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News
Revenue news
Tax avoidance
The Chartered Institute of Taxation has published clarification from the Revenue on the tax disclosure rules.
News
Revenue news
Tax avoidance
The Chartered Institute of Taxation has published clarification from the Revenue on the tax disclosure rules.
The Revenue states that it remains committed to ensuring that everyday tax advice does not trigger a disclosure obligation and is confident that the financial product regulations are now more tightly targeted at innovative avoidance schemes. However, the Revenue says that it welcomes the continuing assistance of the tax and legal professions, etc. to assess and ensure the effectiveness of the employment product filters. It states that it does not intend promoters or employers to have to disclose everyday advice and arrangements. In the context of employment products this would include:
the provision of flexible benefits, such as where employees forego salary in return for a car or are provided with childcare vouchers;
salary sacrifice arrangements for cars, computers, childcare vouchers or certain pension funds;
straightforward incorporations, or dividend payments to employee shareholders;
standard dual contract arrangements (although the Revenue will require disclosure of innovative arrangements); and
the deferral of bonus payments until after the termination of the employment.
The Revenue has also confirmed that where a person merely provides advice as to how the tax system operates in particular circumstances, then that activity on its own does not trigger a disclosure requirement on the part of the adviser.
(CIOT Technical Note, 23 August 2004.)
IHT newsletter
The Revenue has published the August 2004 edition of its IHT Newsletter. This includes information on the following topics.
The extension of the excepted estate regulations.
The results of a survey into Inland Revenue Capital Taxes. Areas of concern were penalties, submissions to Valuation Office, the direct payment scheme, non-taxpaying cases, lack of expertise on Scottish issues and duplication between forms C1 and IHT200.
Clarification on instruments of variation.
Changes to the inheritance tax penalty régime following Finance Act 2004.
Completion of forms IHT200 with regard to excepted estates, double deaths and instruments of variation.
The newsletter is on the Revenue website at www.inlandrevenue.gov.uk/cto/august2004.pdf
(www.inlandrevenue.gov.uk)
New Zealand
A protocol amending the double taxation convention with New Zealand came into force on 23 July 2004. The protocol amends the convention by updating provisions on business profits, dividends, interest, royalties, the exchange of information and the treatment of capital gains. It also includes a provision to deal with income not covered by any other article of the convention. The text has been published as the schedule to the Double Taxation Relief (Taxes on Income) (New Zealand) Order 2004 (Statutory Instrument 2004 No 1274), copies of which can be obtained from The Stationery Office. The text of the Order can be accessed on the Internet at www.hmso.gov.uk.
The amendments will have effect in the United Kingdom:
n in respect of the provisions relating to capital gains and the exchange of information from
4 November 2003;
n in respect of corporation tax, for any financial year beginning on or after 1 April 2005;
n in respect of income tax generally, for any year of assessment beginning on or after 6 April 2005.
In New Zealand, the amendments will have effect:
n in respect of the provisions relating to capital gains and the exchange of information from
4 November 2003,
n in respect of other New Zealand tax, for any income year beginning on or after 1 April 2005.
(Inland Revenue news release dated 17 August 2004.)
Employers NICs
The Inland Revenue has updated its guidance on joint National Insurance contributions elections and agreements, where employer's liability to National Insurance contributions is transferred to employees. This is to reflect changes made by Schedule 16 to the Finance Act 2004, the National Insurance Contributions and Statutory Payments Act 2004, and the Social Security (Contributions) (Amendment No 4) Regulations SI 2004 No 2096.
The main changes take effect from September 2004 and the revised guidance is on the Revenue website at www.inlandrevenue.gov.uk/shares chemes/non_app_nics_elections.htm.
Negligible values
During July 2004, the Inland Revenue accepted the following securities as having negligible value for the purposes of a claim under section 24(2), Taxation of Chargeable Gains Act 1992.
Company Security Effective Date
Gartmore Distribution Trust Plc Ords 1p 15/03/04
Geared Opportunities Income Trust Plc Ords 1p 15/03/04
Leggmason Investors Income & growth ALL 15/03/04
The Media & income Trust Plc Ords 2.5p 15/03/04
The Quarterly High Income Trust Plc Ords 2.5p 15/03/04
Where the value of shares has become negligible, an allowable loss may be established by the owner claiming that they are treated as being sold and reacquired, either on the date of the claim or at a specified time within the two tax years prior to the year of claim.
The full list of negligible value securities is available on the Internet at www.inland revenue.gov.uk/cgt/negligible_list.htm.
Facts and Figures
Tax Deposit Certificates
Rates of interest on and after 6 Aug 2004
Applied Cashed
for tax
Deposit of under
£100,000 1.25% 0.50%
£100,000 or over:
months held
(a) under 1 1.25% 0.50%
(b) 1 but less than 3 3.75% 1.75%
(c) 3 but less than 6 3.75% 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.
