UK: Business Tax Briefing - For Businesses

Last Updated: 23 April 2009
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017

The Budget, as expected, included many tax-raising measures, most notably the increase in the top rate of income tax to 50%. There are also important new measures in relation to tax evasion and tax reporting.

New business reliefs are modest with an increase to 40% in capital allowances for expenditure in the year to April 2010, which is of course of little benefit to loss makers. There is also an extension for an additional year of the three year loss carry back measures, proposed in the 2008 Pre-Budget Report (PBR) but without any increase in the £50,000 limit.

Business tax

Taxation of foreign profits

Today's announcement covers each of the areas of the foreign profits package and finally provides certainty over commencement dates:

  • 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.
  • 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 by reference to the gross consolidated finance expense of the group. The proposal to extend the unallowable purpose anti-avoidance rule that applies to interest and derivative contracts ('para 13') has been dropped from the package and will be kept under review.
  • The removal of some of the exemptions from the current Controlled Foreign Company (CFC) regime will apply for accounting periods beginning on or after 1 July 2009. The Acceptable Distribution Policy and Holding Company exemptions are being abolished subject to grandfathering for two years for existing holding companies. The exemption for local holding companies is retained.
  • The current 'Treasury Consent' rules are to be repealed and a new reporting requirement will apply to transactions with a value in excess of £100m undertaken on or after 1 July 2009. Transactions must be reported within six months, subject to certain exclusions. These exclusions include several based on the existing general consents rules and an exclusion for trading transactions.

Reform of the current CFC regime will continue to be considered separately.

Capital allowances: plant and machinery - temporary first-year allowances

Businesses investing more than £50,000 in general plant and machinery between April 2009 and April 2010 will be entitled to a new temporary 40% first-year allowance for the excess over £50,000, rather than the standard 20% writing-down allowance.

Extension of trading loss carry back for businesses

As previously announced in the 2008 PBR, companies and individuals can carry back trading losses for three years, being an unlimited carry back to the preceding year under existing rules, and £50,000 to the earlier two years. For companies the extended carry back now applies to losses arising in accounting periods ending between 24 November 2008 and 23 November 2010 and for individuals to losses arising in the tax years 2008/09 and 2009/10. This extends the previously announced relief from one year of losses to two.

Personal accountability of senior accounting officers of large companies

Legislation will be introduced in Finance Bill 2009 to ensure that accounting systems in operation within large groups liable to UK tax are adequate for the purposes of accurate tax reporting (ie tax returns and supporting computations). This will be partly achieved by making senior accounting officers of such companies personally responsible for certifying to HMRC that this is the case, or specifying where there are inadequacies and confirming that they have notified the company's auditors. The new obligations will be supported by penalties chargeable on the senior accounting officer personally and on the company for a careless or deliberate failure to meet these obligations. It is expected that the assessment of whether accounting systems are adequate for the purposes of accurate tax reporting will be based on a system of controls similar to those introduced by the US 2002 Sarbanes-Oxley Act. The critical test will therefore not be whether the tax return contains any inaccuracies but whether sufficient controls were in place to enable accurate tax reporting.

Publishing the names of deliberate tax defaulters

Legislation will be introduced in Finance Bill 2009 enabling HMRC to publish names of serious tax defaulters in certain tightly defined circumstances. The tax lost must exceed £25,000 and relate to deliberate defaults. Exemption from publication can be achieved where there is full disclosure to HMRC and there will be a right of independent appeal.

Double taxation relief for companies

The Budget includes a number of specific measures in relation to the double taxation relief (DTR) rules for companies. Legislation in Finance Bill 2009 will confirm that where there are repayments of foreign tax (either in relation to a permanent establishment or a subsidiary) then the repaid amount must be excluded from DTR claims, regardless of who actually receives the repayment, preventing certain tax planning arrangements. The Finance Bill will also address a technical problem with the operation of the mixer cap in relation to dividends received in periods straddling last year's corporation tax rate change from 30% to 28%.

