UK: Weekly Tax Update - 14 December 2015

Last Updated: 22 December 2015
Article by Tina Riches

1. General news

1.1 Making tax digital

HMRC has published two documents outlining some fundamental changes that HMRC intend to make to the way the tax system works, transforming tax administration, with the intention of making it more effective, more efficient and easier for taxpayers.

The digital road map sets out the interesting and bold proposals of HMRC and the Government. This includes quarterly reporting for landlords and all but the largest businesses (over £20m turnover). The plan is that businesses will use software that compiles their tax data as part of their ordinary day-to-day activity, with the submission process being less burdensome.

The 'simpler payment' discussion paper considers payment arrangements for CT, for entities with profits of £20m or less in a 12 month accounting period, Income Tax Self Assessment (ITSA), Value Added Tax (VAT), Class 4 National Insurance Contributions (NICs) and other taxes collected through the self assessment process.

If you have any concerns regarding this area do get in touch with us. Smith & Williamson is already involved in the consultation on this.

www.gov.uk/government/publications/making-tax-digital

1.2Draft Finance Bill 2016 clauses

HMRC has published draft Finance Bill (DFB) 2016 clauses for many of the provisions due to be in next year's Finance Bill. These are published early in draft to provide greater certainty to taxpayers on future tax law and for consultation, with a deadline for comments of Wednesday 3 February 2016.

Many of the provisions have already been announced and we have commented on many of these in our previous Autumn Statement booklet. For some of the provisions or where the detail has not been available before, we have set out a summary and some initial comments below. It is important to remember that these are an early draft only and may not reach the statute book in current form or even at all. In addition, further draft clauses are expected over the next month or so.

www.gov.uk/government/collections/finance-bill-2016

Personal savings allowance (PSA) (clause 1 and 4)

Clause 1 (thank you HMRC for numbering the clauses, even if they were initially in 88 separate documents) introduces the new tax-free Personal Savings Allowance (PSA) for individuals. It could be described as a savings nil rate band. The proposed legislation (new ITA 2007 ss12A and 12B) will from, 6 April 2016, apply a 0% rate on up to £1,000 of savings income, such as interest, paid to an individual. The limit is £500 for individuals with any higher rate income and it is not be available to individuals with any additional rate income. Note that it will only apply to the calculation of income tax for individuals only.

Changes are being made to the conditions for the transfer of personal allowance for married couples and civil partners so that income subject to the savings nil rate does not trigger ineligibility Income from an ISA, and income which qualifies for the 0% starting rate for savings at ITA 2007 s.12, will not use up any part of an individual's savings allowance. The income within an individual's personal savings allowance will still be taxable income and included where taxable and net taxable income need to be considered.

Clause 4 makes the changes so that banks, building societies and National Savings and Investments (NS&I) no longer need to deduct tax from the account interest paid or credited on or after 6 April 2016.

www.gov.uk/government/publications/income-tax-personal-savings-allowance

Dividend nil rate and dividends tax credits (clause 2 and 3)

Clause 2 introduces a dividend nil rate, which is referred to as a dividend allowance. The draft legislation will apply the nil % rate to the first £5,000 of an individual's dividend income otherwise taxable at the dividend ordinary rate, dividend upper rate or dividend additional rate. Note that it will only apply to the calculation of income tax for individuals and not the income of any other person.

For the purposes of the transfer of personal allowance for married couples and civil partners, the dividend nil rate is looked through, such that, if some of the dividend income would have been taxed at the dividend upper rate or additional rate had the old rules continued, then the transfer conditions are not met. An individual will not need not notify HMRC of the receipt of dividend income when there is no liability to tax on it.

Clause 3 removes the adjustments to gross up dividend income by 1/9 and have a 10% notional tax credit, together with various consequential amendments. UK and non-UK distributions will therefore be treated in the same manner.

www.gov.uk/government/publications/income-tax-changes-to-dividend-taxation

Statutory tax exemption for trivial benefits in kind (clause 8)

Clause 8 introduces an exemption from tax for qualifying benefits in kind provided on or after 6 April 2016 costing £50 or less. An annual cap of £300 will be applicable for directors and office holders of close companies and their associates. Broadly, a benefit in kind will be qualifying where it is:

  • not cash or a cash voucher;
  • not provided as part of a salary sacrifice arrangement or other contractual obligation; and
  • is not provided in recognition of particular services or in anticipation of such services.

Employers will no longer be required to report such benefits on P11Ds or via PSAs. There will be a corresponding disregard for such benefits that attract class 1 NICs.

www.gov.uk/government/publications/income-tax-exemption-for-trivial-benefits-in-kind

Travel expenses of workers providing services through intermediaries (clause 9)

This clause closes the apparent loophole on travel expenses for such intermediaries.

The clause applies to IR35 situations or other cases where the worker is under supervision. Put simply, each engagement of the worker is considered a separate employment and thus it will not be possible to avoid the ordinary commuting rules on each of those employments. This has the effect of preventing the travel expenses in question becoming tax deductible for the employee, bringing the position into line with that of 'ordinary' employees.

New HMRC guidance has also been produced. NIC will be brought into line as well.

www.gov.uk/government/publications/income-tax-employment-intermediaries-and-relief-for-travel-and-subsistence

Securities Options (clause 11)

Restricted stock units (RSUs) are to be taxed as share options.

The purpose of this new clause is to bring to an end an old chestnut over the taxation for, largely American, RSUs. In a small change, RSUs will be taxable, if at all, as share options. This has had some implications in particular for internationally mobile employees and the related provisions in HMRC's Manuals have, disconcertingly, changed over the years. This is now a reasonable basis of taxing this kind of award, however, and certainty should be welcomed.

www.gov.uk/government/publications/employee-share-schemes-simplification-of-the-rules

Pensions Lifetime Allowance details (Clause 12)

This clause introduces the well-trailed reduction of the lifetime allowance for registered pensions to £1M from £1.25M from 5 April 2016. In addition, we now have the details of both fixed protection and individual protection. An individual may only apply for one of these protections after 6 April 2016.

