1. General news
1.1. Budget 2011 Consultations Calendar
A calendar showing the dates when the consultations arising from the 2011 Budget is available. www.hm-treasury.gov.uk/d/tax_consultation_tracker_310311.pdf
2. Private Clients
2.1. HMRC Brief 14/11 - Penalty for failure to disclose offshore income or gains
HMRC Brief 14/11 explains how legislation in Schedule 10 to 2010 Finance Act allows for a higher penalty rate where income or gains that arise outside the UK are underdeclared. People who do not declare income or gains arising offshore could face penalties that are up to 200 per cent of the tax owed.
The new penalties for offshore non-compliance came into force on 6 April and will apply for the 2011-12 tax year onwards to income tax and capital gains tax.
www.hmrc.gov.uk/briefs/cgt/brief1411.htm
2.2. Form R40 (2011): Claim for repayment of tax deducted from savings and investments etc
The new version of the R40 claim form is now available from HMRC.
An important change to note is with regards to capital gains. If there is capital gains tax to pay, even if overall there is a repayment due for the tax year, a R40 is not to be completed but instead the 'taxpayer' is required to register for Self Assessment (SA).
HMRC is then able to trap and deal with the details of the capital gains in the SA Tax Return. The reason we were given for this change is that the computer system being used by HMRC to deal with tax repayment claims cannot handle capital gains.
This is likely to lead to additional administration costs in some straightforward cases and problems in getting out of the obligations of the SA system where the reason for being within it no longer applies.
www.hmrc.gov.uk/forms/r40notes.pdf
2.3. Pensions: reduction of the annual allowance
HMRC has published an update to the draft guidance on the reduced annual allowance for pension savings that was originally published on 14 October 2010.
When does the annual allowance charge not apply? (Amended 4 April 2011)
Severe ill-health
If you draw benefits on the grounds of severe ill-health you will be treated as having no pension saving under the arrangement paying that benefit for the tax year concerned. There are two circumstances when this can happen:
- You can be paid a serious ill-health lump sum if you are so ill that you are not expected to live for more than one year. Your pension scheme administrator will need evidence from a registered medical practitioner confirming your limited life expectancy.
- You can draw all your benefits from an arrangement if, because of ill-health, you are unlikely to be able to work at any time up to state pension age. Your pension scheme administrator will need evidence from a registered medical practitioner that you are unlikely to be able to do any type of gainful work, other than in an insignificant way, before state pension age.
This means that you are not able to continue in your current job and you are not likely to be able to take any other paid work to the extent that this is significant. For example you could undertake voluntary work or unpaid work where out of pocket expenses are reimbursed or small amounts of travelling or subsistence payments are made. Any paid work should be insignificant, for example it should be infrequent or only for a few days during the year and the payment must be small in amount, not just as a proportion of previous pay or salary.
www.hmrc.gov.uk/pensionschemes/annual-allowance/aa-not-apply.htm#1
3. IHT & Trusts
3.1. Trust management expenses - revised guidance
HMRC Trusts & Estates has recently published revised guidance on trust management expenses at TSEM8000 to TSEM8790. This section of guidance has been substantially rewritten to reflect the outcome of the Clay case - HM Revenue & Customs v Trustees of the Peter Clay Discretionary Trust [2009] STC 469.'
www.hmrc.gov.uk/trusts/agents/news-080411.htm
4. Business tax
4.1. Corporate capital gains – new degrouping provisions
On 4 April 2011 the Government announced a change to permit companies to apply the new degrouping provisions with effect from 1 April 2011 subject to an election, instead of from the date of Royal Assent as noted in Finance Bill 2011 Sch10 para 9.
The amendment (listed as an addition to page 171 after line 22, but appearing to be an addition to Sch 10 para 9 at page 170 after line 22) provides for an election to be made by the principal company of a group. It can be made outside the tax return.
If a company ceases to be a member of a group in the period which begins with 1 April 2011 and ends with the date of Royal Assent, an early commencement election may be made or revoked in relation to the group only with the consent of that company (the company which has left) contained in a notice which accompanies the election or revocation.
The early commencement election cannot be made or revoked after 31 March 2012.
www.hmrc.gov.uk/budget-updates/march2011/tech-note-ccg-simp.pdf
4.2. Loan relationships and derivative contract rules on amounts not fully recognised
Legislation was published on 6 December 2010 amending the anti-avoidance provisions in sections 311 and 312, and sections 599A and 599B, and inserting new sections 455A and 698A of the Corporation Tax Act 2009 (CTA 2009). The Technical Notes of 6 July 2010 and 9 December 2010 have more information on the background to these changes.
