protected]) or Simon Davis on 020 7147 2666 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN67

TAX AVOIDANCE DISCLOSURE REGIME: SCHEME REFERENCE NUMBER SYSTEM

Who is likely to be affected? 1. Promoters of tax avoidance schemes, including accountancy and law

firms, banks and other financial institutions, and their clients. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to improve the existing

system of identifying users of disclosed tax avoidance schemes through the Scheme Reference Number (SRN) system.

Operative date 3. The legislation will contain substantive provisions and powers to make

regulations. They will have effect on and after separate dates to be appointed by Treasury order.

Current law and proposed revisions 4. Part 7 of Finance Act 2004 and regulations made under it require

promoters of tax schemes falling within certain descriptions to provide information to HM Revenue & Customs (HMRC) about those schemes (“disclose the scheme”) within prescribed time limits.

5. Section 308(4) (“the co-promoter rule”) relieves a promoter of the

obligation to disclose where there is more than one promoter in relation to the same scheme and another promoter has disclosed it.

6. Section 311 provides for HMRC to issue a SRN to a promoter who

discloses a scheme. Section 312 requires the promoter to pass the SRN on to clients who implement the scheme. Section 313 requires a client who uses the scheme to obtain a tax advantage to report it to HMRC within time limits. Section 316 provides for HMRC to specify (i.e. in guidance) the form and manner in which information is to be provided.

7. The information required and the time by which that information must be

provided are prescribed under Part 7 in the Tax Avoidance Schemes (Information) Regulations (SI 2004/1864, as amended).

8. Legislation will be introduced in Finance Bill 2008 to ensure that a user of

a disclosed scheme is supplied with the SRN issued to the promoter who has disclosed it.


9. The co-promoter rule will be amended so that co-promoters are only relieved of the obligation to disclose a scheme under one of the new procedures set out in paragraph 10. Each co-promoter will be required to pass on the SRN to its clients.

10. The new procedures will be either:

• a promoter (P1), when disclosing a scheme, notifying HMRC of any co-promoters (P2) and providing those co-promoters with a copy of the disclosure – HMRC will notify the SRN to those co-promoters under an amended section 311; or

• P1 notifying the SRN to any further co-promoters, and providing them with a copy of the disclosure.

11. The existing legislation requires a promoter to pass the SRN to a client

when the client implements the scheme. In practice, promoters often pass the SRN on earlier, as soon as they make the scheme available to clients. The legislation will be amended to ensure that clients who use a scheme have to report to HMRC SRNs received via this non-compulsory route.

12. HMRC will use the existing powers in section 316 to require promoters to

use an HMRC form to pass the SRN to clients. The form will provide the client with key information about what to do with the SRN. It will be available for download on HMRC’s website alongside the existing disclosure forms.

13. The legislation will require clients who receive a SRN to pass it on to any

other person who is party to the same scheme and is likely to obtain a tax advantage from using it.

14. The legislation will also provide for HMRC to withdraw a SRN, thereby

removing the obligation for the SRN to be passed on to other parties or reported to HMRC.

15. Draft regulations, guidance and an updated Impact Assessment will be

published before this legislation is considered in detail by Parliament. Further advice 16. If you have any questions about these changes please contact Philippa

Staples on 020 7147 2444 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN68

INCOME TAX EXEMPTIONS FOR THE RETURN TO WORK CREDIT, IN-WORK CREDIT, IN-WORK EMERGENCY

DISCRETION FUND AND IN-WORK EMERGENCY FUND Who is likely to be affected? 1. Recipients of payments made under the Return to Work Credit, the

In-work Credit, the In-work Emergency Discretion Fund (in Great Britain) and the In-work Emergency Fund (in Northern Ireland) schemes.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to exempt from income

tax, payments made under the following schemes, on and after 6 April 2008: • Return to Work Credit; • In-work Credit; • In-work Emergency Discretion Fund; and • In-work Emergency Fund.

3. Secondary legislation will be laid to introduce disregards for National

Insurance Contributions (NICs) for these schemes. 4. The Return to Work and In-work Credit schemes have been run as pilot

schemes by the Department for Work and Pensions (DWP) in Great Britain and the Department for Employment and Learning (DEL) in Northern Ireland. The pilot schemes have been in place since 1 October 2003 and 6 April 2004, respectively.

Operative date 5. The exemptions and disregards will have effect for payments made on and

after 6 April 2008. Current law and proposed revisions 6. Individuals are taxed on their earnings. Payments of Return to Work

Credit, In-work Credit, In-work Emergency Discretion Fund and In-work Emergency Fund comprise earnings for the purposes of income tax within the meaning of section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and section 3(1) Social Security Contributions and Benefits Act 1992 for the purposes of NICs.


7. When the pilot schemes were launched, HM Treasury used their powers under section 151 of the Finance Act 1996 to exempt the current Return to Work Credit and In-work Credit pilot schemes from income tax. These exemptions only have effect for payments made under pilot schemes and so cannot have effect for payments made under the national schemes.

8. Section 677(1) of ITEPA includes, in Table B, the list of United Kingdom

benefits which are exempt from income tax. Including the Return to Work Credit, In-work Credit, In-work Emergency Discretion Fund and In-work Emergency Fund in Table B will mean that payments made under the national schemes will be free from income tax.

9. Amendments will be made separately to the Social Security

(Contributions) Regulations 2001 to disregard In-work Emergency Discretion Fund and In-work Emergency Fund payments for NICs.

10. Information about these schemes will be available on the DWP website at

www.dwp.gov.uk and the DEL website at www.delni.gov.uk Further advice 11. If you have any questions about the tax change, please contact Paul

Thomas 020 7147 2479 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN69

COMPANY CAR BENEFIT TAX Who is likely to be affected? 1. Employees provided with a car that is available for their private use, and

employers who pay Class 1A National Insurance contributions on the taxable benefit of a company provided car.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to set the rates of

company car tax charge for 2010-11 and subsequent years. Operative date 3. This measure will have effect on and after 6 April 2010. Current law and proposed revisions 4. Where a car is made available for an employee’s private use, a taxable

benefit arises under sections 114 and 120 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

5. Company car tax is calculated by applying a percentage to the list price of

the car. The percentage is related to the CO2 emissions of the car and ranges from 15 per cent to 35 per cent in 1 per cent increments for a petrol car. Most diesel cars attract a 3 per cent supplement on petrol percentages (also capped at 35 per cent). A new lower rate of 10 per cent for cars with CO2 emissions of exactly 120 grams per kilometre or less (13 per cent for most diesels) will have effect on and after 6 April 2008.

6. The CO2 emissions figure which determines the 15 per cent rate for petrol

cars (the lower threshold) has been set as follows: • 2008-09: 135 grams per kilometre of CO2; and • 2009-10: 135 grams per kilometre of CO2.

7. From 2010-11 the lower threshold will be reduced by 5g/km to 130 g/km.

Further advice 8. If you have any questions about this change, please contact the Employer

Helpline on 0845 7143 143 or your local HMRC office. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN70

EMPLOYER PROVIDED VANS: FUEL BENEFIT RULES Who is likely to be affected? 1. Employees provided with a company van available for their private use,

who purchase fuel for business travel which is then reimbursed or otherwise paid for by their employer. Employers who bear Class 1A National Insurance on the taxable benefit of providing a van and the fuel for it purchased by the employee.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to ensure that

reimbursement of private fuel cost is not treated as earnings for tax purposes and that the same rules have effect for the provision of van fuel for private use as those that currently have effect for company car fuel.

Operative date 3. This measure will have effect on and after the date that Finance Bill 2008

receives Royal Assent. Current law and proposed revisions 4. Section 239(3) of the Income Tax (Earnings and Pensions) Act 2003

(ITEPA) signposts that section 239(1) and (2) of ITEPA do not prevent a charge to tax arising under section 149 of ITEPA in relation to company car fuel benefit. To ensure consistency the amendment expands the signpost to cover van fuel benefit (section 160 of ITEPA).

5. A further minor change to section 269 of ITEPA will ensure that the

signposting provided by the section covers van fuel as well as car fuel. Further advice 6. If you have any questions about this change, please contact Elizabeth

O’Donnell on 020 7147 2502, email: elizabeth.j.o’[email protected] Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN71

HYDROCARBON OILS: DUTY RATES CHANGES AND RATES SIMPLIFICATION

Who is likely to be affected? 1. Businesses producing and importing hydrocarbon oils and alternative fuel

products. General description of the measure 2. Legislation will be introduced in Finance Bills 2008, 2009 and 2010 to

amend the duty rates for hydrocarbon oils and reduce the number of rates for heavy oils and light oils.

Operative date 3. The simplification changes and the introduction of a rebated rate for

biodiesel and bioblend will have effect on and after 1 April 2008. The 2008 rates changes will have effect on and after 1 October 2008. The 2009 changes will have effect on and after 1 April 2009. The 2010 changes will have effect on and after 1 April 2010.

Current law and proposed revisions 4. On and after 1 April 2008, the three existing duty rates for heavy oil

(diesel) will be reduced to one (heavy oil). On and after 1 October 2008, this rate will increase by 2 pence per litre. On and after 1 April 2009, this rate will be further increased by 1.84 ppl, and on and after 1 April 2010, by 0.5ppl above indexation in that year.

Duty rate per litre (£) Heavy oil Current

On and after 1 April 2008

On and after 1 October 2008

On and after 1 April 2009

Heavy oil which is not Ultra low sulphur diesel (ULSD) or Sulphur-free diesel (SFD), i.e. conventional diesel

0.5694

ULSD 0.5035 SFD 0.5035

0.5035 0.5235 0.5419


5. On and after 1 April 2008, the four existing duty rates for light oil (petrol) will be reduced to two (unleaded petrol and leaded petrol). On and after 1 October 2008, the unleaded petrol rate will increase by 2 pence per litre. On and after 1 April 2009, it will be further increased by 1.84 ppl, and on and after 1 April 2010 by 0.5ppl above indexation in that year.

Unleaded petrol

Current rate per litre (£)

Duty rate per litre (£) on and after 1 April 2008

Duty rate per litre (£) on and after 1 October 2008


Unleaded petrol (that is not Ultra low sulphur petrol (ULSP) or Sulphur-free petrol (SFP))

0.5365

ULSP

0.5035

SFP

0.5035

0.5035 0.5235 0.5419

6. On and after 1 October 2008, the duty rate for leaded petrol will increase

by 2 ppl. Leaded petrol Current rate per litre

(£) Duty rate per litre (£) on and after 1 October 2008

Light oil (other than unleaded petrol)

0.6007 0.6207

7. The duty rate for aviation gasoline (AVGAS) is half that of the light oil

(other than unleaded petrol) rate. On and after 1 November 2008 a new fiscal definition of AVGAS will be introduced and the rate will be made freestanding at the 1 October level.

Current duty rate per

litre (£) Duty rate per litre (£) from 1 October 2008

AVGAS 0.3003 0.3103 8. On and after 1 October 2008, on and after 1 April 2009 and on and after 1

April 2010, effective rates of duty (that is, the relevant duty minus the relevant rebate) for non-road fuels will be increased by the same percentage as main road fuels.


Rebated oils Current effective duty rate per litre (£)

Effective duty rate per litre (£) on and after 1 October 2008

Effective duty rate per litre (£) on and after 1 April 2009

Light oil delivered to an approved person for use as furnace fuel

0.0929 0.0966 0.1000

Marked gas oil

0.0969 0.1007 0.1042

Fuel oil

0.0929 0.0966 0.1000

Kerosene to be used as motor fuel off-road or in an excepted vehicle

0.0969 0.1007 0.1042

9. The current duty differential of 20 ppl for biofuels for road use will cease

from 2010 and duty will thereafter be charged at the same rate as main road fuels.

Biofuels Current duty

rate per litre (£) Duty rate per litre (£) on and after 1 October 2008


Biodiesel

0.3035 0.3235 0.3419

Bioethanol

0.3035 0.3235 0.3419 10. On and after 1 April 2008, a new rebated rate of duty will be introduced on

biodiesel and bioblend used other than as fuel for road vehicles. On and after 1 October 2008, this rate will be increased by the same percentage as main road fuels. The existing repayment mechanism in relation to the use of unblended biodiesel in off-road applications will come to an end. In the case of bioblend produced with kerosene for heating use, a nil rate of duty will have effect.


Rebated biodiesel and bioblend

Current effective duty rate per litre (£)

Effective duty rate per litre (£) on and after 1 April 2008

Effective duty rate per litre (£) on and after 1 October 2008

Biodiesel for non-road use

0.0313 0.0969 0.1007

Biodiesel blended with gas oil

0.5694 0.0969 0.1007

Biodiesel blended with kerosene

0.5694 Nil Nil

11. The duty rate for natural gas will increase to maintain the differential with

main road fuels in pence per litre equivalents up to 2010-11. The duty rate for liquefied petroleum gas will increase to reduce the differential with main road fuels by the equivalent of 1 penny on litre of petrol up to 2010-11, in line with the alternative fuels framework.

Road fuel gases Current

effective rate per kg (£)

Duty rate per kg (£) on and after 1 October 2008

Duty rate per kg (£) on and after 1 April 2009

Natural gas (NG), including biogas

0.1370 0.1660 0.1926

Road fuel gas other than natural gas – eg liquefied petroleum gas (LPG)

0.1649 0.2077 0.2482

12. The duty differential applicable to biogas, equivalent to 40.88 pence on a

litre of petrol, will remain at least at its current level until Budget 2012. 13. The Hydrocarbon Oil Duties Act 1979 will be amended by Finance Bill

2008 to implement those changes to have effect on and after 1 April 2008. Further advice 14. If you have any questions about this change, please contact the National



BN72

NEW AVIATION DUTY REPLACING AIR PASSENGER DUTY (APD)

Who is likely to be affected? 1. No individuals or businesses will be affected by this measure. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to enable HM Revenue

& Customs (HMRC) to proceed with the development of the new duty on aviation before its formal introduction in November 2009, when it will replace air passenger duty.

Operative date 3. The measure will have effect on and after the date that Finance Bill 2008

receives Royal Assent. Current law and proposed revisions 4. In the 2007 Pre-Budget Report, the Government announced its intention to

replace air passenger duty with a duty on aviation payable per plane. This proposed aviation duty is a new tax and as such is not currently a function of HMRC.

5. Until the main primary legislation introducing aviation duty becomes law,

expected to be in Finance Act 2009, it remains outside the scope of HMRC’s responsibility and consequently expenditure related to its development is restricted.

6. Paving legislation will be introduced in Finance Bill 2008 to allow HMRC to

incur expenditure on the development of the new aviation duty. Further advice 7. If you have any questions about this change, please contact the National




BN73

VAT: INCREASED TURNOVER THRESHOLDS FOR REGISTRATION AND DEREGISTRATION

Who is likely to be affected? 1. Businesses whose taxable turnover is close to the current VAT thresholds

for registration and deregistration. General description of the measure 2. The measure increases the taxable turnover threshold which determines

whether a person must be registered for VAT from £64,000 to £67,000. 3. The taxable turnover threshold which determines whether a person may

apply for deregistration will be increased from £62,000 to £65,000. The existing conditions for determining entitlement or liability to deregistration remain unchanged.

4. The registration and deregistration threshold for relevant acquisitions from

other European Union Member States will also be increased from £64,000 to £67,000.

Operative date 5. The new registration and deregistration thresholds will have effect on and

after 1 April 2008. Current law and proposed revisions 6. The increase in the taxable turnover threshold means that a person will

have to apply for registration if: • at the end of any month, the value of the taxable supplies made in the

past 12 months or less has exceeded £67,000; or • at any time there are reasonable grounds for believing that the value of

the taxable supplies to be made in the next 30 days alone will exceed £67,000.


7. If at the end of any month, a person’s taxable turnover in the past

12 months or less exceeds £67,000 but HM Revenue & Customs is satisfied that it will not exceed £65,000 in the next 12 months, that person will not have to be registered.

8. Schedules 1 and 3 to the Value Added Tax Act 1994 will be amended by

statutory instrument to give effect to these changes. Further advice 9. If you have any questions about this change, please contact the National



BN74

VAT: AMENDMENT TO THE EXEMPTION FOR FUND MANAGEMENT

Who is likely to be affected? 1. Fund managers and providers of fund administration services. General description of the measure 2. This measure will extend the VAT exemption for fund management to

cover UK-listed investment entities (including investment trust companies and venture capital trusts) and certain overseas funds.

