UK: Weekly Tax Update - Monday 6 August 2012

Last Updated: 13 August 2012
Article by Richard Mannion


1.1. Attribution of gains and the transfer of assets abroad

The anticipated consultation document has now been published regarding on proposals for the reform of two anti-avoidance tax law provisions: (1) gains attributed to members of non-resident closely controlled companies, and (2) the transfer of assets abroad.

These two pieces of anti-avoidance legislation are designed to prevent assets being transferred or held overseas to avoid UK tax. On 16 February 2011 the EU Commission issued infraction notices in the form of Reasoned Opinions as, in its view, these measures go beyond "what is reasonably necessary in order to prevent abuse or tax avoidance and any other requirements in the public interest". It took the view that these current UK tax rules are "disproportionate" and therefore incompatible with the treaty freedoms of the single market in relation to these two pieces of tax legislation.

The consultation document sets out proposals to:

  • introduce a new avoidance motive test and expand the categories of assets excluded from charge under section 13 TCGA;
  • add to the transfer of assets legislation a further exemption test based on objective criteria; and
  • make other improvements to the two regimes.

With respect to TCGA s13, the new motive test will operate where the taxpayer can demonstrate that there is no tax avoidance motive at all in relation to arrangements of which the acquisition, holding or disposal of assets formed part. The proposal for expanding the current exclusion from application of s13 for trade assets is to cater for a broad range of genuinely commercial economic activities based around the principles established in the Cadbury Schweppes ECJ case (C-196/04). It is envisaged that even if there is an element of benefit from a lower tax regime, the exclusion could still apply where it can be shown the assets held by the foreign company are genuinely and effectively employed in a business establishment. A genuine establishment will require activities that encompass more than just the making and holding of investments. If the assets acquired and held are property, the exclusion will only apply if the property is actively managed and not through an independent agent. Active investment management will qualify, provided it takes place on the same basis as would apply to independent parties dealing with each other on an arms-length basis.

Questions around these proposals ask whether it is thought they would be workable and effective, whether there are any issues for private equity firms or other investment vehicles and whether the new motive test would be helpful. It is proposed that if these amendments are adopted in Finance Bill 2013 they would, subject to an election, be effective retrospectively from 6 April 2012.

Other proposed refinements to TCGA s13 (which may only be effective from 6 April 2013), could include:

  • an increase in the de minimis participation limit (currently 10%) before the section could apply;
  • the introduction of a de minimis limit to exempt small liabilities;
  • a request for information on the possible exclusion from application of the section for non-resident companies operating as public investment funds (subject to suitable identification criteria);
  • a potential review of the interaction of TCGA s13 and double taxation agreements (where currently the section is not consistently dealt with across different treaties).

With respect to the transfer of assets abroad anti-avoidance, the proposals include:

  • An additional exemption based around the character of arrangements entered into (arms-length terms for transactions, and the extent of overseas, economically significant, activities resulting from the transaction). This new exemption will not depend on the purpose for which the transactions were effected, but will rely wholly on objective factors.
  • The residence status of companies incorporated overseas will no longer be automatically regarded as non- resident (as currently provided by ITA s718(2)(a). However all such companies that are UK resident due to the location of central management and control will be regarded as non-UK resident, subject to any double tax treaty provisions.

These measures would be included in Finance Bill 2013, but would be effective from 6 April 2012. Further possible amendments (which if adopted would apply from 6 April 2013), include:

  • The potential introduction of matching rules for relevant income to determine when a charge arises.
  • The legislation of the current discretionary practice of not charging income to tax both under the transfer of assets abroad legislation and other anti-avoidance.
  • The removal of the potential for argument that there is protection from the transfer of assets abroad legislation due to a double tax treaty, even though the income is not taxed in the overseas jurisdiction (potential double non-taxation).
  • The abolition of the concept of ordinary residence under the statutory definition of residence consultation would mean the transfer of assets abroad legislation would apply to individuals who are UK resident (they currently apply to individuals who are ordinarily UK resident).

