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Revenue Budget Notices - The Revenue issued 24 Budget Notices on Budget day, 7 March 2001.

14 March 2001
Issue: 3798 / Categories:

Revenue Budget Notices

The Revenue issued 24 Budget Notices on Budget day, 7 March 2001, and the salient points from these were set out in the Budget supplement enclosed with last week's issue of Taxation. In some cases, the Notices contained more points of detail than could be included in last week's supplement and accordingly the main text of those Notices, without the background comments, is reproduced for future record on the following pages.

Revenue Budget Notices

The Revenue issued 24 Budget Notices on Budget day, 7 March 2001, and the salient points from these were set out in the Budget supplement enclosed with last week's issue of Taxation. In some cases, the Notices contained more points of detail than could be included in last week's supplement and accordingly the main text of those Notices, without the background comments, is reproduced for future record on the following pages.

Tax administration

The Finance Bill will include a package of measures to improve and clarify the legislation governing assessments, amendments, appeals and collection under self assessment.

The two main measures relate to Revenue enquiries:

  • It will become possible, if both sides agree, to resolve disputes about a point of law through litigation without having to wait until the whole enquiry is complete.
  • The procedure for amending an assessment at the end of an enquiry into an income tax self assessment return will be simplified.
  • In addition, the rules about income tax self assessments, amendments and enquiries will be rewritten in a more straightforward way. These will:

    • make it clear that the taxpayer has a legal right to amend the arithmetic of the self assessment;
    • enable the taxpayer to reject any corrections of 'obvious' errors made by the Revenue;
    • adjust the Revenue's time limit for opening an enquiry from 30 January to 31 January, bringing it into line with other time limits.
    • A concession, under which interest is added to repayments which arise when relief from one year is carried back against income of an earlier year, will be put on a statutory footing. This will apply, for example, where a taxpayer elects to carry back relief for pension contributions to an earlier year. Currently, legislation does not allow repayment supplement to be added where the relief results in a repayment, and so repayment supplement is not strictly due. However, by concession supplement has been paid from 31 January following the later year, and this measure will give taxpayers a legal right to supplement.

      The rules governing collection of tax, in particular those governing court proceedings for recovery of unpaid amounts, will be clarified. These will include:

      • confirmation that interest on penalties and on surcharge can be included in Revenue claims in court proceedings;
      • specification of a due date for payment or repayment of tax following an amendment to a partnership return;
      • confirmation that proceedings for recovery of payments on account can be taken in County Court, and the Sheriff Court in Scotland.
      • Business assets taper relief

        Employee share ownership

        Employees, including part-time employees, and officers of the company in which they hold shares (or of any company that is in the same group or that has another relevant connection with the company) will qualify for business asset taper relief on the sale of their shares.

        Following consultation after the pre-Budget report, an employee will be eligible for business assets taper relief on shares in a non-trading company if he does not have a material interest in the company or in a company that controls that company. A person would have a material interest if he held or was entitled to acquire:

        • more than 10 per cent of any class of share or security of the company; or
        • more than 10 per cent of the voting rights in the company; or
        • a right to more than 10 per cent of the profits of the company that are available for distribution; or
        • entitlement to more than 10 per cent of the assets of the company on winding up or in other circumstances.
        • For the test, the rights of connected persons (such as spouse, relatives and certain trusts and companies) would be added to the individual's rights.

          The effectiveness of the revenue protection measures will be reviewed after two years.

          The Government will also extend business assets taper relief to shares owned by the trustees of a settlement in a non-trading company where an eligible beneficiary is an employee or officer, provided that the level of the combined shareholdings of the trust and connected persons does not exceed 10 per cent.

          Employee shareholders who do not have a material interest will no longer need to consider whether the company where they work is trading. As a result, many companies, in particular listed companies, will no longer have to address this question on behalf of their employees.

          There will be no change to the treatment of shares held by employees in the trading companies where they work: such shares qualify for business asset taper relief, irrespective of the size of the shareholding.