The paragraphs below summarise the changes that have been made, or not made, in the legislation published in Finance Bill 2011, in response to comments received on the clauses published in December 2010.
Draft guidance for the HM Revenue & Customs (HMRC) Corporate Finance Manual is also set in the note.
www.hmrc.gov.uk/drafts/changes-loan-relationships.pdf
4.3. Business Records Checks start early
CIOT has issued the following press release: "Letters are being sent by HMRC to some businesses asking to arrange visits to carry out pre-return Business Records Checks, under the provisions of the Finance Act 2008 Schedule 36 compliance checks. HMRC has confirmed that these checks are proceeding on a 'test and learn' basis, although the letters do not make that clear. This is despite the recent consultation indicating that checks would not start until the autumn.
Members may wish to discuss with any clients notified of a visit whether the member should be present at the check. HMRC has indicated that as this is a trial there is no plan to levy penalties for poor records identified at the initial visit, as suggested in the consultation document. However, where HMRC considers the records are inadequate they could revisit the client at a later point and consider charging a penalty if there has not been an 'adequate improvement'. These checks should therefore be taken very seriously.
We are currently uncertain as to the training the relevant HMRC staff will have had in preparing accounts from incomplete records, what form the review will take, the type of advice HMRC staff will be providing and whether that is tailored to the client.
We have sought an early meeting with HMRC with the aim of discussing our concerns regarding the early start to this work and hope to report back to members as soon as possible.
A specimen letter advising a business and their agent of a visit is attached."
www.tax.org.uk/media_centre/LatestNews-migrated/BRCstartearly
In a further press release CIOT reported on the meeting as follows:
"HMRC told CIOT that this is a 'test and learn' pilot running until July and no penalties will be charged unless there is evidence of deliberate loss or destruction or complete absence of business records. As a result of the meeting HMRC have agreed to amend their letter to targeted businesses to clarify the basis of the trial. Although HMRC had mooted the idea of a trial, the extent and timing of this had not been communicated to advisers and taxpayers – especially the unrepresented – who have understandably been concerned by the recent developments."
4.4. HMRC Brief 18/11: IHT and IT aspects of EBTs
HMRC has issued Revenue & Customs Brief 18/11 giving their views on inheritance tax and income tax aspects of Employee Benefit Trusts.
www.hmrc.gov.uk/briefs/inheritance-tax/brief1811.htm
It is an update of Brief 61/09, which was itself an update on Brief 49/09.
The latest Brief still indicates s13 (dispositions by close companies for the benefit of employees) applies the IHTA s102(1) definition of participators, which refers to CTA10 s454, which includes any shareholder. However, s13 modifies this so that any participator entitled to less than 5% of the share capital and entitled to less than 5% of the assets on a winding up, is excluded. In relation to the comments on IHT s10, 12 and 13, there has been no significant change in view from that expressed in Brief 61/09, and our comments made in Informal of 14 September 2009 (see below) are still relevant.
However Brief 18/11 expands HMRC's comment to cover the following points:
- IHTA s104 (Business Property Relief - BPR), to comment that a transfer of value by a close investment company would not qualify for BPR
- IHTA s72 (Charge to IHT on property leaving the EBT – at 3/10 of the life-time rate of 20% depending on the number of quarters since the last 10 year anniversary), to comment that where subtrusts are created that are not themselves qualifying s86 EBTs there may be IHT charges. Here HMRC is implying that the creation of subtrusts for family members of the employee who are not employees could cause a charge under this heading. Whether that is the case depends on whether one considers that IHTA s86(3) precludes an employee's non-employee family members being included in the class of beneficiaries where the class includes all or most of the company's employees.
- IHTA s64 ten year charges on subtrusts. HMRC indicate that its view is that subtrusts are not EBTs and therefore relevant property trusts. Whether this view is correct may depend on the relationship of the subtrust to the EBT.
- IHTA s201 to indicate that the company is included in those who can be held liable for IHT charges.
- ITA part 13 chapter 2 charges on transfer of assets abroad. HMRC's view is that an income tax charge could arise on a UK resident employee where the employee transfers the right to receive a bonus to an offshore employee benefit trust. The income tax charge would be on income arising to the EBT. Where the company was regarded as the transferor, HMRC's view is that any benefits provided to employees may be matched with income arising in the trust so that an income tax charge would arise on the matched income.
