UK: Budget 2009 - Part 1 of 2

Last Updated: 24 April 2009
Article by Sandy Bhogal, Michael Cashman, James Hill, Andrew Stanger and Peter Steiner

Originally published 23 April 2009

Please click on this link to read Part 2 of Budget 2009

Keywords: UK Budget 2009, loss making companies Loss carry back rules, Bank agreements, tax losses, reallocation of chargeable gains, REITs, investment funds, investment trust companies, offshore funds, venture capital schemes, anti-avoidance, indirect taxes, personal dividends, interest relief, life policies, double tax relief, indirect taxes, VAT, cross border VAT changes, VAT refund procedure, Stamp taxes, Stamp Duty Land Tax,


With the UK in the midst of a deep recession, and UK business already struggling to deal with the highly prescriptive and compliance heavy UK tax code, the backdrop to this year's Budget could not have been more daunting for the Chancellor of the Exchequer.

However, the response was a series of headline-grabbing measures which suggest that the Government is more focussed on the next year's General Election instead of taking difficult fiscal decisions to help the ailing economy.

Many of the widely speculated measures came to fruition, although in the case of the increase in the top rate of income tax (to 50%), the scale of the change may have caught people by surprise. The measures introduced to reduce uncertainty and tax leakage for investors in certain categories of funds are helpful, but the income tax changes may prompt the UK fund manager industry to consider moving operations offshore. The much publicised tax code of conduct for banks is yet to be published, but is expected shortly together with a consultation document. This all suggests that London may struggle to retain its place as the financial capital of the world.

The Government continues to introduce targeted rules to deal with perceived tax avoidance, and the principles based avoidance legislation on disguised interest and income streams applies from Budget Day. The Chancellor placed great emphasis in his speech on tax incentives for green behaviour and it will be interesting to see if they have the desired effect on domestic investment. The measures introduced are summarised here.

The much debated foreign profits tax package (described as 'balanced and affordable' by the Government) has also been announced. The Government has clearly structured the package to not provide a tax saving and in order for the package to achieve its stated objective of enhancing UK competitiveness one assumes it will offer compliance savings. The draft legislation should be available shortly and it will be interesting to see if this will be the case.

The new powers in relation to tax evasion and tax reporting are also summarised. It should be noted that finance directors will need to take personal responsibility for company tax filings.


Loss carry back rules

In the 2008 Pre Budget Report, measures were introduced to permit loss making companies to carry back losses for up to three years (rather than one year) subject to a £50,000 cap for loss carry backs to the earliest two years. This relief has now been extended to apply to losses which arose or which will arise in the accounting periods ending between 24 November 2008 and 23 November 2010.

Bank agreements on tax losses

Where banks have had to apply for Government support under the Asset Protection Scheme or similar arrangements, a new measure is being introduced to correct an anomaly which exists under current tax law. Banks may surrender their rights to tax losses or other reliefs as payment to the Government for support. There is a technical risk that under current law the losses would continue to be available notwithstanding their surrender to the Government. Legislation, with effect from 22 April 2009, will be introduced to ensure that where a bank or other taxpayer has taken Government support and has undertaken to forgo rights to certain tax losses, any automatic tax relief in relation to those losses is not available. The legislation will also ensure that there is no tax relief for any expense representing the amount of reliefs forgone.

Groups – reallocation of chargeable gains

New rules introduced by the Finance Bill 2009 will enable a company in a group to allocate to another member of its group gains or losses arising on a disposal of assets by means of a joint election. This will affect all losses or gains arising from the date that the Finance Bill 2009 receives Royal Assent and will replace the current regime that currently provides for reallocation of chargeable gains or losses via a notional intra-group transfer of assets at no-gain, no-loss, prior to the third party disposal. Former restrictions regarding the types of asset to which reallocation of chargeable gains or losses can apply and the circumstances under which reallocation of gains or losses can arise do not apply to the new provisions.

Group relief

Under current legislation, a UK company which issues preference shares to investors may, in certain circumstances, be prevented from entering into group relief arrangements with other members in its group. This situation can arise where the holders of the preference shares are treated as "equity holders" in the company and effectively dilute the shareholding of the company's parent below 75 per cent. The term "equity holders", as currently defined, includes the holders of a company's ordinary shares, which includes all shares other than fixed-rate preference shares. Fixed-rate preference shares are, in turn, defined as shares that only carry rights to dividends of a fixed amount or at a fixed rate per cent. of the nominal value of the shares. Preference shares which do not meet this narrow definition are treated as "ordinary shares" and are taken into account when determining whether companies are able to enter into group relief arrangements with other companies within their group.

Legislation will be introduced in the Finance Bill 2009 to amend the definition of "ordinary shares" to ensure that companies issuing certain types of preference shares to external investors do not lose the ability to enter into group relief arrangements. The amendment will remove the reference to "fixed-rate preference shares" and replace it with a new wider definition of "relevant preference shares".

The effect of these changes will be to exclude the holders of a wider range of preference shares from the definition of "equity holders" than is currently the case and thereby make it easier for groups to satisfy the conditions for claiming and surrendering group relief.

These changes will be of most relevance to banks which issue non-cumulative preference shares as Tier 1 regulatory capital. These are shares that do not carry a right to a dividend if the payment of such a dividend would cause the bank to breach its regulatory capital requirements.

The changes will apply to accounting periods that commenced on or after 1 January 2008. A company may, however, elect for the new rules not to apply to shares issued by the company before 18 December 2008.