Operative date 3. The measure will have effect for supplies of services made on or after 1

October 2008. Current law and proposed revisions 4. Items 9 and 10, of Group 5 of Schedule 9 to the VAT Act 1994 exempt the

management of authorised unit trusts, trust based schemes and open-ended investment companies.

5. This exemption will be amended by secondary legislation to be laid before

Parliament around the beginning of June 2008. 6. The funds defined for the exemption will be amended as follows:

• trust-based schemes will be deleted; • closed-ended investment entities, which invest in securities and whose

shares are included in the UK Listing Authority main Official List, will be added; and

• funds established outside the UK, which are recognised overseas schemes under sections 264, 270 and 272 of the Financial Services & Markets Act 2000, will be added.

7. Draft legislation and guidance will be published on the HM Revenue &

Customs website in April 2008. Further advice 8. If you have any questions about this change, please contact Ted

Castledine on 020 7147 0177 (e-mail: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN75

INDIRECT TAX RETURNS: CORRECTION OF ERRORS Who is likely to be affected? 1. Businesses registered for Value Added Tax (VAT), insurance premium tax

(IPT), air passenger duty (APD), landfill tax (LFT), climate change levy (CCL) and aggregates levy (AGL).

General description of the measure 2. This measure will increase the limit below which errors on previous returns

may be corrected on the return for the period in which the errors are discovered.

Operative date 3. This measure will have effect for accounting periods commencing on or

after 1 July 2008. Current law and proposed revisions 4. The error correction regulations for VAT, IPT, APD, LFT, CCL and AGL

permit the inclusion of errors below £2,000 on the next return submitted. Errors exceeding £2,000 have to be separately notified to HM Revenue & Customs (HMRC).

5. Regulation 34(3) of the VAT Regulations 1995 (SI 1995/2518) permits the

taxable person to correct their VAT account during the accounting period in which the error is discovered, provided the net errors discovered do not exceed £2,000.

6. Schedule 3 of the Air Passenger Duty Regulations 1994 (SI 1994/1738)

reproduces the return form APD2. Box 7 of that form provides for entry on the return of underdeclarations from previous periods, provided they do not exceed £2000. Box 8 of that form provides for overdeclarations from previous periods, with no limit.

7. Regulation 13(3) of the Insurance Premium Tax Regulations 1994

(SI 1994/1774) provides that, where the registrable person discovers underdeclarations or overdeclarations in an accounting period, they may be entered on the return for that accounting period, provided they do not exceed £2,000.


8. Regulation 13(4) of the Landfill Tax Regulations 1996 (SI 1996/1527) provides that, where a taxable person discovers underdeclarations they may be entered on the return for the accounting period in which they were discovered, provided that they do not exceed £2,000.

9. Regulation 28(2),(3) and (4) of the Climate Change Levy (General)

Regulations 2001 (SI 2001/838) provide that, where a registrable person discovers a return previously made is based on an under-calculation or an over-calculation, they must correct the error on the return for the accounting period in which it was discovered, provided that it does not exceed £2,000.

10. Regulation 29(2), (3) and (6) of the Aggregates Levy (General)

Regulations 2002 (SI 2002/761) provide that, where a registrable person discovers a return previously made is based on an under-calculation or an over-calculation, they must correct the error on the return for the accounting period in which it was discovered, provided the total net amount does not exceed £2,000.

11. This measure increases the de minimis £2,000 limit to the greater of

£10,000 or 1 per cent of turnover, subject to an upper limit of £50,000 for VAT, IPT, LFT, CCL and AGL. For VAT, LFT, CCL and AGL errors above £10,000, the limit for correcting errors on the next return will be calculated by reference to net VAT turnover (Box 6 on VAT return) for the return period. For IPT, this limit will be calculated by reference to the net IPT turnover (Box 10 on IPT return). APD procedures will be amended to increase the de minimis limit to the greater of £10,000 or 1 per cent of duty due, before adjustments for errors from previous periods, subject to an upper limit of £50,000. For LFT, CCL and AGL taxpayers who are not required to be registered for VAT a single limit of £10,000 will have effect.

12. These regulations will be amended by statutory instrument to effect the

changes to the voluntary disclosure limit. Further advice 13. If you have any questions about this change, please contact HMRC

National Advice Service on 0845 010 9000. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN76

VAT: CHANGES IN FUEL SCALE CHARGES Who is likely to be affected? 1. Businesses which recover input tax on fuel used for private motoring. General description of the measure 2. This measure will amend the VAT scale charges for taxing private use of

road fuel, to reflect changes in fuel prices. It will also amend the table of CO2 bands to maintain alignment with those used for direct tax purposes.

Operative date 3. The scale charges will be amended by secondary legislation which will

come into force on 1 May 2008. Businesses must use the new scale charges from the start of their next prescribed accounting period beginning on or after 1 May 2008.

Current law and proposed revisions 4. The scale charges are set out in Table A in Section 57(3) of the Value

Added Tax Act 1994. Secondary legislation will be laid before Parliament in March to replace the current table with a new table to reflect the changes to the scale charges.

5. The table below shows the revised scale charges and output tax payable

in each accounting period, depending whether it is a 12 month, 3 month or 1 month accounting period.

6. VAT fuel scale charges for 12 month periods:

CO2 band, g/km

VAT fuel scale charge, 12 month

period, £ VAT on 12 month

charge, £ VAT exclusive 12 month charge, £

120 or less 555.00 82.66 472.34 125 830.00 123.62 706.38 130 830.00 123.62 706.38 135 830.00 123.62 706.38 140 885.00 131.81 753.19 145 940.00 140.00 800.00 150 995.00 148.19 846.81 155 1,050.00 156.38 893.62 160 1,105.00 164.57 940.43 165 1,160.00 172.77 987.23 170 1,215.00 180.96 1,034.04 175 1,270.00 189.15 1,080.85 180 1,325.00 197.34 1,127.66 185 1,380.00 205.53 1,174.47


190 1,435.00 213.72 1,221.28 195 1,490.00 221.91 1,268.09 200 1,545.00 230.11 1,314.89 205 1,605.00 239.04 1,365.96 210 1,660.00 247.23 1,412.77 215 1,715.00 255.43 1,459.57 220 1,770.00 263.62 1,506.38 225 1,825.00 271.81 1,553.19 230 1,880.00 280.00 1,600.00

235 or more 1,935.00 288.19 1,646.81 7. VAT fuel scale charges for 3 month periods:

CO2 band, g/km

VAT fuel scale charge, 3 month

period, £ VAT on 3 month

charge, £ VAT exclusive 3 month charge, £

120 or less 138.00 20.55 117.45 125 207.00 30.83 176.17 130 207.00 30.83 176.17 135 207.00 30.83 176.17 140 221.00 32.91 188.09 145 234.00 34.85 199.15 150 248.00 36.94 211.06 155 262.00 39.02 222.98 160 276.00 41.11 234.89 165 290.00 43.19 246.81 170 303.00 45.13 257.87 175 317.00 47.21 269.79 180 331.00 49.30 281.70 185 345.00 51.38 293.62 190 359.00 53.47 305.53 195 373.00 55.55 317.45 200 386.00 57.49 328.51 205 400.00 59.57 340.43 210 414.00 61.66 352.34 215 428.00 63.74 364.26 220 442.00 65.83 376.17 225 455.00 67.77 387.23 230 469.00 69.85 399.15

235 or more 483.00 71.94 411.06 8. VAT fuel scale charges for 1 month periods:

CO2 band, g/km VAT fuel scale VAT on 1 month VAT exclusive 1 120 or less 46.00 6.85 39.15

125 69.00 10.28 58.72 130 69.00 10.28 58.72 135 69.00 10.28 58.72 140 73.00 10.87 62.13 145 78.00 11.62 66.38 150 82.00 12.21 69.79 155 87.00 12.96 74.04 160 92.00 13.70 78.30 165 96.00 14.30 81.70 170 101.00 15.04 85.96 175 105.00 15.64 89.36 180 110.00 16.38 93.62 185 115.00 17.13 97.87


185 115.00 17.13 97.87 190 119.00 17.72 101.28 195 124.00 18.47 105.53 200 128.00 19.06 108.94 205 133.00 19.81 113.19 210 138.00 20.55 117.45 215 142.00 21.15 120.85 220 147.00 21.89 125.11 225 151.00 22.49 128.51 230 156.00 23.23 132.77

235 or more 161.00 23.98 137.02 9. The scale charge for a particular vehicle is determined by its CO2

emissions figure. Where the CO2 emissions figure of a vehicle is not a multiple of five, the figure is rounded down to the next multiple of five to determine the level of charge. For a bi-fuel vehicle which has two CO2 emissions figures, the lower of the two figures should be used. For cars which are too old to have a CO2 emissions figure HM Revenue & Customs (HMRC) have prescribed a level of emissions by reference to the vehicle’s engine capacity (cc).

10. An update to Notice 700/64 VAT: Motoring Expenses, including the

revised figures for all categories of vehicle, will be available from the National Advice Service in due course.





BN77

VAT: REDUCED RATE FOR SMOKING CESSATION PRODUCTS

Who is likely to be affected? 1. Suppliers and consumers of smoking cessation products. General description of the measure 2. Secondary legislation will be introduced to ensure that the reduced Value

Added Tax (VAT) rate of 5 per cent for ‘over the counter’ sales of pharmaceutical smoking cessation products will continue to have effect.

3. Smoking cessation products that are dispensed on a prescription will

remain zero-rated. Operative date 4. This measure will have effect on and after 1 July 2008. Current law and proposed revisions 5. Smoking cessation products dispensed by a pharmacist on the basis of a

prescription of a medical practitioner are already zero-rated by the VAT Act 1994. This measure will not affect smoking cessation products supplied in these circumstances.

6. The reduced rate of 5 per cent has effect for all other supplies of

pharmaceutical smoking cessation products, including supplies made over the internet. This includes all non-prescribed sales of patches, gums, inhalators and other pharmaceutical products held out for sale for the primary purpose of helping people to quit smoking.

7. To coincide with the smoking ban in England, the VAT (Reduced Rate)

Order 2007 (SI 2007/1601) introduced Group 11 of Schedule 7A to the Value Added Tax Act 1994. The Order specified that this reduced rate was to have effect in relation to supplies of smoking cessation products made on or after 1 July 2007 but before 1 July 2008. Secondary legislation will be laid before Parliament to extend the reduced rate beyond 30 June 2008.





BN78

VAT: TRANSITIONAL PERIOD FOR CLAIMS Who is likely to be affected? 1. Businesses registered for VAT between 1 April 1973 and 1 May 1997 who

either declared more output VAT than they were liable for, or claimed less input VAT than entitled to.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to provide a transitional

period to 31 March 2009, during which eligible businesses can make VAT claims for rights that accrued before the introduction in 1996 and 1997 of the three-year time limit for claims.

3. The legislation will also correspondingly amend the powers of assessment

of HM Revenue & Customs (HMRC) to ensure that assessments may be made to recover any amounts paid, which are subsequently found to have been incorrectly claimed by business.

Operative date 4. The transitional period will run to 31 March 2009. Current law and proposed revisions Regulation 29(1A) of the Value Added Tax Regulations 1995 5. Regulation 29(1A) provides that no claim for input tax can be made more

than three years after the due date of the return, for the accounting period in which the input tax was incurred.

6. In January 2008, the House of Lords held in its judgments in Michael

Fleming (trading as Bodycraft) and Condé Nast Publications Ltd that, because there was no transitional period when the three-year cap was first introduced, the three-year time limit does not have effect for any right to claim input tax that accrued before it was enacted on 1 May 1997 until an adequate transitional period has been provided.

7. This measure will give effect to the judgment of the House of Lords by

providing a transitional period during which claims for input tax can be made, for accounting periods ending between 1 April 1973 and 1 May 1997, before they become subject to the three-year time limit.


Section 80(4) of the Value Added Tax Act 1994 8. Section 80 provides that where a person accounts for more output VAT

than is due, they can claim it back from HMRC. Section 80(4) provides that HMRC are not liable to pay any claim made more than three years after the end of the accounting period to which it relates.

9. HMRC considers that the House of Lords’ judgments in Michael Fleming

(trading as Bodycraft) and Condé Nast Publications Ltd also apply to rights to claim overpaid output tax that accrued before the three-year time limit was enacted on 4 December 1996 until an adequate transitional period has been provided.

10. This measure will provide a transitional period during which claims for

overdeclared output tax can be made, for accounting periods ending between 1 April 1973 and 4 December 1996, before they become subject to the three-year time limit.

Section 80(4A) of the Value Added Tax Act 1994 11. Assessments to recover amounts incorrectly paid by HMRC to businesses

who claim under section 80 must be made within two years of HMRC having acquired evidence of facts, sufficient to justify the making of the assessment.

12. This measure will add a two-year time limit from the end of the accounting

period in which an erroneous payment is made. This will ensure that HMRC are able recover amounts paid out where it is later discovered repayment was mistaken.

13. This will also bring these assessment time limits into line with those for

HMRC’s other VAT assessment powers. Section 73(2) of the Value Added Tax Act 1994 14. Assessments to recover amounts incorrectly paid by HMRC to businesses

on input tax claims must be made within two years of the end of the accounting period in which the claim is made.

15. This measure will amend the time limit, so that it runs from the end of the

accounting period in which the claim was paid, ensuring that HMRC will be able to recover any amounts incorrectly paid.

Further advice 16. If you have any questions about this change, please contact Pauline

Walsh on 0113 389 4432 (e-mail: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN79

VAT: OPTION TO TAX LAND & BUILDINGS Who is likely to be affected? 1. Anyone who makes supplies of land and / or buildings. General description of the measure 2. This measure will simplify the legislation relating to the option to tax land

and/or buildings. It will also introduce minor changes to enable taxpayers to revoke an option to tax after 20 years and make a number of associated changes to improve practical administration of the option to tax.

Operative date 3. The rewritten legislation will have effect on and after 1 June 2008. The

earliest date an option to tax will be revocable will be 1 August 2009. Current law and proposed revisions 4. The law relating to the option to tax land and buildings for VAT is

contained in Schedule 10 to the VAT Act 1994. 5. A Treasury Order will be laid after Budget 2008 to insert a revised

Schedule 10 into the VAT Act and make certain consequential changes to other VAT legislation, including new appeal rights. This will be accompanied by a public notice having the force of law.

6. A number of associated changes to improve practical administration of the

option to tax and its revocation will be included in the legislation. These deal with: • opted properties held in a VAT group; • opted buildings acquired for use as dwellings or relevant residential

purpose and bare land acquired for construction of building for such purposes;

• the introduction of a new option to simplify the option to tax process for taxpayers with a number of properties;

• early revocation of an option to tax within a “cooling-off” period; • the automatic lapse of an option to tax six years after the taxpayer

ceased to have any interest in a property that they had previously opted to tax;

• the ability, in certain circumstances, to exclude a new building from a previous option to tax; and

• late applications for permission to opt to tax.


Further advice 7. If you have any questions about this change, please contact James

Ormanczyk on 020 7147 0484 (email [email protected]). Further guidance and information will be published when the Treasury Order is laid. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN80

LANDFILL TAX: EXEMPTION FOR WASTE FROM CLEANING UP CONTAMINATED LAND

Who is likely to be affected? 1. Landfill site operators and those disposing of waste cleared from

contaminated land by landfill. General description of the measure 2. Waste from cleaning up contaminated land disposed of by landfill is

exempt from landfill tax. Secondary legislation to be laid later this year will phase out this exemption.

3. In order to qualify for exemption, disposers must apply for and obtain a relief certificate from HM Revenue & Customs (HMRC) before disposing of their waste. This measure sets the deadline for the receipt of applications for exemption under the scheme and the date from which the exemption will be removed.

Operative date 4. Applications for landfill tax exemption certificates will not be accepted by

HMRC on or after 1 December 2008.

5. Anyone in possession of a valid exemption certificate will have until 31 March 2012 to dispose of their waste if they wish to benefit from the exemption. All certificates issued under the scheme will cease to be valid on or after 1 April 2012 and disposals to landfill of waste from cleaning up contaminated land made on or after that date will be liable to landfill tax at the appropriate rate.