          There will be no change to the requirement for shares held by non-employee shareholders to be in trading companies in order to qualify as business assets.

          Trustees in partnership

          At present for trustees of a settlement, business assets for taper relief include assets other than shares if they are being used at the time in a trade carried on by the trustees of the settlement. The Revenue's legal advice is that the legislation means that trust assets used for trade by a partnership of which the trustees are a member do not have business asset status. The Government has decided to extend the business assets rate of taper relief to assets owned by trustees and used for trade by a partnership of which they or some of them are members.

          Implementation date

          The new definitions of business assets are to apply to disposals on or after 6 April 2000, and to periods of ownership from 6 April 2000, thus coinciding with the changes announced in Budget 2000.

          Where assets qualify as business assets only from that date, an apportionment of the eventual gain will be necessary to identify the part that qualifies for business asset taper and the balance that qualifies for non-business asset taper. The apportionment will be carried out under existing rules.

          The Inland Revenue is publishing a draft of the Finance Bill clause and a draft explanatory memorandum on its website. It will also issue guidance in the Tax Bulletin during the Summer of 2001 on:

          • the definition of 'trading company' and 'holding company of a trading group';
          • the meaning of terms used in the anti-avoidance provisions which apply when a close company changes its activities; and
          • the meaning of 'security' in the context of taper relief.
          • Venture capital and enterprise investment schemes

            Money invested in trading companies through the enterprise investment scheme or corporate venturing scheme must be wholly employed by the company for the purpose of a qualifying business activity within 12 months of being raised or of the business activity starting. The proposal is to relax the requirement so that only 80 per cent of the money need be employed within the 12-month period. Any amount remaining must be employed within the following 12-month period. A similar change will apply to the venture capital trust scheme.

            This change will come into effect for shares issued on or after Budget day. It will also apply to shares already in issue (where the company is part way through the 12-month period) that meet the requirements of the scheme in question on Budget day.

            EIS amendment

            The enterprise investment scheme provides tax incentives to raise new money for small trading companies. There are special rules - 'the value received rules' - that withdraw or reduce investors' tax reliefs in cases where money is returned directly or indirectly to investors either before or after the share issue. The proposals in respect of the value received rules are:

            • to reduce from two years to one year the period prior to the issue of shares during which receipts of value can lead to loss of relief;
            • to provide for insignificant amounts of value received to be ignored in most circumstances; and
            • to allow receipts of value to be disregarded in most circumstances where the value is returned without unreasonable delay.
            • These changes come into effect for shares issued on or after 7 March 2001. For shares issued before that date, they will take effect in relation to value that is received on or after 7 March 2001.

              Listing consequences

              Under the current rules, a company that raises money through the enterprise investment scheme has to remain unquoted for at least the next three years if its enterprise investment scheme investors are not to lose their tax reliefs.

              The proposal is to require the company to be an unquoted company only at the time the enterprise investment scheme shares are issued provided that no arrangements exist at that time for the company to cease to be an unquoted company. This change comes into effect for shares issued on or after 7 March 2001, and in relation to events occurring on or after that date for shares already in issue.

              Loss relief on unquoted shares

              In most cases, investment companies and individuals who subscribe for qualifying shares in trading companies that are unquoted are able to offset any losses made on the disposal of their shares against their income.

              The proposal changes the unquoted requirement so that the company need only be an unquoted company at the time the shares are issued provided that no arrangements then exist for the company to cease to be an unquoted company. The change will come into effect for shares issued on or after 7 March 2001. For shares issued before that date, but after 5 April 1998, it will take effect in relation to events occurring on or after 7 March 2001.

              Personal investment

              Legislation will be included in Finance Bill 2001 to clarify and simplify the tax treatment of transfers of shares in life insurance products. New measures will also be introduced to require insurance companies to give details of life policy gains to their policyholders.