- ITA income tax charges on an offshore EBT where that EBT has UK source income. HMRC is indicating that loans from the offshore EBT to UK resident employees could well create UK source income for the EBT which would be liable to income tax at the rate applicable to trusts (currently 50% for non-dividend income). ITTOIA s368(3) indicates a non-UK resident person would be liable to income tax if the income has a UK source. Whether a loan creates a UK source of income can depend on a number of factors, but it may be relevant to note that where a loan satisfies the following conditions it is almost certainly not regarded as having a UK source:
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- loan was raised overseas
- secured on property overseas
- the agreement was executed overseas
- under the law of a territory outside the UK
- the interest is paid overseas
- the interest is paid from a non-UK source
- the interest is paid in a foreign currency.
For clarification of any of the above, please contact a member of the S&W ETI team.
Comment on Brief 49/09 from Informal item 2.7, 14 September 2009:
HMRC Brief 49/09 deals with contributions to EBTs by close companies. Broadly speaking, the thrust of the Brief is to suggest that where close companies make a contribution to an EBT then unless "stringent" conditions are met, there may be a charge to inheritance tax on the contribution itself.
Much of the Brief may be considered contentious and certainly not agreed by practitioners. Nevertheless, there is a point of active concern for companies where contributions have been made.
The Brief does not really outline anything new in terms of tax analysis and we have been warning about the risk to clients and in published articles since 2003. However, close company clients who have not been advised by Smith & Williamson when making payments into trusts may care to take further advice and should check with us now.
The analysis concerns three sections of the IHTA: s13, s12, and s10 (dealt with in that order).
S13
S13, very broadly, differentiates between trusts where the participators of the company are and are not beneficiaries of the trust. It says that transfers by a close company to trustees to be held in trust for the benefit of all or most of the employees or office holders will not be a transfer of value for IHT purposes. However this exemption will not apply if, broadly, the trust allows any property to be applied at any time for the benefit of participators holding 5% or more of the interest in the company.
As a general rule, HMRC do not appear concerned where participators are excluded; however, they are interested in situations where, although the trust purports to exclude the participators from benefit, they do actually benefit by way of loans or by the assignment of sub-trusts for them and their families. HMRC are saying that these arrangements are caught and are not relieved by s13.
That view is contentious because the test in s13 only looks to the terms of the trust and not to actual benefit. It may also be of concern to the trustees that it is being suggested that they may be benefiting (albeit indirectly) persons who are specifically not members of the class of beneficiaries. Generally speaking, it will be rare for arrangements to be entered into with a view to the participators benefiting under the trust on a more general basis while being excluded from the class of beneficiaries, so this is unlikely to prove much of an issue in practice.
However, many participators with interests in the company of 5% or more are often quite deliberately and correctly included in the class of beneficiaries and transfers to such trusts do not enjoy the immunity from inheritance tax offered by s13. To that extent HMRC are right.
S12
The second defence to the charge to IHT on contribution is s12. Broadly speaking, this section provides that any payment by the company to the trust which is allowable for corporation tax purposes cannot be a transfer of value. Most payments into EBTs will be inherently deductible for corporation tax purposes as remuneration of employees. However the position has been complicated by accounting treatment, case law and statute. S12 has not been updated to take account of developments in each of these areas.
The result is that there is now a good deal of ambiguity as to whether or not s12 can offer a safe haven. In the first instance, where companies make a payment into a trust and accounting practice requires that the trust is shown as an asset of the company then no deduction will be available unless and until that treatment no longer applies, for example, by payment out to beneficiaries.
For EBTs funded before November 2002, the case of MacDonald (HMIT) v Dextra Accessories Ltd (UKHL47, 7 July 2005) effectively denied relief for contributions which were otherwise deductible until such time as an employee received pay from the trust (and if no one did, the deduction was lost). This position was clarified by the introduction of legislation for contributions made on or after 27 November 2002 on slightly different lines but on the same principle.
The conclusion is that at the time of the contribution it is generally not possible to say whether or not the amount in question will become deductible. HMRC say that unless the deduction is actually available for the year in which the payment to the trust is made, then s12 is not available. There is no case law either way and it is perfectly reasonable to argue that this view is wrong, or at least that a judge could very well find otherwise. However, it has to be said that a judge could agree with HMRC's interpretation. Accordingly, no reliance should be placed on s12 other than in what will be exceptional circumstances.
