Revenue news

Relevant discounted securities

Legislation will be introduced in the Finance Bill 2002 which will:

The proposed legislation will prevent a relevant discounted security issued at more than its market value to a connected party from giving rise to an income tax loss on any later disposal to a connected party. For this purpose, the connection rules in section 839, Taxes Act 1988 will apply with a further rule that a person with a minority shareholding in the bond-issuing company will be treated as connected to it if he, together with one or more other persons who also take out bonds, collectively controls the bond-issuing company (or a company connected with it) and the issuing company is a close company.

Comments on this proposal should be sent to: David Gillon, Revenue Policy, Business Tax, 4th Floor, 22 Kingsway, London WC2B 6NR, e-mail: david.gillon@ir.gsi.gov.uk. The measure will apply to transfers of such securities on or after 26 March 2002. The measure preventing a double charge will be deemed always to have had effect. It deals with a technical point which received coverage in 'Meeting Points', Taxation, 16 November 2000 at page 180. Loan notes issued in satisfaction of an earn-out right may not have an 'issue price' for the purposes of Schedule 13 to the Finance Act 1996 equivalent to their face value. On this argument they would be relevant discounted securities so that on redemption a substantial income tax liability would arise as well as a capital gains tax charge on the gain rolled into the loan note. The point is now to be dealt with by amending legislation, albeit after some two years of anguish by certain earn-out right holders.

(Source: Inland Revenue news release dated 26 March 2002.)

Research and development

The Chancellor announced, ahead of the Budget, that the new tax credit to encourage research and development by large United Kingdom companies will apply to research and development spending from 1 April 2002. The credit will follow a simple volume approach based only on the total of research and development spending by a company. The rate of tax credit will be announced in the Budget but material released by the Revenue on 26 March suggests that the rate will be 20 per cent.

Companies will not be required to hold any of the intellectual property rights flowing from the research and development, and that expenditure which is funded by other parts of a group, or otherwise subsidised, will not be debarred.

Legislation to introduce this measure will be included in the Finance Bill.

The large company tax credit will be given by means of an extra deduction (a 'superdeduction') from a company's taxable income, in addition to the normal 100 per cent deduction for current expenditure. The additional amount will be announced in the Budget. The credit will be calculated on a volume basis, i.e., based on all qualifying spending, rather than just on increased spending (an incremental credit).

Companies will receive credit for their current direct research and development expenditure on staff costs; and consumable stores. This follows the pattern of the existing credit for companies which are small or medium enterprises.

Large companies will get credit for research and development work they carry out, on a subcontract basis, for another company, but not for work they themselves contract out to another company, unless the subcontractor would not itself be able to benefit (a charity, for example).

Small and medium-sized enterprises will continue to be able to claim their research and development tax credit for work they subcontract to large companies, but they will be able also to claim the new credit for qualifying expenditure on work subcontracted to them by large companies.

(Source: Inland Revenue news release dated 26 March 2002.)

Substantial shareholdings

The exemption régime for substantial shareholdings held by corporate bodies will apply for disposals from 1 April.

The main exemption applies where a singleton trading company or a company which is a member of a trading group disposes of all or part of a substantial shareholding in another company which is itself a trading company or the holding company of a trading group.

In order to have a substantial shareholding, the investing company must have owned ten per cent or more of the ordinary shares of the company invested in for a period of at least 12 months in the two years before the share sale. This ten per cent threshold was unexpected; the original proposal in a Revenue Technical Note issued on 23 June 2000 was a 30 per cent threshold. The higher threshold of 30 per cent will now apply only to life insurance companies disposing of assets in their long-term insurance funds.

There are special rules for aggregating holdings by members of groups of companies. A group consists of the principal company and its 51 per cent subsidiaries on a world-wide basis.

In most cases it will be straightforward to determine whether companies or groups satisfy the trading requirements. Activities of joint ventures in which the company or group holds ten per cent or more of the shares can be taken into account for these purposes. Where the exemption applies, no claim is necessary, and any gain on the disposal of the shares is not chargeable to tax and any loss is not available to set against gains.