Current law and proposed revisions 6. Section 43B(1) of the Finance Act (FA) 1996 sets out the conditions that

must be satisfied in order for relief certificates to be issued. This subsection will be amended to preclude the acceptance of applications received on or after 1 December 2008.

7. The eligibility criteria for exemption are set out at section 43A of FA 1996.

Sections 43A and 43B FA 1996 will be repealed with effect on and after 1 April 2012.

8. These changes, and a number of consequential changes to FA 1996, will

be made by Treasury Order laid under the affirmative procedure later this year.


9. Notice LFT2 “Reclamation of contaminated land” explains how to apply for

a relief certificate. The notice and application form can be found on the HMRC website.

10. HMRC will write to landfill site operators and other interested businesses

to provide more details about these changes. The secondary legislation needed to enact these changes will be published in draft in Summer 2008.




BN81

LANDFILL COMMUNITIES FUND Who is likely to be affected? 1. Businesses registered for landfill tax and environmental bodies enrolled

under the Landfill Communities Fund (LCF). General description of the measure 2. Secondary legislation will be introduced to amend the maximum credit that

landfill site operators may claim against their annual landfill tax liability, for contributions made to bodies with objects concerned with the environment, enrolled under the LCF, from 6.6 per cent to 6 per cent. This should result in an increase to the maximum value of the fund of £5 million to give a potential value of £70 million of credit claimable for 2008-09.

3. Legislation will be introduced in Finance Bill 2008 to transfer responsibility

for decisions on whether to revoke the approval of an environmental body which fails to comply with its obligations from ENTRUST, the regulatory body, to the Commissioners of HM Revenue & Customs. These decisions by the Commissioners will be subject to their review and appeals system.

4. The period after which an environmental body must submit details of its

income, expenditure and balances to the regulator, or the Commissioners if appropriate, will be extended from 14 to 28 days after either the end of the relevant period or a request being made. The relevant period is usually a 12 month period from 1 April to 31 March each year.

Operative date 5. The measure will have effect on and after 1 April 2008. Current law and proposed revisions 6. A statutory instrument will be laid on 19 March 2008 to amend the

maximum percentage claimable under the LCF set out in regulation 31(3) of the Landfill Tax Regulations 1996 (“the regulations”).

7. Legislation will be included in Finance Bill 2008 to amend paragraph

53(4)(d) of the Finance Act 1996 to enable the withdrawal of the approval of an environmental body to be made by the Commissioners or the regulatory body. By statutory instrument to be laid on 19 March 2008, the regulations will be amended to transfer the power to revoke an environmental body that fails to comply with its obligations set out in regulation 33A(1) from the regulatory body to the Commissioners. The instrument will omit regulation 34(1)(e) of the regulations to remove the


power from the regulatory body and insert a new paragraph in regulation 35 to confer the power on the Commissioners.

8. Legislation will be included in Finance Bill 2008 to insert a new paragraph

in section 54(1) of the Finance Act 1996 to include a decision by the Commissioners to revoke the approval of an environmental body that fails to comply with the requirements of regulation 33A(1) of the regulations in the list of decisions that may be reviewed by the Commissioners. The review decision will be subject to appeal by virtue of section 55 of the Finance Act 1996.

9. A statutory instrument to be laid on 19 March 2008 will amend regulation

33A of the regulations to extend the period of time an environmental body has for submitting financial details to the regulator, or the Commissioners if appropriate, under paragraphs (1)(h), (ha) and (hb).

10. Information on the LCF is available from ENTRUST at www.entrust.org.uk Further advice 11. If you have any questions about this change, please contact the National



BN82

LANDFILL TAX: STANDARD RATE Who is likely to be affected? 1. Businesses registered for landfill tax. General description of the measure 2. Legislation will be included in Finance Bill 2008 to increase the standard

rate of landfill tax by £8 per tonne to £40 per tonne. Operative date 3. The new £40 per tonne rate will have effect for any standard rated

disposal of waste made, or treated as made, on or after 1 April 2009. Current law and proposed revisions 4. Section 42 of the Finance Act (FA) 1996 specifies the rates of landfill tax,

and will be amended to reflect the new standard rate. 5. The standard rate is currently £24 per tonne but this will increase to £32

per tonne from 1 April 2008 as a result of a change made by FA 2007. Further advice 6. If you have any questions about this change, please contact the National




BN83

AGGREGATES LEVY: RATE Who is likely to be affected? 1. Those commercially exploiting taxable aggregate in the UK. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to increase the rate of

aggregates levy from £1.95 per tonne to £2.00 per tonne. Operative date 3. The new rate will have effect for any aggregate commercially exploited on

or after 1 April 2009. Current law and proposed revisions 4. Section 16(4) of the Finance Act 2001 specifies the rate of aggregates

levy. This will be amended by Finance Bill 2008. 5. In Northern Ireland, registered operators in possession of a valid

aggregates levy credit certificate will continue to be entitled to 80 per cent relief of the full levy rate. As a result of the rate increase, in effect, the amount of levy payable by such operators will increase from 39 to 40 pence per tonne.





BN84

CLIMATE CHANGE LEVY: RATES Who is likely to be affected? 1. Suppliers and others liable to account for the climate change levy. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to increase the rates of

climate change levy for 2009-10, broadly in line with inflation. The rates will be:

Taxable commodity Rates Electricity £0.00470 Gas supplied by a gas utility or any gas supplied in a gaseous state that is of a kind supplied by a gas utility

£0.00164

Any petroleum gas, or other gaseous hydrocarbon, supplied in a liquid state

£0.01050

Any other taxable commodity £0.01281 Operative date 3. The new rates shown in paragraph 2 above will have effect for supplies of

taxable commodities treated as taking place on or after 1 April 2009. Current law and proposed revisions 4. Paragraph 42(1) of Schedule 6 to the Finance Act 2000 contains the rates

of climate change levy. Finance Act 2007 amended paragraph 42 to provide for the new rates on and after 1 April 2008. These rates from 1 April 2008, which were increased broadly in line with inflation, will be:

Taxable commodity Rates Electricity £0.00456 per kilowatt hour Gas supplied by a gas utility or any gas supplied in a gaseous state that is of a kind supplied by a gas utility

£0.00159 per kilowatt hour

Any petroleum gas, or other gaseous hydrocarbon, supplied in a liquid state

£0.01018 per kilogram

Any other taxable commodity £0.01242 per kilogram 5. Paragraph 42(1) of Schedule 6 to FA 2000 will be amended again to

provide for the rates that will have effect on and after 1 April 2009.





BN85

CLIMATE CHANGE LEVY (CCL): ELECTRICITY FROM COAL MINE METHANE

Who is likely to be affected? 1. Electricity generators and suppliers. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to remove coal mine

methane from the list of sources of electricity regarded as renewable for CCL purposes. Electricity generated from most renewable sources is eligible for the CCL exemption scheme for such electricity. The impact of this change is that electricity generated from coal mine methane will no longer qualify for the CCL exemption scheme.

Operative date 3. The measure will have effect for electricity generated from coal mine

methane on or after 1 November 2008. Current law and proposed revisions 4. Paragraph 19(4A) of Schedule 6 to the Finance Act (FA) 2000 and

regulation 47(2A) of the Climate Change Levy (General) Regulations 2001 require coal mine methane to be regarded as a renewable source (rather than a fossil fuel) for the purposes of the CCL exemption. Legislation will be included in Finance Bill 2008 to provide for the removal of both requirements. The legislation will also remove section 126 of FA 2002 (which inserted sub-paragraph (4A) (coal mine methane to be regarded as renewable source) into FA 2000).

5. HM Revenue & Customs will write to electricity generators and suppliers,

and to the Gas and Electricity Markets Authority (Ofgem) and the Northern Ireland Authority for Utility Regulation, regarding the details of the removal of the exemption.





BN86

CLIMATE CHANGE LEVY (CCL): CLIMATE CHANGE LEVY ACCOUNTING DOCUMENTS (CCLADs): SIMPLIFICATION

Who is likely to be affected? 1. Electricity and gas suppliers. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to remove the

requirement that, in order to count as a climate change levy accounting document (CCLAD), an invoice issued by an electricity or gas supplier must contain wording identifying it as a CCLAD.

Operative date 3. This measure will have effect on and after the date that Finance Bill 2008

receives Royal Assent. Current law and proposed revisions 4. Supplies of electricity and gas are continuous. The point at which climate

change levy (CCL) should be accounted for on such supplies to HM Revenue & Customs is generally determined by the issue of an invoice (e.g., an energy bill). For CCL purposes, a bill relating to a supply of electricity or gas must contain information relating to the supplier, the customer, the date of issue, and the period and quantity of electricity or gas covered. The bill must also say whether it is a CCLAD by including on it the phrase “climate change levy accounting document”, “CCL accounting document” or similar alternatives. As well as creating an accounting document for CCL, the CCLAD can also be used as evidence to support claims for bad debt relief by the energy supplier.

5. The removal of the requirement in paragraph 143(2)(a) of Schedule 6 to

the Finance Act 2000 to identify electricity and gas bills as CCLADs, for them to count as such for CCL purposes, will have no effect on CCL accounting or claims to bad debt relief, as the other information required on the bill (described above in paragraph 4) will continue to be required and will be sufficient for these purposes.

6. Suppliers of electricity and gas that wish to continue to identify their bills as

CCLADs can still opt to do so.





BN87

ENERGY PRODUCTS DIRECTIVE: EXPIRY OF DEROGATIONS Who is likely to be affected? 1. Suppliers and users of:

• fuel for private pleasure-flying; • fuel for private pleasure-boating; and • waste oil as fuel, either directly after recovery or following a

recycling process for waste oils. General description of the measure 2. The UK’s derogations from the Energy Products Directive (EPD) which

permitted the use of reduced and exempt rates of duty on fuel used for the purposes of private pleasure-flying, pleasure boating and on waste oils re-used as fuel, expired on 31 December 2006 following a decision by the European Commission. On and after 1 November 2008 fuel used for these purposes will no longer benefit from the current reduced and exempt rates of duty. The following changes will instead be introduced.

Pleasure-flying 3. Users of aviation turbine fuel (Avtur) for private pleasure-flying will be

liable for the payment of duty to HM Revenue & Customs (HMRC) on a periodic basis. The duty rate will be 52.35 pence per litre. The supplier will be obliged to draw the attention of the purchaser to end-use liability. The purchaser will be required to make a declaration to the supplier if he intends to use the fuel for pleasure flying.

4. A new fiscal definition of aviation gasoline (AVGAS) with a free-standing

duty rate will be introduced. The duty rate will be 31.03 pence per litre. This will apply to both commercial and private pleasure use so there will be no change to the current procedures.

Pleasure-boating 5. The use of red diesel will continue to be permitted for pleasure boating but

the supplier will be liable to account for and pay to HMRC an amount equivalent to the rebate allowed on the fuel. HMRC will continue informal discussions with stakeholders to consider an allowance for fuel used for the purposes of heating and lighting.


Waste oils 6. Waste oil recoverers will be treated as oil producers. A positive rate of duty

equivalent to that for fuel oil, 9.66 pence per litre, will be introduced on heavy oil, which encompasses waste oils but only if supplied as fuel.

Operative date 7. The changes will have effect on and after 1 November 2008. Current law and proposed revisions 8. Legislation will be introduced in Finance Bill 2008 to amend the

Hydrocarbon Oil Duties Act 1979 (HODA). New sections on heavy oil used for heating and fuel used in aircraft and boats, and a new definition of aviation gasoline in section 1, will be added.

9. Statutory instruments will be made under the relevant sections of HODA. Further advice 10. If you have any questions about this change, please contact the National



BN88

AMUSEMENT MACHINE LICENCE DUTY (AMLD): GAMING MACHINES

Who is likely to be affected? 1. Anyone who provides a licensable gaming machine for play in the UK. General description of the measure 2. Increases the amount of Amusement Machine Licence Duty (AMLD) that

will be paid on licences for all categories of gaming machines. Operative date 3. The new duty amount for all gaming machines will have effect for any

licence applications received at HM Revenue & Customs (HMRC) Greenock accounting centre after 4pm on 14 March 2008.

Current law and proposed revisions 4. The table in section 23 of the Betting and Gaming Duties Act 1981

(BGDA), setting out the amounts of licence duty, will be replaced by the table below.

Months Category

A (£) Category B1 (£)

Category B2 (£)

Category B3 (£)

Category B4 (£)

Category C (£)

1 455 230 180 180 165 70 2 905 450 355 355 320 135 3 1355 675 535 535 485 200 4 1805 905 710 710 645 265 5 2260 1130 890 890 805 335 6 2710 1355 1065 1065 965 400 7 3160 1580 1245 1245 1125 465 8 3610 1805 1420 1420 1290 530 9 4065 2030 1600 1600 1450 600 10 4515 2260 1775 1775 1610 665 11 4965 2485 1955 1955 1770 730 12 5160 2580 2030 2030 1840 760


Applications for payment by instalment 5. Paragraph 7A of Schedule 4 to BGDA allows HMRC to make and publish

arrangements and conditions that apply to the ‘payment by instalments’ scheme. In accordance with that paragraph, and in addition to the conditions published in part 6 of Notice 454 ‘Amusement Machine Licence Duty’, on and after 12 March 2008 HMRC will not accept applications to pay licence duty by instalments more than six weeks before the licence start date. Notice 454 will be amended in due course.

6. Amended licence application forms L222, and L223 for payment by

instalment, are available on the HMRC website. Further advice 7. If you have any questions about this change, please contact National

Advice Service on 0845 010 9000. Information about Budget measures are available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN89

GAMING DUTY: REVALORISATION OF DUTY BANDS Who is likely to be affected? 1. Casino operators. General description of the measure 2. The Gross Gaming Yield (GGY) bandings for each duty band will be

increased in line with inflation. Operative date 3. The changes to the bandings come into effect for accounting periods

starting on or after 1 April 2008. Current law and proposed revisions

The first £1,911,000 of GGY 15 per cent

The next £1,317,000 of GGY 20 per cent



The remainder 50 per cent 4. The table of GGY bandings in section 11 of the Finance Act 1997 will be

replaced by the table above. As a consequence of this change, regulations will be made to amend the table for interim payments on account in the Gaming Duty Regulations 1997.

5. Excise Notice 453 (Gaming Duty) will be amended in due course. Further advice 6. If you have any questions about this change, please contact the National




BN90

TOBACCO PRODUCTS DUTY: RATES Who is likely to be affected? 1. Manufacturers and importers of tobacco products (i.e. cigarettes, cigars, hand-

rolling tobacco, other smoking tobacco and chewing tobacco). General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to increase the rates of duty

on tobacco products imported into, or manufactured in, the United Kingdom in line with inflation.

Operative date 3. The rate changes will have effect on and after 6pm on 12 March 2008. Current law and proposed revisions 4. The new rates of duty are:

• cigarettes: An amount equal to 22 per cent of the retail price plus £112.07 per thousand cigarettes;

• cigars: £163.22 per kilogram; • hand-rolling tobacco: £117.32 per kilogram; • other smoking tobacco and chewing tobacco: £71.76 per kilogram.

5. An amendment will be made to the Table of rates of duty in Schedule 1 to the

Tobacco Products Duty Act 1979, as last substituted by section 6 of the Finance Act 2007.





BN91

ALCOHOL DUTY: RATES Who is likely to be affected? 1. Manufacturers, importers, distributors, retailers and consumers of alcohol

products (spirits, beer, cider, wine and made-wine). General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to provide for the annual

setting of duty rates for alcohol. Duty rates will increase by 6 per cent in real terms for all alcoholic drinks. The impact of the changes on retail prices for typical alcoholic drinks is equivalent to: • 55 pence on a 70cl bottle of spirits @ 37.5% abv; • 4 pence on a pint of beer; • 3 pence on a litre of still cider; • 14 pence on a 75cl bottle of sparkling cider; • 14 pence on a 75cl bottle of wine or made-wine; and • 18 pence on a 75cl bottle of sparkling wine.