              The new rules on transfers will have effect for policy years beginning on or after 6 April 2001, but insurers will have until 6 April 2002 to put in place the systems they need to be able to tell their policyholders about their gains.

              The new rules will make the tax treatment clearer where part of the rights in a life insurance policy are transferred by ensuring that:

              • the tax charge on transfers of part of the rights under an insurance policy or contract will be determined by reference to the part of the rights transferred and the tax charge on such transfers will be the same in England and Wales as it is in Scotland;
              • the person who gives up the interest will be liable for any tax that is due on the transfer;
              • transfers for no consideration of part of the rights under a life policy or contract will no longer be liable to income tax; and
              • it will be easier for policyholders with a taxable gain to complete their self assessment return for transfers made on or after 6 April 2002, because insurers will tell their policyholders whether they have made a gain for income tax purposes on their life policy or contract and the amount of that gain.
              • Part assignments

                There are special rules for taxing gains on life insurance products. These are usually chargeable to income tax which takes priority over any liability to capital gains tax. For policies held with United Kingdom insurers, normally only policyholders liable to income tax at the higher rate will have any tax to pay on the gain. The tax paid by the insurance company on the policyholder's share of profits is treated as satisfying any basic rate liability of the policyholder. The income tax charge arises on what are known as chargeable events. These are death, maturity or the surrender or assignment of all of the rights under the policy or contract.

                Surrenders or assignments of part of the rights under a policy may also give rise to an income tax liability if under special computation rules they give rise to what is known as an 'excess'. An 'assignment' is a transfer to someone else of an interest in a policy or contract. These are known as 'assignations' in Scotland. Under present rules, an assignment of the whole interest is liable to income tax only if it is made for consideration. A part assignment may be taxable whether or not any consideration is given. This taxing régime applies to most life insurance policies, annuity contracts and capital redemption policies.

                Part assignments are governed by the general law relating to jointly owned property. Because of the different types of co-ownership that exist in England and Wales, it is not always clear, when interests are transferred into or out of co-ownership, exactly what has been transferred. This depends on the precise facts in each case. In some cases, the transaction would have been an assignment of the whole interest, in others of only a part of the rights. The position in Northern Ireland is similar. However, under Scots Law the position is different and the interest transferred is normally certain. In England, Wales and Northern Ireland the present position creates uncertainty and, sometimes, different tax charges from those that apply in Scotland for what are, in substance, the same transaction.

                When the income tax law relating to part assignments was changed in 1975 it was clear that the tax charge was intended to apply to the share in the rights under the policy that was given up by the person making the transfer. The Revenue has been advised that, at least in England and Wales, the law as currently drafted is not effective consistently to achieve that intention. It is proposed to amend the law to ensure that for the future it will operate as originally intended and also to ensure that the tax charge in England and Wales will be the same as it is in Scotland. The new rules will apply to cases where there is some element of continuity of ownership after the assignment has been made.

                The Revenue has been further advised that, in relation to the person chargeable to income tax when a part of the rights under a policy or contract is assigned, the law, as introduced in 1975, again fails to operate as intended on part assignments. The effect of the law as it now stands is that if income tax is chargeable on a part assignment it is the person who receives the share rather than the person who transferred it that is liable to pay any tax that is due. This is the case even if that person has paid for the part assigned. It is therefore proposed to amend the law to ensure that for the future it will operate as intended.

                These two changes are of particular relevance to marriage or divorce settlements. They will bring clarity of tax treatment in those types of cases where it is common for the parties to transfer policies of life insurance into single or joint names. For the future, the tax treatment both as to the interest transferred and the person chargeable, should any tax be due, will be certain from the outset.

                It is also proposed, as a simplification measure, that in future there will be no income tax charge on part assignments for no consideration. This brings the treatment of part assignments into line with the tax treatment of whole assignments. Amendments to the rules on who is chargeable to income tax when there are multiple transactions in the course of a 'policy year' will be made to ensure that this simplification will not be abused for the purposes of avoidance.