S10
S10 broadly provides that a payment that is not intended to confer any gratuitous benefit on any person is not a transfer of value. HMRC suggests that the possibility of the slightest benefit infringes that requirement and they suggest that "it will normally be difficult" to show s10 is satisfied at the date the contributions to an EBT were made to the trust.
"Difficult" is not "impossible" so HMRC clearly concede that there will be cases where there is not an issue and contrariwise we would accept that there are some cases where there could be a problem. The problem is most likely to occur where there is a single owner manager rather than a partnership-type close company where, in reality "partners" are at arm's length and the position is fully commercial. There is no further guidance from HMRC on this point. There has only ever been one decided case on s10 (Postlethwaite), concerning a "FURBS", at the level of the Special Commissioners and in that case the company concerned had in effect a single owner and the same single employee but the taxpayer successfully claimed a s10 defence.
Finally, there is an important omission from the Briefing. It makes no comment about the amount of the transfer of value. It would be incorrect to infer that the amount of the transfer of value is the amount paid into the trust. HMRC does not examine the position where the directors of the company make a provision in the accounts, for example, for a director's annual bonus amount before making the payment into the trust in discharge of that liability.
It is difficult to see that recognition of a liability could possibly itself be a transfer of value and, by the same token, the meeting of that liability through a payment into an EBT could not either itself reduce the value of the company's estate (because the company has the liability already) or represent any element of gratuitous intent, except where the payment made exceeded the liability to pay such bonuses or discretionary amounts in the first place. In those latter cases, to the extent that there was a surplus payment, then that surplus amount looks like a transfer of value, though the loss to the estate will not necessarily equate to the amount transferred to the trust. Of course, if the excess is not earmarked in some way in the trust for a class of beneficiaries it may well be that that portion of the trust will have to be accounted for as an asset of the company. It will all depend on the facts.
4.5. REIT consultation
On 5 April HM Treasury announced the informal consultation on the REIT measures announced at Budget 2011.
Amongst the areas on which questions being asked are the following:
- Whether the listing requirements can be relaxed to include for example AIM listed companies and companies listed on smaller foreign regulated stock exchanges;
- Whether abolition of the REIT conversion charge would incentivise new investment rather than acquisition of existing investment companies
- Whether there should be an extension to the time limit for making stock dividend distributions which has been possible for REITs since 16 December 2010. The time limit is currently that the distribution must be made before the filing date for the company's tax return (normally within one year of the accounting date).
www.hm-treasury.gov.uk/consult_reits_measures.htm
www.hm-treasury.gov.uk/consult_reits_measures_questions.htm
4.6. Changes to the loan relationship and derivative contracts rules on group mismatch schemes
HMRC has issued a note summarising the changes incorporated in the 31 March 2011 Finance Bill draft that were made to the 6 December 2010 draft legislation on group mismatches in relation to the loan relationship regime. The main changes are:
- The group mismatch rules will have priority over the debt cap rules;
- References to a company not bringing amounts into account as debits or credits do not include the company not bringing amounts into account because the company is non resident or has made an election for exemption for branch profits (under new CTA09 s18A);
- A further qualification has been incorporated into the meaning of a group mismatch scheme so that the no 'practical likelihood that the scheme will fail to secure a tax advantage' test (new CTA10 s938B(2)) has a £2m filter.
An objective test has been added to the other condition identifying a group mismatch scheme to remove the possibility that standard hedging arrangements could potentially be caught.
www.hmrc.gov.uk/drafts/loan-relations-mismatches.pdf
4.7. Changes to payment dates - Class 2 National Insurance contributions
HMRC has issued a reminder that the payment of Class 2 National Insurance contributions will change from April 2011. Thereafter contributions will become due on the 31 July and 31 January each year, bringing payment dates in line with Self Assessment
www.hmrc.gov.uk/cnr/payts-class2nics.htm
5. PAYE
5.1. Summary of PAYE regulation changes coming into effect on 6 April 2011
From 6 April 2011 the PAYE Regulations are changing to:
- Allow confirmation of an amended tax code to be given to an individual, with their approval, over the phone instead of sending out a paper notice.
- Correct an error with the definition of 'specified date' in PAYE Regulation 198A.