3. The Small Brewers Relief scheme will continue to provide 50 per cent duty

relief to the smallest brewers. Operative date 4. These changes will have effect on and after 17 March 2008. Current law and proposed revisions 5. The Alcoholic Liquor Duties Act 1979 and the HM Revenue & Customs

Tariff will be amended to effect the changes. Further advice 6. If you have any questions about this change, please contact the National



The alcohol duty rates will be as follows:

Type Rate

Rate £ per litre of pure alcohol

Spirits 21.35

Spirits-based Ready To Drinks 21.35

Wine and made-wine: Exceeding 22% abv

21.35

Rate £ per hectolitre per cent of alcohol in the beer

Beer 14.96

Rate £ per hectolitre of product

Still cider and perry: Exceeding 1.2% - not exceeding 7.5% abv.

28.90

Still cider and perry: Exceeding 7.5% - less than 8.5% abv.

43.37

Sparkling cider and perry: Exceeding 1.2% - not exceeding 5.5% abv.

28.90

Sparkling cider and perry: Exceeding 5.5% - less than 8.5% abv.

188.10

Wine and made-wine: Exceeding 1.2% - not exceeding 4% abv

59.87

Wine and made-wine: Exceeding 4% - not exceeding 5.5% abv.

82.32

Still wine and made-wine: Exceeding 5.5% - not exceeding 15% abv.

194.28

Wine and made-wine: Exceeding 15% - not exceeding 22% abv.

259.02

Sparkling wine and made-wine: Exceeding 5.5% - less than 8.5% abv.

188.10

Sparkling wine and made-wine: 8.5% and above -not exceeding 15% abv

248.85


BN92

CALCULATION OF ALCOHOL DUTY Who is likely to be affected? 1. Businesses that pay excise duty on alcoholic drinks (e.g. drinks

manufacturers and importers, and excise warehouse keepers). General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to repeal the current

legal provision that allows HM Revenue & Customs (HMRC) to disregard fractions of a penny in any amount of duty due. This is because, since the half penny is no longer legal tender, this provision is superfluous.

3. In addition, HMRC will introduce a common method of calculating the

excise duty due on all categories of alcoholic drinks. The introduction of a common method of calculation will remove the present inconsistencies in the way excise duty is calculated on alcoholic drinks, which arise from the different treatment of fractions within the calculation process. This measure will clarify that, under the common method, any fractions of amounts of volume or duty must not be disregarded during the duty calculation.

4. The relevant HMRC notices will be updated accordingly. Operative date 5. The repeal of the fraction disregard will have effect on and after the date

that Finance Bill 2008 receives Royal Assent. The common calculation method will be introduced later in the year after further discussions with the alcohol industry on timing.

Current law and proposed revisions 6. Section 137(2) of the Customs and Excise Management Act 1979 (CEMA)

requires that where duty is chargeable on a volume of goods, the duty must be calculated proportionately on any fraction of that volume of goods. Section 137(3) of CEMA allows HMRC to determine the fraction to be taken into account. This applies equally to calculating any amount of duty due from or to a person and is not limited to excise duty on alcohol. No changes are proposed to these provisions.

7. Section 137(4) of CEMA allows fractions of a penny in any amount due to

be disregarded. This is superfluous since the half penny ceased to be legal tender. This section is therefore being repealed.





BN93

EXCISE REVIEWS AND APPEALS Who is likely to be affected? 1. Producers of alcoholic drinks, excise warehousekeepers and businesses

claiming alcoholic ingredients relief. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to extend the excise

review and appeals system to include certain decisions made by HM Revenue & Customs (HMRC) which were previously not covered.

Operative date 3. The measure will have effect on and after the date that Finance Bill 2008

receives Royal Assent. Current law and proposed revisions 4. The current legislation at sections 14-16 of and Schedule 5 to the Finance

Act (FA) 1994 provides a list of the decisions made by HMRC concerning excise matters that are subject to review and appeal. The proposed measure will add further decisions to the list where, at present, there are no rights to review and appeal for decisions under the following sections in the Alcoholic Liquor Duties Act 1979: • on drawback, under section 22; • on repaying excise duty under section 46, or section 61, or section 64; • on the requirement for security under regulations made under

section13, section 15 or section 77; • on registration, security or any restrictions on moving goods under

section 41A, section 47 or regulations under section 49; • for decisions relating to wine and made-wine on licensing and

registration, security or the conditions for moving goods under section 54, section 55 or regulations under section 56; and

• for decisions relating to cider on registration, security or the conditions for moving goods under section 62.

5. The measure will amend paragraph 2(1)(s) of Schedule 5 to FA 1994,

clarifying that an appeal right exists when a guarantee and other security is cancelled under section 157 of the Customs and Excise Management Act 1979, and that a review and appeal right exists when a decision is made that additional or further security is required. The measure will also add additional review and appeal rights for decisions on repayment claims under section 4 of FA 1995.


Further advice 6. If you have any questions about this change, please contact Howard

Buttery on 0161 827 0340 (email: [email protected]). Information about Budget measures is available on the HM Revenue and Customs website at www.hmrc.gov.uk.


BN94

WAIVING INTEREST AND SURCHARGES FOR THOSE AFFECTED BY NATIONAL DISASTERS

Who is likely to be affected? 1. Taxpayers with tax payable who are adversely affected by events

designated as national disasters. The first beneficiaries of this measure will be taxpayers who were unable to pay their taxes on time as a consequence of the severe floods that affected the UK in June and July of 2007.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to provide for a power

allowing interest and surcharges payable to HM Revenue & Customs (HMRC) to be waived by secondary legislation in the context of events designated as national disasters. HMRC will use this power to meet the commitment the Government made on 25 July 2007 to waive interest and surcharges on tax paid late due to the severe floods that affected the UK in June and July of 2007.

Operative date 3. The measure will have effect from the date that Finance Bill 2008 receives

Royal Assent. The power will first be used, with retrospective effect, to waive interest and surcharges on tax paid late as a result of the severe flooding that affected the UK in June and July of 2007.

Current law and proposed revisions 4. Legislation, for example in Part IX of the Taxes Management Act 1970,

requires interest to be charged on all unpaid tax from the date it becomes due until the date of payment.

5. This measure will introduce a power that would allow the Commissioners

of HM Revenue & Customs to waive interest and surcharges where tax and / or duties are paid late because of a disaster of national significance.

6. Section 107 of the Finance Act 2001 ensured that those affected by foot

and mouth should have the interest charge removed where the then Inland Revenue agreed, because of the effect of the foot-and-mouth disease outbreak, to defer the payment of tax. The proposed legislation is modelled on that provision.

7. The Government announcement made on the 25 June 2007 can be found

at www.gnn.gov.uk


Further advice 8. If you have any questions about this change, please contact Robert Horwill



BN95

POWER TO GIVE STATUTORY EFFECT TO EXISTING CONCESSIONS

Who is likely to be affected? 1. Individuals, organisations and businesses. General description of the measure 2. The decision in the case of ‘The Queen (on the application of John

Wilkinson) v. The Commissioners for Her Majesty’s Revenue and Customs’ (‘Wilkinson’) made clear that the scope of the discretion of HM Revenue & Customs (HMRC) to make concessions from the strict application of tax law is not as wide as had previously been thought.

3. HMRC has been reviewing its concessions in the light of the Wilkinson

judgment and that review is expected to be completed in the autumn. The majority of HMRC’s concessions are clearly within the scope of its ”collection and management” discretion and so can continue to operate as they are.

4. Indications are that when the review is completed it will be possible to

legislate a substantial proportion of the remaining minority and so enable the tax treatment they afford to continue. Legislation will be introduced in Finance Bill 2008 to provide for existing HMRC concessions (which include concessions operated by HMRC’s predecessor departments of Inland Revenue and HM Customs & Excise) to be made statutory by Treasury order. Details of the outcome of the review, including those extra statutory concessions to be legislated by order, will be available later in the year.

Operative date 5. This power will be operative on and after the date that Finance Bill 2008

receives Royal Assent, but no orders under this power are expected to be made until after HMRC’s review of its concessions has been completed.

Current law and proposed revisions 6. At present there is no enabling power of this kind to allow existing

concessions to be legislated by order.


7. In the context of this measure: • “existing HMRC concession” - means any statement made by HMRC

(before the enactment of this measure) which allows a person a reduction in liability to tax or duty, or allows any other concession in relation to tax or duty to which there is no legal entitlement; and

• “statement” - means statement of any sort however described. 8. Any order under this power will be made only if a draft of that order has

been laid before, and has been approved by a resolution of, Parliament. Further advice 9. If you have any questions about this change, please contact David

Stephens on 020 7147 2402 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN96

HMRC REVIEW OF POWERS, DETERRENTS AND SAFEGUARDS: PENALTIES FOR INCORRECT RETURNS &

FAILURE TO NOTIFY A TAXABLE ACTIVITY Who is likely to be affected? 1. Individuals and businesses who understate their tax liability, deliberately or

by failing to take reasonable care in completing returns for: • environmental taxes (aggregates levy, climate change levy, landfill

tax); • excise duties (alcohols, tobacco, oils, gambling and air passenger

duty); • stamp duties (stamp duty land tax, stamp duty reserve tax); • accounting for recovery of student loans by employers; and • inheritance tax, insurance premium tax, pension schemes and

petroleum revenue tax. 2. Individuals and businesses who fail to notify HM Revenue & Customs

(HMRC) of a new taxable activity by the required date, where there is tax and / or National Insurance Contributions (NICs) unpaid as a result.

3. This measure will not have effect for tax credits. General description of the measure 4. Legislation will be introduced in Finance Bill 2008 to extend the provisions

enacted in Schedule 24 to the Finance Act (FA) 2007, to create a single penalty regime for incorrect returns across all the taxes, levies and duties administered by HMRC. The penalty will be determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer. The use of suspended penalties will be extended.

5. Provision will also be made to extend and adapt Schedule 24 to FA 2007

to cover penalties for failing to register or notify HMRC of a new taxable activity across all the taxes, levies and duties administered by HMRC, including late VAT registration.

Operative date 6. The new provisions will have effect from a date to be appointed by

Treasury Order. For incorrect returns, this is expected to be for return periods commencing on or after 1 April 2009 where the return is due to be filed on or after 1 April 2010. New penalties for failure to notify are expected to have effect for failure to meet notification obligations that arise on or after 1 April 2009.


Current law and proposed revisions 7. The measure will repeal a large number of different penalty provisions

which are specific to each of the taxes, levies or duties covered and replace these with a single legislative framework for penalties for incorrect returns and another similar one for failing to notify a taxable activity by the required date.

8. The new provisions for incorrect returns will provide for penalties in line

with Schedule 24 to FA 2007, which are based on the amount of tax understated, the nature of the behaviour and the extent of disclosure by the taxpayer. There will be no penalty where a taxpayer makes a mistake but there will be a penalty of up to: • 30 per cent for failure to take reasonable care; • 70 per cent for a deliberate understatement; and • 100 per cent for a deliberate understatement with concealment.

9. The measure will provide for each penalty to be substantially reduced

where the taxpayer makes a disclosure (takes active steps to put right the problem), more so if this is unprompted. For an unprompted disclosure of a failure to take reasonable care the penalty could be reduced to nil. Where a taxpayer discloses fully when prompted by a challenge from HMRC each penalty could be reduced by up to a half.

10. Where a return is incorrect because a third party has deliberately provided

false information or deliberately withheld information from the taxpayer, with the intention of causing an understatement of tax due, there will be a new provision allowing a penalty to be charged on the third party.

11. The measure will also provide for reformed penalties for some specific

excise duty wrongdoings: misusing goods subject to reduced excise duty rates, e.g. red diesel; and handling goods on which excise duty should have been paid but has not.

12. For failure to notify a taxable activity there will be no penalty unless there

is tax and / or NICs due but unpaid as a result, nor where the taxpayer has a reasonable excuse for the failure. Otherwise there will be a penalty of: • 30 per cent of tax unpaid for non-deliberate failure to notify; • 70 per cent of tax unpaid for a deliberate failure to notify; and • 100 per cent of tax unpaid for a deliberate failure with concealment. Each penalty will be substantially reduced where the taxpayer makes a disclosure (takes active steps to put right the problem), more so if this is unprompted.

13. For Class 2 NICs, the provisions will replace the fixed penalty of £100 for

notification more than three months after starting self-employment with a behaviour based penalty. The obligation to notify remains unchanged.


14. The measure will include full and explicit provisions for the right of appeal against all penalty decisions.

15. HMRC will continue to consult on guidance on the operation of these

penalty provisions between the date the Finance Bill 2008 receives Royal Assent and the implementation of the changes. It is intended that guidance will be published well ahead of implementation.

16. This measure was the subject of a consultation document published on

10 January 2008 – Penalties Reform: The Next Stage with draft clauses and explanatory notes. A summary of responses to that consultation and a Final Impact Assessment, including an explanation of any resulting changes, will be published shortly.

Further advice 17. If you have any questions about this change, please send an email to

[email protected] or contact Maria Richards on 020 7147 3223. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN97

HMRC REVIEW OF POWERS, DETERRENTS AND SAFEGUARDS: COMPLIANCE CHECKS

Who is likely to be affected? 1. Individuals and businesses who are within the scope of PAYE, VAT,

income tax (IT), capital gains tax (CGT) and corporation tax (CT) and who pay tax or make claims.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to reform the rules for

checking that businesses and individuals have paid the correct amount of IT, CGT, CT, VAT and PAYE or claimed the correct reliefs and allowances.

3. There will be three elements:

• aligned and modernised record keeping requirements; • new inspection and information powers; and • aligned and modernised time limits for making tax assessments and

claims. Operative date 4. Information powers and penalties for failure to comply with these

obligations will have effect on and after 1 April 2009. Time limits for making assessments and claims will need a transitional period and so will become fully operative on and after 1 April 2010.

Current law and proposed revisions Record Keeping Requirement 5. Primary legislation requires records to be kept which enable a taxpayer to

make an accurate return. Further detail of the required records is then set out in secondary and tertiary legislation. The current rules differ from tax to tax and this measure will pave the way for an aligned approach.

Information powers 6. For VAT and PAYE, HM Revenue & Customs (HMRC) has inspection

powers with no rights of appeal. For IT, CGT and CT, HMRC has a combination of information powers, which need pre-authorisation by the appeal commissioners and can only be challenged by judicial review and enquiry powers that can only be used once a self assessment enquiry notice into a particular return has been issued. Authorisation levels, penalties and appeal rights differ across the different regimes. The relevant


legislation is at sections 19A and 20 of the Taxes Management Act 1970 (TMA), paragraph 7 of Schedule 11 to the Value Added Tax Act 1994 (VATA), paragraph 27 of Schedule 18 to the Finance Act (FA) 1998 and Regulation 97 of the Income Tax (PAYE) Regulations 2003.

7. The new powers will align and modernise HMRC’s access to records and

information. 8. The new package will align existing powers and safeguards and introduce:

• a power to inspect records required under the record-keeping legislation – this restricts the existing VAT and PAYE inspections to statutory records and introduces a new power of inspection for direct tax;

• a power to require supplementary information which is relevant to establishing the correct tax position;

• a power to require third parties to provide information which is relevant to establishing a taxpayer’s correct tax position;

• a power to visit business premises and to inspect records, assets and premises;

• removal of VAT and PAYE powers to undertake inspections at private homes without taxpayer consent;

• appeal rights against any penalty, and against information notices which have not been pre-authorised by an appeal tribunal;

• penalties for failure to allow an inspection and failing to comply with an information notice, including a tax-geared penalty which can be imposed by the new upper tier tribunals; and

• an updated criminal offence of destroying or concealing records requested under a notice authorised by a tribunal.

Assessment Time Limits 9. Time limits for changing the amount of tax due by assessment vary across

the taxes. Current time limits are set out below: Tax Mistake Failure to take

reasonable care Deliberate understatement

VAT section 77 VATA 1994

3 years 3 years 20 years

IT and CGT sections 34 & 36 TMA 1970

5 years 10 months

20 years 10 months 20 years 10 months

CT Para 46 Schedule 1FA 1998

6 years 21 years 21 years

PAYE sections 34 & 36 TMA 1970

5 years 10 months

20 years 10 months 20 years 10 months

10. The new legislation will align the time limits for assessments to the

following model:


Tax Mistake Discovery Failure to take reasonable care

Deliberate understatement orFailure to notify liability

VAT 4 years N/A 4 years 20 years

IT & CGT N/A 4 years 6 years 20 years

CT N/A 4 years 6 years 20 years

PAYE 4 years N/A 6 years 20 years 11. Time limits for taxpayers’ claims will also be aligned, at 4 years. 12. This measure was the subject of initial consultation in May 2007.

