UK: Weekly Tax Briefing

Last Updated: 27 March 2000

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This week's Briefing brings comment on key Budget areas from KPMG specialist partners.

International tax

In a speech delivered on the morning following the Budget, Joy Svasti-Salee, Head of International Tax, made the following key points.

There are proposed changes to the double tax relief (DTR) rules which are very severe.

  • The ability to mix dividends overseas is severely restricted with the DTR rate attaching to dividends from lower tier companies being capped at 30%.
  • The ability to specify the profits out of which dividends are paid is severely restricted.
  • There are also proposals which significantly tighten the Controlled Foreign Company (CFC) rules.
  • Holding companies with non-dividend income may no longer satisfy the exempt activities test.
  • Intra-group service companies with more than 50% of their income from group companies may now be CFCs.
  • There is a change in the control test that means that where a UK company and a non-UK company both have a 40% interest in a joint venture, that company may be a CFC.

The combined impact of both sets of changes is massive.

Companies impacted are advised:

  • to make representations on the DTR changes by 19 April;
  • to consider urgently the impact on quarterly payments; and
  • to rethink structure.

KPMG's International Tax Group is co-ordinating the firm's response on these issues.

Corporate taxes

Ian Barlow, UK Head of Tax, said: 'The Chancellor has shown a lead in Europe by announcing the abolition of the withholding tax on international bond interest and its replacement by comprehensive exchange of information powers - exactly what he is encouraging other European countries to adopt.'

'In the technology and e-commerce sectors, it is disappointing that he has again concentrated on start-ups. The bulk of expenditure on e-enablement will actually occur in larger established companies which need every incentive to join the e-commerce revolution.'

'I welcome the reliefs for capital gains in groups, particularly the extension of roll-over relief on share disposals. An interesting example of European Court tax decisions driving UK legislation is the relaxation in the definition of a capital gains group to include overseas companies in certain circumstances.'

Stamp duty

Steven McGrady, Head of Stamp Duty said: 'Yet another hike in stamp duty rates to a maximum of 4 % affects all commercial property other than shares and is becoming a very significant transactional cost. The exemption which has been announced for transfers of intellectual property is welcome. Initially this will not apply to transfers of goodwill but there is a hint that the Chancellor might be considering extending it.'

Value added tax

Tony Lynne, Head of Indirect Tax, said: 'On VAT it was a case of the dog that didn't bark. Anticipated changes to the property VAT régime failed to materialise. This is probably because of the complexities of ring-fencing a reduced rate on either conversion or new building.'

A Budget for Enterprise?

Loughlin Hickey, Head of Entrepreneurial Solutions, said: 'The Chancellor called this a "Budget for Enterprise and Investment". Indeed it has given a boost to e-commerce within the entrepreneurial business sector but it lacks essential connectivity between the start-up business and the next phase larger business.'

'There is a good package to encourage small businesses to embrace e-commerce including:

  • write-off of the full cost of buying computers and computer equipment;
  • consultancy services to be provided through the Small Business Service;
  • Internet training for employees; and
  • discounts for e-filing tax and VAT returns.'

'The danger is that this will fuel only the much hyped "business to consumer" end of e-commerce. Where is the help for the existing larger businesses to encourage the "business to business" links that smaller companies can benefit from?'

'The changes to CGT taper relief will boost investment in smaller companies, many of which will be involved in e-business. They encourage gains by allowing investors to retain a greater share of capital profits - which encourages sensible risk taking. It is an anomaly however, that the focus remains on start-ups and unquoted companies.'

'We fail to understand this further alienation of the smaller quoted companies (SQC) sector. While we welcome the reduction in CGT for business assets (both the acceleration of relief and the reduction in the size of qualifying holdings), the fact is that favouring unquoted companies by removing any minimum holding will further discourage investment in the SQC sector.'

'There is nothing in the Budget to increase liquidity through attracting private investment in quoted companies. This could have been done either through access to accelerated taper relief or by deferring capital gains on reinvestment into the SQC sector to encourage the serial entrepreneur.'