Fixed protection, broadly, comes at the cost of ceasing all contributions together with no further accrual of benefits in defined benefit schemes over CPI or in accordance with rules providing for further accrual actually in the scheme rules at 9 December 2015. If this is done, the fund is protected up to £1.25M with 55% rates of tax applying over that amount.

Individual protection for funds of over £1M permits further contribution, but only the present value of the fund as at 5 April 2016 is protected. The schedule to the clause sets out the details for both obtaining suitable reference numbers from HMRC for protected schemes and of the inevitable record keeping required.

www.gov.uk/government/publications/reduction-of-pensions-lifetime-allowance

Company distributions (clauses 16 to 18)

The anti-avoidance transactions in securities rules in ITA 2007 will change for transactions occurring on or after 6 April 2016.

The assessment of whether an income tax advantage arises is widened from considering only the person who is a party to the transaction, to any person. The way the fundamental change of ownership rule is assessed will change from considering whether the purchaser has a 75% interest in the close company for the two years after the transaction, to whether the vendor has a 25% interest after the transaction.

Currently, there is a notification procedure followed by the issue of counteraction notices within a six year period. From 6 April 2016 there will instead be a notice of enquiry, followed by the issue of counteraction notices without time limit.

A new rule will deem a distribution in a winding up, formerly a possible capital gain, to be an income distribution where certain conditions are met. One of these is that there is a main purpose of the avoidance or reduction of a charge to income tax. This is a self-assessment provision which appears to legislate what is currently described in HMRC manuals at CTM36850.

www.gov.uk/government/publications/corporation-tax-income-tax-and-capital-gains-tax-company-distributions

Taxation of performance linked rewards paid to asset managers (clause 22)

Following consultation in summer 2015, we now have draft legislation determining the boundary for income and capital for carried interest arrangements under the disguised investment management fee rules. The provisions will apply to carried interest arising on or after 6 April 2016 whenever the arrangements under which the sums arise were made.

In summary, where the investments within the investment scheme giving rise to the carried interest are held within the scheme on average for at least four years, the carried interest will be treated as capital. If held on average for less than three years, the carried interest will be treated as income. There is a sliding scale between these dates where the proportion of carried interest attracting capital treatment increases by 25% after each three month period. Carried interest treated as income instead of capital by these new provisions is known as 'income-based carried interest', and is included within the scope of charge to income for disguised investment manager fees as introduced by FA2015.

www.gov.uk/government/publications/investment-managers-performance-linked-rewards

Loan relationships and derivative contracts (clauses 23 to 25)

We now have the draft legislation that deals with anomalies in the loan relationship and derivative contract changes introduced by F(No2)A 2015. The changes will take effect for accounting periods beginning on or after 1 April 2016, with accounting periods which straddle this date being split. As the default date for many of the regime changes introduced in F(No2)A 2015 Sch7 was the accounting period commencing on or after 1 January 2016, there may be a short period for some groups where the anomalies cannot be corrected by the new draft legislation. The new draft legislation covers three areas:

(i)Non market rate loans

The new rule removes from tax those accounting debits on non-market rate loans relating to corresponding accounting credits on the same loan that will not be taxed under the new regime. It will apply where either the lender is not within the charge to corporation tax, for example, non-market rate loans from individual shareholders, and to loans from corporate lenders that are tax resident in a non- qualifying territory, or that are effectively managed in a non-UK territory that does not tax companies by reason of domicile, resident or place of effective management.

The measures will not deal with loans between a parent lender and subsidiary borrower where the parent is either in the UK or a qualifying territory. The new regime TAAR, effective from 18 November 2015, and the unallowable purpose rule should deal with avoidance arising from this area.

(ii)Debits and credits affected by transfer pricing adjustments

Transfer pricing rules may mean that debits on some loan relationships and derivative contracts are disallowed for tax, but without this provision, a later reversal of the debits may still be subject to tax.

Amendments are made so that no credit can be brought into account for tax that relates to debits previously disallowed as a result of transfer pricing adjustments.

(iii)Exchange gains and losses on transactions not at arms-length

CTA 2009 s.447, 449, 451 and 694 leave out of account any exchange gains or losses arising on loans or derivative contracts to the extent those loans and derivatives are ignored as a result of transfer pricing adjustments. As these provisions currently do not address any hedging of these transactions, this could leave tax exposures on foreign exchange amounts where economically there is none for the company.

Changes are therefore introduced to ensure that these provisions only exclude foreign exchange gains and losses to the extent they are not 'matched' in a hedging relationship or disregarded as a result of the Disregard Regulations.

www.gov.uk/government/publications/corporation-tax-update-of-the-taxation-of-corporate-debt-and-derivative-contracts

Orchestra tax relief (clause 27)

As announced in March 2015, orchestra tax relief is to be introduced for accounting periods beginning on or after 1 April 2016.

The form of the relief is similar to TV, video games and theatre tax relief. Companies will have the ability to claim an additional deduction for tax of the lower of 100% of EEA qualifying expenditure or 80% of total qualifying expenditure. If the business is loss-making, the company can claim the repayment of a tax credit of 25% of the surrenderable loss. A company may qualify if it is engaged in the production of a qualifying orchestral concert. This will be an orchestral concert consisting of at least twelve instrumentalists, none of whom, or a minority of whom, is electronically or directly amplified.

www.gov.uk/government/publications/orchestra-tax-relief

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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