UK: Weekly Tax Update - Monday 26 March 2012

Last Updated: 2 April 2012
Article by Richard Mannion


1.1. Budget 2012

Our Budget 2012 commentary and a 2012/13 tax rate card are available to download from our website:

Link to the Booklet:

Link to the Tax Rate Card:

1.2. Overview of tax legislation and rates

A summary of the tax changes was included in the Budget publications, showing where the change is to be made in Finance Bill 2013, other future finance bills, programme bills or secondary legislation.

2.1 This chapter summarises new tax changes announced in Budget 2012, where the change is to be made in Finance Bill 2013, other future finance bills, programme bills or secondary legislation. In line with the Government's new approach to tax policy making, the vast majority of these measures will be subject to consultation. To assist those who wish to take part in tax consultations, a "tracker" will be published on the HM Treasury and HMRC websites setting out the planned dates of future consultations. Where the policy changes are straightforward (for example routine rate changes or where the policy is settled and will not be subject to consultation), Tax Information and Impact Notes have been published (see Annex A). For other measures, the Government will assess the impacts as part of the consultation and publish a Tax Information and Impact Note alongside the draft legislation in the autumn.

Personal tax

2.2 Income tax personal allowances for 2013-14 – Legislation will be introduced in Finance Bill 2013 to set the personal allowance for those aged under 65 at £9,205 and the basic rate limit at £32,245. A Tax Information and Impact Note for this measure is available at Annex A. Income tax rates and allowances are published in Annex B. The Class 1 Upper Earnings Limit and the Class 4 Upper Profits Limit for National Insurance contributions (NICs) will be aligned with the point at which the higher rate tax becomes payable (£41,450).

2.3 Cap on unlimited tax reliefs – Legislation will be introduced in Finance Bill 2013 to apply a cap on income tax reliefs claimed by individuals from 6 April 2013. The cap will apply only to reliefs which are currently unlimited. For anyone seeking to claim more than £50,000 in reliefs, a cap will be set at 25 per cent of income (or £50,000, whichever is greater). Draft legislation will be published for consultation later this year.

2.4 Statutory residence test – At Budget 2011, the Government announced its intention to introduce a statutory residence test with effect from April 2012. On 6 December 2011, following public consultation over the summer, the Government announced that the test would be legislated in Finance Bill 2013 and take effect from 6 April 2013, to allow further time to finalise the detail of the test. A summary of responses and draft legislation for consultation will be published after Budget 2012.

2.5 Ordinary residence – At Budget 2011, the Government announced its intention to reform ordinary residence with effect from April 2012. On 6 December 2011, following public consultation over the summer, the Government announced that the introduction of any reforms would be deferred until April 2013. At Budget 2012, the Government announced that ordinary residence will be abolished for tax purposes but overseas workday relief will be retained and placed on a statutory footing. A summary of responses will be published with draft legislation after Budget 2012 for consultation. Legislation will be in Finance Bill 2013 and have effect from 6 April 2013.

2.6 Statement of practice 1/09 (SP1/09) – As announced in the consultation on reform of non-domicile taxation in June 2011, the Government will put SP1/09 on a statutory footing. SP1/09 provides an administrative easement for employees who are resident but not ordinarily resident in the UK and have a single contract of employment covering duties carried out in the UK and overseas. The Government will consult on draft legislation which will be introduced in Finance Bill 2013 and will be effective from 6 April 2013. The existing SP1/09 will remain in force for the 2012-13 tax year.

2.7 CGT charge on non-resident non natural persons – The Government will consult on the introduction of a CGT charge on residential property owned by non resident, non natural persons. Legislation will be introduced in Finance Bill 2013 with the measure coming into effect in April 2013. This measure will be consulted on in conjunction with the SDLT enveloping annual charge for high-value residential properties.

2.8 Enterprise Management Incentives(EMI) – EMI is a share option scheme which allows small and medium sized businesses to grant tax-advantaged share options to employees. The Government will make reforms to the EMI scheme in Finance Bill 2013, subject to State aid approval:

  • so that gains made on shares acquired through exercising EMI options on or after 6 April 2012 will be eligible for capital gains tax entrepreneurs' relief; and
  • the Government will consult on ways to extend access to EMI for academics who are employed by a qualifying company.

2.9 Review of tax advantaged employee share schemes – The Government will consider the recommendations of the Office of Tax Simplification's review of tax advantaged share schemes, and will consult shortly on how to take a number of these proposals forward. Legislation will be in future finance bills.

2.10 Glasgow 2014 Commonwealth Games tax exemption – As announced on 26 January 2012, the Government will provide an exemption from UK taxation for money earned by non-resident athletes in relation to a performance at this event. Legislation will be in Finance Bill 2013.

