UK: Weekly Tax Update - Monday 01 August 2011

Last Updated: 9 August 2011
Article by Richard Mannion


1.1. Treasury Committee report into the administration and effectiveness of HMRC

The Treasury Committee has published its report into the administration and effectiveness of HMRC.

The Parliament website summarises the report as follows:

"The Treasury Committee's report into the administration and effectiveness of HMRC has found there is considerable dissatisfaction among the public and tax professionals with the service provided by the Department. The committee is concerned that if this continues it may undermine respect for the tax system.

Following an inquiry by the Treasury Sub-Committee, the report identified serious concerns in a number of areas, including:

  • Unacceptable difficulties contacting HMRC by phone during peak periods
  • Endemic delays in responding to post
  • An increasing focus on online communication that may exclude those without reliable internet access

The committee recognised that the Department performs a crucial role and operates under significant external pressures including continuing resource reductions, deficiencies in tax legislation and the legacy of the merger.

It acknowledged the commitment of management to tackling these problems and the dedication and professionalism of HMRC staff. However, it concluded that the Department has a difficult few years ahead of it, as it attempts to improve its service to taxpayers and benefits claimants, stabilise the PAYE system and introduce Real-time information.

The sub-committee is holding further hearings on HMRC's compliance work, and the committee may report on this later in the year.


The committee made recommendations in the following areas:

  • Improving the service provided by contact centres, particularly in relation to escalating complex queries and providing alternatives to 0845 numbers
  • Providing robust alternative to online contact, including more cost-effective ways of providing face-to-face advice
  • Ensuring greater awareness of the impact of process changes on individuals and businesses, in particular recommending senior staff spend time with tax practices, charities and businesses
  • Ensuring reductions in resources are managed in a way that is commensurate with the enabling IT and process improvements and minimises the loss of Departmental tax expertise
  • Reviewing the division of responsibilities between HMRC and HM Treasury in relation to making tax policy, to ensure practical considerations are taken into account at the earliest possible stage
  • Better targeting of letters that threaten serious consequences against individuals
  • Having the National Audit Office externally audit preparations for Real-time Information, to ensure Ministers can be held accountable for progress against the Government's ambitious timetable
  • Examining how the Department can achieve better accountability around the settlement of large tax cases."

Extracts from the report are set out below:

"There is considerable dissatisfaction among the public and tax professionals with the service that Her Majesty's Revenue and Customs (HMRC) provides to taxpayers and benefit claimants. Three areas in particular stood out in the evidence we received: access to advice over the telephone; responses to post; and offline alternatives to internet-based filing and guidance. This dissatisfaction has been building for some years now, and was reported on by our predecessors in the last Parliament. As such, we do not accept the Department's explanation that these problems are primarily the result of reconciling of multiple PAYE tax years at once. There is a serious risk that if communicating with HMRC becomes too time-consuming, difficult and expensive, respect for the tax system, and with it voluntary compliance, may be undermined.

The PAYE system itself has been the subject of negative publicity throughout the last year.

The National Insurance and PAYE Service should ultimately make PAYE work more effectively and ensure efficiencies across the Department. However, the problems resulting from its flawed implementation have done significant damage to the public perception of HMRC and the tax system more generally.

HMRC continues to face major difficulties with staff engagement. Whilst staff remain dedicated to their work despite the pressures HMRC is under, they have little confidence in the leadership of the Department or that change will be for the better.

One of the most concerning themes in the evidence we received was that some of these savings were effectively being made by displacing the costs of tax administration onto individuals, businesses and tax professionals.

HMRC's task is made harder by the increasing complexity of the tax system and deficiencies in the underlying legislation. The Government has already announced a package of reforms to the way tax policy is made. Following the O'Donnell Review of 2004 HM Treasury has had lead responsibility for making tax policy, whilst HMRC is responsible for "policy maintenance". The time has come to review how those arrangements are operating with a view to ensuring the practical impact of new tax legislation is adequately considered even before the consultation stage begins.

Staff engagement at HMRC was a major concern of our predecessors throughout the last Parliament. The management team have achieved some small improvements in relation to organisational purpose whilst staff remain dedicated to their work despite the considerable pressures on them and the organisation, some of which originates from outside the Department. However, this cannot conceal the overall picture. Relatively positive staff attitudes towards immediate colleagues and superiors stand in stark contrast with overwhelmingly negative attitudes towards organisational change and the management of the Department. It appears likely that the poor handling of the recent PAYE reconciliations and relentless negative publicity has further harmed engagement and morale. This widespread disengagement is a serious problem for a Department about to undergo further restructuring, and which was described by one witness as "stretched almost to breaking point".

Any organisation facing the constant job losses that HMRC has faced over the last five years would experience problems with staff engagement. The Spending Review settlement means that some areas are likely to experience greater stability, even expansion, whilst other parts of the Department continue to be reduced in size. Ensuring that engagement does not fall still further in these latter areas will be an enormous challenge for HMRC managers.