Real Estate Investment Trusts (REITs)


Property rental companies or groups can elect to join the REIT regime if they meet the entry requirements and (on an ongoing basis) the conditions for staying in the regime. These requirements include conditions relating to the company/group, to the properties it rents out, and to the nature of its business and assets.

It seems that a number of groups have considered ways so that properties are let by one group member to another without the properties leaving the group, whilst at the same time meeting the REIT conditions. This was never intended by HM Revenue & Customs as what were non-qualifying groups could thereby become groups to which the REIT legislation applied.

Legislation will be introduced with immediate effect to stop the use of what is described as "artificial structures" to circumvent the intention of the REIT legislation and to prevent owner-occupied properties being included in the tax-exempt business of the REIT.


A number of other changes will be made to the REIT legislation with immediate effect. These include:

  • a REIT will be able to raise funds by issuing convertible preference shares;
  • the "balance of business asset" test (the REIT needing to have 75 per cent. of its assets involved in a property rental business) will have a consistent (accounting-based) definition for single company REITs and group REITs;
  • where a REIT sells a property involved in its property rental business, the sale proceeds can be retained awaiting reinvestment for up to 24 months. The method of apportionment of the sale proceeds where a property has been partly used for the property rental business will also be clarified.

Measures relating to certain funds

The Budget 2009 has introduced a number of measures relating to the taxation of certain funds and also investors in these funds. Most of these measures have been the subject of consultation, but notwithstanding this, there is generally a substantial lead time before the measures become effective. Taxpayers will therefore have ample opportunity to fully consider the impact of these changes and, where an election may be made, to consider the pros and cons of making such an election.


Authorised investment funds (AIFs) are generally authorised unit trusts or open ended investment companies, which are exempt from tax on capital gains in the UK, although they are subject to corporation tax (at a rate of 20 per cent.) on their net taxable income (excluding UK dividends) after deducting management expenses and the trustee's fees (or depositary's fees), as well as the gross amount of any interest distributions where applicable. Distributions from an AIF are treated as dividend distributions in the hands of an investor, although in certain circumstances, a special tax regime may apply to the investors.

The first measure involves the introduction of an elective regime for AIFs that will permit AIFs to become tax exempt, by moving the point of taxation from the AIF to the investor. This would bring UK AIFs into line with similar vehicles in Luxembourg and Ireland, and has been the subject of consultation involving the funds industry. Subject to satisfying certain conditions, under the new rules, an AIF may elect to be treated as a tax exempt fund (TEF). TEFs will be required to make two types of distributions from their income – a dividend distribution and a non dividend (interest) distribution. UK dividend income will remain tax free in the AIF and will be distributed as a dividend, whilst for all other income that is distributed as a non dividend (interest) distribution, the AIF will be entitled to a tax deduction equal to the amount distributed. As a consequence, such income will be tax free in the hands of the AIF, with the tax point now located with the investor, who will be treated as receiving a payment of yearly interest.

The new regime will have effect from 1 September 2009.

Another issue relating to AIFs which has been dealt with in the Budget, is the provision of greater certainty in distinguishing between investing and trading activities. The lack of certainty on this issue has been a problem for AIFs, as the UK tax regime for AIFs really only works effectively where an AIF is engaged in investment activities, not trading activities (as AIFs are exempt from tax on capital gains but taxable on income, including trading income).

HM Revenue & Customs has issued various guidance over the years on AIFs and trading, but a number of "grey" areas remain, for example involving the use of derivatives. The Budget proposes to provide greater certainty on this issue by introducing legislation containing a "white list" of transactions which, when undertaken by an AIF or an equivalent offshore fund will be treated as non-trading transactions. However, as ever, the legislation will contain rules designed to prevent abuse of the new legislation. The first rule is that the fund must be available to a wide range of investors. The second rule is designed to stop financial traders using AIFs to shelter profits.

This is a welcome move and does reflect discussions between the Investment Management Association and HM Revenue & Customs, but it will be interesting to see which transactions are actually included in the "white list" – we would hope that any list is not too narrow.


Similar rules to those discussed above in respect of the taxation of interest income received by AIFs are also to be introduced for investment trust companies (ITCs). ITCs are currently subject to corporation tax on any interest income that they receive. The Budget proposes a new elective regime, similar to that which is being introduced for AIFs, which will allow an ITC to pass the point of taxation to its investors, in respect of interest received by an ITC on its interest bearing assets.

Again, the ITC will receive a tax deduction for any interest distributions which it makes, with the investor treated as receiving a payment of yearly interest. The new regime will have effect from 1 September 2009.


One measure which has been the subject of consultation is the introduction of a new definition of an offshore fund for UK tax purposes.

Under the existing rules, the definition of an investment in an offshore fund is based on the regulatory definition of a collective investment scheme, which is found in the Financial Services and Markets Act 2000. This definition has given rise to a number of issues in certain cases, and is to be replaced by a new definition designed to provide greater clarity and certainty. The new definition of an offshore fund uses a characteristics based approach.

The new definition will apply from 1 December 2009, and is based on the draft legislation which was published following the 2008 Pre Budget Report. Changes were made to this draft legislation to reflect comments received during the consultation period.