Responses to that consultation together with draft legislation for further consultation were published on 10 January 2008 – A New Approach to Compliance Checks: Responses to Consultation and Proposals. A summary of responses to that consultation and a Final Impact Assessment, including an explanation of any resulting changes, will be published shortly.

Further advice 13. If you have any questions about this change, please send an email to




BN98

HMRC REVIEW OF POWERS, DETERRENTS AND SAFEGUARDS: PAYMENTS, REPAYMENTS AND DEBT

Who is likely to be affected? 1. Individuals and businesses who wish to pay tax and duties etc by credit

card. 2. Those who have not met their obligations to pay what they owe on time. General description of the measures 3. The measure will make it easier for taxpayers to pay what they owe on

time, and for HM Revenue & Customs (HMRC) to tackle those who seek to avoid their obligations by paying late or not at all. There are three separate changes to the current law: • new legislation to enable HMRC to introduce a credit card payment

service; • HMRC will be able to set the repayments it must make to individuals

and businesses against the payments it is owed by them; and, • HMRC’s debt enforcement powers to collect unpaid sums by taking

control of goods in England & Wales, or by taking action through the civil courts will be modernised and aligned.

Operative dates 4. It is intended that HMRC will be in a position to accept payments by credit

card from Autumn 2008. 5. The ability to set repayments against debt will have effect on and after the

date that Finance Bill 2008 receives Royal Assent. 6. The changes to HMRC’s powers to enforce payment through the courts

will have effect on and after the date that Finance Bill 2008 receives Royal Assent. In England & Wales the power to take control of goods will come into effect in line with the appointed day for Schedule 12 to the Tribunals, Courts and Enforcement Act 2007.

Current law and proposed revisions 7. Legislation supports a range of payment methods, but HMRC cannot

accept payment by credit cards except in certain limited circumstances such as at ports and airports. Legislation will be introduced in Finance Bill 2008 to allow individuals and businesses to pay tax, duties etc by credit card. Taxpayers who choose to pay in this way will be charged the transaction fee that HMRC will itself be charged. Legislation will be needed


because passing on this fee would otherwise be outside the functions of the Commissioners for HM Revenue & Customs.

8. Under common law, or by request, HMRC may already set-off repayments

payable to taxpayers against debts they owe to HMRC. This measure will give a specific power to HMRC to make set-off across the different taxes, duties etc it administers, at its discretion.

9. HMRC’s powers to enforce the payment of civil debt, where reminders and

other actions have not been successful, were inherited from the former Inland Revenue and HM Customs & Excise. These powers differ across regimes, which can be confusing for taxpayers and lead to unnecessary costs to the Exchequer. This package of changes will modernise and align the enforcement powers in England & Wales and Scotland so that HMRC may recover debts in a single action. It will also mean an end to the current practice where taxpayers may face two sets of costs and fees.

10. This measure was the subject of initial consultation in June 2007.

Responses to that consultation together with draft legislation for further consultation were published on 10 January 2008 – Payments, Repayments and Debt: Responses to Consultation and Proposals. A summary of responses to that consultation and a Final Impact Assessment, including an explanation of any resulting changes, will be published shortly.

Further advice

11. If you have any questions about this change, please send an email to



BN99

CHANGES TO CUSTOMS POWERS Who is likely to be affected? 1. Airport, port, wharf and transit shed operators; and individuals and

businesses involved in the import and export of goods. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to clarify the powers of

HM Revenue & Customs (HMRC) to examine and search goods and baggage being imported and exported.

Operative date 3. The changes will come into effect from the date that Finance Bill 2008

receives Royal Assent. Current law and proposed revisions 4. Section 159(1) of the Customs and Excise Management Act 1979 gives

officers the power to examine goods which are being imported or exported. Officers may for this purpose require that any containers are opened and unpacked.

5. The measure will amend section 159(1) to allow customs officers to open

and unpack containers themselves, should they think it necessary, rather than insisting that it is done by the proprietor of the goods. The changes will also make clear that HMRC’s powers of examination extend to searching containers and baggage.

Further advice 6. If you have any questions about this change, please contact Marie

Campbell on 01702 361780 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN100

TRIBUNAL REFORM: SIMPLIFYING HMRC'S APPROACH TO APPEALS

Who is likely to be affected? 1. Businesses and individuals who may want to appeal against decisions

made by HM Revenue & Customs (HMRC). General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to provide a power to

introduce secondary legislation to change the way appeals against HMRC decisions are handled.

Operative date 3. The power will have effect on and after the date that Finance Bill 2008

receives Royal Assent. It is intended that the secondary legislation will come into effect in April 2009 alongside implementation of the Ministry of Justice tribunal reforms under the Tribunals, Courts and Enforcement Act 2007 (the TCEA).

Current law and proposed revisions 4. Under the law, the way HMRC deals with appeals reflects the different

history of the two former departments, the requirements of particular taxes or schemes and the four independent appeals bodies that hear tax appeals against HMRC decisions.

5. The TCEA creates a First-tier Tribunal into which most existing tribunal

appeal functions will be transferred, including tax appeals, and an Upper Tribunal which will hear appeals against the decisions of the First-tier Tribunal (and may hear some first instance appeals in certain circumstances).

6. This measure will enable the Government to introduce, by Treasury Order,

changes to the legislation about how appeals against decisions made by HMRC are handled, in particular to provide more consistent arrangements for internal review before appeals are referred to a tribunal.

7. The consultation Tax Appeals against decisions made by HMRC ran from

October to December 2007. The results of that consultation and proposals for the way forward are published today on the HMRC website.


Further advice 8. If you have any questions about this change, please contact Eileen

Rafferty on 0207 147 2405 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN101

TAX LAW REWRITE: REMITTANCE BASIS AND FOREIGN DIVIDEND INCOME

Who is likely to be affected? 1. Individuals claiming the remittance basis of taxation who remit foreign

dividend income and who are chargeable to income tax at the higher rate. General description of the measure 2. The rate at which remittance basis users will be liable to income tax on

foreign dividends is being corrected to 40 per cent for those individuals liable at the higher rate. This corrects an error introduced by the Tax Law Rewrite.

Operative date 3. This change will have effect for remittances on and after 6 April 2008. Current law and proposed revisions 4. Currently, remittance basis users who are higher rate taxpayers are liable

at 32.5 per cent on foreign dividend income remitted to the UK. 5. The Income Tax (Trading and Other Income) Act 2005 mistakenly

changed the rate at which foreign dividend income is charged to tax on these remittance basis users from 40 per cent to 32.5 per cent. Tax Law Rewrite Bills are not intended to amend the substance of tax legislation.

6. Legislation will be amended to correct the position so that remittance basis

users liable at the higher rate will be taxed at 40 per cent on foreign dividend income remitted to the UK.

Further advice 7. If you have any questions about this change, please email

[email protected] or telephone 020 7147 2762. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk



BN102

RESIDENCE AND DOMICILE: THE RESIDENCE TEST AND DAY COUNTING RULES

Who is likely to be affected? 1. Non-resident individuals visiting the UK and UK resident individuals

leaving the UK. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to change the way days

are counted for residence test purposes. Operative date 3. This change will have effect on and after 6 April 2008. Current law and proposed revisions 4. Under the current rules, when deciding if an individual is resident in the UK

for tax purposes all days spent in the UK are normally counted, except for days on which the individual arrives in, or departs from, the UK. At the Pre-Budget Report it was proposed that days of arrival and days of departure should count as a day of presence in the UK, subject to an exemption for transit passengers.

5. The changes announced today mean that on and after 6 April 2008, any

day where the individual is present in the UK at midnight will be counted as a day of presence in the UK for residence test purposes.

6. There will be an additional exemption for passengers who are in transit

between two places outside the UK. The exemption is wider than that proposed at the Pre-Budget Report as it caters for people who have to change airports or terminals when transiting through the UK. It will also allow people to switch between modes of transport, so they could fly in but leave by ferry or train for example. Days spent in transit, which could involve being in the UK at midnight, will not be counted as days of presence in the UK for residence test purposes so long as during transit the individual does not engage in activities that are to a substantial extent unrelated to their passage through the UK. So, for example, if they take time out to attend a business meeting then the transit exemption will not have effect.





BN103

RESIDENCE AND DOMICILE: PERSONAL ALLOWANCES AND THE REMITTANCE BASIS

Who is likely to be affected? 1. UK residents paying tax on the remittance basis who have unremitted

foreign income and gains in excess of £2,000 a year. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to end entitlement to

certain personal allowances and reliefs for income tax for individuals resident in the UK who claim to use the remittance basis of taxation. These individuals will similarly lose access to the annual exempt amount (AEA) for capital gains.

Operative date 3. This change will have effect on and after 6 April 2008. Current law and proposed revisions 4. All UK residents are entitled to a personal tax allowance and reliefs for

income tax and the AEA for capital gains. The majority also pay tax on their worldwide income and gains even if that income and gains remains offshore. UK residents who are either not domiciled, or not ordinarily resident, in the UK can pay tax on the remittance basis which means that income and gains arising overseas are taxed in the UK only when, and if, they are brought into the UK.

5. On and after 6 April 2008, individuals who claim use of the remittance

basis will not be entitled to any of the personal income tax allowances. This includes the basic personal allowance and age-related allowances, blind person’s allowance, tax reductions for married couples and civil partners and relief for life insurance payments. Remittance basis users will also lose access to the AEA for capital gains.

6. A de minimis limit will have effect so that remittance basis users who have

unremitted foreign income and gains of less than £2,000 a year will be able to retain access to any of the personal income tax allowances to which they are entitled and the AEA for capital gains. This £2,000 limit is instead of the £1,000 limit proposed in the Pre-Budget report.


7. Individuals who have access to the remittance basis of taxation can choose each year whether they wish to claim the remittance basis of taxation or pay tax on their worldwide income and gains. Individuals will be entitled to the personal income tax allowances and the AEA for capital gains in a particular year if they do not claim the remittance basis in that year.




BN104

RESIDENCE AND DOMICILE: CLOSING LOOPHOLES IN THE REMITTANCE BASIS

Who is likely to be affected? 1. UK residents paying tax on the remittance basis. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to remove various

loopholes and anomalies which allow remittance basis users to remit income and gains to the UK without paying tax on them.

Operative date 3. The majority of these changes will have effect on and after 6 April 2008.

However some have effect on and after 12 March 2008. Operative dates are provided below.

Current law and proposed revisions 4. There will be a number of changes made to the way the remittance basis

works. An explanation of the current remittance basis rules and how they will change follows.

‘Ceased source’ 5. Foreign savings and investment income are not currently taxed when

remitted to the UK if the source of the income no longer exists in that year. 6. Legislation will be amended so that where the remittance basis has been

claimed for a year, income of that year will be liable to tax if it is remitted to the UK, even where the source of the income has ceased in a previous year. The legislation to achieve this was published in draft on 18 January 2008.

‘Cash only’ 7. Relevant foreign income can only currently be taxed if it is brought into the

UK as cash. If a remittance basis taxpayer turns relevant foreign income into an asset outside the UK and then imports that asset, no UK tax can be charged on the income unless and until the asset is sold or turned into cash in the UK.


8. Legislation will be changed so that money, property and services derived from relevant foreign income brought into the UK will be treated as a remittance and will be taxed as such.

9. There will be exemptions for personal effects (that is, clothes, shoes,

jewellery and watches), assets costing less than £1,000, assets brought into the UK for repair and restoration and assets in the UK for less than a total nine month period purchased out of relevant foreign income. There is also a new exemption from a remittance basis tax charge for works of art brought into the UK for public display. That is explained in BN105.

10. Any asset purchased out of untaxed relevant foreign income which an

individual owned on 11 March 2008 will be exempt from a charge under the remittance basis, for so long as that individual owns it, even if that asset is currently outside the UK and later imported. Any asset in the UK on 5 April 2008 will also be exempt from a charge under the remittance basis, for so long as the current owner owns it, even if that asset is later exported and the re-imported. The existing charge that arises if such an asset is sold in the UK will remain.

11. The current rules for employment income and capital gains already tax

assets when they enter the UK where they were purchased out of untaxed foreign employment income or capital gains. Those rules remain unchanged.

‘Claims mechanism’ 12. Foreign savings and investment income arising in a year in which the

remittance basis is claimed are not currently taxed if remitted in a subsequent year in which no claim to the remittance basis is made.

13. Legislation will be introduced so that foreign savings and investment

income arising in a year in which the remittance basis is claimed will be taxed if it is remitted to the UK, irrespective of the year in which it is remitted and whether or not a claim to the remittance basis is made in the year in which the remittance is made. The legislation to achieve this was published in draft on 18 January 2008.

Mixed funds 14. There are currently no statutory rules on the treatment of remittances from

funds which include some combination of untaxed relevant foreign income, employment income, capital gains, taxed income or gains and capital.

15. Legislation will be introduced to lay down clear statutory rules for

determining how much of a transfer from a mixed fund is treated as the individual's income or chargeable gains, and the manner in which these amounts are chargeable to tax. These rules will be more comprehensive than the rules in the draft legislation published on 18 January 2008.


Alienation 16. The law currently allows overseas income and gains to be alienated by a

non-domiciled or not ordinarily resident individual to a third party, such as an offshore vehicle or a close relative. That alienated income or gains can then be brought into the UK in such a way that the individual whose income or gain it originally was has the use or enjoyment of it in the UK without attracting a charge to tax.

17. Legislation will be introduced that will have effect where an individual

arranges for money or property to be brought into the UK, or services and benefits to be provided in the UK, that were funded out of untaxed foreign income or gains. Where that individual, or their immediate family, benefits in any way then that individual will be taxed on that money, property, services or benefits under the remittance basis rules of taxation.

18. The definition of an individual’s “immediate family” will be different from the

“relevant person” definition proposed in the draft legislation published on 18 January 2008. It will be limited to spouses, civil partners, individuals living together as spouses or civil partners and their children or grandchildren under 18. It will also cover close companies, or foreign companies that would be close if in the UK, of which any of them are participators and trusts of which any of them are settlors or beneficiaries.

Non-resident trusts 19. There will be extensive changes to the capital gains tax regime for

non-resident trusts. The new rules will be different from the changes detailed in the draft legislation published on 18 January 2008.

20. Non domiciled beneficiaries of non-resident trusts who claim the

remittance basis will, from 6 April 2008, be taxed on the remittance basis on all UK and offshore assets.

21. Trustees will be able to make an irrevocable election to rebase assets held

as at 6 April 2008 for the purpose of excluding any part of a chargeable gain relating to the period before 6 April 2008 from being taxed on non domiciled beneficiaries.

22. Settlors and beneficiaries of non-resident trusts will not be required to

disclose information to HMRC about trust assets in relation to which a remittance arose, or details of the trustees, provided they have made a correct return of their tax liabilities.

23. Beneficiaries of non-resident trusts may be required to provide additional

information to HMRC where the trustees choose to make an election to rebase trust assets or where HMRC enquire into a beneficiary’s tax return.

24. Full details of the new rules are set out in the supplementary document

“Residence and Domicile: Taxation of distributions to beneficiaries of non-resident trusts.” One of the changes comes into effect on 12 March 2008 (see paragraph 11(d) of the document).


Non-resident companies 25. Anti-avoidance legislation designed to prevent UK residents from realising

chargeable gains free of tax through a holding in a non-UK resident company does not currently have effect for non-domiciled individual participators.

26. The legislation will be amended so these anti-avoidance rules ensure that

UK participators of foreign companies will be taxed on the chargeable gains accruing to the company irrespective of the participator’s domicile. The legislation to achieve this was published in draft on 18 January 2008 although some minor changes will be made as a result of the consultation.

Transfer of Assets Abroad 27. Anti-avoidance legislation designed to prevent individuals from avoiding

income tax by transferring assets abroad will be amended to ensure these anti-avoidance provisions apply to non domiciled individuals. The remittance basis will apply to remittance basis users.