2.11 Expenses of members of devolved administrations – Legislation will be introduced in Finance Bill 2013 to formalise aspects of the existing income tax treatment of travel and accommodation expenses incurred by Members of the Scottish Parliament, Welsh Assembly Members and Members of the Legislative Assembly on parliamentary or assembly duties. It will also introduce a new tax exemption for expenses incurred on travel by spouses or partners of devolved administration members where they share caring responsibilities for a dependant. These changes will have effect from 6 April 2013.

2.12 Company car tax rates 2015-16 and 2016-17 – In both 2015-16 and 2016-17, the appropriate percentages of the list price subject to tax will increase by two percentage points, to a maximum of 37 per cent. From April 2016, the Government will remove the three percentage point diesel supplement so that diesel cars will be subject to the same level of tax as petrol cars. From April 2015, the five year exemption for zero carbon cars and the lower rate for ultra low emission cars will come to an end as legislated in Finance Act 2010. The appropriate percentage for zero emission and all low carbon cars emitting less than 95g of carbon dioxide per kilometre will be 13 per cent in 2015-16, and will increase by two percentage points in 2016-17. Legislation will be in a future Finance Bill.

2.13 Pensions tax relief – Legislation will be introduced in Finance Bill 2013 to amend the rules which currently allow employers to pay pension contributions into their employees' family members' pensions as part of their employees' remuneration package to remove the tax and NICs advantages from these arrangements. A regulation making power will also be introduced to allow changes to be made to the lifetime allowance fixed protection legislation. Technical improvements will also be made to the annual allowance rules through secondary legislation.

2.14 Pensions tax: abolition of contracting out – Contracting out through a defined contribution scheme will be abolished from 6 April 2012. Legislation will be introduced in Finance Bill 2013 to bring tax legislation into line with Department for Work and Pensions legislation.

2.15 Bridging pensions – Legislation will be introduced in Finance Bill 2013 to amend the pensions tax legislation for bridging pensions to reflect the changes in state pension age. A power will also be created to allow for regulations to be made changing the tax rules on bridging pensions to fit with any further changes to state pension rules.

2.16 Qualifying Recognised Overseas Pensions Schemes (QROPS) – Changes in primary legislation will be introduced in Finance Bill 2013 to strengthen reporting requirements and powers of exclusion relating to the QROPS regime. They will support the changes in secondary legislation published for consultation on 6 December 2011. The Government also announced that where the country or territory in which a QROPS is established makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended or available under the QROPS rules, the Government will act so that the relevant types of pension scheme in those countries or territories will be excluded from being QROPS.

2.17 Transfer of assets abroad and gains on assets held by foreign companies – The Government will propose amendments in Finance Bill 2013 to two pieces of legislation designed to protect the UK tax base. These are contained in sections 714 to 751 of the Income Tax Act 2007 (transfer of assets abroad) and section 13 of the Taxation of Chargeable Gains Act 1992 (gains on assets held by foreign companies closely controlled by UK participators). The Government will publish a consultation including draft legislation after the Budget.

2.18 Inheritance tax: spouses and civil partners domiciled outside the UK – The Government will consult on legislation to increase the IHT-exempt amount that a UK domiciled individual can transfer to their non UK domiciled spouse or civil partner. The Government similarly proposes to allow individuals who are domiciled outside the UK and who have a UK domiciled spouse or civil partner to elect to be treated as domiciled in the UK for the purposes of IHT. Legislation will be in Finance Bill 2013.

2.19 Income tax rules on interest – The Government will consult on changes to the income tax rules on the taxation of interest and interest-like returns, and the rules on the deduction of tax at source from such amounts. Following the consultation period there will be further opportunities to contribute to the development of policy. Any legislation will be in Finance Bill 2013.

2.20 Heritage maintenance funds (HMF) – The Government will introduce legislation in Finance Bill 2013 to ease a restriction for trusts that are HMFs and which have deferred, or may defer, capital gains tax charges arising from the re-settlement of assets from one to another. This will apply with retrospective effect to April 2012 and will be subject to informal consultation.

2.21 Inheritance tax: periodic charges on trusts – The Government will consult on simplifying the calculation of IHT periodic and exit charges for trusts. Legislation will be in Finance Bill 2013.

2.22 Community Investment Tax Relief (CITR) – The Government will introduce legislation in Finance Bill 2013 to relax the CITR on-lending requirements that currently place conditions on the speed with which Community Development Finance Initiatives must on-lend the funding they receive, and introduce new rules to allow investors to carry unused relief forward.

2.23 Personal Independence Payment (PIP): tax reliefs – PIP will replace Disability Living Allowance (DLA) from 2013-14. A number of tax reliefs are available to people in receipt of DLA. The Government will publish draft legislation in the autumn on how those reliefs will apply to PIP claimants; and to help inform decisions in relation to trusts for vulnerable and disabled people will consult over the summer on how they are best defined.

