1. General news
1.1. Office of Tax Simplification review of reliefs
As announced at Budget 2011, and following consultation over the summer, legislation will be included in Finance Bill 2012 to abolish the following provisions from 6 April 2013 (1 April 2013 for corporation tax elements and harbour reorganisation schemes):
- mineral royalties;
- SDLT disadvantaged areas relief – this currently consists of a relief in respect of residential property purchases of up to £150,000 and a transitional relief in respect of non-residential property purchases made before 17 March 2005 (the relief was abolished from that point for non-residential properties). The conclusion of the consultation is that the relief for residential property purchases will be abolished in its entirety from April 2013, but the transitional relief for non-residential property purchase contracts entered into before 17 March 2005 is retained;
- grants for giving up agricultural land;
- Angostura bitters;
- Black Beer;
- luncheon vouchers;
- relief on certain payments arising from a reduction in pool betting duty;
- stamp duty: relief on certain transactions in shares;
- tax reserve certificates issued by HM Treasury;
- payments for the benefit of family members;
- capital allowances: safety at sports grounds;
- capital allowances: flat conversion allowances;
- stamp duty: reliefs for certain transactions in land;
- harbour reorganisation schemes; and
- pensions for 1947 redundancies.
Legislation will be included in Finance Bill 2012 to abolish the following provisions and to repeal the relief from 6 April 2015 (1 April 2015 for corporation tax elements):
- deeply discounted securities;
- life assurance premium relief; and
- life assurance premiums paid by employers under an employer-financed retirement benefit scheme (EFRBS).
Legislation will be introduced in a future National Insurance Contributions Bill to abolish the provision covering deduction for certain losses from income other than from a trade or profession or vocation for Class 4 NIC purposes.
Regulations will be made to abolish the provisions set out below effective from 6 April 2012:
- Class 1 NICs exemption for certain apprentices and students coming to the UK;
- Class 1A NICs exemption for prescribed general earnings; and
- certain payments to mariners to be disregarded for Class 1 NICs.
Regulations will be made to abolish the provisions set out below effective from 6 April 2013:
- cycle to work days: provision of meals;
- luncheon vouchers: exemption from Class 1 NICs
The summary of responses claims that "The repeal of these reliefs will result in the removal of over 100 pages of tax legislation". Sadly the "Overview of legislation in draft form" and the "Finance Bill 2012 draft clauses and explanatory notes" amounted to 1,045 pages. Consequently the Finance Act 2012 will no doubt substantially widen the gap between UK and India in "the longest tax code in the world" stakes, and whilst it's good to win something these days this is not an accolade that the country should be proud of.
www.hm-treasury.gov.uk/d/condoc_responses_tax_reliefs.pdf
1.2. Agent Strategy - Consultation on proposals for engaging with tax agents
HMRC has issued the following briefing note on the consultation "Establishing the future relationship between the tax agent community and HM Revenue & Customs" . "The consultation sought views on HMRC's proposals for:
- Secure enrolment of tax agents to differentiate between those in business and those in the voluntary sector or acting for friends and family.
- Providing agents with the ability to self serve basic transactions on behalf of their clients without HMRC involvement.
- The creation of an "agent view" to bring together information about agents and their clients on HMRC systems and enable HMRC to provide support and target communications where they are needed.
- Maintaining and improving standards for the minority of agents whose performance falls short of what might reasonably be expected.
What agents told HMRC
In general responses to the consultation showed that agents were supportive of HMRC's proposals for enrolment and would welcome the ability to self serve.
Agents did however want to know how enrolment would work in a multi office/multi location firm and some wondered about the robustness of HMRC systems and the security needed to enable agents to self serve.
A number of respondents expressed concern that the agent view was a step towards regulation "by the back door" and many considered that professional body membership and commitment to Continuing Professional Development (CPD) were an indication of firms wanting to get things right.
The question of formal qualifications elicited the most responses and some strong views with many agents saying that HMRC should seek to accommodate agents who are "qualified by experience" as well as those with formal qualifications. There was overwhelming support for independent oversight and safeguards for any sanctions HMRC might seek to impose if agents were considered to be acting unprofessionally.
A number of respondents also agreed that there should be different and simpler processes to enable Voluntary and Community Sector organisations and those acting for friends and family to do business with us. (A programme of work to make it cheaper and easier for unpaid agents to contact HMRC is already underway).
Next Steps
HMRC will work collaboratively with the agent community and the representative bodies to ensure that any proposals are properly tested to meet the needs of both agents and HMRC.
