UK: Weekly Tax Briefing

Last Updated: 10 April 2000

Post-Budget planning

Although the Chancellor’s Budget speech was comparatively short, it was accompanied by significant amounts of supporting documentation, including press releases and regulatory impact assessments.

Now that the dust has settled, there are a number of changes which were introduced where the taxpayer might benefit from some post-Budget planning.

March 1982 valuations

Companies involved in outright sales of property or restructuring transactions where the property in question has been held since before 31 March 1982 normally need to establish the value of their property at that date to calculate the chargeable gain arising on the transaction.

Companies and groups with a property portfolio held since 31 March 1982 of 30 or more properties or with properties worth more than £30 million may now ask the Inland Revenue to agree the March 1982 values of the entire portfolio in advance of any disposal.

This service is being operated on a two-year trial basis with effect from 21 March 2000. Businesses will need to provide their own values, supported by professional opinions, for the Inland Revenue to consider.

Although this scheme does have the advantage of providing certainty on any subsequent disposal, it may also involve significant professional fees.

Businesses should therefore consider carefully whether this service will be beneficial.

Quarterly payments of corporation tax

The Inland Revenue laid before the House of Commons last week regulations amending the interest rate on underpaid corporation tax instalment payments and doubling the de minimis limit, below which companies do not have to pay instalments whatever the level of their profits, to £10,000 of tax liability in the year.

The reduced interest rate of 1% over the base rate will apply from 20 April 2000, and the revised de minimis limit will apply for accounting periods ending on or after 1 July 2000.

Those companies with an estimated tax liability for this accounting period between £5,000 and £10,000 should therefore reconsider their obligation to make payments on account. This is especially true for companies with accounting periods ending 30 September 2000, whose first payment will otherwise be due next Friday.

Capital allowances for information technology expenditure by small businesses

Measures were announced in the Budget to encourage the use of IT and e-commerce in small businesses.

Over the three years commencing 1 April 2000, qualifying small businesses will be able to claim 100% first year allowances on relevant expenditure.

Qualifying small businesses should ensure that they record all of their expenditure on computers, software, and internet-enabled mobile telephones, together with the associated cabling and electrical systems, to ensure they maximise their claims for this relief.

Capital allowances - requirements for an inexpensive car pool removed.

Expenditure on inexpensive cars (ie, under £12,000) and certain pre-1986 leased assets will no longer need to be separately recorded for capital allowances purposes. This change is effective from the start of the chargeable period in which 1 April 2000 for corporation tax, or 6 April 2000 for income tax, falls. Balances from the previous accounting period will be transferred into the general pool of qualifying assets.

Businesses can defer the change for one year to periods in which 1 April or 6 April 2001 fall.

In certain circumstances, such as the full disposal of the pool of cars, it may be possible to arrange a business’ tax affairs to maximise any capital allowances. Businesses should therefore consider, in the light of their proposed capital expenditure and disposals, whether they should transfer balances this year or defer for 12 months.

Double tax relief

Draft clauses containing changes to the double tax relief (DTR) rules following the Inland Revenue review were published as part of the Budget. A summary of the new measures is set out below.

  • The Government has concluded that the credit method of relieving double taxation will be retained and an exemption method will not be introduced.
  • The underlying tax rate on a dividend paid from one overseas company to another will be capped at a rate equal to the UK corporation tax rate (currently 30%) reducing the tax benefits of offshore mixer companies.
  • A rule allowing companies to specify the particular profits out of which they pay a dividend will also be repealed making it more difficult to retain pools of low tax profits offshore.
  • Underlying tax relief will be available automatically for tax paid on pre-merger profits in the case of a merger of two foreign companies, while the relevant profits of all companies in a foreign tax group will bear the same underlying rate of foreign tax.
  • The definition of relevant profits has been amended so that it is now necessary to add back to relevant profits any provisions made on the grounds of prudence as distinct from those made under local law.
  • Relief is now only available for tax spared at the level of a sub-subsidiary if the overseas company paying a dividend to the UK is resident in the same territory as the sub-subsidiary and relief is available under a double tax treaty if the sub-subsidiary were a company paying a dividend directly to the UK.
  • Carry back and carry forward of excess foreign tax credits will apply for Schedule D Case I profits of a foreign branch and underlying tax and withholding tax on Schedule D Case V dividends. The relief only applies to income of the same description from the same source. The carry back period is limited to one year but carry forward is indefinite.
  • UK branches of non-resident companies will be allowed credit for third country tax paid on their UK branch profits. This means UK branches of foreign companies are effectively allowed the same DTR as UK tax resident companies.
  • A minimum foreign tax rule will apply so that taxpayers can only claim relief for foreign tax they would have paid if they have taken all reasonable steps to minimise their foreign tax bills under both double tax treaties and law of the other country. In addition, taxpayers will not be allowed unilateral relief if entitled to relief under a double tax treaty.
  • The time limit for claiming credit relief has been extended to the later of within six years of the end of the accounting period in which the income is taxable and not more than one year after the end of the accounting period in which the foreign tax is actually paid.

In addition, rules have been introduced to ensure that anti-avoidance clauses in the UK’s double tax treaties are applied consistently concerning relief from UK withholding tax on royalties which are in excess of an arm’s length rate. The time limit for making claims under the mutual agreement procedures of the UK’s double tax treaties is also clarified.

For further information or support regarding the impact of these changes please get in touch with your normal contact at KPMG or Joy Svasti-Salee or Christopher who are leading KPMG’s approach in this area.

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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