5 Feb 2004 5 May 2004 4.00%
6 May 2004 9 Jun 2004 4.25%
10 Jun 2004 4 Aug 2004 4.50%
5 Aug 2004 Current 4.75%
Repayment Supplement and Interest on Tax
From 6 Dec 2003:
Customs: Pay 6.50%; Receive 3.00%
From 6 Sept 2004:
Income tax, CGT and NIC:
Interest on tax 7.50%
Repayment supplement 3.50%
Inheritance tax 4.00%
Corporation Tax:
Accounting periods 30.9.93-30.6.99
Pay 6%; Receive 2.75%
Accounting periods ending after 30.6.99
Pay 7.50%; Receive 4%
From 16.08.04 on instalments:
Pay 5.75%; Receive 4.5%
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
Spot rates to sterling
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
It's Official
Extracts from the Revenue's seventy-second Tax Bulletin.
Financial mis-selling
A significant number of individuals are being paid compensation for the mis-selling of certain financial products, such as mortgage endowment policies. The Revenue is sometimes asked whether an enhancement element added to the compensation is interest, and so taxable under Case III of Schedule D. The principles it applies in considering whether a payment is, or includes, interest, are as follows.
All interest is chargeable to tax under Case III by virtue of section 18(3)(a), Taxes Act 1988. However, whether a particular payment is interest to start with can only be answered by reference to principles of common law.
An entitlement to interest arises under common law where there is an express agreement to pay interest or such agreement can be inferred from the circumstances.
As methods of calculating compensation vary within the financial services industry, and from case to case, it is not possible to provide a comprehensive list of which methods will or will not give rise to taxable interest. Whether the hallmarks of interest are present will depend on the basis on which the compensation is calculated.
Payers may offer compensation based on one of a number of formulae approved by the Financial Ombudsman Service and others, according to the claim. While detailed approaches may vary, the broad aim is to put investors back in the position they would have been in had they not bought, or put money into, the product. One way of doing this is to refund the premiums (or other amounts) paid by the investor together with an additional amount to compensate for the time he did not have use of the money.
Where this approach is adopted, the Revenue considers that there can be little doubt that the additional payment is interest. The hallmarks of interest are present. It is calculated by reference to a sum of money which the investor is entitled to be repaid, and compensates him for being deprived of the use of that money.
Where other methods are used, the tax treatment of any enhancement element will depend on whether the characteristics of interest are present. Further guidance on the meaning of interest is in the Revenue's Inspectors' Manual (paragraphs IM1500 to IM1507). Where a payment fits the description of interest, it will normally be paid net of income tax by the compensating company. However, whether or not tax is deducted, the interest is still taxable.
Frequently asked questions
Interest as damages
: It is sometimes suggested that where interest is included in a compensation award, it cannot be 'true' interest because it is 'damages' or 'redress'. The authorities do not support this.Ex-gratia or voluntary payment: It is sometimes suggested that an interest addition is not taxable because it, or the compensation on which it is calculated, is paid ex-gratia or voluntarily. The Revenue accepts that a truly voluntary payment cannot be interest, even if described as such, because the essential feature of an entitlement to it is absent. In practice, however, the Revenue considers it will be extremely rare for any payment arising from claims that a financial product has been mis-sold to be truly voluntary, since the redress is given in consideration of the complainant giving up a right of action.
Global settlements: It is also sometimes argued that where interest is added to other elements of an award, and the whole amount paid in one global sum, it loses its identity in the bundle. Here again, case law does not support such a contention. Sir Robert Megarry VC held in Chevron Petroleum (UK) Ltd & Others v BP Petroleum Development Ltd & Others 57 TC 137 that where a settlement is made in a global amount, the interest element is still interest.
Personal injury: Some settlements may include payment for personal injury, for example damage to feelings. Such payments are exempt from capital gains tax by section 51(2), Taxation of Chargeable Gains Act 1992. Interest on such payments is also exempt from income tax by virtue of section 329, Taxes Act 1988. There is further guidance in the Revenue's Inspectors' Manual at paragraph IM1526.
Manufactured payments
Finance Act 2004 introduces an 'unallowable purpose' rule for manufactured payments. It applies only where the manufactured payment is made by a company. The Tax Bulletin gives an overview of the new rule and sets out the circumstances in which the Revenue will, and will not, seek to apply it. Only brief extracts are given below, intended mainly for those who are not familiar with this area: the full article should be consulted before giving advice to clients.
Manufactured payments are payments which arise under a contract or other arrangement for the transfer of securities that are representative of interest or dividend payments on securities. They typically arise under stock lending or repo arrangements and are intended to compensate the original holder of the securities for not receiving real interest or dividends.