Complementary to the change in the definition of offshore funds, the Budget proposes to introduce an elective regime for funds located outside the UK, which are not companies, partnerships or unit trusts (generally entities constituted by contractual arrangements). Where such a fund falls within the new definition of an offshore fund discussed above, it will be possible for an election to be made to treat the interest in the fund itself as an asset for the purpose of calculating capital gains tax on chargeable gains – as is already the case for shares in a company or units in a unit trust. As a consequence, investors will no longer be required to consider disposals of the underlying assets for calculating capital gains tax on chargeable gains. The tax treatment of partnerships will not be affected by these new rules.

The new treatment will apply to investments in contract based offshore funds from 1 December 2009. However, elections into the new treatment may be made from 22 April 2009, and can be applied retrospectively back to the 2003-2004 tax year. Once made, an election will be irrevocable and will apply for all relevant years following the date of the election.

It was also announced that investors subject to corporation tax will continue to treat such entities as transparent, although the industry will be consulted about the introduction of similar changes.

Improvements to the venture capital schemes

Some helpful improvements have been made to the Enterprise Investment Scheme (EIS), Corporate Venturing Scheme (CVS) and Venture Capital Trust (VCT) legislation. These will have effect from 22 April 2009.

For all the schemes, there is a relaxation on the time during which the money raised must be used. Previously 80 per cent. had to be used by the company receiving the investment within, usually, 12 months of the receipt or issue of shares, with the balance being used within the following 12 months.

This is being replaced with a single requirement that all the money must be used within the two year period.

For EIS, three additional changes are being made:

  • the rules regarding the carry back of relief to the previous year are being relaxed – this could substantially increase the amount of relief available;
  • money raised from shares issued on the same day as EIS shares used to have to be used on the same timescale as the money raised from the EIS shares – this provision is being removed;
  • a capital gains tax anomaly is being corrected to allow a tax free share for share exchange in certain circumstances.

However, the Chancellor has ignored calls to raise income tax relief on EIS investments to 40 per cent. and to allow VCTs to invest in secondary issues on the London AIM.

North Sea fiscal regime


For oil and gas companies that operate in the UK or on the UK Continental Shelf (UKCS), legislation will be introduced in the Finance Bill 2009. Some of these changes are:

  • changes will be made to the ring-fence corporation tax (RFCT) and petroleum revenue tax (PRT) rules to facilitate change of use activities where North Sea assets and infrastructure are re-used for purposes other than oil and gas production;
  • the chargeable gains rules will be amended to make it easier to allow companies to transfer their UK and UKCS assets to those most able to maximise the potential of those assets;
  • the PRT rules that provide relief for decommissioning costs will be extended to cover the situation where, as a result of a licence expiry, a company is no longer a licensee. This will make the tax rules more flexible and (at least from a tax perspective) will incentivise decommissioning.

The effective dates of the above measures vary, but will be during 2009.


Budget 2009 announced a package of measures to provide support through the North Sea fiscal regime for investment in the UK and UKCS.

A new "Field Allowance" will be introduced which will reduce the rate of tax paid in respect of certain challenging new developments (small fields, ultra heavy oil fields and ultra high temperature high pressure fields). When the specific type of field is producing, the Field Allowance can be offset against the supplementary charge (currently 20 per cent., in addition to the 30 per cent. RFCT, payable by companies that produce oil and gas in the UK and on the UKCS from new fields). The Field Allowance will apply to fields given development consent on or after 22 April 2009.

Taxation of foreign profits

The widely debated foreign profits package was confirmed today. After more than two years of consultation on this topic, some certainty over commencement dates is now available. The updated draft legislation will be eagerly awaited and only then will it be possible to accurately consider the benefits of the package as a whole. Updated legislation for these reforms is intended to be in the Finance Bill 2009. Separate reform of the current controlled foreign company regime will continue as announced in the 2008 Pre Budget Report. The foreign profits package will contain four elements:

  • the dividend exemption will apply to qualifying dividends received on or after 1 July 2009. The original proposals suggested the exemption would only apply to medium and large enterprises but it has now been extended to all companies where a shareholding of 10 per cent. or more is owned in the paying company. For shareholdings of less than 10 per cent., it is unclear whether these will be exempt;
  • the worldwide debt cap will apply to large groups for accounting periods beginning on or after 1 January 2010 and will restrict UK tax deductions for interest payable by UK members of a group to affiliated entities by reference to the consolidated gross finances expense of the group. It is worth noting that as currently envisaged wholly domestic groups will need to apply the debt cap rules (even though these may not have any effect);
  • the removal of some of the exemptions from the current CFC regime will apply for accounting periods beginning on or after 1 July 2009. The Acceptable Distribution Policy exemption will be abolished. The exemptions for superior and non-local holding companies will also be removed (subject to a two year grandfathering provision for existing holding companies);
  • the current Treasury Consent rules are being repealed and a new reporting requirement will apply to transactions with a value in excess of £100m undertaken on or after 1 July 2009. Relevant transactions must be reported within 6 months subject to certain exclusions. These will include several based on the existing 'General Consents' rules and an exclusion for certain trading transactions.

The proposal to extend the unallowable purpose anti-avoidance rule that applies to loan relationships and derivative contracts ("super para 13") has not been included in the package but is subject to further review.

Double taxation relief on dividends – mixer cap

Legislative changes will be introduced to resolve mismatches between the amount of corporation tax paid on dividends and the amount of double taxation relief available in respect of those payments, which originated from the reduction in the corporation tax rate from 30 to 28 per cent. on 1 April 2008. In respect of foreign dividends received by UK companies after 1 April 2008, the new rules provide that the availability of double taxation relief will be calculated by reference to the actual blended rate of corporation tax suffered on those dividends, as opposed to the corporation tax rate in force at the date of the dividend payment.