'The Government remains mesmerised by the excitement of start-ups and is not promoting measures to keep these companies in the UK through encouraging a vibrant market for SQCs. The danger is continued reduction in the SQC market through acquisitions by larger (often overseas) companies or private equity houses (also often overseas) and a flight to overseas exchanges to raise new capital to go beyond the start-up phase.'

Employment Issues

Inez Anderson, Employee Issues Partner, said: 'The relaxation on obtaining work permits for employees with specialist skills is excellent news, although it highlights the need for the UK to invest in this area to ensure "home grown" talent. It also raises the question as to why this talent is leaving the UK. This issue has not been addressed in the Budget.'

'Small businesses will welcome the support announced to help on payroll issues. The introduction of the Working Families Tax Credit, deduction of student loan repayments from salary, etc have resulted in substantial additional administration for employers.'

'It is only right that the Government should help the small employer deal with these issues and alleviate any concerns about getting it wrong. The Government now seems to be putting the emphasis on helping employers to "get it right", which is refreshing and may result in businesses being less concerned about calls from the tax man.'

Rebirth of the perk car?

Inez Anderson also said, 'Today's announcement of the new régime for taxing company cars from 6 April 2002 has turned the current system on its head.'

'As a result of the abolition of the business mileage discounts the system will no longer encourage the use of cars for business purposes, and will penalise the salesmen who have to drive for a living.'

'But we may see the rebirth of the perk car as low business mileage drivers will benefit across the board. This is good news for employers with no essential car users but bad news for organisations with heavy sales forces as employer's Class 1A NIC is based on the tax charge.'

'This is said to support the "green philosophy" as it is expected to reduce the number of business miles travelled. This would only be the case on the assumption that non-essential business miles are travelled in company cars. Another factor which does not seem to have been considered is the possible increase in the number of perk cars which may end up on the road.'

NICs on unapproved share options

David Tuch, Head of Share Schemes, said: 'We are disappointed that it is still not clear what the Government is going to do to address this issue.'

'Ideally we would like to see employers' NIC on the exercise of unapproved options abolished. In reality this would only be taking us back to the position we were in until last April. If this is seen as being too expensive then at a minimum the Government should consider:

  • capping the share option gains which are subject to employers' NIC at £50,000 per year; or
  • allowing employers to recharge the employers' NIC to the individual, and reducing the rate of employers' NIC on unapproved option gains to 5%.

What is critical is that any changes introduced apply to all companies and not just to internet start-ups and similar high-tech companies.

The new all-employee share plan and Enterprise Management Incentives

David Tuch said: 'We are disappointed that the Chancellor has not used some of his war chest to reduce from five to three years the period before shares can be taken out tax-free under the new all-employee share plan. We also feel it is a shame that he has done nothing to deal with the potential NIC exposure where employees take out their shares within three years - although it is possible this will be dealt with as part of the review of NIC on unapproved options.

David Tuch added: 'Although the Chancellor has again taken the opportunity to increase the number of employees who may participate in Enterprise Management Incentives, from ten to 15 (having already increased it from six) we would like him to have widened the class of companies which qualify.

Press releases - w/e 17.3.00

16 March 2000 - Inland Revenue - Improvement of Payroll Giving Scheme

Under new regulations, agencies that distribute payroll giving donations to charities must do so within a set period.

16 March 2000 - Deregulation of NICs: treatment of non-cash vouchers

From 6 April 2000, under new regulations, where a third party provides workers with non-cash vouchers as part of an incentive scheme, the third party may pay the NICs instead of the employer.

17 March 2000 - Customs & Excise - Business Brief 4/2000

Single European Authorisation Project. This pilot project is testing, with 12 UK companies, simplified procedures under which customs duties are paid in one Member State only, for all the company's imports into the EU.

Legal Aid work. New arrangements for paying solicitors were introduced by the Legal Aid Board with effect from 1 January 2000. The VAT treatment of these is clarified.

VAT and cemeteries. The VAT position of cemeteries operated by local authorities has been changed by a recent Tribunal case.

New VAT publications. New or revised notices have been issued dealing with 'Gold', 'Investment gold coins' and 'What if I don't pay'.

For further information, speak to your usual KPMG tax contact.

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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