- Change the tax code employers operate in certain circumstances:
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- When a new employee doesn't have a P45 and doesn't complete a form P46.
- When an employee receives income from an occupational pension whilst still in the same employment.
- When an employee receives payments from their employer after leaving.
- Post termination employment related securities. (More on this below.)
- New 50 per cent rate tax code.
www.hmrc.gov.uk/paye/paye-regchange.htm
5.2. Coding changes: OT/BR codes and post termination employment related securities
We have received a copy of confirmation from HMRC that code BR may continue to be used for share scheme related payments made after the termination of employment.
Up to 5 April 2011 the employer had to deduct tax at basic rate (BR) on any payments not included on the P45, which meant that higher-paid employees may not pay enough tax. From 6 April 2011 the PAYE Regulations changed so that the employer should operate code 0T, not BR. However, this causes problems for employers making share scheme payments after termination of employment, particularly where the employer has to account for the tax.
The OT code means that income tax is to be accounted for at the basic, higher and additional rates of tax . The code raises specific issues in respect to share-based payments. HMRC has listened to the concerns raised in respect to share-based payments and have advised that they will be making changes that will mean in relation to share scheme payments for leavers that the same code as previously, code BR, should be applied. This will be effective for payments from 6th April 2011. Further guidance on the change can be expected from HMRC in a few days.
www.hmrc.gov.uk/incometax/itax-si.htm
5.3. Centralising PAYE work in Newcastle
HMRC has announced that all employer work is to move from local HMRC offices to one national location in Newcastle.
Employer work will be dealt with by the National Insurance Contributions and Employer Office (NIC&EO), Benton Park View, Newcastle upon Tyne. This change sees work previously dealt with by 30 offices nationwide, centralised into one location.
Employer work consists of:
- Maintaining employer records
- Dealing with PAYE scheme mergers and scheme successions
- Dealing with employer letters
- Queries referred via the employer helpline
- Reconciling End of Year returns
- End of Year work - queries relating to P35/P14
- Working with employers to improve customer service.
The Employer Helpline now deals with telephone enquiries previously dealt with in Local Offices. Appropriate messages have been placed on the old contact numbers redirecting customers to the Employer Helpline. The contact number for Employer Helpline is 08457 143 143.
Employers and agents should send correspondence to:
Customer Operations Employer team
BP4009
Chillingham House
Benton Park View
Newcastle NE98 1ZZ
5.4. Real Time Information pilot to go ahead in 2012
Following consultation HMRC has confirmed:
- a pilot will begin in April 2012 with volunteer employers and software developers;
- work to ensure data quality will begin from October 2011 and continue until all employers have moved to the new system successfully;
- subject to successful completion of the pilot, employers will be required to start using the RTI system from April 2013 and all employers will be using the RTI system by October 2013;
- it will invite software providers and their clients to participate in the pilot.
5.5. Employer supported childcare - new guidance
HMRC has issued new guidance to support employers who operate a childcare voucher scheme or a directly contracted childcare scheme.
www.hmrc.gov.uk/thelibrary/employer-qa.pdf
6. VAT
6.1. HMRC Brief 15/11: Changed view on the delayed tax provisions for inaccuracy penalties
This brief explains a change in how HMRC views the operation of the 'delayed tax' provision of the new penalties for inaccuracies, introduced in paragraph 8 of Schedule 24 to the Finance Act 2007.
Under these penalties, if a return contains an inaccuracy that relates to a timing error which is automatically reversed in a subsequent tax period, the penalty is not calculated on the full amount of tax underpaid in the first period, but on a reduced amount to take account of the timing error. HMRC's approach to date has been that in order for the penalty to be calculated in this way, the customer had to have submitted both the return containing the initial inaccuracy, and the one containing the automatic reversal of the inaccuracy in a later period. This means that in some cases HMRC has charged a penalty on the full amount because they acted to correct the inaccuracy on the first return before the second return could be submitted, thereby preventing the inaccuracy from being reversed. HMRC is changing its approach for cases where HMRC intervened to correct the inaccuracy before the second return was received, preventing the inaccuracy from being reversed.
When HMRC is satisfied that, but for its intervention, the inaccuracy would have been automatically corrected in a subsequent return, taxpayers will receive the reduced penalty based on the rules for delayed tax. HMRC will shortly update its guidance to reflect this.
www.hmrc.gov.uk/briefs/vat/brief1511.htm
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Spring Budget 2017: Employment Taxes (Video)