2.24 Income tax and NICs reform – The Government announced in Budget 2011 that it would consult on the options, stages and timing of reforms to integrate the operation of income tax and NICs. Since then, the Government has issued a call for evidence, published a response and set out an indicative timetable for reform in Integrating the operation of income tax and National Insurance contributions: Next steps. Following detailed work with interested parties over recent months, the Government will consult shortly after Budget 2012 on a broad range of options for employee, employer and self employed NICs.

Corporate tax

2.25 Corporation tax rates – Legislation will be introduced in Finance Bill 2013 to reduce the main rate of corporation tax for non ring fence profits to 22 per cent for the Financial Year commencing 1 April 2014. A Tax Information and Impact Note for this measure is available at Annex A.

2.26 Research and development (R&D) tax credits – As announced at the Autumn Statement 2011, the Government intends to introduce an 'above the line' R&D tax credit in Finance Bill 2013 to encourage R&D activity by larger companies. The Government will consult on the detail but will ensure that SME R&D incentives are not reduced as a result of this change.

2.27 Corporation tax reliefs for the creative sector – The Government will introduce corporation tax reliefs for the production of culturally British video games, television animation programmes and high end television productions. Consultation on the design will take place over the summer. Legislation will be in Finance Bill 2013 and will take effect from 1 April 2013, subject to State aid approval.

2.28 First year capital allowances for gas refuelling equipment – Legislation will be introduced in Finance Bill 2013 to extend the 100 per cent first year capital allowance for plant and machinery used in gas, biogas and hydrogen refuelling stations for two years beyond the current expiry date, to 31 March 2015. 2.29 First-year capital allowances for low emission cars – Legislation will be introduced in Finance Bill 2013 to extend the 100 per cent first year capital allowance for businesses purchasing low emission cars for two years beyond the current expiry date of 31 March 2013, except for leased cars. The qualifying threshold will also be reduced to 95g/km driven from the same date, to match EU emissions targets for 2015.

2.30 Capital allowances: emissions threshold for a main rate car – Legislation will be introduced in Finance Bill 2013 to reduce the threshold for a main rate car to 130g/km, to match EU emissions targets for 2020, and the associated lease rental restriction will also be revalorised in line with this change. These changes will have effect from 1 April 2013 (for businesses in the charge to corporation tax) or 6 April 2013 (for businesses in the charge to income tax).

2.31 Tax credits for expenditure on environmentally beneficial plant or machinery – Legislation will be introduced in Finance Bill 2013 to extend the availability of first-year tax credits, for companies surrendering losses attributable to their expenditure on designated energy-saving or environmentally beneficial plant or machinery, for a further five years from 1 April 2013.

2.32 Tax simplification for small businesses – Following the Office of Tax Simplification review of small business taxation, the Government will consult on introducing a voluntary cash accounting basis for unincorporated businesses up to the VAT registration threshold, with a view to introducing legislation in Finance Bill 2013. It will also consult on a simplified expenses system for business use of cars, motorcyles and home. Finally, the Government will also consult on proposals to introduce a disincorporation relief. The consultation will look at the potential demand for such a relief as well as the practicalities of how it would work.

2.33 Lease premium relief – The Government will consult on an informal basis on the potential implications of amending a complex element of lease premium relief, concerning the deemed tax treatment of long leases as shorter leases. Any legislation will be in Finance Bill 2013.

2.34 Life insurance: Qualifying Policies – The Government has announced that it will limit the premiums that can be paid into qualifying life insurance policies each year with effect from 6 April 2013. Policies issued on or after this date will only be Qualifying Policies where the premiums payable for an individual into a policy or policies do not exceed £3,600 each year. Transitional provisions will also apply to qualifying policies issued on or after 21 March 2012 and before 6 April 2013, and before 21 March 2012 where certain variations are made after this date. These provisions will ensure that income tax relief continues to apply to benefits from these policies but only in respect of the premiums paid before 6 April 2013 and premiums paid up to the limit on or after this date. This measure will be the subject of formal consultation with legislation to be introduced in Finance Bill 2013. A Technical Note with further detail about this measure is available on the HMRC website.

2.35 Life insurance policies – The Government will consult on reforming the time apportionment rules in the chargeable event gain regime that reflect a policyholder's period of residence outside the UK. Any legislation will be in Finance Bill 2013.

2.36 Foreign currency assets and corporate chargeable gains – The Government will consult over the summer on whether to introduce a rule allowing companies with a non-sterling functional currency to compute their capital gains and losses in their functional currency. It aims to provide simpler and fairer tax treatment, as well as reducing administrative burdens for the companies impacted. Any legislation will be in Finance Bill 2013.

2.37 Corporation tax: NHS bodies – Following changes to be introduced by the Health and Social Care Bill, the Government will legislate in Finance Bill 2013 to exempt certain NHS bodies from corporation tax.

