News
Revenue news
Gifts of shares
The Government has tabled amendments to the Finance Bill to prevent individuals from obtaining income tax relief in excess of the benefit received by a charity from the donation of shares or securities. The changes affect section 587B, Taxes Act 1988 (gifts of shares, securities and real property to charity), and apply from 2 July 2004.
News
Revenue news
Gifts of shares
The Government has tabled amendments to the Finance Bill to prevent individuals from obtaining income tax relief in excess of the benefit received by a charity from the donation of shares or securities. The changes affect section 587B, Taxes Act 1988 (gifts of shares, securities and real property to charity), and apply from 2 July 2004.
Section 587B enables those making gifts of shares, securities and real property to charity to claim a deduction against income equivalent to the market value of the gift. However, it is possible to arrange the value of the gift in the hands of the charity so that it bears no relation to the market value of the underlying asset. For example, two trusts might each buy for a token amount options to purchase from a charity any gilts that may be donated to that charity during a specified period, if a certain condition is met. The conditions for the exercise of the two options are near-mirror images of each other, e.g. Trust A having the option to purchase if X does happen and Trust B having the option to purchase if X does not happen. Each option to purchase will be at a tiny fraction of the market value of the gilts, e.g. £5,000 for £1 million gilts. The options may be worded so that, for example, the charity has to sell the gilts at market value and then hand over the cash realised (so that strictly the value of the gilts is not affected). Various arrangements can be put in place to secure the transfer of benefit back to the donor from the trusts.
The effect of the exercise is to eliminate most of the value of the gift in the hands of the charity, while potentially returning virtually the whole value of the gift to the control of the donor.
The new clause ensures that the amount of income tax relief claimed by the donor cannot exceed the net benefit to the charity. Where a person places an obligation on the charity that results in the value of the gift in the hands of the charity being less than the value of the gift in the hands of the donor, the income tax relief that can be claimed by the donor is restricted to the lower amount.
In broad terms, the new rules will operate where the obligation can be linked to the assets given, or where it is unlikely that the gift would have been made without the existence of the obligation.
(Inland Revenue news release dated 2 July 2004.)
More anti-avoidance clauses
New clauses, which take effect from 2 July, block two new avoidance schemes, the first involving rent factoring for plant and machinery, and the second involving manufactured payments arrangements.
Full details of both clauses are contained in the explanatory notes published on the Treasury website, www.hmtreasury.gov.uk, but brief summaries follow.
With regard to plant and machinery rent factoring, businesses are able to negate the effect of legislation introduced in the 2004 Finance Bill, by selling rental streams from leased plant or machinery for a sum that is not brought into charge as income. The new clause will treat sums received for the transfer of the rental streams as income where they would not otherwise be brought into charge as income. The new rule should be considered in conjunction with the rent factoring legislation in sections 43A to 43G, Taxes Act 1988.
In respect of manufactured payments, a new clause will apply where arrangements have an 'unallowable purpose', i.e. one that is not a business or commercial purpose of the company, and will deny tax relief, on a just and reasonable apportionment, for any manufactured payment arising under those arrangements.
The new rule will mirror closely the existing 'unallowable purpose' rules for loan relationships and derivative contracts. Ordinary commercial transactions will not be affected by this measure. The legislation will apply to all manufactured payments made by companies on or after 2 July, subject to transitional rules for arrangements already in place.
(Inland Revenue news release dated 2 July 2004.)
Tax Bulletin
It's Official
Further excerpts from the Inland Revenue's seventy-first Tax Bulletin, including National Insurance and tips.
National Insurance
The National Insurance Contributions and Statutory Payments Bill was introduced in the House of Commons on 27 November 2003 and received Royal Assent on 13 May 2004. It has five measures. The first two measures will make the administration of National Insurance simpler when employers reward their employees with security based earnings. The three other measures help bring the National Insurance, statutory payments and equivalent tax régimes closer together.
Share based earnings
The Social Security Act 1998 introduced legislation which allowed employers and employees to enter into written agreements allowing the employer, when making payment of the share based earnings, to retain or sell shares equal to the employee's National Insurance liability. Prior to the National Insurance and Statutory Payments Act, this could only be done where:
* an employee had ceased employment and the payment of share based earnings was made after they left the employment but in the tax year of cessation; or
* an employee had received share based earnings and was ceasing employment in that tax year, and the employer was unable to recover the National Insurance from the employee's subsequent monetary earnings.
The Act has extended this and the new legislation will allow written agreements for the withholding of shares and other securities to be entered into for:
* all employees, including those in continuing employment, irrespective of whether the recovery could be made from the employees' subsequent monetary earnings;
* employees who receive security based earnings in the year after they have ceased employment, as well as the year that they left.