During late Spring 2012 HMRC will pilot a number of the proposals in the agent strategy with a group of volunteer agent firms. They will look in more detail at the practical steps for designing an enrolment process and influence the extent and pace of introduction of self serve.
HMRC has taken account of agents' concerns about the agent view and improving standards and we expect this work to proceed on a slower track to ensure that we get things right.
By mid 2012 we plan to create a concept model of the agent view to illustrate how we might bring together and use information about agents and their clients. In 2012 we will also consult further on standards and oversight of the profession.
Improving Service Standards
The important work set in train as a result of HMRC's Chairman/senior leaders meeting with representatives from the professional bodies and the Voluntary Sector to discuss improving service standards will continue alongside the agent strategy work.
Dishonest Conduct
As announced in Budget 2011 and following consultation over the summer, legislation will be introduced in Finance Bill 2012 to address dishonest tax agents."
1.3. Budget 2012 will take place on Wednesday 21 March
HM Treasury has announced (via Twitter) that Budget 2012 will take place on Wednesday, 21 March 2012.
1.4. High-risk tax avoidance schemes
At Budget 2011 the Government announced a consultation on a proposed measure to tackle the use of high risk tax avoidance schemes by 'listing' certain schemes in regulations and attaching certain consequences to the use of those schemes, primarily an 'additional charge' on tax underpaid as a consequence of using a listed scheme.
The consultation responses indicated that it would be difficult to implement the proposed measure, at least in its current form, in a way that was both effective and proportionate. Consequently, the proposed measure will not be included in Finance Bill 2012.
The Summary of Responses indicates that Government will continue to explore new options for strengthening the anti-avoidance strategy in relation to high risk schemes, to change the economics of avoidance and make the use of these schemes less attractive. The Government will provide an update at Budget 2012.
1.5. HMRC reviews and First Tier Tribunal appeals
HMRC has published statistical information on reviews for 2010/11 (with comparisons for the previous year).
www.hmrc.gov.uk/complaints-appeals/internal-review-process.pdf?WT.ac=APPEALS_Internal_review.
The analysis is divided into outcomes for non penalty cases, for VAT penalty cases and for other penalty cases. The trend shows an increasing proportion of reviews concerning VAT penalty cases being cancelled. Statistics on First Tier Tax Tribunal cases are usefully summarised by Anne Fairpo at:
www.ip-tax.com/2011/07/ot-uk-tax-tribunal-statistics-2/
In 2010/11 year to 31 March, 8,900 appeals were received and 6,100 appeals were disposed of. There were 17,500 appeals outstanding at the end of 2010/11. It is understood around 12,500 of these appeals were 'stayed' or 'sisted' (i.e. put on hold indefinitely), awaiting a lead decision, and the majority of these behind two VAT cases (one of which being an MTIC case).
2. Private Clients
2.1. Reform of the taxation of non-domicilied individuals
The Government has published its response to the feedback generated over the summer from its Reform of the taxation of non-domiciled individuals: a consultation along with draft legislation to be included in the Finance Bill 2012. However the draft legislation is not complete and further provisions which will be effective from 2012/13 will be available next year and additional changes may be introduced for 2013/14 onwards.
The Government has clearly listened to the concerns raised as to the restrictive nature of some of the initial proposals to encourage investment in the UK. However the exemption for making tax free remittances for investment is still relatively restricted.
The Government has again stated it does not intend to change the broad principles behind the existing tax system for non-doms during the life of this Parliament.
Increase in the Remittance Basis Charge (RBC) to £50,000
As from 6 April 2012 the RBC will be increased to £50,000 for those non-dom taxpayers who have been in the UK for 12 out of the previous 14 years. This will first apply to any non-dom who came to the UK before 6 April 2001 and has remained here since then.
The existing £30,000 charge will apply to non-doms who have been in the UK for 7 out of the previous 9 tax years until such time as the £50,000 charge becomes relevant for them.
The Government has committed not to increase the level of the RBC during the current Parliament which will end in May 2015 at the latest. This commitment is welcome.
Remitting Funds to the UK for investment
Any untaxed foreign income or gains that are remitted to the UK to make a 'qualifying investment' will not be taxed unless and until a specific event occurs and then only if the funds are not then taken overseas or reinvested within a strict time period. Several modifications to the original proposals have been made. A 'qualifying investment' will be broadly as follows:
- Structure of business - Investment must be in a private limited company. There is no restriction to UK companies and whilst the company must not be fully listed it can be quoted on exchange-regulated markets such as AIM or PLUS quoted. Investment can be by way of the issue of shares or securities or as a loan.