The evidence we have received about the management culture within HMRC, supported by the staff survey results, is very disturbing. There is a perception that the Department is run on the principles of close control and management scrutiny, with little opportunity for individuals to develop autonomy and exercise their skills. Whilst there is a need for consistency in dealing with people's tax affairs and appropriate performance management, a culture such as the one described to us is likely to harm staff morale and lead to disengagement and poor performance.

It is particularly concerning that staff feel unable to escalate possible problems up the management chain or challenge established practice. In principle one of the benefits of close scrutiny should be that issues are anticipated and responded to. This does not appear to be the case, as the handling of the 2009–10 PAYE reconciliations shows. HMRC intends to reduce its layers of management to improve communication; however this will achieve little unless the underlying culture of the organisation is changed. We recommend that HMRC engage constructively with staff and unions to see how this can be achieved and report back to this Committee within the financial year.

HMRC has been through a period of instability at the top of the organisation that has led to a lack of strategic vision. The current management team has now been in place for two years. It has set out a vision of where they would like the organisation to be, but have yet to demonstrate substantial progress towards achieving those goals and do not yet have the confidence of staff. We intend to monitor progress in these areas closely during the Parliament.

The episode's impact on the reputation of HMRC cannot be overstated. The problems with PAYE spring immediately to mind when reading Tax Help for Older People's damning verdict on HMRC's public profile:

'Ten years ago the Inland Revenue had the reputation of being one of the best run

Departments in Whitehall. Today HMRC's reputation is in tatters as one disaster has followed another'.

The National Insurance and PAYE Service should ultimately make PAYE work more effectively and ensure efficiencies across the Department. However, the problems resulting from its flawed implementation have done significant damage to the public perception of HMRC and the tax system more generally. It is crucially important for the credibility of the management team that the 2012 target for clearing open cases is met and that improvements in overall performance follow soon afterwards.

We welcome the move to introduce Real-time Information. We agree with the professional bodies that the system must be tested thoroughly before full implementation, with full consultation with users and close cooperation with the Department for Work and Pensions at all stages. We note that large employers will be required to use the new system in January 2013, which is before the system has been tested through one complete tax year.

HMRC has committed to an ambitious timescale to deliver Real-time Information, driven in part by the importance of the project in delivering the Universal Credit. The history of large IT projects subject to policy-driven timescales has been littered with failure. The timetable is made more ambitious by the fact HMRC will still be resolving the legacy of open cases and stabilising the National Insurance and PAYE Service during the project's early stages. Introducing Real-time Information before HMRC and the Government can be sure it will work correctly would run unacceptable risks for the reputation of the Department and the tax system. We recommend that HMRC and DWP have contingency plans in place in case a delay becomes necessary.

The Chartered Institute of Taxation described customer experience of HMRC as being "at an all time low", whilst its Low Incomes Tax Reform Group was damning:

'From the perspective of unrepresented taxpayers on low and modest incomes, HMRC is now too often seen as an organisation that is unable to collect the right amount of tax, increasingly difficult to contact by phone, letter or in person, yet unforgiving of customer error and relentless in its pursuit of small debts'.

We welcome HMRC senior management's acknowledgement that the Department's customer service performance has been unacceptable. We are not convinced, however, that the problems can solely be accounted for by the problems with PAYE in 2009–10.

The evidence received by us and our predecessors suggest that poor service standards have been an issue for many years and have not been fully reflected in HMRC's customer service measures.

We reiterate our predecessor's 2007 recommendation that HMRC work closely with the professional bodies, tax charities and businesses to develop a series of performance indicators that credibly reflect customers' end-to-end experience of dealing with HMRC and that these indicators are regularly published as part of the transparency section of its five-year business plan. We are disappointed that our predecessor's recommendation was not acted upon and expect to see meaningful progress within the next twelve months.

The evidence we received raised five issues in particular: the performance of contact centres, the time taken to respond to post, the displacement of costs from HMRC onto businesses and individuals, the need for face-toface contact or robust alternatives and HMRC's drive towards online communication.

HMRC's performance at responding to telephone calls has been patchy at best and unacceptable at worst. Based on past performance we do not have confidence that the Department will be able to achieve its target of 90% of calls answered in a day by March 2012. Given that it has been HMRC's strategy to push so many taxpayers and tax credit claimants into communication by phone it is important that performance in this area improves rapidly.

There was significant concern among our witnesses that it has become increasingly difficult to resolve a complex tax issue in a single phone call to HMRC. We recommend that HMRC examine its processes for escalating complex queries to ensure this is done quickly and appropriately. We also understand that the Department is running a pilot aimed at ensuring contact centre staff dealing with tax credits and benefits are better able to answer more complex queries first time around. The pilot is to be reviewed over summer 2011. If this pilot is successful HMRC should look at expanding it to all areas of tax.