                All the above changes will apply to chargeable events arising in connection with policy years beginning on or after 6 April 2001. A policy year is a period of 12 months that begins on the date on which the policy or contract is made and any such subsequent period. Death, maturity or a full surrender of rights brings a policy year to an end even if the period is less than 12 months.

                Information obligations

                With effect from 6 April 2002, life insurers are to be required to provide details of chargeable event gains on life policies or contracts to their policyholders. The insurers will not be required to issue certificates to the Revenue except where the gains are substantial.


                The Revenue, in relation to the part assignments described above, has interpreted and operated the law in accordance with its understanding of the law as it was enacted. Differences in the interpretation of the law arose between the Revenue and insurers. In the light of recent advice, the Revenue's interpretation has proved in certain circumstances to be wrong in relation to what has been assigned. That advice confirmed that the Revenue's view as to who is chargeable to tax on any gain that might have arisen was also incorrect.

                Previous part-assignments

                The following applies to anyone, in any part of the United Kingdom, who has, since 1994-95, included in a return of income or a self assessment return a gain in respect of an assignment, made before 7 March 2001, of a part of the rights under a life policy or contract. If a person considers, in the light of the changes in the view of the law described above, that the gain was wrongly included he should contact the tax office that deals with his tax affairs. This applies whether he considers that the amount of the gain was wrongly included or that he is not the person who in law is liable for any tax due on it. He should supply full details of the policy in connection with which the assignment was made, the details of the parties involved in the transaction, the circumstances in which the assignment was made and the date of the assignment. If tax has been paid on the gain, policyholders should also give details of the amount of tax charged, the year in which the assessment or self assessment was made and when the tax was paid. Claims may be made for years of assessment ending less than six years before Budget day. Claims for 1994-95 will be admitted by way of a relaxation of the normal six-year time limit.

                It may prove to be the case that the transaction has been correctly characterised as a part assignment. Alternatively, the transaction may prove to be an assignment of the whole. Who is taxable and the amount of income tax due will or may be different in each case. It may be that no change is required. If in the light of the law as it is now understood to be, income tax was wrongly charged, that tax will be repaid with interest under normal rules. If income tax is wrongly due but unpaid, it will be discharged and where an assessment to tax or self assessment can be revised, it will be amended if the income tax is wrongly charged. Where income tax is repaid, discharged or an assessment or self assessment amended, the Revenue will not seek to recover any income tax that is due from the person who, under the changed view of the law, was liable for the tax.

                Current part-assignments

                Assignments made on or after 7 March 2001 in any policy year that begins before that date will be treated for income tax purposes in accordance with the view of the law as the Revenue now understands it to be. That means the law in accordance with the advice received, and not as changed in line with the Chancellor's proposals.

                Substantial shareholdings

                A new relief is still under consultation for chargeable gains to be deferred where a qualifying company, which has held a substantial shareholding in a qualifying company (a trading company or the holding company of a trading group) throughout a 12-month period, realises a gain on the disposal of shares in that company and:

                • reinvests the proceeds in shares in another qualifying company in which it holds a substantial shareholding and holds that substantial shareholding for 12 months; or
                • reinvests in qualifying business assets within the capital gains tax business rollover relief régime.
                • The relief will also be available where a company disposes of qualifying business assets and reinvests in shares in a qualifying company in which it has or then comes to hold a substantial shareholding and holds those shares for 12 months. The new relief is to apply to shareholder companies, including the United Kingdom branches of non-resident shareholder companies, of the following types:

                  • companies which are not close;
                  • close trading companies that are not members of a group;
                  • close companies that are members of a trading group, whether or not the companies themselves are trading.
                  • The definition of 'trading company' and 'trading group' will be considered further. Concerns continue to be raised at adopting the definitions used for taper relief. Trade for the purpose of defining qualifying shareholder companies will have its normal meaning, and will not be restricted by the rules in paragraph 9 of Schedule 25 to the Taxes Act 1988.