1.2. Responses to income tax loss reliefs consultation

HMRC has published a summary of the responses to the consultation on High Risk Areas of the Tax Code: Relief for income tax losses.

At the 2011 Budget, the Government published 'Tackling Tax Avoidance' setting out HMRC's anti-avoidance strategy, the strategy being to focus on preventing tax avoidance so as to protect the Exchequer and increase certainty for taxpayers. At the same time, the Government also announced a number of specific measures for improving legislative defences against avoidance.

On 30 June 2011, HMRC published a consultation document 'High-Risk Areas of the Tax Code: Relief for income tax losses' on options to deter tax avoidance exploiting income tax loss reliefs. The consultation proposed three options to counter this behaviour:

  • a principle-based approach;
  • a mechanistic approach of limiting relief to £25,000; and
  • an administrative approach of withholding repayment where the total loss relief claimed for set-off in a year is in excess of £25,000, until claims have been agreed by HMRC.

In view of recent policy developments (the proposed cap on uncapped income tax reliefs and General Anti- Abuse Rule) the Government has decided that HMRC will monitor the effect of these developments before considering whether further action is needed against avoidance involving income tax loss reliefs.


2.1. HMRC launch new P46 (Short) for employers

HMRC has created a single page version of form P46 called P46 (Short) which enables employers to collect necessary information from new employees who do not have a P45.

2.2. Company car and car fuel benefit calculator updated

HMRC has updated the company car and car fuel benefit calculator to reflect the increase in the car fuel benefit multiplier from 6 April 2012.

2.3. Complexities of unapproved share schemes identified

The Office of Tax Simplification (OTS) has published its interim report on the complexities and barriers involved in 'unapproved' employee share schemes. This follows its report on approved employee share schemes published earlier this year.

The report looks at the most commonly used 'unapproved' employee share schemes such as option schemes, long-term incentive plans, deferred share schemes, as well as more ad hoc arrangements. This review, covering both technical and administrative aspects, aims to identify recommendations for simplifications, to make it easier for employers to introduce and run such arrangements. The purpose of this interim report is to ensure that the OTS has a full and complete picture of the arrangements in use by businesses and the issues that arise before it starts to seek solutions.

2.4. Change in bonus rates for SAYE share option schemes

Changes have been made, effective from 1 August 2012, to bonus and interest rates for Save As You Earn (SAYE) share option schemes (sometimes referred to as 'Sharesave').

The new bonus rates effective from 1 August 2012 will be:

Contract type

Bonus rate (previous rates in brackets)

Annual equivalent rate (previous rates in brackets)

3 year

0.0 x monthly payments (0.0)

0.00% (0.00%)

5 year

0.0 x monthly payments (0.0)

0.00% (0.00%)

7 year

0.0 x monthly payments (1.6)

0.00% (0.58%)

Source: HMRC

The Early Leavers' Rate will remain unchanged at 0 per cent.

Employees who are already saving under existing SAYE contracts are not affected by these rate changes.

3. VAT

3.1. The place of supply of services connected to land

Revenue & Customs Brief 22/12 provides a statement of HMRC's' policy on the place of supply of services connected to land following discussions at EU level. It is aimed at businesses that make or receive supplies of services connected to land and property. In particular it will affect businesses that:

  • supply or buy in stands at exhibitions;
  • store goods for overseas customers; and
  • provide access to airport lounges.

3.2. Commission proposes new instrument for speedy response to fraud

A proposal for a Quick Reaction Mechanism (QRM), that would enable Member States to respond more swiftly and efficiently to VAT fraud, has been adopted by the Commission. Under the QRM, a Member State faced with a serious case of sudden and massive VAT fraud would be able to implement certain emergency measures, in a way which they are currently not allowed to under VAT legislation. In this context, the proposal provides that Member States would be able to apply, within the space of a month, a "reverse charge mechanism" which makes the recipient rather than the supplier of the goods or services liable for VAT.

The derogation would be valid for up to one year. This would allow the Member State in question to begin counteracting the fraud nearly immediately, while more permanent measures are being established (and if necessary while the standard derogation procedure is being launched).

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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