The evidence we have received, correspondence from the public and the coverage in the professional press suggest that long delays in responding to post at HMRC are endemic. This is unacceptable. Such delays increase demand elsewhere in the system, as taxpayers and tax credit claimants chase progress, increasing costs for the public and HMRC alike.

We recommend that HMRC draw up minimum service standards for dealing with post in a timely and accurate fashion in consultation with the professional bodies, tax charities and businesses representatives. Such standards should recognise the distinction between simple and complex queries, and look at the progress of correspondence end-to-end rather than in relation to individual items of post. We recommend that the Department publishes an indicative timetable for achieving those standards and keeps us regularly updated on progress towards meeting them.

Whilst we would welcome any moves towards greater use of email or secure messaging by HMRC, we accept there are genuine concerns on the grounds of security. Without proper planning, greater use of email may also achieve little more than transferring the bulk of the correspondence backlog from one medium to another. We recommend that the Department make a clear statement of their intent in relation to email and secure messaging.

The features of the Large Business Service that appear to have led to high customer satisfaction ratings are personal contact with an individual responsible for a case and the ability of a single contact point to coordinate HMRC activity across departments. Whilst it is not feasible for every individual or small business to have access to that level of service, these are features that HMRC should be trying to replicate as closely as possible in its contact centres through effective channels of escalation and responsibility.

HMRC are right to base their customer-service strategy on research into what taxpayers want. However, we question whether a strategy focused around shifting customers' behaviour can truly be described as customer-centric. Where behaviour shifts are achieved voluntarily through the increased attractiveness of (for example) an online alternative the claim is credible. It is not credible, however, where contact options are narrowed down to the one HMRC would prefer customers to use. The evidence we have received suggests that both elements are present in HMRC's current approach.

The prospects of HMRC's customer service improving in the near future appear bleak.

The Department is still wrestling with the fall-out from the implementation of NPS and does not expect to clear the backlog of open cases until 2012. HMRC's written evidence suggests the Department accepts and understands many of the issues. However, Mike Clasper admitted that, in relation to customer service, "we are not going to be in a great place until 2013."

The service standards provided by HMRC cannot be treated as a separate issue from the collection of tax revenues and the level of tax compliance. Current levels of voluntary compliance should not lead to complacency: any negative change in attitudes regarding paying taxes may take many years to filter through into reduced tax compliance and tax yields, at which stage it may be very hard to reverse. If a view of dealing with HMRC as being a frustrating, costly and time-consuming business were to become entrenched then there is a significant risk of public respect for the institution, and the tax system more generally, being lost.

The public needs to be assured that cases involving large sums of money are being settled correctly. Equally it is unfair on HMRC staff and damaging to public confidence that the Department can be the subject of repeated allegations it cannot refute, even if they are groundless. We agree with the Committee of Public Accounts that HMRC should consider how the accountability and transparency of the settlement of large and complex tax cases might be improved. We are taking further evidence on how this might be achieved.

We seek confirmation from HMRC that effective real-time lines of communication exist between Debt Management and other areas of the Department. Effective communication is especially important where private debt collectors are involved.

It is inevitable that HMRC will have to pursue some taxpayers for outstanding debts and it may have to be forceful in doing so. However, the tone of some of the letters being sent out suggests the "potential consequences" are inevitable unless payment is immediately forthcoming. These letters appear to have been widely used without sufficient thought to whom they were sent to, even being sent to people who did not actually owe money. Such language is appropriate only where there is strong evidence of persistent and deliberate non-payment; it is completely inappropriate where the amount owed is in dispute, where the amount may be zero, or where the recipient is vulnerable. We recommend HMRC take steps to ensure such hard-hitting correspondence is used in a more proportionate way, is better tailored to individual case histories and contains information on the specific debt in question.

The evidence we have received in this inquiry has been disturbing. HMRC's delivery of services to the general public has fallen to unacceptable levels in several areas. Many factors have contributed to this process: overly ambitious expectations for IT projects, sustained cuts to resources, a management culture of "command and control", increasingly complex tax legislation and the legacy of the merger.

HMRC performs a crucial role and operates under significant pressures. The Department has faced and will continue to face substantial reductions in resources, tax policy has not always been designed with full consideration of the administrative impact and there will always be a degree of public and media dissatisfaction with a revenue collection agency, even if it is doing its job perfectly. The staff of HMRC face a difficult challenge in responding to these pressures and their continued professionalism and dedication are vital to ensuring that the Department regains the reputation of its predecessors as being among the most effective in Whitehall.

The management team at HMRC has been in place for two years. The broad view from our witnesses was that the team had improved its understanding of the issues facing HMRC and is committed to tackling them. However, the Department's achievements have been obscured by high-profile failings and staff do not have confidence in management. The Department faces a difficult few years as it resolves the legacy of 'open cases' in PAYE and introduces further ambitious IT upgrades. We will monitor HMRC's performance closely during this Parliament and expect the Department to deliver where substantial improvements have been promised.

