UK: Budget 2005: Proposed and Possible Legislation

Last Updated: 11 March 2005
Most Read Contributor in UK, August 2017

Note: because it is expected that a General Election will be a called for 6 May it is likely that the Budget statement will be followed by a short Finance Bill enacting the minimum of measures, and followed by another Bill containing the rest of the measures should Labour win the election.

Corporate tax reform

The Government has again been consulting on reforms to the CT system, the main proposals are: Schedular reform, Capital assets and Leasing, draft legislation has been published. The proposals may be mentioned in the Budget, but a substantive response at this stage is thought unlikely.

International financial reporting standards: tax implications

The Revenue published some 70 pages of draft legislation and explanatory comment relating to the tax implications of international financial reporting standards (IFRS) and UK generally accepted accounting practice (GAAP) at the time of PBR. Further measures are promised in the Finance Act to address specific issues, and it is likely the topic will be revisited in the Budget.

Anti-avoidance generally

The disclosure regimes for direct tax and VAT have been fully operational for more than six months, and it seems inevitable that the Chancellor will introduce further anti-avoidance measures on Budget Day to counteract arrangements which have come to light, besides those on which legislation has already been announced. A number of schemes are said to be on the Revenue’s ‘hit list’. The focus may well be on employment-reward packages, given the statement by the Paymaster-General in the Pre-Budget Report, in which she said that losses to the Exchequer as a result in this area could amount to £2 billion in a single year unless decisive action was taken. She said that measures to combat such schemes would be included in the Finance Act 2005, and that they would take effect ’if necessary’ from the date of the PBR, i.e. 2 December 2004. It remains to be seen whether this threat to use retrospective legislation, which would be an unprecedented move by the Treasury, will be carried out. It is hoped that the Inland Revenue will at least publish a paper setting out their thinking on the principles which will guide the way they will implement this PBR statement, in line with the recommendations of the House of Commons Treasury Committee in its Report on the PBR.

Enterprise capital funds

These are modelled on the lines of the US Small Business Investment Company (SBIC). They will have broadly comparable tax treatment with direct investments in unquoted equities, irrespective of their legal structure. Bids are to be invited for ‘pathfinder’ funds but the process has been held up pending state aid approval for the scheme from the European Commission (this was expected last autumn, but is still awaited.) The Government has said that its plans for Enterprise capital funds will be updated and announced in the Budget.

Tax treatment of small companies and the self employed

The Chancellor has said he wanted to look at the differences in tax treatment between small businesses that choose to operate through sole trader, partnership or corporate structures. The Finance Act 2004 introduced rules guaranteeing a minimum amount of corporation tax of 19% on distributed profits to counteract sole traders adopting a corporate structure in order to shelter profits at low tax rates, and shelter earnings from national insurance, by paying dividends rather than salary. A discussion paper was issued with the PBR which looks at other possible changes, e.g. whether shareholders in owner managed businesses should be treated differently from other shareholders (i.e. taxed more like sole traders). There is certainly a great deal of confusion and difficulty surrounding this area, aggravated by such factors as the IR35 rules and the Revenue’s interpretation of the settlement rules.

Business premises renovation allowance

The Government published a Consultation Document proposing 100% first year allowance for the capital costs of renovating or converting unused business premises in any of the 2,000 designated ‘Enterprise Areas’. The relief will apply to all companies and individuals who own or lease business premises which have been unused for at least a year. The measure requires European Commission state aid approval. Subject to receiving this, the Government intends to introduce this measure in 2005, to run for a period of five years. We can expect a final announcement in the Budget.

Accrued income scheme

An announcement is expected on the consultation issued in 2004 outlining three options for reform of the AIS:

  • An increase in the existing threshold. This would remove more individuals from the scope of the AIS, but would have a revenue cost and do nothing to remove the complexity for those still covered by the scheme.
  • A new form of threshold, which would prevent the AIS applying to small transactions where the tax at stake was trivial. This would involve an exchequer cost, and the underlying complexity of the AIS would remain.
  • A complete change to the way the AIS identifies accrued interest needing to be taxed. One possibility would involve a scheme based on the difference between transfer value and a 'clean' price, operating only where the value of transactions in the year exceeded (say) £50,000, coupled with an increase in the level of the threshold.

Taxing land betterment

Further details may be given on the proposals in the Barker Review on securing future housing needs for a ‘planning-gain supplement’ charged on the increase in the value of land linked to the grant of planning permission.

Capital gains tax

There have been some indications from press reports that the Chancellor may be receptive to representations that taper relief for individuals be brought more closely into line with taper relief for business assets. Although it is unlikely he would align them precisely, he could:

  • eliminate the three year period during which non-business assets attract no relief; and/or
  • increase the relief from 5% to, say, 10% a year, and cap it after five years rather than ten. There has also been speculation that the Chancellor might announce a simplification of business-asset taper together with a higher effective rate for business assets.

European Company

Tax changes are required to accommodate the European Company Statute (ECS) that came into effect in October 2004. A technical note with draft clauses was published earlier this year. Further details are likely. 

Civil Partnerships Act

The Act will allow same-sex couples to make a formal, legal commitment to each other by entering into a civil partnership through a statutory civil registration procedure. For tax purposes civil partners will be treated the same as married couples. Couples will be able to give the necessary notice for entering into civil partnerships as from 5 December 2005, with effect from 21 December 2005. The Government has said the necessary tax changes will be in the next Finance Bill. (Note that the consequences of this will not always be beneficial: e.g. partners will be permitted only one CGT main residence exemption between them; state benefits entitlements will take account of both incomes, etc.)