Foreign denominated losses

Where the functional currency of a UK resident company is not sterling, the company must translate its profits and losses for an accounting period into sterling at the exchange rate for the period in which the profits or losses arose. Where a company is loss-making, losses (which can be carried forward or back to other accounting periods) have to be converted in this way, despite not being used to offset profits in that period. Movements in exchange rates can have a significant effect on the value of such losses. Changes will be introduced in the Finance Bill 2009 to ensure that, where a company incurs a loss computed in a foreign currency and then offsets that loss against profits in a different accounting period, the loss will be translated into sterling at the exchange rate that is used to convert the profits in that different accounting period.

A similar problem arises where a company changes its functional currency between the accounting period in which a loss arises and the accounting period in which that loss is relieved. In these circumstances, losses will be converted into the new functional currency at the spot exchange rate for the date of the change of functional currency.

These amendments will apply to accounting periods beginning on or after 29 December 2007. A company can, however, elect to defer the commencement date to the first accounting period beginning on or after the Finance Bill 2009 receives Royal Assent.

Life insurance companies – consultation outcomes and simplification

HM Revenue & Customs launched a consultation in May 2006 to simplify and modernise certain aspects of the tax law relating to life insurance companies. A number of changes affecting companies and friendly societies carrying on life insurance business have been announced. These include the measures set out below.


The tax treatment of an addition to the LTIF is governed by case law and an unpublished HM Revenue & Customs' concession. Generally, life insurance companies make additions to their LTIFs for commercial or regulatory reasons. HM Revenue & Customs says that it has seen evidence of such additions being made to facilitate a Case I loss. Legislation will be included in the Finance Bill 2009 targeted at this perceived problem and will have effect for accounting periods ending on or after 22 April 2009 in respect of additions made on or after 22 April 2009.


Current legislation allows a deduction for amounts allocated to policyholders without restriction. Legislation will be included in the Finance Bill 2009 to restrict the deduction of amounts allocated to policyholders where (for example) those amounts are capital in nature or the amounts allocated are not funded out of the LTIF's taxable income. These measures will have effect for accounting periods ending on or after 22 April 2009 in respect of allocations made on or after 22 April 2009.


The anti-avoidance value-shifting rules in s30 Taxation of Chargeable Gains Act 1992 may apply where the reduction in the value of the shares of a company arises as a result of a transfer of a company's life assurance business. Legislation will be included in the Finance Bill 2009 to ensure that s30 does not apply where the reduction in value arises from the commercially-driven transfer of life assurance business to a group company. These changes will apply to disposals of assets on or after 22 April 2009.

UK dividend exemption for Lloyd's corporates

Corporate members of Lloyd's insurance market are subject to special tax provisions in Finance Act 1994. An effect is that both UK and foreign dividends received by a corporate member are charged to corporation tax as part of its insurance trading profits.

The Finance Bill 2009 will include provisions that repeal this part of the Lloyd's tax code to bring the tax treatment of dividends received by Lloyd's corporate members into line with those of general insurance companies so that for dividends received on or after 1 July 2009 they are exempt from UK corporation tax.

Release of trade debts

Under the loan relationship rules, a creditor which releases a debtor with which it is connected from a trade debt or a property business debt is denied a deduction for its impairment loss on the debt. The loan relationship rules do not, however, apply to the debtor in this situation, who is chargeable to corporation tax on the release of the debt. Legislation will be introduced in the Finance Bill 2009 to address this mismatch; the loan relationship rules will apply to the debtor as well as to the creditor so that no charge to corporation tax will arise on the release of the debt. Releases of debts between parties which are not connected will, in general terms, continue be taxable for the debtor and relievable for the creditor. This change will apply to debts released on or after 22 April 2009.

Late paid interest

Under current rules, a debtor is only allowed a deduction for interest payments made to a connected creditor in the accounting period in which they are actually paid (rather than when they are accounted for) if they are paid more than 12 months after the end of the accounting period in which they accrue and the creditor is outside the loan relationship rules. A similar rule applies to deeply discounted securities where the parties are connected and credits are not brought into account by the creditor for accounting periods in which the discount accrues.

Following questions over the compatibility of these rules with EU law, amendments to be included in the Finance Bill 2009 will disapply these "late paid interest" rules except where the creditor company is resident in a tax haven. Equivalent changes will also be made to the deeply discounted securities legislation.

The amendments will have effect for accounting periods beginning on or after 1 April 2009, although companies will be able to elect for the "paid basis" of deductions to continue to apply for the first accounting period which begins on or after that date.

Capital allowances

The Finance Bill 2009 will introduce a new temporary first year allowance of 40 per cent. for qualifying expenditure on general plant and machinery incurred in the 12 months beginning on 1 April 2009 (for corporation tax purposes) or 6 April 2009 (for income tax purposes). This will apply, in practice, to expenditure which does not fall within the Annual Investment Allowance of £50,000 announced in last year's Budget and which would otherwise attract writing down allowances of 20 per cent. Expenditure on items such as integral features, long life assets, cars and assets for leasing will be excluded from the 40 per cent. allowance.

Corporate intangible fixed asset regime

The Finance Bill 2009 will confirm certain measures in relation to the corporate intangible fixed asset regime - namely that the regime will only affect companies' goodwill or other internally generated intangible fixed assets and goodwill created or acquired from an unrelated company on or after 1 April 2002 and that goodwill will be excluded from the regime if the business of the relevant company commenced before 1 April 2002, unless or until that business is acquired by an unrelated party.