2.38 Oil and gas: decommissioning certainty – The Government will introduce legislation in Finance Bill 2013 giving it statutory authority to sign contracts with companies operating in the UK and UK Continental Shelf, to provide assurance on the relief they will receive when decommissioning assets. The Government will consult further on the precise form and details of such contracts in the coming months.

2.39 Real Estate Investment Trusts (REITs) – The Government will consult on:

  • the role REITs can play in supporting the social housing sector; and
  • whether to change the treatment of income received by a REIT when it invests in another REIT.

Any legislation will be in Finance Bill 2013.

Indirect tax

2.40 Remote gambling – The Government will introduce a place of consumption based taxation regime for remote gambling. This follows a review of remote gambling taxation announced on 18 July 2011. Under the revised taxation regime, operators will pay tax on gambling profits generated from customers in the UK, whether the supplier is in the UK or elsewhere. A consultation on detailed design characteristics will follow shortly after Budget 2012. Legislation will be introduced in a future finance bill and the measure is planned to be introduced in December 2014, although the implementation date will be kept under review.

2.41 Combined bingo – Subject to consultation the Government will relax the current bingo duty arrangements for combined bingo involving non-UK participants. An informal consultation will start in June and any legislation will be introduced in Finance Bill 2013.

2.42 Alcohol fraud – The Government will consult on alcohol anti-fraud measures, including the introduction of fiscal marks for beer, supply chain legislation and a licensing scheme for wholesale alcohol dealers. Any legislation will be introduced in a future finance bill.

2.43 Herbal smoking products – The Government will bring the tax treatment of legally available herbal smoking products in line with the treatment of those containing tobacco. A consultation will be published shortly after the Budget and legislation will be in Finance Bill 2013.

2.44 Aviation tax: rates – Legislation will be introduced in Finance Bill 2013 to increase air passenger duty rates in line with RPI from 1 April 2013.

2.45 Vehicle excise duty (VED) administration – The Government will introduce legislation in Finance Bill 2013 to:

  • extend the amount of time that a tax disc does not have to be displayed following the payment of tax from five working days to 14 days; and
  • allow additional days on nil rate VED licences, to deregulate licensing for vehicle leasing businesses.

2.46 Aggregates levy rate – At Budget 2011, the Government announced that the rate of aggregates levy would increase from £2.00 to £2.10 per tonne from 1 April 2012. Budget 2012 delayed the planned increase until 1 April 2013. This will avoid putting additional pressure on the aggregates industry in Northern Ireland, following the suspension of the aggregates levy credit scheme. Legislation will be in Finance Bill 2013.

2.47 VAT: reduced rate for energy-saving materials in charitable buildings – Charitable buildings, i.e. buildings that are used by charities for non-business purposes, and/or as village halls, will be removed from the scope of the reduced rate of VAT for the supply and installation of energy-saving materials. The reduced rate of VAT will continue to apply to the supply and installation of energy-saving materials in residential accommodation, including accommodation operated by charities. Legislation will be introduced in Finance Bill 2013.

2.48 VAT: zero rate for adapted motor vehicles and boats for wheelchair users – The Government will introduce a voluntary disclosure scheme to gather further information about the use of the VAT zero rate relief on the supply of motor vehicles and boats adapted for use by wheelchair users. The relief is open to wide interpretation, difficult for suppliers to administer and vulnerable to abuse.

2.49 VAT: fuel scale charges – The Government will consult on legislation to be introduced in Finance Bill 2013 to give effect to extra statutory concessions relating to fuel scale charges and the proposal that the revalorised fuel scale charges will be set out in an annual public notice having the force of law instead of an annual statutory instrument.

2.50 VAT: refunds for NHS bodies – Following changes to be introduced by the Health and Social Care Bill, the Government will introduce legislation in Finance Bill 2013 to include certain NHS bodies within the Section 41 VAT Refund Scheme.

2.51 VAT: invoicing rules – Following changes made by the EU Invoicing Directive, secondary legislation will be introduced to simplify the VAT invoicing rules, with effect from 1 January 2013.

2.52 VAT: Universal Credit consequential changes – The rules governing the VAT zero and reduced rates will be amended to ensure claimants of Universal Credit (UC) get the same VAT relief as those who are claiming the benefits that the UC replaces. These changes will be introduced by statutory instrument with effect from 1 April 2013.

2.53 VAT: exemption for education providers – The Government will consult on and review the VAT treatment of education, particularly at university degree level, to ensure that commercial universities are treated fairly.

2.54 VAT: freight transport services - The Government will introduce secondary legislation in autumn 2012 to formalise the temporary arrangements under which supplies of freight transport and related services taking place wholly outside the EU are not liable to UK VAT when performed for UK businesses and charities.