Whilst genuine efficiencies have been, and will continue to be, made, we are concerned that HMRC's performance will continue to deteriorate if further reductions in resources are badly managed. There was near unanimity among our witnesses that the reductions made so far have had a damaging impact. We are particularly worried as there is no evidence that the methods that management will deploy to find 'efficiencies' and 'cost savings' have changed in any substantial way. We also believe there is a tension between the drive for 'more automation' and 'centralisation' and the desire to empower and boost the morale of staff who must deliver the cost savings.

HMRC collects revenue for the Government of more than a hundred times the amount it costs to run. Given the fiscal position, it would make little sense for the Department to be cut back further if resource reductions in addition to those plans already agreed would have the effect of reducing receipts, displacing disproportionate costs onto the wider economy or further eroding public confidence in the tax system. Great care will be needed before any further savings are planned or implemented."

All in all a hard-hitting report, which encapsulates the perception of HMRC's performance from the eye of the taxpayer and the agent extremely well.

Perhaps the most damning evidence that the committee heard came from a former HMRC employee who wrote as follows about his experience of the culture within HMRC:

  • Middle managers are discouraged from reporting back to the top "bad news" or news that projects and initiatives are becoming unmanageable or are going awry. Such reports are regarded as "negativity" and will damn career progress.
  • Thus at the top senior managers are largely unaware of the difficulties, problems, and obstacles that the bulk of the organisation faces. They know little of the scale of unanswered phone calls, and the unopened letters, the data quality of tax payers' records and perhaps most importantly the nature and quality of the service provided on a daily basis to the taxpaying public.
  • The role of middle managers is to struggle vainly and to provide the appearance that their targets have been met. They are not expected to provide reasons why targets are not met, they are just expected to get on and meet them.

This evidence puts one in mind of the story about the King's new suit of clothes.

A recurring theme is the constant reduction in staff numbers before expected efficiencies have come to fruition – hopefully Ministers will now recognise that customer service standards need to be judged from the customer's position and take the necessary action towards real improvement.

1.2. China: Double Taxation Agreement signed 27 June 2011

A new comprehensive Double Taxation Agreement between the UK and the People's Republic of China was signed in London on 27 June 2011.

The Agreement generally follows the OECD Model Double Taxation Convention. It will enter into force once both countries have completed their legislative procedures and the provisions of the Agreement will then take effect from the following year.

The main changes are as follows:

Dividends: The reduction in the withholding tax rate to 5% (from 10%) where a UK company directly or indirectly holds more than 25% of the capital in the Chinese company. This is welcome news as it puts the UK on par with Hong Kong, Singapore, Luxembourg and Belgium. Given the lack of withholding tax on outbound dividends, the provisions should make the UK a more attractive location to structure inbound investment into China.

Royalties: The withholding taxes on royalties and similar payments of 10% which is applied to only 70% of the payment in the case of industrial, commercial and scientific equipment is to be reduced to 60%. The effective rate of withholding is to be reduced to 6% rather than 7%.

Permanent Establishment: The concept of a services permanent establishment is being introduced in the DTA. Where a building site, construction, assembly or installation project or supervisory activities in connection with the site or project continue for a period exceeding 12 months, such services including consultancy services by the enterprise through its employees or other personnel engaged by the enterprise would constitute a permanent establishment if the activities continue for a period or periods of more than 183 days over a 12 month period.

These provisions are likely to increase the risk of creating a permanent establishment in China if the services, including consultancy services are provided for a period exceeding 183 days over a 12 month period.

The standard period for construction, installation or assembly projects is to be increased from 6 to 12 months before a permanent establishment arises.

Business Profits: A more flexible approach is to be adopted for the purposes of determining the profits derived by the permanent establishment based on accepted principles. Accordingly, some of the head office costs which have previously been disallowed can now be taken into consideration to determine the taxable profit subject to tax in China.

Anti-treaty shopping: In common with recent treaties, specific provisions are being introduced to deny treaty relief for entities that are being used for taking advantage of the treaty without any real substance in the contracting state.

Capital Gains: The new article will be consistent with the OECD model treaty so that gains will only be taxable in the state of residence unless the gain is attributable to immovable property or shares which derive more than 50% from immovable property and from the sale of shares in a Chinese resident company where the UK company has held a least 25% of the shares in the last 12 months preceding the disposal.

1.3. Working Together Bulletin

The latest Working Together Bulletin has been published.

1.4. Business Payment Support Service (BPSS)

HMRC has issued its final Official Statistics on the BPSS. The report indicates that the BPSS has been hugely helpful for businesses endeavouring to recover from the economic recession, although there have been reports that HMRC has become tougher in its consideration of applications for time to pay.