Additional rules confirmed by the legislation are that internally generated assets potentially fall within the scope of the regime, that all goodwill is created in the course of carrying on the business in question and that goodwill is treated as created before 1 April 2002 where the business is carried on any time before 1 April 2002. This legislation will take effect from 22 April 2009 but will then be treated as having always been in force.

Alternative finance investment bonds

Legislation will be included in the Finance Bill 2009 to provide relief from SDLT where finance is raised by the issue of alternative finance investment bonds (Islamic financial instruments commonly known as "sukuk") which are backed by land assets. These proposals form part of the government's wider policy to create a level playing field between alternative finance products and their conventional economic equivalents. A significant barrier to issuing such bonds is that an SDLT charge can arise on both the transfer of land to the issuer of the bonds and on the return of the asset to the person seeking the finance. A further SDLT charge can sometimes arise on holders of the bonds.

The measures announced today will exempt from SDLT the transfer of property to and from the issuer of the bonds and will ensure that no charge to SDLT arises on the bond holders.

The various steps involved in the issue of alternative finance investment bonds can also have capital gains consequences. The legislation in the Finance Bill 2009 will provide relief from any capital gains charges by ignoring the various transactions involved and by treating the original owner as having owned the asset throughout the period during which the land asset was held by the bond issuer.

The reliefs from SDLT and capital gains tax will be available for land transactions, the effective date of which is on or after the date that the Finance Bill 2009 receives Royal Assent.

The legislation in the Finance Bill 2009 will (similarly to the capital gains provisions) address the capital allowances consequences of the measures described above.

Stock lending and repurchase arrangements

Under current law, transactions under stock lending and repurchase arrangements are not chargeable to stamp duty or stamp duty reserve tax (SDRT) provided that securities of the same kind and amount are returned to the lender or seller in accordance with the arrangements. A stamp duty or SDRT charge can, therefore, arise where one of the parties to the arrangement becomes insolvent and the effect of the insolvency is that stock is not returned to the lender or seller. The Finance Bill 2009 will include legislation to provide relief from these stamp duty and/or SDRT charges. Where the reason for the stock not being returned is the insolvency of the borrower or purchaser, no stamp duty or SDRT will be chargeable on the borrower/ purchaser. Where the borrower has provided collateral in the form of chargeable securities and the lender becomes insolvent with the effect that the collateral is not returned to the borrower, no stamp duty or SDRT will be chargeable on the lender. Where the borrower is unable, due to its insolvency, to return the stock to the lender and the lender acquires replacement stock from third parties, the normal stamp duty or SDRT charges will not apply. Similarly, where a borrower needs to replace collateral securities lost on the insolvency of a lender, a replacement purchase will not incur a charge to stamp duty or SDRT.

The Finance Bill 2009 will also contain provisions which will disapply the rule that a lender makes a disposal, for capital gains tax or corporation tax purposes, of borrowed stock where the borrower does not, owing to its insolvency, return the stock to the lender. The acquisition of any replacement stock by the lender will be treated (for chargeable gains purposes) as a return of the borrowed stock by the borrower. No such changes will be made in respect of repurchase arrangements.

The reliefs described above will apply where the insolvency of the borrower or the lender occurs on or after 1 September 2008.

Hedging future share issues

Companies that undertake a rights issue in a currency other than their functional currency may use derivative contracts to hedge the value of the proceeds received. Currently there is an asymmetry as the foreign exchange gains and losses on the derivative hedge are subject to tax while any exchange movements on the shares themselves are not.

As already announced in a statement on 10 March 2009, the tax rules will be extended to cover such transactions described above. If a company enters into a derivative transaction to hedge the exchange rate risk from the proceeds of a future rights issue any exchange gain or loss on the derivative contract will be disregarded unless there is an overall exchange gain and such gain is subsequently distributed to shareholders. The new rules will apply to all currency derivative contracts entered into on or after 1 January 2009 but this is subject to a complicated transitional rule which may stream the relief available depending on whether the derivative contract hedging the exposure is current or closed out.


Minor amendments to the remittance basis

The opportunity has been taken to make a series of minor changes to the substantial overhaul of the remittance basis rules brought in by the Finance Act 2008.

Avoidance using employment income legislation

The Budget Notes also reprise two anti-avoidance measures announced in January in relation to the employment income legislation. The measures will close down tax avoidance schemes which relied on the creation of artificial liabilities through intentional acts of default in the context of contrived employments. These liabilities are then used to obtain tax relief. The measures provide for amendments to the legislation to make deductions or claims for relief under ss346 and 555 Income Tax (Earnings and Pensions) Act 2005 and s128 Income Tax Act 2007 unavailable where the main purpose, or one of the main purposes, of the arrangements is the avoidance of tax. These measures will have effect on the tax liabilities of affected persons on and after 12 January 2009.

Taxation of personal dividends

From 22 April 2009, provisions in the Finance Bill 2009 will take effect to entitle individuals with shareholdings of 10 per cent. or more in a non-UK company, who receive dividends in respect of those shares, to a non-payable tax credit, subject to certain conditions. This tax credit will only be available if the dividend is paid from a territory with which the UK has a double taxation agreement that contains a non-discrimination article. Such territories are referred to in the legislation as "qualifying territories". The legislation will also include a number of anti-avoidance provisions including methods to prevent the establishment of structures that result in such tax credits being secured in respect of dividend payments arising from non-qualifying territories.