2.55 VAT treatment of small cable-based transport – The rate of VAT applicable to the carriage of passengers on small cable-based transport will be reduced from 20 to 5 per cent with effect from 2013. This will apply where vehicles carry fewer than 10 people each, as transport in larger vehicles is zero-rated. This reduction will be evaluated after three years. Consultation on implementation, impact, administrative burdens and proposals for evaluation will take place in summer 2012.

2.56 Enveloping annual charge for high-value residential properties – The Government will consult on the introduction of an annual charge on properties over £2 million owned by certain non-natural persons. Legislation will be introduced in Finance Bill 2013 with the measure coming into effect in April 2013.

2.57 Stamp duty land tax (SDLT): leases simplification – The Government will explore ways of simplifying the complex rules that apply to lease arrangements that involve an abnormal rent increase, the substantial performance of an agreement for lease or a lease that continues after a fixed term. Informal consultation will take place through the SDLT working group, commencing in April 2012. Any legislation will be in Finance Bill 2013.


2.58 General anti-abuse rule (GAAR) – The Government accepts the recommendation of the Aaronson Report, published on 11 November 2011, that a GAAR targeted at artificial and abusive tax avoidance schemes would improve the UK's ability to tackle tax avoidance whilst maintaining the attractiveness of the UK economy as a location for genuine business investment. The Government will consult on: new draft legislation which will be based on the recommendations of the Aaronson Report; establishment of the Advisory Panel; and the development of full explanatory guidance. In addition it will extend the GAAR to SDLT. The consultation will be issued in summer 2012 with a view to introducing legislation in Finance Bill 2013. The Government is committed to ensuring that this legislation effectively tackles abusive tax avoidance and that the supporting guidance is practical both for taxpayers and for HMRC.

2.59 Manufactured payments – On 15 September 2011, the Government announced its intention to legislate to block a tax avoidance scheme involving manufactured overseas dividends, a type of manufactured payment. At the same time it announced that it would consult on proposals to simplify the manufactured payments tax rules, as part of its rolling review of high risk areas of the tax code. A consultation will be published after Budget and there will be further opportunities for interested parties to contribute to development of the policy. If legislation follows in Finance Bill 2013 it will not have effect before Royal Assent to Finance Bill 2013.

2.60 Review of the taxation of unauthorised unit trusts – Following consultation on reforms to the tax rules for unauthorised unit trusts in 2011, the Government will issue a further consultation in April 2012, which sets out detailed proposals for change. Legislation will be in Finance Bill 2013.

2.61 Personal services companies and IR35 – The Government is bringing forward a package of measures to tighten up on avoidance through the use of personal service companies and to make the existing IR35 legislation easier to understand. This will include HMRC strengthening specialist compliance teams, simplifying the way IR35 is administered, and consulting on proposals which would require office holders/controlling persons who are integral to the running of an organisation, to have PAYE and NICs deducted at source.

Tax administration

2.62 Simplification of regulatory penalties – Following consultation in June 2011, the Government intends to introduce a new power in Finance Bill 2013 to increase the value of fixed penalties in line with inflation. In addition, a small number of defunct penalties will be repealed. The Government has decided that the benefits of simplifying regulatory penalties are not sufficient to justify the cost of major reform.

2.63 Withdrawing a notice to file a self-assessment tax return – HMRC will consult later this year on new legislation to enable them to withdraw a notice to file a Self Assessment (SA) tax return in appropriate cases. Legislation will be in Finance Bill 2013.

2.64 PAYE late payment and filing penalties – HMRC will consult before the summer on new models for late payment and late filing penalties under Real Time Information. Legislation will be in Finance Bill 2013.

2.65 Information powers – The Government announced on 8 February 2012 that it has agreed to work with the governments of France, Germany, Italy and Spain to facilitate exchange of information between financial institutions and the US Internal Revenue Service for the purposes of the US Foreign Account Tax Compliance Act (FATCA), which aims to combat cross-border tax evasion. HMRC will consult with the financial institutions affected about how this can be done, with a view to legislation in Finance Bill 2013.

2.66 Criminal investigations – Legislation will be introduced in Finance Bill 2013 to allow HMRC officers undertaking criminal investigations into direct tax or tax credits (former Inland Revenue) offences to:

  • seize suspected criminal cash under the Proceeds of Crime Act 2002 (POCA); and
  • exercise POCA search and seizure warrants.

This will bring the powers into line with those for indirect taxes and duties.

2.67 Customs and excise modernisation – Following consultation, the Government will update legislation in relation to detention and definition of goods and the size of penalties for smuggling on ships. Legislation will be in Finance Bill 2013.