There are two specific anti-avoidance measures in relation to certain DTR planning arrangements typically used by banks. The first seeks to deny deductions for foreign tax which has not actually been economically borne in relation to certain repo transactions over foreign shareholdings. The second seeks to prevent banks from avoiding the existing rules which limit credit relief on their trading income.

Corporate intangible fixed asset regime

Legislation will be introduced to specifically support HMRC's long-held view that, for the purposes of the intangible fixed asset rules, goodwill includes internally-generated goodwill. The legislation will have effect on or after 22 April 2009 and shall be treated as always having had effect. For example, the legislation prevents future debits in respect of goodwill where a business, which commenced before 1 April 2002, has been acquired from a related party before 22 April 2009.

Financial arrangements anti-avoidance rules

Anti-avoidance measures are being introduced in Finance Bill 2009 to counteract two particular transactions involving financial arrangements that have been disclosed to HMRC.

The first transaction involves the use of a particular intra-group convertible bond, and the measure aims to restore symmetry for tax purposes where there may be an accounting mismatch between expense recognised by the borrower and income recognised by the lender. The second transaction involves a company 'derecognising', for accounting purposes, a derivative contract that is carried at fair value. The legislation is expected to require full recognition of profits and losses in relation to the derivative contract for tax purposes, regardless of any 'derecognition' for accounting purposes.

The legislation for both transactions is to take effect for debits and credits that arise on or after 22 April 2009. This is an expected targeted response by HMRC to disclosed avoidance schemes, but its scope cannot yet be accurately gauged in the absence of draft legislation.

Groups: reallocation of chargeable gains

The rules that allow certain capital gains and losses to be reallocated amongst UK group companies are to be relaxed. At present, there needs to be a disposal to a third party and that third party must acquire an asset. Therefore, it is not currently possible to elect, for example, for the reallocation of a loss arising on a negligible value claim as there is no disposal/acquisition. The changes will apply to gains/losses arising on or after the date on which Finance Bill 2009 receives Royal Assent.

Late paid interest and release of connected party trade debts

These changes have been the subject of our earlier Special Bulletins. A welcome change, which was raised by Deloitte and others, is the bringing forward of the release of trade debt legislation that will now apply from 22 April 2009.

Structured foreign exchange arrangements

A technical note is due to be released by the Treasury in the summer which sets out the 'issues and possible approaches' to certain structured foreign exchange arrangements entered into by corporate groups – most notably structures which allow access to increased investment returns, or reduced borrowing costs, by taking foreign currency positions whilst using tax capacity to hedge the inherent foreign exchange risk.

Whilst the Government acknowledges that such arrangements do not constitute tax avoidance schemes, this is an indication that they nevertheless consider that 'post tax hedging' is an unacceptable shift of currency risk onto the Exchequer.

Hedging proceeds from future share issues

The foreign exchange 'disregard' regulations will be amended to provide that exchange gains and losses arising from transactions hedging the proceeds of rights issues will be disregarded for corporation tax purposes. Gains will be recognised for corporation tax purposes only to the extent that a disregarded gain is subsequently distributed to shareholders. The rationale for this amendment is to ensure symmetry of treatment, given that the exchange differences arising in respect of the issue proceeds will not usually be taxed.

Disguised interest

Finance Bill 2009 will include provisions relating to disguised interest. The rules are the result of extensive consultation by HMRC and will take effect in relation to disguised interest arrangements to which a company is a party on or after today.

Transfers of income streams

The Budget confirmed that the widely debated transfers of income streams rules will be included in Finance Bill 2009 although the final legislation is not yet available.

Foreign exchange losses: targeted anti-avoidance rule (TAAR)

The Government proposes to introduce a TAAR to counteract tax planning arrangements that abuse the corporation tax regime relating to the hedging of currency risk in respect of a company's foreign operations.

Although this is aimed at two types of planning, there is some potential for commercial hedges to be caught. This would render the hedging ineffective for tax purposes and would entail extremely onerous compliance obligations.

The TAAR will take effect from today.