The statistics show that between the launch of the BPSS in November 2008 and the end of June 2011:

  • 444,400 arrangements were granted which were worth £7.71 billion.
  • £6.69 billion has already been paid to HMRC from mature arrangements.
  • Demand in 2010 was 60% of the 2009 levels for the number of requests and 59% for the value considered.
  • Demand in the first half of 2011 was 37% of the 2009 levels for the number of requests and 36% for the value considered.
  • 46% of the total number of arrangements were for VAT, equating to 50% of the total value of all arrangements.
  • 61% of the total number of arrangements were for a period of 3 or fewer months, equating to 65% of the total value of all arrangements.
  • 61% of the total number of arrangements were for requests under £10,000, equating to 15% of the total value of all arrangements.
  • 7% of the total number of arrangements were for requests between £10,000 and £100,000, equating to 59% of the total value of all arrangements.
  • 23,300 TTP requests, worth a total of £1.08 billion, have been refused by HMRC.


2.1. Delay in the issue of some Self Assessment statements

HMRC has issued the following statement:

"HM Revenue & Customs (HMRC) has more Self Assessment statements than usual to issue this year. Normally these are all issued in July, but this year some will be issued later. The majority will be sent on time.

No one needs to worry about this, HMRC will send out statements to remaining customers soon.

If HMRC have asked you to make a second payment on account in July, you normally have to pay this by 31 July. You usually have to pay interest if you don't pay on time. If you receive your statement in August, you should still pay the tax due as soon as you can. You'll only be asked to pay interest on the tax due on the second payment on account if you still haven't paid it more than 30 days after you receive your statement.

Online customers will still be able to check their statement online and pay online too.

HMRC are sorry if anyone experiences any inconvenience.

Questions and answers

How will I know if I am one of the customers who have been affected?

Most customers who are due to make a payment will get their Self Assessment statement by 31 July. The statement tells you how much tax they need to pay. If your Unique Taxpayer Reference (your ten digit reference number) ends with digits from 70 to 99 then you may be affected. If so HMRC will send your statement as soon as possible.

I'd like to pay now - what should I do?

If you send your tax return online you can pay electronically, or you can make a payment by phone. You can find advice on how to pay by following the link below.

How to pay Self Assessment

How do I know how much to pay?

If you send your tax return online you can find out how much you owe by viewing your account online.

Log in to Self Assessment Online

How many people are affected by the delay in issuing statements?

HMRC estimate around 500,000 customers are affected.

You've been here before – in January 2008 around 500,000 - 600,000 customers didn't get their Self Assessment statements on time – why has this happened again?

HMRC changed their forecasting arrangements in light of the 2008 events and over the past three years these have proved more than adequate. However the volumes on this occasion have risen out of all proportion to previous patterns. HMRC will now ensure that they understand the reasons for this and will be fully prepared for any future rises."

CIOT has issued the following guidance on how to pay in a case where no payslip is received:

"Details on how to pay HMRC are at

While HMRC prefer payments to be made electronically or, where a cheque payment is made, to pay it by bank giro using the computer-generated payslip, which is usually attached to the bottom of an SA statement of account, there are alternatives.

Some banks will allow their customers to pay by cheque if they take along the HMRC bank details (sort code, account number and UTR), but this service is not offered by all banks.

SA 361 manual payslip

If a pre-printed payslip is not available and payments cannot be made online or by telephone, the SA361 can be completed online, printed out and used to accompany a cheque posted to HMRC; it cannot be used to make a payment by bank giro at a bank.

Any payments posted with an SA361 should be sent to:
HM Revenue & Customs
BD98 1YY

While HMRC have stated that no interest will be charged as long as payment is made within 30 days of receipt of the statement, it is not clear how they will know when the statement has been received.

The SA361 payslip is available at"

2.2. French tax reform

Cabinet–Sevestre (Nexia France) have provided us with the following briefing note on the French tax reforms.

Wealth tax

  • Threshold, computation and reporting requirements<

    French tax residents are liable for wealth tax on their worldwide assets whereas non French tax residents are liable for wealth tax only on their assets located in France. Their financial investments are wealth tax exempt.

    Until December 31st 2010, people whose net assets exceeded € 800k were liable for wealth tax. They were taxed according to a progressive rate. The amended finance bill for 2011 modified the wealth tax threshold liability as from January, 1st 2011, which was raised from € 800k to € 1,300k.

    As of 2012 wealth tax, the progressive rate will be replaced by two tax rates applicable on the total amount of the net assets: 0.25% if the amount of the net assets is less than € 3,000k or 0.50% if the amount of the net assets exceeds € 3,000k. A tax relief will also be introduced as of 2012 for taxpayers whose net assets range from € 1,300k to € 1,400k and from € 3,000k to € 3,200k.

    From 2012 on, the reporting requirements are simplified.

    The delay payment penalties are increased from 5% to 10%.
  • Valuation of the shares held by non French tax residents on non-trading real estate companies

    The net amount of the shares held by non French tax residents in non-trading real estate companies having real estate located in France is subject to wealth tax in France. However, their financial investments in France are wealth tax exempt. Therefore, shares held by non French tax residents in non-trading real estate companies financed by partner's receivable in the company was the mechanism we used to rely on in order to reduce the taxable basis of the shares subject to wealth tax.

    The amended finance bill for 2011 modifies the method of valuation of the shares held by non French tax residents in non trading real estate companies as from 2012: the partner's receivable will no longer be taken into account for the valuation of such shares.
  • Tax shield

    The part of direct taxes (income tax, wealth tax, social contributions, and council taxes corresponding to the the usual residence) which is paid by a taxpayer in France and which exceeds 50% of his income is either refunded to him or used for the payment of other taxes: this is called the "tax shield" ("bouclier fiscal").

    The 2011 amended finance bill provides that this tax shield will be withdrawn as of 2013.

Gift and inheritance taxes, and "share tax" ("droit de partage")

  • Increase of taxation

    French gift and inheritance taxes apply to all transmitted assets, located either in France or abroad, if the donor (or the deceased) is a French tax resident or if the beneficiary is a French tax resident and who has been living in France for 6 years within the past 10 years. If both the donor (or deceased) and the beneficiary are non French tax residents, then gift and inheritance taxes only apply to assets which are located in France .

    The 2011 amended finance bill increased the gift and inheritance taxes concerning direct line transmission (and married couple or "PACS" partners regarding gift taxes): for the transmission whose net taxable value ranges from €902,838 to €1,805,677, the applicable tax rate amounts to 40% (instead of 35%) and for the transmission whose net taxable value exceeds €1,805,677, the applicable tax rate amounts to 45% (instead of 40%).

    The 2011 amended finance bill also cut down tax reductions granted according to the donor's age (except in some cases) when the law comes into force. Gifts made within 10 years (instead of 6 years) prior to death or previous gifts must be taken into account for the computation of taxes.

    Finally, as of January, 1st 2012, "share tax" will be increased from 1,1% to 2,5%.
  • Insurance policy taxation

    A 20% tax was withheld on the amount exceeding € 152,500 paid to a beneficiary in some insurance policies. The 2011 amended finance bill increased this taxation. When the law comes into force, a 20% tax will be withheld on the taxable amount of a beneficiary which is less or equal to € 902,838. If the taxable amount exceeds € 902,838, then the tax withheld will be 25%.

    The amended finance bill also has extended the tax area. When the law comes into force, the French tax will also be applicable to contracts whose subscriber is not a French tax resident at the moment of the underwriting if the beneficiary is a French tax resident and has been living in France for 6 years within the past 10 years.


Trusts are common law institutions and do not exist in the French legal system. Therefore, the French tax consequences deriving from a trust created abroad were not defined in most cases. The 2011 amended finance bill creates a legal definition in order for the French tax system to be able to determine the tax consequences of such trusts.

  • Trust and income tax

    Until now, all income included in a trust was liable to French income tax. When the law comes into force, only the income which will be distributed by the trust will be liable for income tax. Therefore, income which is not distributed but is reinvested in the trust will not be subject to French income tax.
  • Trust and wealth tax

    Individuals who hold assets in a trust will be liable for wealth tax as from January, 1st 2012, on the net value of these assets if it exceeds K€1,300 (charitable trusts such as pension trust are excluded from wealth tax). If the net value of the assets included in the trust does not exceed this threshold, then there will be a specific taxation of 0.5% of this net value. However, this specific tax will not apply if some legal requirements are fulfilled.

    The 2011 amended finance bill also creates some reporting requirements as from January, 1st 2012 if the settlor or one of the beneficiaries is a French tax resident: information regarding the trust, such as the terms of the trust, assets included in the trust, their value..., will have to be provided to French tax authorities.
  • Trust and gift and inheritance taxes

    When the 2011 amended finance bill comes into force, each gift and estate concerning assets included in a trust will be liable to gift and inheritance taxes. If the transmission can be qualified as gift or estate, then the taxation will be function of the family relationship between the settlor and the beneficiary of the trust.

    If the transmission cannot be qualified as gift or estate, then a new specific taxation will apply at the settlor's decease, irrespective of the fact that the transmission actually takes place at the settlor's decease or subsequently. The amount of this tax will be function of the beneficiary's quota and if this quota is, or not, precisely determined (the taxation may vary between 45% to 60%)

    Finally, assets included in a trust are liable to gift and inheritance taxes up to 60% if the trust is set up as of May, 11th 2011 by a settlor who is a French tax resident or if the trust is located in a non cooperative country.

Exit tax

France already knew an "Exit Tax mechanism" but it was withdrawn in 2005 because it did not comply with the free currency movement principle. The 2011 amended finance bill creates a new version of the "exit tax" which concerns individuals who transfer their tax residence out of France and who have been living in France for 6 years within the past 10 years. The exit tax is applicable to unrealized capital gain on shares held in companies, subject or not to corporate tax ("SICAV" are excluded), and representing either 1% of its rights or having a value exceeding €1,300k, on some claims on additional price or on profit on shares with suspended taxation.