- Type of business - The company must be 'trading' although up to 20% of the activities can be non qualifying activities. Companies existing wholly for the purposes of investing in such trading companies can also qualify. There appears to be no minimum. shareholding required. Trading activities include the development and letting of commercial property and the development of residential property as well as research and development activities.
- Source of funds - The investment can be by any 'relevant person' which includes the individual, certain family members, a trust or company where the investment would otherwise be taxable as a remittance by the non-dom. There is no restriction to the size of the investment.
- Connection with the - The non-dom and their family can be employed in the business and draw business commercial remuneration. There are anti-avoidance rules to prevent the non-dom deriving non arm's length benefits.
- Sale of business - The remitted funds must be exported from the UK or reinvested within 45 days of a specified event such as a sale, otherwise the initial investment will be treated as being remitted and taxable. This is a welcome extension to the proposed requirement to export funds within 2 weeks.
Although the draft legislation does not currently allow investments in partnerships the relief may be widened to include them from April 2013. Investment in sole trades will not qualify. It is disappointing that investments in fully listed companies will not be eligible for relief.
The Government acknowledges that a pre-clearance procedure would be helpful to potential non-dom investors and it is hoped this will be available.
The Government has confirmed that a claim for relief by a non-dom will not affect entitlement to other UK reliefs such as EIS or VCT reliefs, provided that the relevant conditions are met. It is hoped that investment in the new Seed Enterprise Investment Scheme (SEIS) will also qualify.
This confirmation means that this relief could be very valuable in that untaxed funds can be remitted to the UK by a non-dom and invested in such a way so as to reduce the tax payable on UK income and gains. After two years the investment should also be exempt from UK inheritance tax.
If the initial remittance is treated as being taxable at a later stage and it came from an offshore 'mixed fund' there are complex rules to determine which foreign income and gains are treated as remitted to the UK.
Other non-dom tax rule changes
- Works of art - There will not be a remittance if assets, such as works of art are brought to the UK and sold, provided all the proceeds are exported within 45 days of the proceeds being received (which must be within 95 days of the sale). Alternatively the funds can be invested in a 'qualifying investment'. It is intended that the gain on sale of the asset will be treated as a foreign gain (rather than exempted) so that it will only be taxable if the proceeds are later remitted. This is extremely welcome and should help to encourage the UK auction market as intended.
- Nominated income - The procedure is to be simplified.
- Employees not ordinarily resident - Legislation to replace the existing concession relating to employees who are resident not ordinarily resident will be introduced from 6 April 2013.
2.2. Statutory Residence test
The anticipated publication of the Government's response to the recent consultation on tax residence and the statutory residence test (SRT) has been postponed.
The Government has announced that the consultation raised a number of detailed issues which will require careful consideration to ensure the legislation achieves its important aim of providing certainty for individuals and businesses.
The Government is committed to the form of the SRT outlined in consultation and will publish around Budget 2012 its response to the points raised followed by further consultation on policy detail and draft legislation. It will then legislate for the SRT in Finance Bill 2013 to take effect from April 2013 rather than April 2012. It also intends to introduce any reforms to ordinary residence at the same time.
2.3. Capital gains tax: foreign currency bank accounts
At Budget 2011 the Government announced that it would include measures to simplify aspects of the current remittance basis rules to remove undue administrative burdens.
As part of this, it will introduce legislation in Finance Bill 2012 which will exempt from capital gains tax (CGT) the withdrawals of money from foreign currency bank accounts on or after 6 April 2012. From this date onwards, capital gains arising on these withdrawals will not be liable to CGT, and capital losses will not be allowable losses.
This change is a welcome simplification and also provides for a tax planning opportunity with regards to the timing of when gain/losses are crystallised.
Note that foreign currency bank accounts do not include money market funds, or similar, and so withdrawals of money from the latter will continue to be subject to CGT. The exemption applies to individuals, trustees and personal representatives of deceased persons, and not to companies.
2.4. ISA reinstatement following failures of financial firms
The Financial Secretary to the Treasury (Mark Hoban) has announced the Government's intention to make changes to the ISA rules for investors whose ISA savings have been affected by the failure or default of a financial firm. This includes ISA investors affected by the collapse of Lehman Brothers.
Where an ISA is affected by the failure or default of a financial firm, any reinstatement of sums held in the account at that point, or investment of any subsequent compensation received, is currently treated as a new ISA subscription, and therefore counts towards the normal annual limit. The intention is to change the ISA rules to permit investors affected by such a failure or default to make certain ISA investments over and above the normal subscription limits:
- investors who have lost their cash ISA will be permitted to reinstate up to the balance of their account at the time of the firm's failure in a new ISA;
- where a stocks and shares ISA has been affected, the investor will be permitted to invest any compensation (or any similar payment) derived from assets held within their ISA in a stocks and shares ISA; and
- different arrangements for cases in which Lehman Brothers was, at the time of its collapse, the sole counterparty to an ISA product such that investors will be permitted to reinstate up to the balance of their ISA at the time of this collapse irrespective of whether any compensation has been paid to the investor.
www.parliament.uk/documents/commons-vote-office/1-Chancellor-ISAReinstatement.pdf
2.5. Seed Enterprise Investment Scheme – CGT exemption
HMRC has published a Technical Note explaining how the new CGT exemption for SEIS investments will work.
"Form of the CGT relief
The relief will take the form of an exemption from CGT where an individual realises gains in the tax year 2012/13 (6 April 2012 to 5 April 2013). The relief will be available only to individuals and not to other persons, such as companies or the trustees of settlements.
The relief will have to be claimed.
Outline of qualifying conditions
To be entitled to the exemption the individual will have to make a qualifying disposal and a qualifying investment (or one or more qualifying investments) in the tax year 2012/13.
Qualifying disposal
The individual must dispose of an asset in 2012/13 and the gain must arise on that disposal. There is no limitation on the type of asset that may be disposed of. All types of disposal, including part disposals, will qualify.
The Capital Gains Manual available at www.hmrc.gov.uk gives guidance on when an asset is disposed of for CGT purposes, starting at paragraph CG14250.
Qualifying investment
The individual must invest in shares issued on or after 6 April 2012 and before 6 April 2013 in respect of which they receive income tax relief under SEIS. The shares must be subscribed for wholly in cash, fully paid up at the time of issue, and held for 3 years. If income tax relief is not due the CGT exemption will not be available.
For more information on the qualifying conditions for income tax relief under SEIS, HMRC published draft legislation and a draft explanatory note, together with a Tax Impact and Information Note. These are available at www.hmrc.gov.uk/budgetupdates/march2011/index.htm
By way of simple summary, SEIS income tax relief is available in respect of investments in shares in new (two years old or less) smaller companies (those with 25 or fewer employees and assets of up to £200,000). The company must be carrying on, or preparing to carry on, a new business in a qualifying trade, and must not have previously raised money under the EIS or VCT (venture capital trust) schemes.
The income tax relief is available on total investments up to £150,000 per company. To give the greatest degree of flexibility, this will be a cumulative limit, not an annual limit. For individual investors there is an annual limit on the amount of qualifying investments of £100,000. Income tax relief is not available where the individual is an employee of the company (unless they are also a director), or has a more than 30% interest in it (for this purpose, no account is taken of loan stock).
To qualify for exemption from CGT on the whole of the gain on the disposal of the asset, the individual will have to invest the full amount of the gain in SEIS shares. It will not be necessary to invest the full proceeds from the disposal of the asset. If only part of the gain is invested partial relief will be available.
Example
Catherine sells an asset in June 2012 for £200,000 and realises a chargeable gain (before exemption) of £80,000.
If Catherine makes qualifying investments of at least £80,000 in SEIS shares in 2012-13, and all other conditions are met, the £80,000 gain will be completely free from CGT. She does not need to invest the whole £200,000 sale proceeds in order to get full exemption.
If Catherine makes qualifying investments of only £20,000 in SEIS shares in 2012-13, £20,000 of her gain will be exempt from CGT (provided all conditions are met) and she will be liable to CGT on a chargeable gain of £60,000 on the disposal of the asset in June 2012. The remaining £60,000 chargeable gain will still be eligible for any other CGT reliefs that are available, and allowable losses and the CGT annual exempt amount can be set off against it in the normal way.)
Failure of qualifying conditions
For complete exemption of a gain, the individual must hold their qualifying investment throughout the 3 year qualifying period for full SEIS income tax relief. The individual, and the company, must continue to meet the conditions that apply during this period. In particular, neither the individual nor any connected person may receive any value from the company during this period. (This does not include receipt of ordinary commercial payments such as dividends or reimbursement of expenses to a director). There must be no loss of income tax relief in respect of the SEIS shares in that period. Where some or all of the income tax relief is lost a corresponding proportion of the CGT exemption will also be lost.
There will be an exception where an individual transfers the SEIS shares to their spouse or civil partner during the three year qualifying period. Provided all other conditions continue to be met during the remainder of the qualifying period, such transfers will not lead to a failure to meet the qualifying conditions.
Where a gain has initially qualified for exemption and subsequently an event occurs which means that any qualifying conditions for SEIS income tax relief cease to be met, the amount that was previously exempt will be liable to CGT. For example, if, during the period of 3 years following the issue of the shares, the company comes under the control of another company then, even if the individual has not disposed of any of their shares, the company (or the particular issue of shares) ceases to qualify, any income tax relief given must be repaid. In such a case any CGT relief will also be withdrawn.
In some circumstances income tax may be only partially withdrawn. For example, if the individual receives value from the company, only a proportion of the income tax relief may be withdrawn. Where a partial withdrawal of income tax relief applies there will be a corresponding partial withdrawal of the CGT relief."
HMRC plans to publish draft legislation in January 2012.
www.hmrc.gov.uk/budget-updates/06dec11/seed-enterp-invest-sch.pdf
2.6. UK/Swiss agreement
HMRC has issued updated Frequently Asked Questions about the Tax Agreement between the UK and Switzerland signed on 6 October 2011.
www.hmrc.gov.uk/taxtreaties/ukswiss-faqs.htm
3. IHT & Trusts
3.1. Reduced rate of IHT for estates leaving 10% or more to charity
Earlier this year the Government published a consultation document on the proposal to reduce the rate of IHT to 36% in cases where 10% or more of the estate was left to charity. There was considerable criticism that despite the Government's promise to always consult on new legislation the decision had in fact already been taken in principle and it was only the means of achieving it that was consulted on.
Many of the concerns raised in the consultation centred on the complexity of the underlying calculations and so it is somewhat disappointing that the preferred method of calculating the relief introduces even more complexity. The estate will be divided into three sections:
- The free estate
- Jointly owned assets
- Settled property (held in trust).
The calculation of whether more than 10% of the net estate (after deducting reliefs, exemptions and nil rate band) has been left to charity will be applied to each section in turn on an incremental basis.
Depending on the arithmetic in any particular case it may be that increasing a charitable legacy will produce a tax saving and increase the amount left to beneficiaries and it will be possible to achieve back-dating here by using an Instrument of Variation.
There are some interesting statistics contained in the consultation response paper:
- The measure is expected to decrease receipts to the Exchequer by approximately £60 million per annum.
- The number of estates liable to IHT is relatively low and is forecast to be 16,000 in 2010/11 or about 3% of the total number of death estates.
- The assumption is that the number of estates where a person will die and increase the amount they leave to charity to 10% will be about 50 in 2012/13, increasing to about 200 in 2013/14, 600 in 2014/15, 1,000 in 2015/16, and eventually to about 5,000. The take up will depend on the extent to which the reduced rate is promoted by charities and by professional advisers.
- The gender split for those whose estates become liable for IHT is around 60% female and 40% male. This is because, for married couples, IHT generally becomes due on the second death, which is more likely to be the wife.
3.2. Index - linking of IHT Nil Rate Band
The Government had already announced its intention to switch from using the Retail Price Index (RPI) to the Consumer Prices Index (CPI) when indexing various reliefs and tax thresholds and the draft legislation for the 2012 Finance Bill includes a clause to apply this rule to the IHT nil rate band. Historically CPI has run at a lower figure than RPI so this will undoubtedly lead to lower increases in future.
However that decision is academic at the moment because the IHT nil rate band is currently frozen until 2014/15. There is some good news here as the explanatory notes suggest that it is intended to recommence index linking of the nil rate band in 2015/16 after six years of being frozen at £325,000.
4. PAYE and Employment matters
4.1. Late night taxis
Earlier this year the Office of Tax Simplification recommended that the relief for late night taxis should be withdrawn and the Government announced in the Budget last March that it had accepted that recommendation.
However following the consultation process the Government has now changed its mind, saying:
"Based on the new information provided in the consultation, the Government undertook further analysis to assess the equalities impact on vulnerable groups as well as the administrative burden that employers would face as a result of the repeal. New analysis has shown that repeal risks having a disproportionate impact on women; and could increase administrative burdens, therefore working against the Government's objectives for tax simplification.
Based on this assessment, the Government has decided not to abolish this relief."
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