Taxation of personal dividend distributions from offshore funds

From 22 April 2009, any individual in receipt of a distribution from an offshore fund, which is largely invested in equities, will be entitled to a non-payable tax credit. This credit will not be available in respect of investments in offshore funds that have a holding of more than 60 per cent. in interest bearing form, since any distributions received by individual investors in respect of such investments will be treated as payments of yearly interest (as opposed to the receipt of dividends).

Financial Services Compensation Scheme

The Budget confirms that individuals who receive compensation from the Financial Services Compensation Scheme because of the default of a financial institution such as a bank, will be subject to income tax on any portion of the compensation which represents accrued interest.

This measure applies to all payments made on or after 6 October 2008.


Sale of lessor companies

Further to consultation following the publication of the Discussion paper by HM Revenue & Customs on 29 July 2008 regarding certain unintended consequences of Schedule 10 to Finance Act 2006 (Schedule 10), the Government has published new draft legislation to make changes to Schedule 10.

Schedule 10 was introduced to create a tax charge upon the sale of a company carrying on a qualifying business of leasing plant/machinery. The perceived avoidance targeted for leasing companies was that typically they would show tax losses for the initial periods of a lease (as tax deductions such as capital allowances exceed taxable rental income), and this timing benefit reverses in subsequent periods as tax deductions reduce compared with taxable rental income. If the company could be sold to a loss-making group before the leases became "tax positive", the future (deferred) tax liability that would otherwise have arisen would be avoided. Similar provisions apply on the sale of certain partnership interests. Schedule 10 creates a corresponding deduction for the leasing company immediately after the sale with restrictions on the way in which that deduction may be utilised, so that for a UK tax-paying purchasing group Schedule 10 should produce only a timing disadvantage.

The changes include relieving provisions and are designed to ensure that Schedule 10 has the intended effect in relation to certain transactions involving partnerships and consortia. These apply from 22 April 2009. The relieving provisions address concerns that purchasers of leasing companies may not be able to utilise the deduction created by Schedule 10 within the current time period for which it is possible to group relieve the deduction. The Government has introduced draft legislation which extends the period over which a purchasing group can relieve the deduction created by Schedule 10 as group relief from up to two years following the purchase to up to six years.

Updates to the draft legislation published in November 2008 in respect of the anti-avoidance measures announced at that time which counteract specific planning in relation to certain sale and leasebacks and chains of leases intended to enable a sale of a leasing company without triggering a tax charge under Schedule 10 are still awaited.

These changes will only apply to the purchase and sale of certain companies or partnership interests which have a business of leasing including hiring out plant and machinery.

Plant and machinery anti-avoidance

HM Revenue & Customs has also announced 'minor amendments' and clarifications to draft legislation on plant and machinery leasing introduced as part of the 2008 Pre Budget Report. On 13 November 2008 measures were announced to counter a range of perceived avoidance involving the grant of long funding leases. The announcement was accompanied by draft legislation. Today, HM Revenue & Customs has also proposed changes to existing definitions of a sale and leaseback to ensure that they apply where an asset continues to be used by the seller following a sale.



A technical note will be published later in 2009 that will set out the issues and potential approaches to certain structured arrangements, often described as overhedging or underhedging. These transactions, broadly speaking, seek to take advantage of an interest rate differential between two currencies, with any foreign exchange exposure being hedged through a liability for tax in a company's consolidated accounts. There is no guidance as to what impact the technical note will have, or further steps that the Government may seek to make.


A new provision, with effect from 22 April 2009, is being introduced to prevent tax planning arrangements that use the rules relating to the hedging of currency risk ('matching') in an asymmetric manner. Matching defers the taxation of (and in many cases ultimately does not tax) exchange gains and losses from loans and derivatives that hedge currency risk arising from a company's investments in subsidiaries or branches operating in a different functional currency.

The new provision will seek to counter two types of arrangements:

  • arrangements that procure a one-way exchange effect. For example, an arrangement might give rise to an allowable loss, where (given the opposite currency movement) a gain would have been matched. The rules should only apply where the arrangements give rise to a tax advantage and utilise matching; and
  • where forward points in a currency contract (which reflect the inherent interest rate differential between different currencies) were accounted for as part of a matched exchange difference and therefore not taxed.

This provision will apply so that where a financial instrument is part of an arrangement that has a 'one way exchange effect', the exchange gains and losses on that instrument will not qualify for matching. It will also restrict matching where the exchange gain or loss is not computed with respect to spot rates of exchange (e.g. where forward or contract rates are used).

Interest relief

As previously announced, with effect from 19 March 2009, an individual will be denied a deduction for interest payments on loans used to invest in partnerships or small companies as part of an arrangement whereby the tax deductibility of the interest means that the investor is guaranteed to make a profit. The measure is not intended to affect genuine commercial investments in businesses where there is uncertainty as to the return that will be produced from the arrangements but is aimed at preventing tax relief where individuals have entered into artificial tax avoidance schemes.

Life policies

New anti-avoidance measures will apply from 6 April 2009 (or potentially from 1 April 2009) which prevent offshore life insurance policies being used to create income tax losses that can be offset against other taxable income. Such tax deductions will be disallowed from 2009/10 onwards even if the losses relate to a previous year. The new rules apply to all losses on offshore life insurance policies, not just those where losses have been created artificially.