The unrealized capital gain is computed at the time of the transfer of residence and its basis is the difference between the value of the assets at this time of transfer and the purchase price. This unrealized capital gain will be subject to a 19% income tax and to social contributions up to 12,3%. However, individuals will benefit from a payment deferral in case of transfer of the tax residence to EU and EEA. In other cases, payment deferral will have to be claimed (except in the case where the transfer is due to professional reasons), and French Tax Authorities will request some guarantees.

If the amount of the effective capital gain is higher than the unrealized capital gain, then the taxation will be totally due. On the contrary, the taxation will be limited to the effective capital gain.

Finally, a tax relief will be granted to individuals who will have kept the shares over 8 years after the transfer of the tax residence or if they come back to France within this 8 year period.

2.3. Partial surrenders of life insurance policies

The First-Tier Tribunal considered the case of Chnadraprakash Shanthiratnam in September 2010 and their decision was published in July 2011 (TC01215).

The taxpayer was required to put up collateral for obligations to Shell and he paid £150,000 on 22 March 2006, as a single premium, for overseas life policies issued by an Irish company in the HSBC banking group. The policies were issued as a cluster of 50 policies, each with a separate policy number.

During the following year, it emerged that Shell no longer required the taxpayer to post the full collateral, and so he surrendered approximately one-third of the rights under the policies and withdraw £50,000 on 22 March 2007.

Sections 461, 473, 498 and 507 of the Income Tax (Trading and Other Income) Act 2005 set out the calculation of gain (charged as income) on the occasion of partial surrenders. These rules produced the extraordinary result that £42,500 out of the £50,000 was treated as taxable income of the Appellant, regardless of the fact that the total policies were probably worth less at the time of the partial surrender than the premium paid. The judges summarised the impact of the rules as follows:

"12. In the event that a small partial surrender is made, the rules are almost favourable. Their method of operation is, broadly, to deduct 5% of the premium for each year during which the policy has subsisted (disregarding such amounts where they have already been deducted from earlier partial surrender receipts) from the amount received on a partial surrender, and to tax only the balance of the value received on the partial surrender as income. No regard whatsoever is given, at this point, to the value of the remaining rights attaching to the non-surrendered element of the policy.

13. Accordingly, had the Appellant received only £7,500 on the partial surrender, the entire amount would have been received tax-free. This could indeed be beneficial, should the policy actually have increased in value and should the policyholder consider deferring taxation to be beneficial.

14. Modifying the example, had the policyholder received £10,000 on the partial surrender on the first anniversary of the policy, there would have been the same deduction of 5% (i.e. the same £7,500), so that the taxable income would have been £2,500. Further modifying the example, had the partial surrender been made on the second anniversary of the policy, and had no earlier surrender been made, the policyholder would then have been able to deduct two 5% amounts (i.e. £15,000) from the cash receipt, such that only the excess over £15,000 would have been taxed.

15. This blunt method of calculating gain and income can of course occasion very unrealistic results, and those results are at their most unrealistic on the facts of this case where:

  • the surrender is made at an early date (i.e. when only one element of 5% can be deducted from the receipt);
  • the cash received on the partial surrender is significantly in excess of the deductible amount; and
  • the most objectionable feature of all, namely that the polices are in fact worth less at the point of the partial surrenders than the premiums paid.

16. It is not for us to give tax advice to the Appellant, but we consider that we should draw to the Appellant's attention the broad nature of the rules that are intended to reverse the excessive taxation that has plainly occurred to date. These rules provide for a Relief for Deficiencies on the eventual Surrender of the various policies (or any of them), the result of which is that if during the life of the policies the policyholder has been treated as having income that exceeds the real total gain on the policies , then in the year when the final surrenders are made, there should be some form of tax relief for the excess taxation already suffered. Thus if the Appellant was now able to surrender the balance of the policies for £100,000, such that in total he had received £150,000 (i.e. making no real gain whatsoever), the feature that in year 1 he had been treated as receiving income of £42,000 should be broadly reversed, since in the year of final surrenders he should be entitled to tax relief for £42,000."

This case is a good example of the need for investors to take tax advice in a situation like this. As the judges pointed out the income tax liability could have been avoided if the taxpayer had surrendered one–third of the policies outright rather than surrendering one-third of the rights to all the policies.

2.4. IHT Statistics

HMRC has published updated statistics on IHT.

Inheritance Tax receipts have risen by 14% in 2010/11, but are still 29% below their peak in 2007/08 due to falling receipts in 2008/09 and 2009/10 reflecting changes in asset prices and policy changes.

In particular the introduction of the Transferable Nil Rate Band in October 2007 took many estates out of tax and reduced the tax burden on other eligible estates contributing to the falls in receipts seen in 2008/09 and 2009/10.

Around 19,000 estates left on death in 2008/09 had their liability reduced by the Transferable Nil Rate Band. The use of reliefs against assets and tax has stayed broadly constant over time.