The Revenue has become aware of a number of schemes that seek to reduce corporation tax liabilities by the use of manufactured payments. The new rule counters any such scheme by introducing an 'unallowable purpose' test similar to that used elsewhere in the tax legislation.
Three initial points may be made.
First, very few transactions will be affected. 'Arrangements' will not have an unallowable purpose if a company has been party to them solely for commercial reasons and entered into them on commercial terms.
Secondly, the rule is closely modelled on the unallowable purpose test that is a feature of the 1996 loan relationship régime and a similar rule introduced for derivative contracts in 2002. The principles used in the guidance that the Revenue has already published on the operation of these rules will be followed here.
Thirdly, transitional rules make proper provision for companies which are already committed to such arrangements.
A new paragraph 7A (see section 137, Finance Act 2004) is inserted into Schedule 23A to the Taxes Act 1988 which provides for 'relevant tax relief' to be restricted where that relief is attributable to manufactured payments made by a company in pursuance of arrangements having an unallowable purpose. Before paragraph 7A can apply, the following conditions must be met:
a company must make, or be deemed to make, a manufactured payment in pursuance of arrangements to which it is party; and
the arrangements, or any transaction entered into in pursuance of them, must have an unallowable purpose.
A purpose is unallowable if it is not among the business or other commercial purposes of the company. These are defined to exclude the purpose of any part of its activities which is outside the scope of corporation tax.
Tax avoidance is an unallowable purpose if it is the main or one of the main purposes for which the company is party to the arrangements. Tax avoidance means a purpose that consists in securing a tax advantage for the manufacturer or any other person. Tax advantage takes its meaning from section 709, Taxes Act 1988.
Where the relevant conditions are met, relevant tax relief attributable to the manufactured payment is disallowed on a just and reasonable basis. The restriction can apply only to the company that makes the payment. It follows that where that person would not otherwise receive relief for the payment, for instance because it is representative of a dividend on United Kingdom equities and the manufacturer is not within the scope of section 95, Taxes Act 1988, then the rule can have no effect.
The rule will not operate where any relief for the manufactured payment could be restricted under the existing unallowable purpose rule in the loan relationships legislation. For accounting periods starting on or after
1 April 2004, the new management expense rules contain an unallowable purpose test. Again, the new manufactured payments rule will not apply where relief is restricted under this provision.
The unallowable purpose rule will apply fully to all new arrangements. The transitional rules will be relevant only to old arrangements where the manufactured payment is made on or after Royal Assent. Companies committed to any arrangements that might have been subject to the rule will therefore have had a short window up to the Royal Assent of the Finance Bill to unwind those arrangements without the new unallowable purpose rule applying.
Where manufactured payments in pursuance of old arrangements are paid after the date of Royal Assent, there is a further provision restricting the extent to which the unallowable purpose rule can apply.
Online filing
The quality standard (Statutory Instrument 2003 No 2682 Regulation 209) sets out what is expected of employers and intermediaries when they file their employer's annual return online for the tax year 2004-05.
If an employer's annual return fails to meet the standard, the Revenue will reject it and treat it as not having been sent. The employer will have to correct the return and resubmit it to the Revenue by the deadline date, if the late filing penalty is to be avoided.
The final version of the standard as well as the standard for 2004-05 can be found on the Revenue website at www.inlandrevenue.gov.uk/ebu/qual_stand.htm.
Penalties
A penalty of up to £3,000 has been introduced for employers who do not send their return online when they should have done so. This is in addition to the existing late filing penalty. The penalty for not filing online is based upon the number of P14s, which should have been included in the employer's return (Statutory Instrument 2003 No 2682 Regulation 210).
To enable the Revenue to quickly decide the level of penalty it will, for 2004-05 only, base it on the number of employees the employer had as at 26 October 2003. If an employer feels the outcome is excessive, he may appeal to have the penalty calculated on the statutory basis.
In most cases, the number of employees at 26 October will provide a lower figure, which the Revenue will not seek to increase when the exact size of the employer's return is known.
Allowable expenditure
A new Statement of Practice, SP2/04, replaces Statement of Practice 8/94 in relation to certain expenses incurred by the personal representatives of deceased persons where the death in question occurred on or after 6 April 2004, and to expenses incurred by corporate trustees in making transfers and disposals on or after 6 April 2004. The text of the new statement is reproduced in the Bulletin.
Both statements of practice set out standard scales of allowable expenses which may be used for certain purposes of the Taxation of Chargeable Gains Act 1992 in place of the actual allowable expenditure incurred. The main changes introduced by Statement of Practice 2/04 are:
an increase in the monetary values set out in the scales broadly in line with the increase in the retail price index since 1994; and
the introduction of two new higher bands to cover larger estates.
In addition, there are some minor changes in wording to improve the clarity of the text.
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.