Double tax relief


Legislation introduced in 2005 sought to limit the amount of UK double taxation relief available to UK banks for overseas tax suffered on trading receipts by restricting tax relief to the amount of UK corporation tax on the relevant profits. With effect from 22 April 2009 specific structured transactions where:

  • the trading profits are either diverted to another group (investment) company to avoid this restriction; or
  • specified low-cost funding has been allocated against the trading income by the bank thus reducing the amount of relief subject to the restriction, will be blocked. In the first structure, the income will be treated as trading income when received by a member of a banking group, unless that assumption is unreasonable in the circumstances. The second structure is dealt with by ensuring that a proportion of the bank's average cost of funds across all transactions is deducted in calculating the available relief.


The Chancellor announced today that legislation, with effect from 22 April 2009, will be introduced to deny double tax relief, or withdraw it where a repayment of foreign tax has already been made, regardless of who receives the payment e.g. a foreign subsidiary or permanent establishment of a UK resident company. This change will most likely affect legacy transactions given the announcements about dividend taxation in the foreign profits package.

Manufactured dividends

From 22 April 2009, this provision will seek to deny a deduction for foreign withholding tax where a bank has entered into a specific structured transaction involving manufactured overseas dividends. The targeted transaction is one whereby the bank has not borne the economic cost of foreign withholding tax on a manufactured overseas dividend but would otherwise be entitled to such a deduction based on the current rules.

Disguised interest

Following extensive consultation, the new legislation to tax as income any amount which is 'economically equivalent' to interest as if it were a profit arising to the company from a loan comes into effect for arrangements entered into on or after 22 April 2009. Draft legislation has been available since November 2008. However, there are two exclusions from the new rules which should be noted:

  • where it is not the main purpose, or one of the main purposes, of the arrangement to secure that the return is not chargeable as income for corporation tax purposes; or
  • the 'interest' return arises solely from an increase in the value of shares in a connected company or certain joint venture companies.

The rules are also subject to a transitional period for most existing arrangements, but do not exclude the application of existing rules targeting disguised interest e.g. the 'shares as debt' rules.

Transfer of income streams

As with the disguised interest rules, the transfers of income streams rules are effective from 22 April 2009 and were subject to extensive consultation. They are anti-avoidance provisions that aim to tax transfers of income by a transferor where the consideration received would not otherwise be taxable. As a result of the introduction of these rules, several existing pieces of anti-avoidance legislation will be repealed.

The transferee company will only be taxable on its accounting profit from acquiring the income stream. The provisions are subject to the following exceptions:

  • transfers of income resulting from the grant or surrender of leases;
  • transfers of income resulting from the disposal of an interest in an oil licence;
  • amounts that are already taxed as income; and
  • transfers of income by way of security.

The rules will also not apply in relation to sales of income that arise from loan relationships and derivative contracts where that income is excluded under those rules.

Financial products

No Budget would be complete without targeted measures which seek to close down certain schemes notified under the disclosure rules. The scope of the measures will only be known when draft legislation is published but will have effect from 22 April 2009.

The first transaction involves the use of a convertible bond issued between connected companies that is "highly likely" to convert into shares. The structure of the scheme is such that the borrower accrues an interest deduction for accounting and tax purposes that is greater than the income accrued by the lender. Accordingly, legislation is to be introduced to correct the asymmetry and require the lender to recognise additional taxable amounts, to the extent a deduction is allowed to the borrower.

The second transaction involves arrangements under which a company derecognises income from derivative contracts carried at fair value. The result of the derecognition is that the profits arising to the company in relation to the derivative fell out of account for accounting and therefore tax purposes. Legislation is to be introduced to require full recognition for tax purposes of the profits and losses of the derivative even where these are not recognised for accounting purposes.

Manufactured interest

Following the High Court case of DCC Holdings (UK) Limited v Commissioners of HM Revenue & Customs, it was announced in January 2009 that legislation would be enacted to deal with the deductibility of a deemed manufactured interest payment under a sale and repurchase transaction. In deciding the case against HM Revenue & Customs, the High Court held that a deduction was allowed for the deemed payment of manufactured interest in accordance with the prescriptive rules in the loan relationships code, regardless of whether it was recognised for accounting purposes.

Today's announcement counteracts the decision by introducing legislation which provides that a deduction for a deemed manufactured interest payment is only allowed where it is recognised for accounting purposes. Futhermore, legislation will be introduced retrospectively, such that a deduction for a real manufactured interest payment will only be allowed where it was also recognised in the accounts, which is in accordance with existing practice.

Indirect taxes



The taxable turnover threshold, which determines whether a person must be registered for VAT, increases from £67,000 to £68,000 with effect from 1 May 2009. The taxable turnover threshold, which determines whether a person may apply for deregistration, is being increased from £65,000 to £66,000.


The 2008 Pre Budget Report announced a temporary reduction in the standard rate of VAT from 17.5 per cent. to 15 per cent. for the 13 month period from 1 December 2008 to 31 December 2009. This will revert to 17.5 per cent. on 1 January 2010.

This temporary reduction in the standard rate has been widely criticised as being expensive and ineffective in generating demand, and the reverting to 17.5 per cent. with effect from 1 January 2010 has been criticised as the most difficult time of year for businesses to have to implement such a change.

HM Revenue & Customs has ignored these criticisms and is sticking with its original proposals.