All earnings that come under the definition of 'securities' defined at section 420, Income Tax (Earnings and Pensions) Act 2003 as amended by Schedule 22 to the Finance Act 2003 can be included. This definition of securities covers shares, company loan stock, Government gilts and a number of specialised financial instruments. It does not include such things as cash, cheques and leases. This will be set out in regulations.
Regulations also govern how and when recovery can be made. The regulations will state that the employee has to have given prior written consent for the employer to withhold or sell an amount of securities equal to the employee's National Insurance liability. There is no set form that this has to be made on. The agreements can be entered into at any time up to the day that the earnings arise. It may therefore be possible for employers who, for instance, granted share options to an employee before this legislation came into force to make recovery by withholding shares. As long as the employee gives his written consent, and this consent was given after the legislation came into force but before the earnings were paid, this method can be used.
The extension of the ability to recover from non monetary earnings does not impinge on the ability of the employer to recover the primary National Insurance that he has paid on the employee's behalf from his future monetary earnings. Statutory Instrument 2003 No 1337 removed the limits on the amounts that could be recovered per pay period, and extended the time limit for recovery to the following tax year after share based earnings had been paid. This was subsequently amended by Statutory Instrument 2004 No 770 which allowed this extension for all security based earnings. If employers prefer to recover by this method then they can continue to do so.
Joint agreements
Joint elections and agreements for National Insurance contributions were introduced in 2000 to allow the transfer of some or all of the employers' National Insurance liability (the secondary liability) arising on share option gains to the employee, with the employee's agreement.
The new legislation extends the existing joint election and agreement facility to restricted and convertible shares. Employees who agree to bear the secondary National Insurance liability arising on share option gains are entitled to an income tax relief on those gains, equivalent to the amount of employer's National Insurance they pay. The Finance Bill 2004 includes a measure proposing to extend this tax relief to employees who agree to bear secondary National Insurance liabilities arising on restricted and convertible shares.
Recovery of contributions
The measures relate to the approximately three per cent of National Insurance contributions which are not collected through the pay-as-you-earn and self assessment systems and to which the provisions governing the recovery of tax debt do not apply. Mostly these are the flat rate Class 2 contributions paid by the self employed, but they also include some Class 1A and Class 4 contributions which are not collected with tax. The measures:
* align the 30-day period of notice currently required under section 121A, Social Security Administration Act 1992 for distraint action to recover contribution debt in England and Wales, with the seven-day period of notice which Revenue guidance specifies for the recovery of tax under section 61, Taxes Management Act 1970;
* align the 30-day period of notice currently required under section 121B, Social Security Administration Act 1992 for application for a summary warrant to recover contribution debt in Scotland, with the14-day period of notice required for the recovery of tax debt under section 63, Taxes Management Act 1970 and procedures for the recovery of debt generally under the Debt Arrangement and Attachment (Scotland) Act 2002; and
* replaces the current provisions of section 115A, Social Security Administration (Northern Ireland) Act 1992 which provide for contributions debt in Northern Ireland to be recovered by the Enforcement of Judgments Office, with provisions which allow the Revenue to levy distraint in Northern Ireland on the same basis as in England and Wales.
The changes will come into effect later this year.
Information powers
Revenue powers to investigate National Insurance cases are contained in section 110ZA, Social Security Administration Act 1992. These powers are considerably wider than those for tax and include a power to enter premises and examine (interview) persons on those premises as well as a power to compel the production of documents and information. This misalignment is being corrected by removing the power of entry and examination and applying the section 20, Taxes Management Act 1970 information powers to National Insurance.
This will allow the Revenue to ask both primary and secondary contributors to provide documents and information about their liability for National Insurance. The Revenue can also ask third parties to provide documents which are relevant to the contributions liability of another. But these requests must be made under a formal notice which needs the consent of a Tax Appeal Commissioner before it can be issued.
The Revenue is also introducing a regulation making power which will allow it to introduce powers to inspect statutory sick and maternity pay records on the same basis as it can currently inspect pay-as-you-earn records.
The two measures enabling employers to choose how to meet their National Insurance liability when security based earnings have been paid will be commenced as soon as possible following Royal Assent of the Bill, as will the measures on distraint. The other measures will commence in the tax year beginning 6 April 2005.