                    To claim relief on the gain on the disposal of shares, or the deferral of the gain against an acquisition of shares, the company in which the shares are held must be a trading company or holding company of a trading group.

                    A substantial shareholding will be 20 per cent of ordinary share capital (as amplified by the rules in Schedule 18 to the Taxes Act 1988). Securities will not qualify.

                    The transfer of the whole or part of a trade within a group of companies will not debar a claim by reason of the investee company ceasing to be a trading company within the 12-month period before the claim can be made.

                    Relief will be available for the acquisition of newly issued shares, but there will be special rules within groups so that only the company realising the gain to be deferred can claim relief in respect of newly issued shares.

                    Special rules will facilitate relief for share reorganisations. Companies will be able to elect to disapply the 'stand in shoes' provisions so as to trigger a disposal on which deferral relief can be claimed.

                    Groups of companies

                    Section 101, Finance Act 2000 introduced new section 171A, Taxation of Chargeable Gains Act 1992 which facilitates the matching of gains and losses within a group of companies by allowing companies to elect to treat a disposal of an asset by one company as if it had been made by another company in the group. New proposals will enable companies treated as making a disposal to obtain relief for incidental disposal costs incurred by the company which actually makes the disposal. Relief is not available under the current rules because the costs are borne by a different company from the one which is treated as making the disposal.

                    In addition, companies that are deemed to have disposed of an asset are currently unable to claim relief for indemnity payments that become enforceable. Changes to paragraph 13 of Extra-statutory Concession D33, the new text of which follows, will enable the deemed vendor to claim relief.

                    '13. Indemnity Payments

                    'The principle in Zim Properties Ltd is not regarded as applicable to payments made by the vendor to the purchaser of an asset under a warranty or indemnity included as one of the terms of a contract of purchase and sale.

                    'Where such a contractual payment is made, then the cost of the asset to the person acquiring it will, on the occasion of a further disposal be reduced by the sum received. The sale proceeds of the person who makes (or is treated by section 171A as making) the disposal of the asset are adjusted under section 49, in respect of the sum received. Where a warranty or indemnity payment is not made in accordance with the terms of the contract, the principle in Zim Properties may apply and the sums received by the vendor or purchaser as appropriate may be identified as capital sums derived from the asset, or from the right of action, depending on the facts of the case.'

                    Further small changes are proposed to align the time limit for making an election under section 171A with other corporation tax time limits, and to extend the rules governing intra-group transfers and value shifting for inheritance tax purposes to include section 171A.

                    Double taxation relief

                    Two changes to double taxation relief were announced in the pre-Budget report:

                    • Extension of on-shore pooling rules for double taxation relief to allow relief for rates of foreign tax paid up to 45 per cent even if this was at more than one level in a chain of companies.
                    • Changes to the way in which the mixer cap is calculated.
                    • These will be supplemented by:

                      • allowing companies to claim relief for less than the full amount of foreign tax if they so wish. This will mean that the mixer cap is not triggered in relation to a particular dividend, so that eligible unrelieved foreign tax arising on other dividends may be credited against the United Kingdom tax payable on it. This will also help companies which try to keep the rate of tax at or below 30 per cent, but which subsequently find that the actual rate is above that figure;
                      • deeming the rate of underlying tax attributable to dividends from United Kingdom subsidiaries held by an overseas holding company to be equivalent to the United Kingdom corporation tax rate at the date that the dividend was paid;
                      • amending Finance Act 2000 where it refers to 'accounting periods' ending on or after 21 March 2000 in the provision that extends double taxation relief to non-residents trading here. This will be changed to 'chargeable periods' to ensure that the provision works properly for non-residents other than companies.
                      • Apart from the last point, these changes will apply for dividends paid to the United Kingdom on or after 31 March 2001. These additional changes mean that:


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