Accrued Income Scheme 28. Currently, income tax charges under the Accrued Income Scheme apply to

domiciled individuals but not to the non-domiciled. 29. Legislation on the Accrued Income Scheme will be amended so that the

income tax charge has effect for non-domiciled individuals as well as domiciled individuals. The legislation to achieve this was published in draft on 18 January 2008.

Capital Gains Tax Losses 30. Currently, non-domiciled individuals get no capital gains tax relief for

losses arising offshore as the remittance basis of taxation is compulsory for them with respect to capital gains tax. From 6 April 2008 individuals will be able to elect in and out of the remittance basis on a year by year basis so a non-domiciled individual could pay capital gains tax on unremitted foreign gains in a year they are taxed on the arising basis.

31. Legislation on capital gains tax will be amended so that non-domiciled

individuals taxed on the arising basis who have not claimed the remittance basis from 2008-09 will get relief for foreign losses. Individuals who claim the remittance basis from 2008-09 will be able to elect into a regime that enables them to get relief for their foreign losses in the UK in years they are taxed on the arising basis. That election will be irrevocable and as it will require non-domiciles to disclose details of unremitted capital gains the election will be optional.


Offshore Mortgages 32. Currently individuals paying tax on the remittance basis who borrow

money from a non-UK institution can repay the interest on that loan out of untaxed foreign income without giving rise to a tax charge on the remittance basis, even if the loan is advanced into the UK. The draft legislation published on 18 January 2008 proposed that repayments on such loans would be treated as a remittance on or after 6 April 2008.

33. The legislation in the Finance Bill 2008 will include grandfathering

provisions such that untaxed relevant foreign income used to fund interest repayments on existing mortgages secured on a residential property in the UK, will not be treated as a remittance on or after 6 April 2008. This grandfathering will have effect for repayments for the remaining period of the loan, or until 5 April 2028, whichever is shorter. In addition if the terms of the loan are varied or any further advances made after 12 March 2008 then the repayments will be treated as remittances from that point.





BN105

RESIDENCE AND DOMICILE: REMITTANCE BASIS AND ART FOR PUBLIC DISPLAY

Who is likely to be affected? 1. UK individuals claiming the remittance basis of taxation. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to exempt works of art

from being taxed under the remittance basis if they are brought into the UK for public display.

Operative date 3. This change will have effect on and after 6 April 2008. Current law and proposed revisions 4. Currently, a work of art which has been purchased offshore from

unremitted untaxed relevant foreign income is not taxed under the remittance basis when it is brought into the UK. A work of art purchased offshore from unremitted untaxed employment income or capital gains is currently taxable under the remittance basis when brought into the UK.

5. Legislation will be introduced in Finance Bill 2008 to introduce a new

scheme that will allow works of art, purchased overseas from unremitted untaxed employment income, capital gains or relevant foreign income, to be brought into the UK for public display without giving rise to an income tax or capital gains tax charge under the remittance basis.

6. This new scheme will be based on the existing HM Revenue & Customs

schemes for VAT and import duty (temporary imports and items brought into the UK permanently by museums and galleries). It will allow for works of art to be imported either indefinitely or temporarily without giving rise to a charge to tax on the remittance basis so long as that work of art is on public display in an approved establishment. Works of art not on display, but held by approved establishments for the public to see or for educational purposes, will also be covered by the scheme.

7. This exemption for art is in addition to any exemptions which have effect

for assets more generally.





BN106

RESIDENCE AND DOMICILE: CHANGES FOR EMPLOYMENT-RELATED SECURITIES

Who is likely to be affected? 1. Employees who are taxed on the remittance basis and who receive shares

or options as part of their remuneration, and their employers. General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to bring employees who

are resident but not ordinarily resident in the UK, and who receive employment-related securities (ERS), within those provisions of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) which currently have effect only for resident and ordinarily resident employees.

3. Where gains on ERS that this measure will bring within Part 7 are partly

derived from employment duties in the UK, and partly from duties outside the UK, they will be apportioned appropriately, with gains from ERS related to duties outside the UK being subject to UK Income Tax to the extent that they are remitted.

4. A similar apportionment will be available to individuals who are not

domiciled in the UK in certain circumstances. Operative date 5. The measure will have effect on and after 6 April 2008 in respect of

employment-related securities acquired or options granted on or after that date. Securities acquired or options granted on or before 5 April 2008 will not be affected.

Current law and proposed revisions 6. Employment-related securities and securities options are shares and other

securities, and options over such shares or securities, which are acquired by an employee by reason of his or her employment. Chapters 1 to 5 in Part 7 of ITEPA provide the income tax rules for employment income from such securities and options.


7. Employees who are not both resident and ordinarily resident in the UK (R/OR) at the time employment-related securities or securities options are acquired are not within the scope of Part 7 of ITEPA, except for Chapters 3A-3D. This means that those who are R/OR at the time of acquisition are subject to all the rules in Part 7, but those who are resident / not ordinarily resident (R/NOR) are only within Chapters 3A-3D of Part 7. Part 7 does not therefore deal with R/NOR employees who receive this type of remuneration in a comparable way to R/OR employees.

8. Changes will be introduced in Finance Bill 2008 to Part 7 of ITEPA which

will bring R/NOR employees within all Chapters of the Part 7 regime so that their remuneration from employment related securities or options is subject to the same rules as for R/OR employees. Where such employees are taxed on the remittance basis, the measure will provide apportionment of the ERS income to ensure that that proportion relating to overseas duties will only be subject to Income Tax when it is remitted to the UK.

9. A similar apportionment basis will be available to non-domiciled individuals

where the ERS income relates to a foreign employment where the duties are performed wholly outside the UK.

Further advice 10. If you have any questions about this change, please contact Claire Talbot

on 020 7147 2867 or Tom Rollinson on 020 7147 2866 (email: [email protected]). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk


BN107

RESIDENCE AND DOMICILE: ANNUAL £30,000 CHARGE FOR SOME USERS OF THE REMITTANCE BASIS

Who is likely to be affected? 1. Adults who are UK residents, who have been UK residents for more than

seven of the past ten years, who claim the remittance basis of taxation and who have unremitted foreign income and gains in excess of £2,000 a year.

General description of the measure 2. Legislation will be introduced in Finance Bill 2008 to ensure that adult

non-domiciled, or not ordinarily resident, individuals who have been in the UK more than seven of the past ten tax years, will be able to continue to access the remittance basis of taxation on payment of an annual charge of £30,000 charged on the foreign income and gains they leave outside the UK, unless their unremitted foreign income and gains are less than £2,000.

Operative date 3. This change will have effect on and after 6 April 2008. Current law and proposed revisions 4. Currently, UK residents who are either not domiciled or not ordinarily

resident in the UK can access the remittance basis of taxation without any UK tax being charged on the foreign income and gains they leave outside the UK. So the remittance basis means that income and gains arising overseas are only taxed in the UK when they are brought into the UK.

5. On and after 6 April 2008, non-UK domiciled and / or not ordinarily

resident adults who claim the remittance basis of taxation, who have been resident in the UK more than seven of the past ten tax years, will have to pay a £30,000 annual tax charge in respect of the foreign income and gains they leave outside the UK. This £30,000 charge is in addition to any tax due on UK income and gains or foreign income and gains remitted to the UK.

6. Following consultation there are 3 main changes to the draft legislation

published on 18 January. These are: • in the draft legislation the charge did not have effect for remittance

basis users who have unremitted foreign income and gains of less than £1,000 in the year of assessment. This has been raised to £2,000;

• the charge will apply only to adults so that individuals under the age of 18 will not have to pay the £30,000 charge until the year they turn 18;


• the tax charge will take a different form from the one set out in the draft legislation. It will be a tax charge on unremitted income and gains rather than a stand alone charge.

7. The £30,000 annual tax charge will be payable through the self

assessment system. If the adult pays the £30,000 tax charge from an offshore source directly to HM Revenue & Customs (HMRC) by cheque or electronic transfer, the £30,000 will not itself be taxed as a remittance. If the £30,000 is repaid it will be taxed as a remittance at that point.

8. Individuals who have access to the remittance basis of taxation can

choose each year whether they wish to claim the remittance basis of taxation or pay tax on their worldwide income and gains. Adults will not have to pay the £30,000 minimum tax charge for a particular year if they do not claim the remittance basis for that year.

9. The tax charge to be introduced from April 2008 will take a different form

from the one set out in the draft legislation published on 18 January. It will be a tax charge on unremitted income and gains (or a combination of the two) rather than a stand alone charge. Individuals paying the charge will choose what foreign unremitted income or gains the £ 30,000 is paid on. As a result the tax paid will either be income tax or capital gains tax. The unremitted income or gains upon which the £ 30,000 tax has been paid will not be taxed again when and if it is eventually remitted to the UK. There will be ordering rules that determine that untaxed unremitted foreign income or gains will be treated as remitted before income or gains upon which the £ 30,000 has been paid.

10. The £30,000 charge will be income tax or capital gains tax and should be

treated as such for the purposes of Double Taxation Agreements. The tax will also be available to cover Gift Aid donations.

11. Further information on the £30,000 charge, and in particular how it will be

treated by the US under the UK/US double taxation agreement and applicable US domestic tax law is available on the HM Treasury website at: www.hm-treasury.gov.uk

12. For convenience, that information is reproduced as an Annex to this

Budget Note. Further advice 13. If you have any questions about this change, please email



ANNEX TO BN107: RESIDENCE AND DOMICILE: ANNUAL £30,000 CHARGE FOR SOME USERS OF THE REMITTANCE

BASIS

March 11, 2008

MEMORANDUM FOR HER MAJESTY'S TREASURY

RE: UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO UNITED STATES CITIZENS OF CERTAIN PROPOSED REVISIONS TO THE UNITED KINGDOM REMITTANCE BASIS OF TAXATION

You have requested our advice regarding certain of the United States

federal income tax consequences of specific proposed revisions to the current United Kingdom remittance basis of taxation as applied to United States citizens subject to that tax. This memorandum responds to that request.

As we have discussed, Skadden has many partners and employees

based in London, including many United States citizens, who would be affected by the proposed revisions. Several of these individuals have been and continue to be public in their opposition to them. In this context we want to be clear that, in accordance with our terms of engagement, our advice is limited to the United States federal income tax consequences of the proposed revisions and does not address other matters, including the merits of the policies that form the basis for the proposals, which are, of course, matters for the Chancellor of the Exchequer and not for us.

You have provided us with a brief description of the proposals as well

as a copy of your instructions to counsel describing the proposals. Our understanding of the proposals is based on these materials and on our discussions with representatives of Her Majesty's Treasury and Her Majesty's Revenue & Customs. We have not reviewed draft legislation implementing the proposals. Any changes to the proposals as described herein could affect our analysis and the views we express.

Our advice is principally based on the United States Internal Revenue

Code of 1986, as amended (the "Code"), and regulations issued by the United States Treasury thereunder ("Treasury Regulations"), and on the Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains currently in force (the "Treaty"), and the United States Treasury's Technical Explanation1 of the Treaty (the "Technical Explanation"). We have met with representatives of the United States Treasury and the Internal Revenue Service 1 Department of the Treasury, Technical Explanation of the Convention Between the Government of

the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and On Capital Gains.


("IRS") to discuss our analysis and views, but neither agency has in any manner endorsed our analysis or the views we express.

This memorandum is divided into several parts. First, we describe the

proposals establishing a Remittance-Based Minimum Charge ("RBMC"). Second, we analyze the creditability of the RBMC against United States federal income tax. Third, on the assumption the RBMC is a creditable foreign tax for United States federal income tax purposes, we analyze the potential limitations on the ability of United States citizens to utilize the RBMC as a credit against the United States federal income tax on non-United States source income under the Code, and against the United States federal income tax on United States source income under the Treaty. Finally, we provide our concluding views.

This memorandum is intended to provide you with an overview of the issues discussed herein without reference to the facts and circumstances of any particular United States taxpayer. Accordingly, it is not intended as tax advice for any taxpayer, and it was not written, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Code. Description of United Kingdom Treasury Proposal In general, persons resident and domiciled in the United Kingdom are taxed on their worldwide income and capital gains as they arise. Those persons who are resident but not domiciled in the United Kingdom ("resident non-doms") may elect, alternatively, to be taxed on the remittance basis, under which non-United Kingdom source income and capital gains are subject to tax only when remitted to the United Kingdom.2 Generally, income and capital gains are considered remitted under United Kingdom tax law when they are transmitted or brought to the United Kingdom. With respect to any remittance, taxpayers bear the burden of establishing, where appropriate, that such remittance is not out of previously unremitted income or capital gains (for example, a remittance reflecting a return of capital or pre-residency income). The tax rate applied to remittances that reflect income or capital gains depends on the character of the remittance. On or after April 6, 2008, a maximum rate of 40%3 applies to remitted employment and other income generally, and an 18% rate applies to remitted capital gains. Her Majesty's Treasury is proposing a number of changes to the remittance basis of taxation including an amendment that, if enacted, would cause certain resident non-doms who elect the remittance basis to pay a minimum tax (called a Remittance Basis Minimum Charge or "RBMC") on non-United Kingdom source income and capital gains not remitted to the United Kingdom in the year earned. In particular, persons who are resident for United Kingdom tax purposes in the current year, and were resident for seven of the prior nine tax years, and who elect the remittance basis for the current year, will be required to pay an RBMC of £ 30,000 on unremitted non-United Kingdom source income and capital gains. For this

2 Domiciliaries of the United Kingdom who, for the purposes of United Kingdom tax law, are

"resident but not ordinarily resident" in the United Kingdom may also elect to be taxed on the remittance basis.

3 In general, employment and other income are subject to graduated rates of 20% and 40%. (There is also a savings rate of 10% applied to a narrow range of income.)


purpose, the taxpayer may designate whether the RBMC is levied on (i) unremitted non-United Kingdom source income, (ii) unremitted non-United Kingdom source capital gains, or (iii) a combination thereof. Further, the RBMC is levied on the amount of unremitted non-United Kingdom source income or capital gain, or combination thereof, that would give rise to a £ 30,000 liability, after taking into account any credit for source based non-United Kingdom income tax reliefs, losses and allowances. Resident non-doms whose net liability for United Kingdom tax on non-United Kingdom source income is less than the RBMC should choose to report their worldwide income and capital gains on an arising basis (which also provides for certain allowances not permitted to taxpayers filing on a remittance basis). Any resident non-dom initially filing on a remittance basis and paying RBMC can amend his or her filing for a period of up to one year from the date thereof to report worldwide income and capital gains on an arising basis and receive a refund of any RBMC paid in excess of net income tax liability. Otherwise the RBMC is not refundable. The amount of income and capital gains determined to have been taxed through the RBMC will be previously "taxed" (or "franked") income if it is later remitted. For this purpose, remittances will be statutorily determined to be made first out of income and capital gains upon which RBMC has not been levied ("untaxed" income and capital gains) until all such income cumulatively arising (and not taxed on the arising basis) since the beginning of the first year of United Kingdom residency has been remitted (or, if later, since the beginning of the tax year beginning April 6, 2008). The net effect of this system is that electing resident non-dom taxpayers who remit the entirety of their cumulative non-United Kingdom source income and capital gains will pay no more than the relevant United Kingdom income tax rate[s] times their cumulative pre-foreign tax worldwide net income and capital gains, reduced by any credits for non-United Kingdom source based foreign tax. All other electing resident non-doms will pay a lesser amount of United Kingdom tax. To administer these rules, a system of pools and specific rules will track: (i) the amount of unremitted non-United Kingdom source income and capital gains upon which RBMC has been determined to have been levied, (ii) the amount and character of untaxed unremitted non-United Kingdom source income and capital gains, and (iii) the amount of source based foreign tax associated with untaxed income and capital gains.4 We understand Her Majesty's Treasury estimates that the RBMC will generate approximately 50% of the annual revenues of the tax charged through the remittance basis on non-United Kingdom source income taking into account all proposed revisions to that basis of taxation. In addition, it is expected that a substantial number of resident non-doms who previously filed on a remittance basis will switch to filing on an arising basis. Analysis of Proposal Article 24 of the Treaty provides that the United States shall allow United States residents and citizens a credit against United States federal income tax

4 Subcategories of the pools will track types of income, such as dividends, and the associated

foreign taxes.


for certain taxes paid or accrued to the United Kingdom.5 Section 901 of the Code6 permits United States citizens, resident aliens, and corporations to claim a credit for income, war profits and excess profits taxes (“income taxes”) paid or accrued to a foreign country.7 In addition, a tax imposed in lieu of an income tax otherwise generally imposed by a foreign country is treated as an income tax for section 901 purposes.8 This memorandum discusses whether the RBMC as proposed is creditable under the Treaty or section 901 and, if so, the possible treatment of that credit under the credit limitation rules of section 904 and the Treaty. A. Whether the RBMC is creditable under the Treaty Article 24 of the Treaty provides that the United States "shall allow to a resident or citizen of the United States as a credit against the United States tax on income the income tax paid or accrued to the United Kingdom by or on behalf of such citizen or resident."9 The United Kingdom taxes covered by this provision (the "covered taxes") include: "(i) the income tax; (ii) the capital gains tax; (iii) the corporation tax; and (iv) the petroleum revenue tax,"10 as well as "any identical or substantially similar taxes that are imposed after the date of signature of [the Treaty] in addition to, or in place of, the existing taxes."11 The Treaty provides that "all taxes imposed on total income, or elements of income" shall be regarded as taxes on income and on capital gains, "irrespective of the manner in which they are levied."12 The Technical Explanation of the Treaty describes the remittance basis of taxation as imposing tax "on income from sources outside the United Kingdom . . . to the extent such income is remitted to the United Kingdom."13 Accordingly, the United States Treasury clearly understood the remittance basis of taxation to be a tax on an element of income—income and capital gains from non-United Kingdom sources to the extent remitted. Consequently, we believe that the tax levied on the remittance basis should be viewed as a covered tax, creditable under Article 24. The foregoing analysis should not be affected by the inclusion of the RBMC as a feature of the remittance basis of taxation for the following reasons. We understand that Her Majesty's Treasury and Her Majesty's Revenue & Customs intend to treat the RBMC as a tax covered under the Treaty as part of the remittance basis of taxation. Moreover, the remittance basis of taxation, as amended to include the RBMC, will continue to tax elements of income: remitted non-United Kingdom source income and capital gains and a portion of unremitted non-United Kingdom 5 Treaty Art. 24(1); Art. 2.