Manufactured interest - effect of High Court decision in DCC Holdings

Finance Bill 2009 will include measures to reverse the October 2008 decision of the High Court in DCC Holdings, the case which sent shockwaves through HMRC and the Government. It precipitated a ministerial statement in January 2009 announcing retrospective changes to the taxation of manufactured interest payments. The Budget proposals are in line with this statement.

Personal and employment taxes

Tax rate and personal allowance changes for higher rate taxpayers and trusts

From 6 April 2010 there will be changes to the tax rate and the personal allowance applying to higher rate taxpayers. An additional rate of 50% will be introduced and will apply to taxable income above £150,000.

The basic personal allowance will also be reduced for those with income exceeding £100,000. Broadly, there will be a reduction in the allowance by £1 for every £2 by which a taxpayer's net income exceeds £100,000.

As from 6 April 2010, the income tax rate for discretionary trusts is to be increased to 50% on income over £1,000.

Foreign dividend tax credit extended

Presently, a 10% notional tax credit is available on dividends paid to individuals from UK companies and, since 6 April 2008, dividends received from non-UK companies where the individual owns less than 10% in the distributing company.

With effect from 22 April 2009, individuals receiving dividends from a non-UK company where he/she owns 10% or more of the company will now also be eligible for the same tax credit, as long as the source country is a 'qualifying territory,' which is broadly one with a double tax treaty with the UK.

No credit is available where the company is an offshore fund, unless it is largely invested in equities. Where the fund is substantially invested in interest bearing assets, no credit will be available.

Tax relief for pension contributions to be restricted

Higher rate income tax relief is being restricted for contributions by or on behalf of individuals to UK registered pension schemes and qualifying overseas pension schemes. Higher rate relief will be tapered away for those with taxable incomes of between £150,000 and £180,000 from 6 April 2011 so that for those with incomes above £180,000, contributions will only benefit from basic rate tax relief. The exact mechanism for applying these rules has not yet been decided.

Provisions applying from today will prevent the forestalling of the new rules. For the tax years 2009/10 and 2010/11 individuals with incomes of at least £150,000 in the year, or any of the preceding two tax years, could be affected.

In each case the anti-forestalling rules will only apply to those who change their normal pattern of pension saving and whose total pension savings exceed £20,000 per year.

Increase in Individual Savings Accounts (ISAs)

The ISA investment limit will be increased to £10,200, of which £5,100 can be saved in cash. Currently the maximum is £7,200 (£3,600 cash). This increase will come into effect from 6 October 2009 (2009/10) for those aged 50 and over, and from 6 April 2010 (2010/11) for everyone else.

Living accommodation provided to employees

The Chancellor has closed a long standing loophole which allowed employees and employers to minimise the tax and national insurance payable on the provision of accommodation by the employer through the payment of a lease premium and a small rent, instead of a market rent.

The legislation is designed to ensure that where a lease premium is paid for a lease of 10 years or less, the lease premium will be treated for tax purposes as if it was payment of rent. The taxable amount in any tax year will be treated as the amount of the lease premium spread over the duration of the lease plus the amount of any rent paid by the person at whose cost the accommodation is provided less any amount made good by the employee.

Venture Capital Schemes

The Chancellor announced several measures designed to improve tax relief for individuals investing in Venture Capital Schemes.

To date, investors have been restricted to treating 50% of their investment as being made in the previous tax year, subject to an overall investment limit of £50,000. For 2009/10 onwards, the annual investment limit for income tax relief on Enterprise Investment Scheme subscriptions is £500,000 and it is possible for the full amount to be carried back and treated as being made in the preceding year.

The new measures will also relax the time limits within which the company needs to employ the money invested and will apply to investments made on or after today.

Extension of agricultural and woodlands reliefs

In January 2009 the European Commission made a formal request to the UK for it to amend inheritance tax (IHT) legislation to bring to an end what is considered to be a discriminatory practice. In response to this, it was announced that with immediate effect IHT agricultural property relief will be extended to include property in the European Economic Area (EEA) and not simply property in the UK, the Channel Islands or the Isle of Man.

