UK: Weekly Tax Update - June 1, 2015

Last Updated: 10 June 2015
Article by Smith & Williamson

1 General news

1.1 Queen's speech

Among the measures noted in the Queen's speech were the following concerning tax: Legislation will be brought forward to ensure people working 30 hours a week on the National Minimum Wage do not pay income tax, and to ensure there are no rises in Income Tax rates, Value Added Tax or National Insurance for the next 5 years.

1.2 Scotland Bill published

The Scotland Bill, published on the first day of the new Parliament, is due to turn the all-party Smith Agreement into legislation, with further devolvement to the Scottish Parliament. It covers substantial new tax powers, in addition to measures around new welfare powers, including benefits for carers and disabled people together with cold weather payments and winter fuel payments.

On the new tax powers, Scotland will have a wide range of new financial powers including the power to set rates for income tax and the Scottish Parliament will keep all the money raised in Scotland. In addition half of VAT raised in Scotland will stay in Scotland. The Bill will also devolve Air Passenger Duty and the Aggregates levy to the Scottish Parliament.

The bill provides for the Scottish Parliament to legislate to set the rates of Income Tax and the limits at which these are paid, for the non-savings and non-dividend income of Scottish taxpayers. Instead of being able to set a Scottish Rate of Income Tax (SRIT), which would have sat on top of the UK rates less 10%, the Bill makes provision for Scotland to set more than one rate – ie a basic rate and any other rates of Income Tax for Scottish taxpayers.

In addition to amendments to both the Scotland Act 1998 and the Income Tax Act 2007 (with affect from an appointed date) there are due to be changes to the capital gains tax legislation to ensure that the CGT higher rate of 28% is paid by Scottish income taxpayers by reference to the UK income tax limits, irrespective of Scottish limits and rates. The 18% CGT rate will be paid where a Scottish taxpayer has income below that level.

1.3 Sugar tax

Those with a sweet tooth will be pleased to hear that at a recent press briefing, the Prime Minister's Official Spokesperson (PMOS) said the Prime Minister's position had not changed and there were no plans for a tax.

2 Private client

2.1 Draft legislation on tax-advantaged venture capital schemes

The CIOT has commented on the draft legislation published in March 2015, which makes changes to the rules for the Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). It has raised concerns that the further qualifying conditions being introduced, in particular for EIS and SEIS, may restrict the number of potential investors who can qualify for the relief and that the additional complexity may deter individual investors from taking advantage of the reliefs.

In its response, the ATT focused on the proposal to exclude from EIS eligibility any company whose first commercial sale had occurred earlier than in the 12 years prior to the new investment unless either there had been a separate qualifying investment within that twelve year period or the level of new investment (within a 30-day window) was at least equal to 50% of the company's average turnover in the five previous years. The ATT has questioned the logic of the turnover: investment ratio test and recommended a de minimis exclusion from the rule.

2.2 Valuation of unquoted company shares

The First-tier Tribunal (FTT) has considered a dispute around the valuation used for unquoted company shares in BG Foods, gifted by Brian and Doreen Foulser to companies held within insurance bonds. The case is interesting in its examination of the discount rates used when valuing the particular holdings, though in applying the discounts to other cases, there will need to be close consideration of the particular circumstances applying.

Mr Foulser had been exploring routes to realise the value of his and his wife's 60% holding. Based on a 95/96 profit forecast, the 60% holding had been valued at £16m. One of the other shareholders of BG Foods (3i) offered £16m for that holding in 1997. Negotiations continued and there was eventually a £26m offer for the 60% holding in October 1997. A sale was eventually agreed at £27.3m on 2 November 1998.

In March 1998, the Foulsers considered methods of potentially reducing the CGT on the sale of their holdings, eventually gifting their shares to companies holding insurance bonds.

The purported values given by the respective experts for a 51% and 9% holding respectively were as follows:

HMRC's expert – £20.6m and £2.5m: a notional value was initially used by considering the projected earnings of the company to be £2.7m, multiplied by 15 to give an overall value of £40.5m for the company, using comparables. A discount of 15% was then applied to the 51% share and a 40% discount applied to the 9% share giving values of £17.5m and £2.1m respectively. However, when the indicative offer of £26m was considered, the values were increased to £20.6m and £2.5m using a control premium of 40%.

Taxpayers' expert - £6.6m and £243k: The actual ongoing profit at the time (without expected growth projections) was considered to give a £1.6m after tax profit, to which a multiple of between 8 and 10 was applied giving a value for the business of £16m. A 51% holding was discounted by 20% to give £6.6m. The 9% holding was valued on a dividend yield basis assuming a required rate of four times the risk free rate (considered to be 6% at the time).

On the particular facts of the case the FTT concluded the respective values were £15.9m and £1.7m. This was arrived at by applying a control premium of 35% to the value of the company, valuing it at £39m. The discount applied to a 51% share of this was 20%, thus arriving at £15.9m, while a 50% discount was applied to a 9% share to arrive at the £1.7m value.

3 PAYE and employment

3.1 Pension schemes newsletter April 2015

Amongst other things, HMRC's April 2015 pension scheme newsletter includes notes on tax payments to scheme members arising from the new pension flexibility, as well as notes on the implications of pension flexibility for scheme administrators.

Download - Weekly Tax Update - June 1, 2015

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015

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