HM Revenue & Customs is concerned that there may be widespread use of so-called "forestalling" of the VAT due at 17.5 per cent., even though goods are not due to be delivered or services to be performed until on or after 1 January 2010. Targeted legislation is to be included in the Finance Bill 2009 in order to counter this in certain situations where the customer cannot recover all the VAT on the supply. These provisions will have effect on and after 25 November 2008 (the date of the 2008 Pre Budget Report announcement) and will provide for a supplementary charge to VAT of 2.5 per cent.

A supplementary charge will also apply (with effect from 31 March 2009) where a pre-payment of more than £100,000 is made before the rate rise in respect of goods or services to be provided on or after 1 January 2010 (unless it can be shown that the pre-payment represented normal practice).


Where a taxpayer had previously made exempt supplies of land and buildings and now wishes to opt to tax them, HM Revenue & Customs' formal (and prior) permission was required to do so. This was designed to ensure that the taxpayer did not recover too much input tax on goods and services received by the taxpayer which were attributable to the land and buildings.

For some years, a list of circumstances has existed where it is accepted that automatic permission is available.

Reacting to criticism that the procedure can be cumbersome (and following extensive consultation), HM Revenue & Customs is seeking to regularise, streamline and simplify the procedure with effect from 1 May 2009. It is suggested by HRMC that as a result of the changes more taxpayers will be able to opt to tax without a need to seek HM Revenue & Customs' prior permission.

Cross Border VAT Changes


The current general rule is that VAT is due where the supplier has established its business. This is the case for supplies to both businesses and non-business customers. From 1 January 2010 (to comply with EC law), the new general rule will be that for business customers the place of supply will be where the customer is established. The rule for supplies to non-business customers will remain unchanged i.e. it will be where the supplier is established.

There will continue to be certain exceptions to the general rule. For instance, land-related services are currently deemed to be supplied where the land is situated; this will not change.

The place of supply of certain international services (e.g. legal advice) will continue to be treated as supplied where the customer belongs when provided to non-business customers outside the EC.

For cross-border supplies, in most cases, the business customer will account for VAT using the so-called reverse charge procedure (and recover the tax subject to the normal rules) as happens now for a wide range of international services.


Accompanying these changes are requirements for UK businesses to complete EC Sales Lists where the place of supply to the customer's country within the EU.


The time of supply determines when VAT is to be brought into account. Currently, the time of supply (or tax point) for cross-border services supplied to a UK business customer is usually when payment is made. If the consideration is non-monetary, the tax point will occur at the end of the VAT accounting period during which the service is performed.

From 1 January 2010, the rules will be governed primarily by when a service is performed and a distinction will be made between single and continuous supplies. For single supplies, the tax point will occur when the service is completed (or, if earlier, when it is paid for).

For continuous supplies, the tax point will be the end of each billing or payment period. For example, if charges are billed monthly or the customer is required to pay a monthly amount, the tax point will be the end of the month to which the bill or payment relates. If a payment is made before the end of the billing period, then the payment date (rather than the end of the period) will be treated as the tax point.

For other continuous supplies (not subject to billing or payment periods), the tax point will be 31 December each year (unless a payment has been made beforehand, in which case the payment will create a tax point).


A new electronic VAT Refund procedure is being introduced across the EU from 1 January 2010 to replace the current paper-based system. Businesses established in the UK will submit claims for overseas VAT electronically on a standardised form to HM Revenue & Customs rather than direct to the Member State of Refund.

Amongst the changes:

  • businesses will have 9 months from the end of a calendar year in which the VAT was incurred (rather than the current 6 months); and
  • tax authorities will normally have 4 months to make repayments (rather than the current 6 months), with interest in the case of late payments.

Overseas businesses will make their claims for UK VAT through the electronic interface in the EU Member State where their business is established.

Stamp Taxes


In September 2008, the government announced a 12 month exemption from Stamp Duty Land Tax (SDLT) for certain transactions in land consisting entirely of residential property where the chargeable consideration was no greater than £175,000. The Chancellor announced today that this "holiday" from SDLT would be extended to transactions normally completed on or before 31 December 2009. From 1 January 2010, the SDLT threshold for residential property will revert to £125,000.


Please see the section entitled "Alternative finance investment bonds" under the section entitled "Business" for details on the SDLT relief for alternative finance bonds announced in today's budget.


The Finance Bill 2009 will make it easier to claim SDLT relief for leasehold enfranchisement. Currently, this relief can only be claimed by a statutory "Right to Enfranchise" company. The changes will allow relief to be claimed by a nominee or appointee who acquires the freehold of a block of flats on behalf of leaseholders under a statutory right of leasehold enfranchisement. The changes will have effect for land transactions with an effective date of 22 April 2009 or later.


It is apparent that HM Revenue & Customs has become aware of certain SDLT avoidance schemes marketed to individuals intending to purchase high value residential property. In response, HM Revenue & Customs has published a consultation document and published draft regulations which will extend the scope of the current SDLT Disclosure Regime. The consultation proposes that the regime be extended to include residential property with a value of at least £1 million and that arrangements be introduced to enable HM Revenue & Customs to identify users of disclosed SDLT schemes for both residential and commercial property. It is intended that regulations implementing the proposals will be introduced towards the end of 2009.


Despite its stated intention to reform the "Schedule 19" SDRT rules on surrenders or transfers of units in unit trusts, the Government has not announced any amendments to the rules at this stage.


Please refer to "Stock lending and repurchase arrangements" in the section entitled "Business".

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Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2008. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

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