Anti-avoidance measures - interest relief

As announced prior to the Budget, 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 through which the deductibility of the interest means that the investor is guaranteed to make a profit. The anti-avoidance measure is designed to prevent individuals from exploiting the interest relief rules but is not intended to affect genuine commercial investments in business where there is uncertainty as to the return that will be produced from the arrangements.

Anti-avoidance measures - offshore life insurance policies

As previously announced, from 1 April 2009 anti-avoidance measures will prevent offshore life insurance policies being used to create income tax losses that can be offset against other taxable income. The new rules apply to all losses on offshore life insurance policies, not just those created artificially.

VAT, stamp duty and other indirect taxes

VAT rate to increase to 17.5% from 1 January 2010

As expected, the Budget included an announcement that the VAT rate is to revert to 17.5% with effect from 1 January 2010. Finance Bill 2009 will make provision for the continuance of the 15% rate until 31 December 2009 (the original legislation only covered the period to 30 November 2009) as well as changing the rate back to 17.5%. The change is accompanied by an announcement of the usual anti-forestalling provisions, which will impose an extra 2.5% charge on certain transactions which attempt to preserve the effect of the 15% rate beyond 1 January 2010.

'VAT Package' changes

Many of the previously announced changes needed to implement the EU's 'VAT Package', which start coming into force on 1 January 2010, were re-announced in the Budget. These include changes to the place of supply of services, changes to the time of supply for 'reverse charge' services, the introduction of sales listing for cross-border services and the introduction of an electronic refund scheme for VAT incurred in other Member States.

New fuel scale rates from 1 May 2009

Businesses that provide fuel for employees' private use will need to use the new scale rates announced in the Budget with effect from their first accounting period beginning after 30 April 2009. The change reflects the increase in fuel prices since the scale charges were last revised.

Increase in the VAT registration and deregistration thresholds

As usual, the VAT registration and deregistration thresholds have been increased. The registration threshold goes up to £68,000 (from £67,000) and the deregistration threshold to £66,000 (from £65,000).

Extension of stamp duty land tax exemption threshold

A holiday from stamp duty land tax was previously introduced for residential property acquisitions between 3 September 2008 and 2 September 2009 where the consideration for the acquisition did not exceed £175,000. The effect was to raise the exemption threshold from £125,000 to £175,000. The benefit of the increased threshold has been extended until 31 December 2009.

Administration and compliance matters

Offshore disclosure

A New Disclosure Opportunity (NDO) for holders of offshore accounts will run until March 2010. This will give holders of these accounts the opportunity to disclose, of their own accord, if they have unpaid tax or duties and to settle debts. HMRC is also seeking to issue notices requiring financial institutions to provide information about offshore account holders.

Payments, repayments and debt

Finance Bill 2009 will include the following changes:

  • Voluntary managed payments plans - allowing taxpayers to spread income tax and corporate tax payments from April 2011.
  • Small debts - allowing HMRC to collect small debts through PAYE from April 2012.
  • Information powers - giving HMRC a third party information power to trace missing debtors by requesting information from companies and businesses on or after the date Finance Bill 2009 receives Royal Assent.

Penalties for late filing of returns and late payment of tax

Following recent consultation, legislation is to be introduced to reform penalty regimes for late filing of tax returns and late payment of tax. This will apply to income tax, corporation tax, PAYE, NIC, Construction Industry Scheme, stamp duty land tax, stamp duty reserve tax, inheritance tax, pension schemes and petroleum revenue tax.

It will replace a variety of penalties and introduce for the first time penalties for late payment of corporation tax and monthly PAYE and NIC where no time to pay arrangement has been agreed with HMRC. The penalty regime varies dependant on the tax and return but correlates to the length of delay. Penalties will not apply where HMRC have agreed a time to pay arrangement and there will be a right of appeal against all penalties. Implementation will be staged over a number of years with the earliest implementation date being 1 April 2010.

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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