New pensions regime

The new regime comes into force on 6 April 2006. The main provisions were in Finance Act 2004. . A large number of amendments were announced in February 2005 but further details may be announced. In particular:

  • the Revenue is said to be considering tightening the pension scheme investment rules, which allow all schemes, including Self-Invested Personal Pensions, to invest in residential property. The new rules governing alternatively secured pensions may mean this can be used to pass on the family home to the next generation free of IHT.
  • If press reports are to be believed, judges are to be given an exemption from the £1.5 million cap on pensions which will apply under the new regime. (Lord Falconer has denied this, and claims that the only effect of the changes proposed for judges will be to put them on the same basis as everyone else).

Modernisation of trusts

The income tax and capital gains tax system for UK resident trust is to be modernised with effect from April 2005. The Revenue has consulted extensively on the detailed proposals, and the Budget is likely to include a further announcement on the outcome.

Individuals - taxation of dividends from EU countries

The European Court of Justice (ECJ) has ruled in the Manninen case that Finland must give individuals a tax credit for dividend income from foreign and domestic companies in the same way. (It is clear that ‘foreign' in this context includes EU, but it may also include non-EU). In Finland, Finnish individuals who receive a dividend from a Finnish company get a full imputation credit, but if the dividend comes from a foreign company, there is no imputation credit. The ECJ held that the Finnish rules infringe the free movement of capital provisions of the EC treaty. So far there has been no formal statement by the UK tax authorities as to the implications.

Non-resident entertainers

The foreign entertainers' legislation may be amended to restore the position to what the Revenue believed it to be before the Court of Appeal decision in Agassi v Robinson (A sportsman was held not taxable in respect of payments connected with his activities in the UK as a sportsman which were made by foreign companies with no tax presence in the UK to a foreign company, owned by him, with no tax presence in the UK).

Help for first-time buyers

The Chancellor is said to have ruled out an exemption from stamp duty for first time buyers to help them enter the housing market.

Review of residence and domicile rules

It is possible that there may be a further progress report on this although there is no recent intelligence.

Inheritance tax: banding

The Chancellor is said to have ruled out introducing a banding system for inheritance tax, similar to income tax, as proposed last year in the report from the Institute for Public Policy Research.

Legislation is to be introduced to prevent the creation of capital losses from capital redemption bonds, and to extend the provisions that prevent the offset of losses on the change of ownership of a company if it is associated within a prescribed period of certain major changes in the business, or the business becoming small or negligible.

Measures already announced

Double taxation relief

Meaasures to change the rules giving relief for foreign taxes against UK corporation tax were announced in the PBR. The Inland Revenue also issued a Technical Note on proposals to change the rules under which foreign tax credit relief is calculated and allowed in respect of foreign income received in the course of a trade. Meantime, one of the announced measures, which restricts relief for foreign tax on income received as part of a company's trade to the UK tax on the net profit derived from that income, has been extended with effect from 10 February 2005 in respect of income arising as a result of scheme where one of the main purposes is the achievement of DTR above the amount of UK tax on the profits from the transaction. This was prompted by a recent Special Commissioners’ decision (Legal & General) which meant that expenses need not be allocated to foreign sources. We can expect a final announcement confirming the measures.

R&D tax credits; spin out companies

Draft legislation on spin outs has been published. Further announcement enhancing R&D reliefs may be expected in the light of recent statements from the Chancellor.

Taxation of pre-owned assets

Finance Act 2004 provides for an income tax charge with effect from 2005/06 on the benefit people enjoy when they have arranged free continuing use of major capital assets that they once owned. Modifications are to be implemented by regulation to fill in a number of gaps in the legislation. In particular, they will ensure that bona fide equity-release schemes either made at arm’s-length, or not at arm's length, provided the part sale was made before 7 March 2005, are not caught. Relief will also be given from the double IHT charge which can arise where taxpayers have made use of a 'double trust' structure and make an election under FA 2004 Schedule 15.

New gift aid rules on admission to a charity

Draft legislation has been published in relation to Gift Aid and gifts to charity that attract a right of admission to a charity. We can expect a final statement in the Budget.

Employment – related securities: anti-avoidance

A technical paper was published at the time of the Pre-Budget Report outlining steps the Revenue intended to take to counter the use of employment-related securities for ‘cash bonus planning’. Draft legislation was published on 4 February. Confirmation and possible new anti-avoidance measures can be expected. See also 28 below.

Employer Provided Computers and Bicycles

A simplification of the ‘benefits in kind’ rules on employer-provided computers and bicycles has been announced. This clarifies the position when an employee buys a computer or bicycle that has previously been loaned to them by their employer.

Private equity transaction: measures to prevent tax relief for loan stock interest.

The Revenue has announced they will include measures in Finance Act 2005, effective from 4 March 2005 which will:

  • extend transfer pricing rules, so that they apply where parties who collectively could control a business act together to finance that business. This will mean, for example, that shareholder loans in private equity "club deals" (where several PE funds club together to acquire a large company, and each own less than 40% of the equity) may be caught.
  • apply transfer pricing rules to financing put in place up to six months before a control relationship exists.
  • limit the relieving provisions which, in effect, treat private equity controlled close companies as if they were not close for the purposes of the loan relationship rules to SMEs with effect from 4 March. The effect of this relieving provision was to preserve accruals basis deductions for interest and discount shareholder debt for all companies.

Repo, stock lending agreements

Legislation announced in the PBR is aimed at preventing tax avoidance by companies who purchase loan relationships under repo, or borrow them under stock lending agreements, and seek to realise profits on that loan relationship in a non-taxable form. Applies to profits made by a company in respect of loan relationships acquired under repo or stock lending agreements on or after 2 December 2004.

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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