Gratuities and offerings
The Social Security (Contributions) (Amendment) Regulations 2004 (SI 2004 No 173) were laid before Parliament on 30 January 2004 and came into force on 23 February 2004. The regulations are available on the Inland Revenue's website at www.inlandrevenue.gov.uk/practitioner/legislation. They amend paragraph 5 of Part 10 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (SI 2001 No 1004) to exclude from the disregard in paragraph 5, gratuities or offerings made by a:
* person connected with the secondary contributor; or
* trustee holding property for any persons who include, or any class of persons which includes, the earner.
There is no intention for the regulations to change the long-standing position with regard to the treatment of tips paid to staff working in service industries.
Where payments cannot be disregarded, they must be added to any other earnings paid in the same earnings period, and Class 1 National Insurance liability should be calculated in the normal way in relation to the total figure.
Connected persons
A person is connected with the secondary contributor if his relationship with the secondary contributor, or where the employer and secondary contributor are different, with either of them, is as described in subsection (2), (3), (4), (5), (6) or (7) of section 839, Taxes Act 1988. For example, the following are connected persons:
* wives, husbands, relatives;
* a company connected with another company, if the same person has control of both.
Where a payment of, or in respect of, a gratuity or offering is paid by a person connected with the secondary contributor, is made in recognition of personal services rendered to the connected person by the earner or by another earner, and the amount is similar to that which might reasonably be expected to be paid by a person who is not connected, or the person making the payment does so in his capacity as a tronc-master, providing that one of the following conditions is satisfied, the payment can be disregarded from earnings, so that no Class 1 National Insurance liability arises.
The conditions are that:
* the payment is not made, directly or indirectly, by the secondary contributor, and does not comprise or represent sums previously paid to the secondary contributor; or
* the secondary contributor does not allocate the payment, directly or indirectly, to the earner.
The Tax Bulletin article contains three examples to which readers are referred for further details.
The foregoing are extracts from longer articles in the Tax Bulletin, which is Crown copyright, and to which reference should be made for details of the full text. Information regarding subscription is available from Sylvia Brown, tel: 020 7438 6373. Bulletins can be downloaded free of charge from www.inlandrevenue.gov.uk.
Facts and Figures
Tax Deposit Certificates
Rates of interest on and after 11 June 2004
Applied Cashed
for tax
Deposit of under
£100,000 1.00% 0.50%
£100,000 or over:
months held
(a) under 1 1.00% 0.50%
(b) 1 but less than 3 3.75% 1.75%
(c) 3 but less than 6 3.50% 1.75%
(d) 6 but less than 9 3.75% 1.75%
(e) 9 to 12 months 3.75% 1.75%
United Kingdom Bank Base Rates
From To p.a.
6 Nov 2003 4 Feb 2004 3.75%
5 Feb 2004 5 May 2004 4.00%
6 May 2004 9 Jun 2004 4.25%
10 Jun 2004 Current 4.50%
Repayment Supplement and Interest on Tax
From 6 Dec 2003:
Customs: Pay 6.50%; Receive 3.00%
From 6 Dec 2003:
Income tax, CGT and NIC:
Interest on tax 6.50%
Repayment supplement 2.50%
Inheritance tax 3.00%
Corporation Tax:
Accounting periods 30.9.93-30.6.99
Pay 5%; Receive 2%
Accounting periods ending after 30.6.99
Pay 6.50%; Receive 3%
From 21.06.04 on instalments:
Pay 5.50%; Receive 4.25%
Official Rate of Interest
From 6 Jan 2002 5.00%
State Retirement Pensions
Taxable Amount 2004/05 2003/04
Single 4,139.20 4,027.40
Wife (non-contrib.) 2,477.80 2,410.20
Foreign Exchange
31.12.03 31.3.04
Australia A$2.376 A$2.4072
Canada C$2.3133 C$2.4154
Denmark DKr10.5674 DKr11.1342
Euro zone €1.4192 €1.4955
Hong Kong HK$13.898 HK$14.3188
Japan Yen191.85 Yen191.201
Norway NKr11.9095 NKr12.6185
South Africa Rand11.9492 Rand11.5831
Sweden SwKr12.8806 SwKr13.8598
Switzerland SwF2.214 SwF2.3283
USA US$1.7901 US$1.8378
Average rates to sterling
31.12.03 31.3.04
Australia A$2.524 A$2.4488
Canada C$2.2881 C$2.2893
Denmark DKr10.7423 DKr10.7070
Euro zone €1.4457 €1.4400
Hong Kong HK$12.7301 HK$13.1806
Japan Yen189.3354 Yen190.9326
Norway NKr11.5624 NKr11.9099
South Africa Rand12.3217 Rand12.0949
Sweden SwKr13.1934 SwKr13.1427
Switzerland SwF2.1973 SwF2.2266
USA US$1.6348 US$1.6939