6 All section references are to the Code unless indicated otherwise.

7 Section 901(a), (b)(1).

8 Section 903.

9 Treaty Art. 24(1).



12 Treaty Art. 2(1), (2).

13 Technical Explanation at 19 (emphasis added).


source income and capital gains. The RBMC merely adds as an additional element of income that is actually taxed under the remittance basis, an amount of unremitted non-United Kingdom source income and capital gains; it does not alter the character of the tax thereby imposed as a tax on elements of income. Accordingly, we believe that the remittance basis of taxation, as amended to include the RBMC, should be viewed as a covered tax, creditable under Article 24. B. Whether the RBMC is creditable under section 901 Section 901 permits a credit for income taxes paid or accrued (or deemed paid) to a foreign country. Regulations promulgated by the United States Treasury provide detailed guidance on the criteria used to determine whether a foreign levy is an income tax for purposes of section 901.14 As a threshold matter, whether a foreign levy qualifies as an income tax is determined independently for each separate levy imposed by a foreign country.15 In general, to be creditable, a levy must be a tax and its predominant character must be that of an income tax in the United States sense.16 In addition, a tax imposed in lieu of an income tax otherwise generally imposed by a foreign country is treated as an income tax for section 901 purposes.17

i. Whether the RBMC and tax charged on the remittance basis are separate levies

In order to determine whether the RBMC is creditable as an income tax under section 901, it must first be determined whether the RBMC and the remittance basis of taxation are separate levies. Whether a single levy or separate levies are imposed by a foreign country depends on United States federal income tax principles and not on whether foreign law imposes the levy or levies in a single or separate statutes.18 In general, levies are not separate merely because some provisions determining the base of the levy apply, by their terms or in practice, to some, but not all, persons subject to the levy.19 A foreign taxing authority is viewed as imposing separate levies “where the base of a levy is different in kind, and not merely in degree, for different classes of persons subject to the levy.”20 As an example, the Treasury Regulations provide that a foreign levy identical to the tax imposed by section 871(b) (tax on nonresident alien individuals engaged in a trade or business within the United States) is a separate levy from a foreign levy identical to the tax imposed by section 1 (tax on United States citizens

14 Treas. Reg. § 1.901-2.

15 Treas. Reg. § 1.901-2(a)(1) and (d).

16 Treas. Reg. § 1.901-2(a)(1).

17 Section 903.

18 Treas. Reg. § 1.901-2(d)(1).

19 Id.

20 Id.


and resident aliens), as it applies to persons other than those described in 871(b).21 Similarly, foreign levies identical to the taxes imposed by section 11 (tax on income of corporations), section 541 (tax on undistributed personal holding company income), section 881 (tax on income of foreign corporations not effectively connected with the conduct of a trade or business in the United States), section 882 (tax on income of foreign corporations engaged in a trade or business in the United States), section 1491 (excise tax on certain transfers of property, repealed in 1997), and section 3111 (tax on employers) are each separate levies because the base of each of those levies "differs in kind, and not merely in degree, from the base of each of the others."22 The base of the remittance basis of taxation, as currently enacted, is the non-United Kingdom source income and capital gains of resident non-doms who elect to file on a remittance basis. The base of the RBMC, as proposed, is the non-United Kingdom source income and capital gains of resident non-doms who elect to file on a remittance basis and who have been resident for United Kingdom tax purposes in the United Kingdom for seven of the nine tax years prior to making that election. The fact that the RBMC is imposed only on a subset of taxpayers who file on a remittance basis and only on a portion of the income and capital gains which could ultimately be taxed under the remittance basis of taxation does not mean that the levies are separate. The Treasury Regulations state that levies are not separate merely because some provisions determining the base of the levy apply, by their terms or in practice, to some, but not all, persons subject to the levy.23 In addition, there is no difference in tax rates between the RBMC and the tax that would be collected under the remittance basis of taxation. The RBMC and tax charged on the remittance basis are not different in kind like the separate levies listed in the Treasury Regulations; instead, the RBMC is analogous to a minimum inclusion provision of the remittance basis regime. Notably, the Treasury Regulations do not list the Alternative Minimum Tax imposed under section 55 as a separate levy from the taxes imposed under either section 1 or section 11. Accordingly, we believe that the RBMC as proposed and tax charged on the remittance basis should be viewed as part of the same levy.

ii. Whether the remittance basis of taxation, as amended to include the RBMC, gives rise to an income tax or a tax in lieu of an income tax for United States purposes

A foreign levy is an income tax if and only if (i) it is a tax, and (ii) the

predominant character of that tax is that of an income tax in the United States sense.24 A foreign levy is a tax in lieu of an income tax only if (i) it is a tax, and (ii) it is in substitution for an income tax. Whether tax charged on the remittance basis, as

21 Id.

22 Id.

23 Id.

24 Treas. Reg. § 1.901-2(a)(1).


amended to include the RBMC, meets either of these sets of requirements is addressed below.

a) Whether tax charged on the remittance basis, as

amended to include the RBMC, is a tax

A foreign levy is a tax if it requires a compulsory payment pursuant to the authority of a foreign country to levy taxes.25 Whether a foreign levy requires a compulsory payment pursuant to a foreign country's authority to levy taxes is determined by principles of United States federal income tax law and not by principles of law of the foreign country.26 Notwithstanding any assertion of a foreign country to the contrary, a foreign levy is not pursuant to a foreign country's authority to levy taxes, and thus is not a tax, to the extent a person subject to the levy receives (or will receive), directly or indirectly, a specific economic benefit from the foreign country in exchange for payment of the levy.27 For this purpose, a "specific economic benefit" is an economic benefit that is not made available on substantially the same terms to substantially all persons who are subject to the income tax that is generally imposed by the foreign country.28 An economic benefit includes property, a service, a fee or other payment, a right to use, acquire or extract resources, patents, or other property that a foreign country owns or controls, or a reduction or discharge of a contractual obligation.

Tax charged on the remittance basis, as amended to include the

RBMC, will be levied by the United Kingdom government pursuant to its authority to levy taxes. For those who are subject to the remittance basis of taxation (i.e., those who elect to file on a remittance basis), payment is compulsory. The fact that a taxpayer may elect between one of two levies does not mean that either of the levies is not compulsory for this purpose. For example, in Rev. Rul. 73-588,29 the IRS ruled that a certain Greek tax was a tax in lieu of an income tax under section 903. The taxpayer had elected to be subject to the tax in question rather than the otherwise generally applicable income tax. As described below, to be a tax in lieu of an income tax, a levy must be a "tax" under Treas. Reg. § 1.901-2(a)(2)(i). Accordingly, implicit in this ruling is that a levy is no less compulsory because a taxpayer elects to pay it in lieu of another tax.

In addition, tax charged on the remittance basis is not imposed in

exchange for a "specific economic benefit" of the type listed in the Treasury Regulations; the only economic benefit that may inure to a remittance basis taxpayer is a potentially reduced tax liability compared to filing on an arising basis. Clearly, a reduction in tax liability is not property, a service, a fee or other payment, a right to use, acquire or extract resources, patents, or other property that a foreign country owns or controls, or a reduction or discharge of a contractual obligation. Accordingly, we believe the remittance basis of taxation, as amended to include the

25 Treas. Reg. § 1.901-2(a)(2)(i).

26 Id.

27 Id.

28 Treas. Reg. § 1.901-2(a)(ii)(B).

29 1973-2 C.B. 268.


RBMC, should be viewed as requiring "a compulsory payment pursuant to the authority of a foreign country to levy taxes" and thus as a tax.

b) Whether the predominant character of tax charged on the remittance basis, as amended to include the RBMC, is that of an income tax in the United States sense

If a levy is a tax, it is creditable if it has the predominant character of

an income tax in the United States sense.30 The predominant character of a foreign tax is that of an income tax in the United States sense if it is likely to reach net gain in the normal circumstances in which it applies, and liability for the tax is not dependent on the availability of a credit for the tax against income tax liability to another country.31 Liability for tax charged on the remittance basis, as amended to include the RBMC, is not dependent on the availability of a credit for the tax against income tax liability to another country. Accordingly, whether tax charged on the remittance basis, as amended to include the RBMC, has the predominant character of an income tax in the United States sense depends on whether it is likely to reach net gain in the normal circumstances in which it applies.

A foreign tax is likely to reach net gain in the normal circumstances in which it applies if and only if the tax, judged on the basis of its predominant character, satisfies each of three requirements: the realization, gross receipts, and net income requirements.32

A foreign tax satisfies the realization requirement if, judged on the basis of its predominant character, it is imposed upon or subsequent to the occurrence of events ("realization events") that would result in the realization of income under the income tax provisions of the Code.33 In addition, a foreign tax may satisfy the realization requirement if it is imposed upon the occurrence of an event prior to a realization event and certain other requirements are met.34 Tax charged on the remittance basis, as amended to include the RBMC, is imposed only at or after the time income or capital gains arise: when remitted or, in the case of the RBMC, prior to remittance but still at or after the time the income or capital gains arise. We understand that the predominant character of the concept of income and capital gains arising in the United Kingdom is equivalent to the concept of income and capital gains earned by or accrued to a taxpayer in the United States sense. Accordingly, because the remittance basis of taxation as amended to include the RBMC is imposed only at or after the time income or capital gains arise, we believe it should meet the realization requirement.

A foreign tax satisfies the gross receipts requirement if, judged on the basis of its predominant character, it is imposed on the basis of gross receipts or gross receipts computed under a method that is likely to produce an amount that is not

30 Treas. Reg. § 1.901-2(a)(1)(ii).

31 Treas. Reg. § 1.901-2(a)(3).

32 Treas. Reg. § 1.901-2(b)(1).

33 Treas. Reg. § 1.901-2(b)(2)(i)(A).

34 Treas. Reg. § 1.901-2(b)(2)(i)(B), (C)


greater than fair market value.35 Tax charged on the remittance basis, as amended to include the RBMC, will be levied on non-United Kingdom source income and capital gains remitted to the United Kingdom and that amount of unremitted non-United Kingdom source income and capital gains of individuals resident for seven of the nine prior tax years that, if remitted, would produce a £ 30,000 tax liability. This computation is "likely to produce an amount that is not greater than fair market value." Only remittances of receipts less expenses paid and net capital gains are subject to tax charged on the remittance basis, and, accordingly, the tax thus charged is levied on an amount likely to be not greater than a taxpayer's gross receipts. Additionally, taxpayers can establish that remittances are not out of gross receipts by showing, for example, that any particular remittance is attributable to a return of capital or to earnings prior to the beginning of United Kingdom residency. Accordingly, we believe the remittance basis of taxation, as amended to include the RBMC, should be viewed as predominantly imposed on the basis of gross receipts calculated in a manner likely to produce an amount that is not greater than fair market value.

A foreign tax satisfies the net income requirement if, judged on the basis of its predominant character, the base of the tax is computed by reducing gross receipts to permit recovery of either (i) the significant costs and expenses (including significant capital expenditures) attributable, under reasonable principles, to such gross receipts, or (ii) such significant costs and expenses computed under a method that is likely to produce an amount that approximates, or is greater than, recovery of such significant costs and expenses.36 The remittance basis of taxation generally allows the same deductions and credits for particular types of income and capital gains as those allowable under the arising basis of taxation.37 For example, remittances of business profits are taxed after a deduction of allowable expenses. Similarly, the RBMC will be levied on income and capital gains after allowing those credits and deductions that would be allowable had such income and capital gains been taxed on the arising basis. Accordingly, we believe the remittance basis of taxation, as amended to include the RBMC, should satisfy the net income requirement and therefore should be viewed as having the predominant character of an income tax in the United States sense.

c) Whether the remittance basis of taxation, as amended to include the RBMC, is a tax in lieu of an income tax

Even if tax charged on the remittance basis, as amended to include the

RBMC, is not treated as a tax the predominant character of which is an income tax in the United States sense, it will still be creditable under section 901 if it is determined to be a tax imposed in lieu of an income tax under section 903. Section 903 treats a tax imposed in lieu of an income tax otherwise generally imposed by a foreign country as an income tax for section 901 purposes.38 To qualify as a tax “in lieu of” 35 Treas. Reg. § 1.901-2(b)(3).

36 Treas. Reg. § 1.901-2(b)(4).

37 Taxpayers who file on the remittance basis are not entitled to certain income tax personal allowances or the annual exemption for chargeable capital gains which are available to United Kingdom resident taxpayers who file on an arising basis.

38 Section 903.


an income tax, the foreign levy must be a tax and must be “imposed in substitution for, and not in addition to, an income tax or series of income taxes otherwise generally imposed.”39 As discussed in Part B.ii.a) of this memorandum, tax charged on the remittance basis, as amended to include the RBMC, should be treated as a tax. Accordingly, whether tax charged on the remittance basis, as amended to include the RBMC, is a tax in lieu of an income tax depends on whether that tax is imposed in substitution for an otherwise generally imposed income tax.

In determining whether tax charged on the remittance basis, as

amended to include the RBMC, is a tax in lieu of an income tax, the relevant "otherwise generally imposed" income tax is tax charged on the arising basis. The remittance basis of taxation, as amended to include the RBMC, and the arising basis of taxation are alternative bases of taxation and do not apply to tax the same items of income and gain. In particular, the remittance basis of taxation cannot give rise to tax on funds that have been previously taxed on the arising basis. Similarly, the arising basis of taxation cannot tax items of income or capital gains that have been taxed on a remittance basis. In addition, all income and capital gains taxed on the remittance basis are income and capital gains that would alternatively have been subject to tax on an arising basis. Thus, the remittance basis of taxation does not add to the tax that would have been collected on an arising basis, but instead is an entirely alternative basis of taxation. Accordingly, if tax charged on the remittance basis, as amended to include the RBMC, is not treated as having the predominant character of an income tax in the United States sense, we believe it should be viewed as tax imposed in substitution for income tax collected on an arising basis and therefore as a tax paid in lieu of an income tax.

iii. Whether the RBMC, if treated as a separate levy from the tax

charged on a remittance basis, is an income tax As described in Part B.ii. of this memorandum, a foreign levy is an

income tax if and only if (i) it is a tax, and (ii) the predominant character of that tax is that of an income tax in the United States sense. A foreign levy is a tax in lieu of an income tax only if it (i) is a tax and (ii) is in substitution for an income tax. Whether the RBMC, if treated as a separate levy from tax charged on the remittance basis, meets either of these sets of requirements is addressed below.

a) Whether the RBMC, if treated as a separate levy from the tax charged on the remittance basis, is a tax

As described in Part B.ii.a) of this memorandum, a foreign levy is a tax

if it requires a compulsory payment pursuant to the authority of a foreign country to levy taxes.40 The same reasoning that indicates that tax charged on the remittance basis, if determined to include the RBMC, is a tax suggests that the RBMC standing alone is also a tax. The RBMC will be levied by the United Kingdom government pursuant to its authority to levy taxes. For those who elect the remittance basis, and who have been United Kingdom tax residents for seven of the prior nine tax years, the RBMC will be compulsory. The fact that such a taxpayer elects the remittance basis does not mean that payment of the RBMC is not compulsory. Also, as previously 39 Treas. Reg. §1.903-1(a), (b).