2.1. The impact of the 50% additional rate of tax

HMRC has published a report "The Exchequer effect of the 50% additional rate of tax". Not surprisingly the report concludes that a number of taxpayers changed their behaviour in order to shift income into 2009/10 that otherwise would have fallen into 2010/11 and been taxed at 50%.

Based on their assumptions of the income shifted on that occasion, they have estimated that income of £6.25bn will be shifted from the tax year 2012/3 into 2013/4 so as to be taxed at 45% rather than 50%.

2.2. SDLT and the new envelope rules

It was announced in the Budget that a new higher rate of SDLT will be applied to the acquisition of high value residential properties by certain types of 'non-natural' persons.

It was also announced that Government will consult on the introduction of a CGT charge on residential property owned by non resident, non-natural persons.

That has led to questions as to whether trusts are non-natural persons for these purposes. We understand that trusts will not be included in the SDLT rules, but that it is intended that they will be included for the CGT rules.

We expect the position to be clarified beyond doubt in due course.

2.3. CGT Entrepreneurs' relief and Shares acquired through EMI options

An individual who holds EMI options and is considering exercising them before 5 April 2012 may wish to consider the proposed changes in the rules concerning CGT entrepreneurs' relief for shares acquired through the exercise of an EMI option after that date.

The requirement that the disposer holds 5% of the shares of the company at the time of disposal is being waived for shares acquired through EMI after 5 April 2012.

All other entrepreneurs' relief rules, and in particular the requirement for the shares to have been owned for at least a year ending with the disposal date, remain in place.


3.1. CGT avoidance scheme succeeds in First Tier Tribunal

The First Tier Tribunal has considered the case of James Albert McLaughlin (TC01870). The case involved a marketed tax scheme whereby loan notes (sited outside UK) were appointed to a non-domiciled individual before they were encashed and the Tribunal summarised the planning as follows:

  1. The Taxpayer would transfer the Loan Notes to the trustees of the Settlement;
  2. The trustees would borrow a sum slightly less than £1.179m from a bank, and would divide the trust fund into two Parts, Part A consisting of the money borrowed from the bank, and Part B consisting of the Loan Notes subject to the liability to the bank. Thus, the net value of Part B would be low; it would in effect constitute payment to the non-domiciliary for his participation.
  3. The trustees would appoint Part B to a non-UK domiciled beneficiary, but without prejudice to the trustees' lien and right to reimbursement in respect of their liability to the bank;
  4. It was intended that the Appointment would be a disposal of the Loan Notes by the trustees to the beneficiary under section 71(1), but there would be no Capital Gains Tax charge, because hold-over relief would again be claimed, by the trustees and the beneficiary.
  5. The Loan Notes would be redeemed or sold and the trustees would repay the bank; this would be a disposal of the Loan Notes by the non-UK domiciled beneficiary, but there would be no Capital Gains Tax charge on this disposal as either:

    1. the Loan Notes were situated outside the UK and the disposal was by a non UK domiciliary; or
    2. Taper relief would apply and no chargeable gain would accrue on the later redemption or sale.

  6. Where necessary the Loan Note instruments would be varied beforehand so that the Loan Note register was outside the UK and the Loan Notes would be non UK situs property.
  7. This, as noted above, was done in this case towards the end of October 2002. It is not clear whether this is part of the "composite" HMRC argue for but the Tribunal assumed for the purposes of this Decision that it was part of the arrangements for the planning. It is hard to see why else it would be done. HMRC did not include it in the steps which constituted the "composite" when replying to the Tribunal's question as to what the steps they said were included in the "composite".

HMRC put forward a wide range of arguments including:

  1. this was a series of transactions designed to be a "composite" intended to achieve the outcome that the taxpayer paid less tax;
  2. under this "composite" AG had no right to call for and/or deal with the Loan Notes which continued to be vested in the trustees who made the disposal for tax purposes;
  3. a tax charge therefore arose on the Taxpayer on the adjusted price on the transfer into settlement.

The Tribunal found as follows:

  • The effect of the Deed of Appointment was that Part B of the trust fund was held for AG absolutely;
  • AG had the right to call for a conveyance of the assets and to give a good receipt for them;
  • "Absolutely entitled as against the trustees" broadly meant that AG had to be capable of dealing with the assets as if entitled to them absolutely which he could do by requiring the assets to be transferred to him first which was to be disregarded under section 60 TCGA which so provided;
  • This was the case for general law and tax law. The Appointment did signify for tax purposes. It answered to the statutory description of transactions fitting the statutory wording interpreted purposively and viewing the facts realistically;
  • Consequently, we find that AG did become absolutely entitled to the Loan Notes as against the trustees within the meaning of section 71 TCGA.

It remains to be seen whether HMRC appeal the decision.


4.1. HMRC addresses P35 filing penalty problems

Following extensive discussions within the Joint Understanding Agents Programme – the forum for taking forward the 'Clasper initiative' between HMRC, the professional bodies and tax charities – HMRC have announced changes to their procedures around P35 returns and penalties.

