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22 January 2007
Categories: News
Interest rates; HMRC builder spotting; New repos regime; POAT election; Negligible values; HMRC and UITF 40

Interest rates

The rate of interest charged on underpaid instalment payments of corporation tax has been increased from 6% to 6.25%.
The rate of interest on overpaid instalment payments of corporation tax, and on corporation tax paid early (but not due by instalments) has been increased from 4.75% to 5%.
HMRC news release 17 January 2007

Builder spotting

It seems that HMRC have been checking up on builders in north London recently. The Tax Faculty was recently sent a copy of a letter which was sent out at the end of 2006 to householders in the North London area who have been subject to building regulations.
The format of the letter is similar to other such exercises which have been undertaken in the past, where HMRC risk teams are seeking information which may help point to undeclared sources of income. The information requested is quite detailed, asking for details of cash and cheques paid as well as the builder's name, address and VAT registration number. It promises confidentiality, but does not point out that a response is not mandatory.
The Tax Faculty suggests that householders may also need to consider that if they do provide this information, they may also wish to inform the builder concerned, as innocent errors could result in unnecessary tax enquiries for the builder.
An HMRC spokesman says that this 'was a small local initiative — people are not obliged to reply to the letter, and as it states, there is no question of the recipients being liable for any additional costs'.
Have readers come across similar local HMRC initiatives? What do they think of this approach? In this instance, it seems particularly unhelpful not to have made it clear that recipients of the letters are not obliged to provide the information, since many will have had limited dealings with HMRC and would feel bound to reply to letters from an official and, to many, intimidating source.

New repos regime

The Government announced in the Pre-Budget Report that it would consult on introducing new legislation setting out a comprehensive corporation tax regime for sale and repurchase arrangements (repos). HMRC have recently published a document setting out the Government's detailed proposals for a new regime for companies.
The draft legislation plans to tax repos in accordance with their accounting treatment as collateralised loans by assimilating them into the loan relationship in FA 1996, Part 4 Chapter 2. Accordingly, the aim is that the tax treatment of repos will follow the accounts, subject to any adjustment that would be required under the loan relationship rules if the transaction were a straightforward loan at interest.
The final part of the document identifies issues on which respondents' views are sought by 28 February 2007. HMRC and HM Treasury also propose to hold, on 2 February, an open day at which the proposals would be explained and where stakeholders would be invited to provide their views. Requests to attend the open day together with any representations on this document should be made to: Richard Rogers, tel: 020 7147 2625, e-mail:

POAT elections

As a result of correspondence with the Chartered Institute of Taxation, HMRC have confirmed to the Institute that they will be amending their pre-owned assets tax guidance in respect of elections under FA 2006, s 80. Elections to avoidshould be made prior to 31 January 2007.
FA 2006, s 80 amended the income tax charge imposed by FA 2004 on pre-owned assets. Unfortunately, a drafting error means it has a wider impact than was intended. The error is that the amendment made by s 80 applies not only to trusts where the life tenant is another beneficiary but also to those where the life tenant is the settlor himself. Where s 80 applies, it removes the exemption from the pre-owned asset charge otherwise applicable where the taxpayer is treated as beneficially entitled to the relevant property for the purposes of inheritance tax. Loss of the exemption is thus in point, in any case where the life interest vested in the settlor arose before 22 March 2006, or where the settlor takes an interest in possession after 21 March 2006 and is disabled within the meaning of IHTA 1984, s 89. The effect, on the widest view, is that any such life interest exposes the settlor to pre-owned assets tax. Strictly, this is only avoided where the asset was settled land or chattels which have at all times subsequently been retained in the trust.
HMRC contend that s 80 does not apply if the life interest of the settlor has subsisted at all times since the inception of the trust and have said that this view will be included in revised pre-owned assets tax guidance. On this basis, the difficulties identified above only arise where the initial trusts were discretionary or conferred interests in possession on other beneficiaries. But such scenarios are by no means uncommon, particularly in relation to non-domiciliaries who are resident in the UK. A typical case where a non-domiciliary would be caught would be where before 22 March 2006 he became entitled to an interest in possession in a UK house owned by a discretionary trust which he had created. Such interest could have arisen either by express appointment prior to the purchase of the house or as a result of Statement of Practice 10/79.
HMRC have confirmed that the effect of s 80 can be removed by making an election, and that the cost of making the election is merely to disapply the reverter-to-settlor reliefs in IHTA 1984, ss 53 and 54. It is true that s 80 has conferred the right to make an election, and it is also the case that in most cases the sole effect of the election is indeed to disapply ss 53 and 54. For this reason an election should be considered urgently in all cases where the settlor did not have an interest in possession when the trust was created, but has been appointed one subsequently.
If an election is to be made, then, subject to the de minimis exemption (i.e. £5,000 per taxpayer), it must be made on or before 31 January 2007. The Society of Trust and Estate Practitioners and CIOT are pressing HMRC to introduce amendments to reverse the unintended effect of s 80 as described above. However, there is no certainty such amendments will be introduced, and an election should therefore be seriously considered. As the amendments made by s 80 took effect only on 5 December 2005, the amount potentially chargeable to pre-owned assets tax for 2005-06 may be modest. Should the taxable benefit fall within the de minimis exemption, no tax is due for 2005-06, and an election will only be needed for 2006-07. It is not possible to make an election on 31 January 2007 if the taxable benefit is under £5,000. However, this gives the taxpayer another year to consider his options. An election would then need to be made by 31 January 2008.
An election may not be appropriate where the settlor is non-domiciled and the asset giving rise to the pre-owned asset charge is land or chattels owned through an offshore company. In such cases, an election could expose the land and chattels, and assets representing them, to inheritance tax. Specialist advice should therefore be sought.
Finally, it should be borne in mind that s 80 can impact on a trust in which the settlor has had a life interest since inception where the trust has been funded by an advance from another trust of which he was settlor but has not at all times had an interest in possession. In those cases too, an election should be considered.
HMRC have not offered to extend the 31 January deadline for making elections, although, as the Tax Faculty points out it may be difficult to identify cases and give the necessary advice in time. It suggests that such elections cannot be made by that date, advisers give notice to HMRC by 31 January that an election is being considered and indicate when they will be able to confirm either way. The Faculty adds that there is 'no guarantee that late elections will be accepted, but it is unusual for so complex an issue to arise so close to a deadline'.
CIOT, and Tax Faculty,

Negligible values

HMRC have accepted the following securities as having negligible value during December 2006 for the purposes of a claim under TCGA 1992, s 24(2).



Effective date

Storedale plc



Palmerston Holdings plc




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 date of claim.
See for the full list of negligible value securities.

HMRC and UITF 40

HMRC have published an advance copy of their guidance on UITF 40 to be included in their Business Income Manual. This guidance reflects that issued by the Consultative Committee of Accountancy Bodies on 15 August, the ICAEW viz. ICAEW Taxguide 8/06 UITF 40 and Taxation and the Association of Chartered and Certified Accountants published the same material as Technical Factsheet 135 on 4 October. It has been agreed both with HMRC and a number of other accounting and tax bodies; HMRC say that they have not reviewed or agreed any other guidance.
HMRC have also amended helpsheet IR238 setting out what would happen when a business changes its accounting practice for turnover because it is required to do so by UITF40. See the HMRC website for full details.
HMRC also mention that although the adjustment is not part of the trading profits for income tax purpose (being included in the return elsewhere) for the child and working tax credits it is part of income from self-employment. It should be included as such in Part 5 of the tax credits claim form (TC600) and in Part 2 of the tax credits annual renewal forms (TC603RD and TC603R).

Categories: News
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