40 Treas. Reg. § 1.901-2(a)(2)(i).


discussed, the RBMC will not be chargeable in exchange for a specific economic benefit. Accordingly, we believe the RBMC, if treated as a separate levy from tax charged on the remittance basis, should meet the definition of a tax.

b) Whether the predominant character of the RBMC, if

treated as a separate levy from the tax charged on the remittance basis, is that of an income tax in the United States sense

As described in Part B.ii.b) of this memorandum, a levy is creditable,

in addition to being a tax, only if the levy has the predominant character of an income tax in the United States sense.41 The predominant character of a foreign tax is that of an income tax in the United States sense if it is likely to reach net gain in the normal circumstances in which it applies and liability for the tax is not dependent on the availability of a credit for the tax against income tax liability to another country.42 Liability for the RBMC, if treated as a separate levy from the tax charged on the remittance basis, is not dependent on the availability of a credit for the tax against income tax liability to another country. Accordingly, whether the RBMC, if treated as a separate levy from the tax charged on the remittance basis, has the predominant character of an income tax in the United States sense depends on whether it is likely to reach net gain in the normal circumstances in which it applies.

As described in Part B.ii.b) of this memorandum, a foreign tax is likely

to reach net gain in the normal circumstances in which it applies if and only if the tax, judged on the basis of its predominant character, satisfies each of three requirements: the realization, gross receipts, and net income requirements.43 The RBMC, if treated as a separate levy from the tax charged on the remittance basis, arguably meets the realization requirement because it is levied only at or after the time income or capital gains have arisen or accrued to the taxpayer. The RBMC, if treated as a separate levy from the tax charged on the remittance basis, arguably meets the gross receipts requirement because it is imposed on the basis of gross receipts computed in a manner likely to reach no more than fair market value in normal circumstances: taxpayers will generally not elect to file on a remittance basis and pay the RBMC where doing so would reach more than gross receipts because in such a case the arising basis would produce a lower liability.44 Taxpayers who erroneously choose the more expensive levy will be allowed one year to change their election retroactively. Therefore, overall, the RBMC, if treated as separate from the tax charged on the remittance basis, is arguably imposed on the basis of gross receipts calculated so as likely to produce an amount that is not greater than fair market value. Finally, the RBMC, if treated as a separate levy from the tax charged on the remittance basis, arguably meets the net

41 Treas. Reg. § 1.901-2(a)(1)(ii).

42 Treas. Reg. § 1.901-2(a)(3).

43 Treas. Reg. § 1.901-2(b)(1).

44 Under the Treasury Regulations, amounts paid in excess of a taxpayer's liability under foreign law (determined so as to reduce, over time, the taxpayer's expected liability under foreign law), are not amounts of tax paid. Treas. Reg. § 1.901-2(e)(5). Accordingly, a taxpayer who elects to file on a remittance basis for a particular year and pay the RBMC and whose tax liability for that year is, as a result, more than it would have been on an arising basis, may be treated as having paid only the amount of tax that would have been due under the arising basis.


income requirement because, as described Part B.ii.b) of this memorandum, the RBMC will be levied on income and capital gains after allowing those credits and deductions that generally would be allowable had such income and capital gains been taxed on the arising basis. Accordingly, we believe the RBMC, if treated as a separate levy from the tax charged on the remittance basis, arguably has the predominant character of an income tax in the United States sense.

c) Whether the RBMC, if treated as a separate levy from

the tax charged on the remittance basis, is a tax in lieu of an income tax

As discussed in Part B.iii.a) of this memorandum, the RBMC, if

treated as a separate levy from tax charged on the remittance basis, is a tax. Accordingly whether the RBMC, if treated as a separate levy from the tax charged on the remittance basis, is a tax in lieu of an income tax depends on whether that tax is imposed in substitution for an otherwise generally imposed income tax or series of income taxes.

In determining whether the RBMC, if treated as separate from the tax charged on the remittance basis, is a tax in lieu of an income tax, the relevant "otherwise generally imposed" bases of income tax are the arising basis and the remittance basis. The RBMC would not tax income or capital gains which have been taxed either under the arising basis or (if regarded as separate from the RBMC) the remittance basis. The RBMC taxes unremitted non-United Kingdom source income and capital gains; the remittance basis of taxation only applies to remitted non-United Kingdom source income and capital gains that have not previously been taxed. Similarly, income and capital gains previously taxed by the RBMC are by definition never taxed on an arising basis because the RBMC can only be incurred in situations where a taxpayer elects for remittance basis in respect of his or her income and capital gains in any tax year. In addition, all income and capital gains taxed by the RBMC are income and capital gains that would alternatively have been subject to tax on a remittance basis or on an arising basis. Accordingly, the RBMC does not add to any tax chargeable on the arising basis or remittance basis but instead partially replaces them. The RBMC therefore is arguably imposed in substitution for otherwise generally imposed income taxes and arguably meets the definition of a tax paid in lieu of an income tax.

C. Limitation on the use of credits for the RBMC under the Code and the Treaty

In general, section 904 provides that the total amount of credit allowable under section 901 shall not exceed the same proportion of the tax against which such credit is taken as the taxpayer's specified taxable income from sources without the United States (but not in excess of the taxpayer's entire taxable income) bears to his or her entire taxable income for the same taxable year.45 The limitation is determined separately for passive category income and general category income.46

45 Section 904(a).

46 Section 904(d)(1). In general, passive category income is any income received or accrued by any person which is of a kind which would be foreign personal holding company income as defined in section 954(c). This includes, for example, dividends, interest, rents and royalties unless derived


This limitation effectively caps the rate of foreign tax that can be used as a credit against either passive category income or general category income that is non-United States source income to a taxpayer's average effective rate of United States federal income tax (before foreign tax credit) on total taxable income. Because of the benefits of 15% tax rates on certain dividends and capital gains and the potential benefit of lower than 35% marginal rates on certain levels of other income, most United States individuals can only utilize foreign tax credits at a rate significantly below 35%. Given that the RBMC is imposed at an 18% rate on capital gains and a rate up to 40% on income, a United States citizen will generally not be able to take a credit against his or her United States federal income tax for the full amount of RBMC paid unless that citizen has other foreign source income in the same category taxed at a relatively low foreign tax rate. Any foreign tax, including RBMC, that cannot be taken as a credit in the year it is paid or accrued can be carried back one year and carried forward ten years for use against tax on income in the same category in that other year.

To aid in understanding the ability of United States citizens to take a

credit against United States federal income tax for the RBMC, this Part C. discusses (i) the allocation and apportionment of the RBMC to categories of income; (ii) the use of the RBMC as a credit against non-United States source income under the Code; (iii) the use of the RBMC as a credit against United States source income under the Treaty; and (iv) the effect of the difference in taxable year between the United States and the United Kingdom.

i. Allocation and apportionment of the RBMC to categories of

income In general, for United States credit purposes, the amount of foreign

taxes paid or accrued with respect to a separate category of income (including United States source income) includes only those taxes that are related to income in that separate category.47 For this purpose, taxes are related to income if the income is included in the base upon which the tax is imposed.48 For example, if foreign law provides for a specific rate of tax with respect to a certain type of income (e.g., capital gains), or if certain expenses, deductions, or credits (including foreign tax credits) are allowed under foreign law only with respect to a particular type of income, each such type of income is a separate base for purposes of determining the amount of foreign tax imposed on such income. 49 A tax imposed on a base that includes more than one separate category of income is considered to be imposed on income in all such categories, and, thus, the taxes are related to all such categories included within the foreign country's taxable income base. 50 A tax related to a base that includes more

in the active conduct of a trade or business, certain capital gains, and income from notional principal contracts. General category income is any income that is not passive category income. Section 904(d)(2)(A)(ii).

47 Treas. Reg. § 1.904-6(a)(1)(i).

48 Id.

49 Id.

50 Id.


than one separate category is apportioned among the separate categories in proportion to the relative amount of net income in each separate category.51

Under these rules, the RBMC arguably should be treated as related

only to those types of income of the taxpayer (and to those amounts of each) actually designated by the taxpayer as the unremitted income or capital gains upon which the RBMC is levied. It is also possible, however, that the United States Treasury and IRS may not respect the taxpayer's designation as determinative for these purposes. In such a case, the RBMC might be allocated to each type of income in proportion to the United Kingdom tax charged on the remittance basis that would be levied on each type of income if income and capital gains were fully remitted. Alternatively, the RBMC could be simply apportioned among all categories of taxable income other than United Kingdom source income (i.e., income and capital gains that are taxed on a remittance basis only), although such an apportionment would seem inconsistent with the allocation provisions of Treas. Reg. § 1.904-6(a)(1)(i) given the differences in tax rates on capital gains and other income and the availability of foreign tax credits against RBMC with respect to some but not necessarily all income. The determination of the appropriate allocation and apportionment of the RBMC under the Treasury Regulations is important to United States citizens because of the limitations on the use of foreign tax credits discussed below, including most importantly the limitations on the use of such credits against United States source income under the Treaty.

ii. The use of the RBMC as a credit against non-United States

source income under the Code Any RBMC allocated or apportioned to general category income for

United States purposes will be allowed as a credit up to the average effective rate of United States federal income tax on all income within the general category and taking into account all foreign taxes attributed or apportioned to that income. With respect to passive category income, the Code and the applicable Treasury Regulations provide a special rule under which income received or accrued by a United States person that would otherwise be passive category income is treated as general category income if the income is determined to be high-taxed income.52 In general, income of a United States person is considered to be high-taxed income if, after allocating expenses, losses and other deductions of the United States person to the income, the sum of the foreign income taxes paid or accrued by the United States person with respect to the income exceeds the highest rate of tax specified in section 1 (applicable to individuals) or section 11 (applicable to corporations), whichever applies, multiplied by the amount of such income.53 To make this determination, items of income are assigned to one of four groups: (i) all passive income that is subject to a withholding tax of fifteen percent or greater, (ii) all passive income that is subject to a withholding tax of less than fifteen percent (but greater than zero); (iii) all passive income that is subject to no withholding tax or other foreign tax; and (iv) all passive income that is subject to no withholding tax but is subject to a foreign tax other than a withholding

51 Treas. Reg. § 1.904-6(a)(1)(ii).

52 Section 904(d)(2)(F); Treas. Reg. § 1.904-4(c)(1).

53 Id.


tax.54 RBMC that is treated as levied on passive income not subject to withholding will be allocated to this fourth group; such income will likely constitute high-taxed income to the extent the RBMC rate of tax exceeds the highest marginal rate of tax imposed by the United States on United States citizens. Passive income that is subject to withholding will be allocated to one of the first two groups, regardless of whether the RBMC has been levied on it. Whether that income will be treated as high-taxed income will depend on what other income is included in that group and the amount of foreign tax allocated or apportioned to that other income.

iii. The use of the RBMC as a credit against United States source

income under the Treaty Paragraph 6 of Article 24 of the Treaty provides special rules for the

taxation of certain types of income derived from United States sources by United States citizens who are residents of the United Kingdom.55 The practical effect of paragraph 6 is that United States citizens resident in the United Kingdom are taxed on income from United States sources as follows. First, the United States is entitled to tax the taxpayer's income from United States sources to the extent the United States would have imposed tax had the income been paid to or earned by a resident of the United Kingdom, taking into account any reduced rates of taxation available under the Treaty to such United Kingdom residents (the "United States source-based tax"). Second, the United Kingdom is entitled to tax the taxpayer's United States source income but must give a credit for the United States source-based tax (the "United Kingdom residency-based tax"). Third, the United States is entitled to tax the taxpayer's United States source income but the incremental United States federal income tax liability on such income is reduced by the amount of United States source-based tax on such income as considered above (the "United States citizenship-based tax"). The United States then provides a credit against this United States citizenship-based tax for the United Kingdom residency-based tax, but only to the extent such United Kingdom tax does not exceed the United States citizenship-based tax. Finally, United States source income is re-sourced as United Kingdom source income to the extent the United States provides a credit for the United Kingdom residency based tax.

Applying these rules, United States taxpayers will generally credit the

RBMC against United States citizenship-based tax to the extent the RBMC may be allocated to certain United States source investment income and capital gains, because there is no or relatively low United States source-based tax on such income and capital gain.56 The credit, however, will often be limited to an amount less than the RBMC because the United Kingdom rates of tax on these types of income currently exceed the average United States effective tax rates at which foreign tax credits are allowed. Moreover, to the extent the United States treats the RBMC as allocable to United States source business profits attributable to a permanent establishment in the United States or to gain on the sale of real estate located in the United States, no credit 54 Treas. Reg. § 1.904-4T(c)(3).

55 The United Kingdom is not bound to provide a credit for United States federal income taxes with respect to income from sources without the United States, as determined under United Kingdom law. Treaty Art. 24(6)a).

56 It may not be possible to credit the RBMC against United States source dividend income of United States citizens who are eligible to be taxed at a 15% rate under section 1(h)(11).


will likely be allowed, because the United States federal income tax on such income is levied on the basis of source and not citizenship.

iv. The effect of the difference in taxable year between the United

States and the United Kingdom The taxable years of individuals in the United States and United Kingdom are different: in the United States it is the calendar year (that is, January 1 through December 31); in the United Kingdom it is April 6 through April 5. Because the RBMC may not be due until approximately nine months after the end of the United Kingdom tax year, it is possible that it will not be paid until the second tax year (for United States federal income tax purposes) following the tax year in which a portion of the taxed income was earned for United States federal income tax purposes. The Treasury Regulations provide that, in allocating taxes between passive category income and general category income, the nature of the income taxed determines the allocation even if the income was taxed in a different period.57 Although the Treaty is silent on this issue with respect to re-sourcing under paragraph 6 of Article 24, parallel concepts could be applied. Thus, the re-sourcing rule in the Treaty could re-source the unremitted income upon which the RBMC has been levied even if it is earned in an earlier tax year (for United States federal income tax purposes) than the year in which the RBMC is paid or accrues. With respect to non-United States source income and particularly with respect to United States source income that is re-sourced under the Treaty, United States taxpayers who claim foreign tax credits on a paid basis will need to manage tax payments to make sure that when the RBMC is paid it can be carried back to the year in which the income to which it is attributed for United States federal income tax purposes was earned. Concluding Views

We expect that the United States Treasury and IRS will in due course provide authoritative guidance on some or all of the issues analyzed above, which guidance may well have retroactive effect. Based on our analysis and subject to the limitations on the use of credits described herein, it is our view that under current United States law (including the Treaty), and in the absence of such guidance, the RBMC should be treated, for United States federal income tax purposes, as a foreign tax creditable against United States federal income tax. However, given the limitations on the use of foreign tax credits against United States federal income tax provided in the Code and the Treaty, and, more importantly, given that the rates at which the RBMC will be generally imposed is currently higher than the average effective United States federal income tax rate of individuals, most United States citizens will not be able to credit against their United States federal income tax all of the RBMC they pay. The portion of RBMC that cannot be used as a credit will vary depending on a number of factors, including the amount and character of the income of any particular United States citizen and on the resolution of various interpretative issues under Treasury Regulations and the Treaty described above.

SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP

57 Treas. Reg. § 1.904-6(a)(1)(iv).

Date post:	13-Nov-2014
Category:	Documents
Upload:	davidclee
View:	93 times
Download:	4 times