One of the issues identified in the Joint Understanding Agent Programme has been the problems surrounding P35 end-of-year return filing penalties. HMRC have agreed to try and provide more timely information to employers, in an effort to ensure a greater number of PAYE end-of-year returns are submitted to deadline.

The professional bodies and charities involved in the joint initiative are the Institute of Chartered Accountants in England and Wales, the Chartered Institute of Taxation, the Institute of Chartered Accountants of Scotland, the Association of Chartered Certified Accountants, the Association of Accounting Technicians, the Association of Taxation Technicians, the Institute of Indirect Taxation, the Low Incomes Tax Reform Group, Tax Aid, and Tax Help for Older People.

They have issued a joint statement with HMRC, reproduced below. In it, HMRC addresses the many recent complaints by commentators, advisers and taxpayers about how late-filing fines are issued to employers.

The statement reads:

"The joint initiative between HM Revenue & Customs (HMRC), the professional bodies and tax charities*, launched in late 2011, set a number of service objectives for delivery during 2012.

One of these was to work together to address concerns about the delay in informing employers that their PAYE end-of-year returns are late, and therefore subject to penalties.

The background to this issue is that where employers do not file their annual P35 return by 19 May, they incur penalties of £100 per 50 (or fewer) employees for every month (or part month) that their return is late.

In some cases, employers were unaware their returns were late until they received a first penalty letter in September covering four months' worth of accrued penalties.

We can now announce a number of agreed measures to deal with this problem.

To help employers comply with their obligations, HMRC will:

  • Change the date when we issue the "Notification to complete form P35 Employer Annual Return 2011/12" from mid-February to mid-March 2012, so that employers will receive it much nearer to the end of the tax year.
  • From 28 April 2012, where we believe a 2011/12 P35 remains outstanding, we will issue an "Employer Annual Return Reminder".
  • From 31 May 2012, we will introduce a "P35 Interim Penalty Letter" which will be issued over a five-day period, so that it reaches employers within a month of the filing deadline. The letter will state that the employer has incurred a late return penalty and explain what to do to avoid it increasing. We have worked together with the professional bodies on the content of this letter and it has been tested on employers and payroll agents to make it clear and employer-focused.
  • Improve the online guidance for submitting P35s online, including specific advice about the test-in-live service to reduce the number of employers who believe their test submission is the live submission. The onscreen messages within the HMRC online product will also make it much clearer that even when a successful test transmission has been made, a live transmission is still required. We would encourage those using commercial payroll software (where the text of test/ live messages may vary) to sign up for HMRC's email alert facility to help them avoid this problem.
  • Instruct Employer Helpline staff to tell employers about filing dates when setting up new employer schemes, to help them avoid a penalty.
  • For next year, improve the information on the P35 and the reminders to include a warning that the first penalty notice will cover 4 months.

Taken together, these measures should help employers to avoid incurring unnecessary penalties and significantly reduce the number of cases where penalties in excess of £100 are charged."

The joint statement says nothing about the penalties issued in previous years to employers who believed that they had successfully filed the form P35 only to find out several months later that HMRC did not receive it.


5.1. Revenue & Customs v First Nationwide and Stock Lending

HMRC has lost on appeal to the Court of Appeal in the case of First Nationwide, thus confirming the decisions of both the First Tier and Upper Tier Tribunals.

Our earlier summary of the First Tier Tribunal decision is below. In addition to the comment below regarding CTA09 s931A(2), it may also be appropriate to consider CTA10 s1027A, which applies for corporation tax (not income tax) so that a distribution from a reserve arising from a reduction of share capital (which will include share premium) is treated as if it was made out of profits available for distribution otherwise than by virtue of the reduction.

Stock Lending and the nature of dividends

The case of HMRC v First Nationwide (FN) considered the corporation tax implications of a transaction undertaken by Nationwide Building Society to access funds to enable the Society to expand its mortgage business. The transaction resulted in Nationwide obtaining the use of £50m of funds in September 2003, half of which had to be repaid in December 2003, the balance in March 2004. The amounts repaid were in excess of the amounts effectively received, and in substance would probably equate to interest on the amount borrowed. However, the structuring of the transaction was reflected on the corporation tax return of the borrowing entity as management expenses of £51m and a chargeable gain of £49.3m.

