UK: Tax Update - Monday 23 April 2012

Last Updated: 26 April 2012
Article by Richard Mannion

1. General news

1.1. Office of Tax Simplification and the complexity of tax legislation

On Monday 16 April 2012, the OTS published a short paper on the length of tax legislation. The paper concludes that length of legislation is a factor that contributes to complexity, but the issue is more complex than a simple page count. Although there are 17,795 pages in the Tolley's Yellow and Orange books for 2011/12, the OTS found that on closer analysis there are "only" 6,102 pages of substantive direct and indirect tax legislation.

1.2. Treasury Select Committee report on Budget 2012

The Treasury Committee has published its report to the House on the Budget.

Amongst its conclusions are the following recommendations that the Government:

  • clarifies what retrospection is proposed with regard to stamp duty. (Paragraph 86)
  • restricts its use of retrospective legislation to wholly exceptional circumstances, which should be narrow and clearly-defined. The Treasury should set these out as soon as possible for consultation, along with an explanation of how gradual further extension of retrospection can be prevented. Any future retrospective tax measure must be justified against the agreed criteria: such justification must include clear explanatory statements to Parliament by the responsible Minister and should invite views from relevant professional bodies. (Paragraph 89), and
  • that the Treasury soon ask HMRC to make an assessment and publish the impact of the cap on income tax reliefs, both on business investment and charities. A more detailed explanation of the problem the cap seeks to address is needed, along with consideration of other possible means of dealing with it as the Red Book proposes. (Paragraph 120).

2. Private Clients

2.1. "May Day" call for unfiled tax returns

Anyone whose Self Assessment return is more than three months late is now charged a £10 penalty for each day it remains outstanding, up to a maximum of 90 days. This is on top of the £100 late-filing penalty they will have already received.

This means people who file their 2010/11 return online on or after 1 May will be liable to daily penalties, as the deadline for these was 31 January. Daily penalties for paper returns began on 1 February, as paper returns were due by the earlier deadline of 31 October.

Anyone filing now should do this online so as to reduce their exposure to these penalties,

Looking ahead, further penalties of at least £300 (or 5 per cent of the tax due, if that is more) will be apply where returns are 6 and then 12 months late.

2.2. UK/Swiss Protocol - changes to the formula

Letters have been exchanged to implement the UK's right under the Protocol to have beneficial changes in the operation of the formula which calculates the one-off payment for the past between Switzerland and Germany incorporated into the UK Agreement.

The original Protocol had an applicable (maximum) rate of 34 % for to the one-off payment which is to be replaced with a sliding scale. Where the tax charge amounts to 34% or more and the relevant capital amounts to one million pounds sterling or more, then the tax charge (applicable on the entire relevant capital) shall increase by one percentage point for each additional million pounds sterling relevant capital, up to a maximum of 41%.

The minimum rate is being increased from 19% to 21%.

3. Business tax

3.1. Distributions in respect of share capital prior to the dissolution of a company

SI2012/266 came into force on 1 March 2012 and introduced new CTA10 s1030A and s1030B. s1030A provides that a distribution made either when the dissolution procedure has commended, or in its anticipation is not a distribution if that (and any other distribution falling within that section) does not exceed £25,000. In order to come within that provision the company must intend to secure payment of all sums due to it and satisfy all debts owed by it. It should be noted that (ignoring any transitional provisions agreed with HMRC for dissolutions which commenced prior to 1 March 2012) this provision applies to distributions made in contemplation of making an application for a striking off under Companies Act s1003.

New CTA10 s1030B provides that where two years have passed since the making of a distribution and the company has not been dissolved, or has failed to secure the recovery or payment of all its debts and liabilities, then s1030A is treated as never having had effect. Thus care will need to be taken when seeking to apply the capital treatment permitted for payments within new s1030A, in assessing the £25,000 limit for all payments that might be considered to be distributions within the previous two years.

3.2. Conditions to be met for claiming relief for interest on a loan to a company

ITA s392-395 represents the re-written version of the provisions permitting interest relief for a loan to buy shares in, or to provide loan funds to, a close company that is not a close investment holding company. In respect of the tax deductibility of interest on a loan taken out to fund an onward loan to such a close company, they require that:

  • the capital recovery condition is met; and
  • either (i) the full time working or (ii) the material interest, conditions are met.

The full time working condition requires that the individual hold part of the ordinary share capital and from the period from the use of the loan to the payment of the interest, the greater part of the individual's time has been spent on the actual management or conduct of the company or an associated company.

The material interest condition is that the individual, either alone or together with any one or more associate, or any associate of the individual (either alone or together with such other associates) is either:

(a) the beneficial owner of or able to control, more than 5% of the company's ordinary share capital; or

(b) entitled to acquire such rights as in the event of a winding up as would give entitlement to more than 5% of the assets available for distribution to participators.

Participators is defined as for CTA10 s454 and in addition to those entitled to acquire share capital or voting rights, includes a loan creditor of the company.

A case involving Antoni Nowosielski considered whether he had a material interest in a property development company (Vanframe Limited) of which he was a director, but not a shareholder, and to which he had made a loan of £100,000 to cover its cashflow problems. The case summary refers to the balance sheet and total assets of a company associated with Vanframe Ltd (Andrew Linchin Architects Limited), but gives no further detailed information on the assets of Vanframe Ltd. However the case does consider that Mr Nowosielski was a participator in Vanframe Ltd and entitled to far more than 5% of the assets on a winding up. He was therefore entitled to relief for interest costs on the loan he took out to offset against the interest income he received from Vanframe Ltd on the loan he had made.

4. Tax Publications

NTBN214 - Matching Share Plan (MSP)

This briefing note provides basic information on the matching share plan (MSP), including how it works, who it is suitable for and the accounting and tax implications.

NTBN215 - Contracts for difference (CFD)

This briefing note provides basic information on contracts for difference (CFD) in the context of remuneration arrangements, including how they work, who they are suitable for and the accounting and tax implications.

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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