Receipts lag an estate being left on death, so for example 2010/11 receipts will mainly correspond to estates left on death in 2009/10 and 2010/11, but some will correspond to estates left on death in earlier years. The movements in receipts partly reflect changes in asset prices over this period, in particular falling house prices (in the second half of 2008 and through most of 2009 followed by year on year growth in 2010) will have contributed to the falls in receipts and recent rise.

While cash receipts data is available up to 2010/11, the most recent data on year of death is for 2008/09 as this is based on returns and is subject to a lag in order to achieve a full year's data.

2.5. CGT private residence relief

In the case of Martin Benford v Revenue & Customs (TC01309), the First-Tier Tribunal considered whether a property was the taxpayer's only or main residence and whether he had separated from his wife in circumstances likely to be permanent.

Mr Benford purchased the property in his sole name on 24 March 2005 for £124,000 and it was sold on 30 September 2005 for £175,000 realising a capital gain. Mr Benford contended that he was not liable to CGT on the disposal as the Property was his principal private residence during a period of separation from his wife.

Mr Benford gave evidence that he bought the Property "as seen" after separating from his wife and that at that time it was "unliveable". He had to board up broken windows and clean out the Property and he was not able to move in for "a couple of weeks".

He said that he worked during the day but continued to carry out improvements to the property whilst living there. This included re-glazing all of the windows and installing central heating in the house. However, Mr Benford was unable to give any approximate date of when this work was undertaken other than to say it was during the period that he lived at the property.

There were no carpets or rugs, just plain wooden floor boards, no heating, no cooking or food storage facilities, no furniture to speak of and nowhere to hang his clothes which he stored on the floor. Mr Benford said he slept on an inflatable bed and that he had a kettle and bought takeaway food. He said that he also had meals and showers at both the matrimonial home where Mrs Benford still lived and at his mother's house which was "10 minutes away" which was also where he took his washing.

Despite the separation from his wife all correspondence addressed to Mr Benford, including his bank statements, continued to be sent to the matrimonial home. Mr Benford explained that he did not notify his change of address to any official body (eg his bank, utilities etc) as he was concerned about someone breaking into the property.

The only documentary evidence provided in support of Mr Benford's occupation of the property were copies of two bills from Southern Electric and one from South East Water. However the property did not have a water meter and so the water charge would have applied whether or not it was occupied.

Of the two electricity bills, the first was dated 21 July 2005 and was for the period from 28 April 2005 to 15 July 2005; the second, dated 5 October 2005, covers the period from 16 July 2005 to 30 September 2005, when the Property was sold. Although Mr Benford explained that he owned no other electrical appliances other than his kettle and the lights and as that he lived in the Property during the summer and went to bed early he would not need much lighting, the judges were surprised at how little electricity was used and noted that the major item on each of the bills was the service charge. With VAT, this accounted for the entirety of the 21 July 2005 bill which was for £9.48. The 5 October 2005 bill shows that 31 units of electricity were used at a cost of £2.27 and that the service charge was £9.44 with VAT making up the balance of the total bill which was £11.86.

Mr Benford had told the Council the property was unoccupied, but he maintained before the tribunal that he had not told the Council the truth as he wanted to reduce the Council Tax on the property.

The judges accepted that Mr Benford had occupied the property. However, having regard to all of the circumstances, in particular the absence of any convincing documentary evidence to show that Mr Benford lived at the Property, the lack of furniture and appliances there and the very small amount of electricity used, the judges concluded that there was not sufficient assumption of permanence or degree or expectation of continuity to turn such occupation into residence.

Although that finding was enough in itself to dispose of this appeal the judges also considered whether the circumstances of the separation of Mr and Mrs Benford were such that the separation was likely to be permanent. They concluded that Mr Benford had not discharged the burden of proof required to demonstrate that he was separated from his wife in such circumstances that the separation was likely to be permanent.

Therefore, in accordance with s 288(3) TCGA and s 282 of the Income and Corporation Taxes Act 1988, Mr Benford was to be treated as living with his wife for CGT purposes. In such circumstances, as s 222(6) TCGA provides that there can only be one residence or main residence for a husband and wife living together and as Mrs Benford had never lived at the Property, it was the matrimonial home that was their main residence.

This decision once again underlines the fact that it is the quality of occupation which is critical to a claim for private residence relief, rather than the quantity of time spent there.


3.1. Companies House delays mandatory online filing

Companies House has announced a decision not proceed with legislation to mandate electronic services by March 2013.

The reason given is the Government's "determination not to add new regulations that affect small business". The press release concludes with the not that mandating electronic services is an issue which it will reconsider once the moratorium on new regulation for small businesses has ended in 2014.

3.2. Office of Tax Simplification consultations on small business

On 28 July 2011, the OTS published two discussion papers to invite comment on the issues of a simpler income tax system for the smallest businesses and disincorporation for small companies. These documents, including information on the timetable and process for responses, are available below:

Further details of the first discussion paper are set out below. More information regarding the disincorporation paper will be in next week's publication.

To read this Update in full, please click here.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Richard Mannion
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.