HMRC was seeking to deny the deduction for management expenses on the grounds that the payments made (which Nationwide had classified as manufactured dividends) were either not dividends (and so there were no management expenses), or the bundle of transactions was fully within the manufactured dividends regime, so that the overall position would be a net management expense of £1.7m, instead of the split and grossed up management expense and capital gain declared on the tax return. The main issues discussed in the case were:

  • Were the payments that FN made in respect of dividends paid on preference shares that passed through their hands (and so expenses under the manufactured overseas dividend rules), or were the so called dividends (paid from a share premium account) not dividends, but a return of capital (so that FN's payments were net expenses under manufactured dividends rules)?
  • Were the dividends on the preference shares properly "overseas dividends" within the meaning of the manufactured dividend rules?
  • Did the sale of the preference shares by FN in September 2003, and FN's subsequent March 2004 purchase of other preference shares, constitute a sale and repurchase of shares so that the price differential would be the result, or were they separate transactions altogether?

Nationwide's financial statements for the years ended April 2004 and April 2005 comment that it did not provide for tax liability on disposal of premises on the basis that such liability would either be covered by roll over relief or brought forward capital losses. The advantage to Nationwide of the result of the financing transaction they undertook, would therefore seem to include the possibility of using brought forward capital losses that might otherwise be carried forward unused.

The vehicle used for the funding was a Cayman Islands Company (Blueborder Cayman Ltd) originally owned by a subsidiary of ABN Amro bank and the case includes discussion of a dividend for Cayman Islands Company law purposes with reference to English case law.

Blueborder had issued preference 50,050 shares with a nominal value of £1 for a price of £1,000, entitling the holder to two quarterly dividends of £509.49051 per share and an annual dividend equal to a fixed rate of 1% of the nominal amount. ABN Amro (and its subsidiaries) agreed to transfer the preference shares (the first preference shares) to FN on 25 September 2003 in return for a commitment by FN to pay 'manufactured dividends' in respect of the quarterly dividend entitlements and redeliver equivalent shares (the second preference shares) in Blueborder [to ABN Amro] on 29 March 2004. FN then sold the first preference shares to Anglo Irish Bank on 29 September 2003 for £50.3m. Two dividends were paid by Blueborder to Anglo Irish in December 2003 and March 2004, each of £25.5m. The dividends were paid from the share premium account. FN paid £25.5m in respect of each dividend to ABN Amro. On 29 March 2004 FN subscribed for a further 50,050 preference shares in Blueborder for a total of £1m, handing them back to ABN Amro to close the stock lending arrangement.

FN treated the manufactured dividend payments they made totalling £51m as investment management expenses, and surrendered net management expenses arising to Nationwide Building Society. It treated the sale of the preference shares and subsequent repurchase as a capital transaction resulting in a net gain of £49.3m, making a s171A election to treat the gain as accruing to Nationwide Building Society.

The relevant UK legislation was contained in ICTA88 Sch23A which treated "manufactured overseas dividend payments" (made pursuant to a contract in respect of an overseas dividend) as business expenses, and ICTA88 s730A (now ITA07 s569 s607 – s610) and s737A which treats the price differential on the sale and repurchase of securities effectively as a manufactured dividend payment.

In relation to the sale and repo provisions, it was held that 'buying' similar securities did not mean the same as 'subscribing' for similar securities, so that these provisions did not apply to the sale and repurchase as undertaken by FN (with the consequence that that part of the transaction was not within the manufactured payment rules of ICTA88 Sch23A). Support for this view came from the comments of Lord Greene MR in the High Court case of Re VGM Holdings [1942] Ch 235. The Tribunal judge commented that if Parliament had intended the sale and repo provisions to include a subscription for shares, the legislation would have explicitly said so.

In relation to whether the payments made by Blueborder were dividends and therefore overseas dividends (with the consequence that payments made by Nationwide in respect of these were manufactured dividend payments), the conclusion was that under Cayman law dividend payments could be made out of the share premium account, and there was nothing in Cayman Law to say that such a payment was not a payment out of 'profits available for distribution' (of a revenue rather than a capital nature). Under English law the share premium account is now regarded as capital, but different from share capital, with the consequence under English legal law that a dividend paid from a share premium account would be regarded as a return of capital.

However the case of Rae v Lazard [House of Lords, 1963 WLR 555] was cited as support for the case that whether a distribution is received as capital or income is determined not by the source from which the relevant assets are distributed, but by the machinery employed in their distribution. In that case the hiving off of part of a company's business under the local laws of the US in Maryland was held to be a capital distribution and not a dividend. The case of Courtaulds Investments v Fleming 46 TC 111 [1969 High Court], where payment of a dividend from share premium account of an Italian company was held to be a capital distribution because of Italian law, was also considered. In the context of Cayman Island law, the Tribunal concluded that dividend payments from share premium account could well be dividend payments from profit and the share premium account could not be regarded as part of the share capital. The conclusion was that the payments from Blueborder were dividends and overseas dividends within the meaning of the UK manufactured dividend payment rules.

It will be worth bearing in mind that the CTA09 part 9A provisions exclude from dividend exemption those distributions of a capital nature (CTA09 s931A(2)).

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.

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Richard Mannion
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