Where a company meets the conditions for the main exemption and also owns an asset related to shares in the company invested in, any gain on a disposal of the asset is not chargeable and any loss not available to set against gains. This exemption applies only where the company making the disposal, or another member of its group, also owns shares in the company invested in immediately before the disposal.

Where, at a time when the substantial shareholding requirement is met, a disposal of shares or a related asset in the company invested in does not qualify for either of these exemptions, but a disposal at any time in the previous two years would have qualified, any gain on the disposal is not chargeable and any loss is not available to set against gains if certain conditions are met.

A revised draft of the legislation is on the Revenue website at www.inlandrevenue.gov.uk.

In addition to introducing the exemption régime for substantial shareholdings, the Government has also amended the way the degrouping charge operates in order to facilitate commercial restructuring and reinvestment.

Where a company leaves a group owning an asset it acquired from a fellow group member within the previous six years, the degrouping charge under section 179, Taxation of Chargeable Gains Act 1992 will operate to produce a gain or loss on the asset. The new rules will permit the company which leaves the group (or other members of that group) to claim rollover relief in respect of degrouping gains, where the necessary conditions are met. They will also allow degrouping gains and losses (or parts of them) to be surrendered to other members of the group that may have losses or gains of their own against which to set them. It will also be possible for a degrouping gain (or part) which is surrendered to another member of the group to be rolled over under the new rollover relief provisions.

(Source: Inland Revenue news release dated 26 March 2002.)

Intangible assets

The Chancellor has confirmed that the new régime to provide relief for the cost of intangible assets, including intellectual property and goodwill, will take effect from 1 April.

Companies (but not unincorporated businesses) will be able to obtain tax relief for the cost of intangible assets, in most cases based on the amortisation reflected in their accounts. There is also provision for tax allowances at a fixed rate of four per cent a year to provide for relief in the case of indefinite or longer life assets.

The new rules will apply to expenditure on the creation, acquisition and enhancement of intangible assets, including abortive expenditure, as well as expenditure on their preservation and maintenance. Relief will be available for the cost of internal development, as well as acquisition, of intangible assets.

Payments for the use of intangibles will also be within the scope of the new régime. The charge on income rules will no longer apply to royalty payments and relief will be given in line with the accounting treatment. The taxation of royalty receipts will also follow the accounts.

Disposals of intangible assets will be taxed on an income basis under the new rules. A rollover relief will apply where disposal proceeds are reinvested in new intangible assets.

Intangible assets that companies hold at commencement will generally be taxed under current law, subject to the changes in rollover relief described below.

Capital gains on the disposal of intangible assets held at commencement will qualify, where appropriate, for rollover relief under the new arrangements for intangible assets.

Disposals by companies of goodwill and agricultural and fishing quotas held at commencement will not qualify for rollover relief, except where reinvestment under the capital gains rules has taken place before 1 April 2002 and within the 12-month period prior to the disposal.

Purchases of goodwill and quotas after commencement will no longer be qualifying acquisitions for the purpose of rollover relief.

Revised legislation will be included in the Finance Bill.

(Source: Inland Revenue news release dated 26 March 2002.)

Tax law rewrite

The Tax Law Rewrite project has published exposure draft no 13 'Foreign Income and Property Income'. This incorporates the rules for foreign source income into the charging provisions for trading income, savings and investment income and miscellaneous income wherever possible. The foreign income clauses also cover various provisions relating to foreign income generally. The property income clauses cover both United Kingdom and overseas property income and include all the property income rules that will go into the second income tax rewrite Bill.

Copies of the draft and the draft Finance Bill legislation are available from the Inland Revenue Information Centre, Bush House, South West Wing, Strand, London WC2B 4RD, or on: www.inlandrevenue.gov.uk.

Comments on this exposure draft should be sent by 28 June 2002 to David Mutton, Tax Law Rewrite project, Inland Revenue, Room 826, Bush House, South West Wing, Strand, London WC2B 4RD, e-mail: David.Mutton@ir.gsi.gov.uk.

Issue: 3851 / Categories: