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New controlled foreign company rules

Andrew Boucher, Partner, PwC

The new CFC rules contained in the draft legislation are, on the face of it, better than we were expecting. They are a potential game changer for the UK and although specific points need to be resolved, the package should generally be welcome news for UK-based multinational groups and inward investors. Being new legislation, the key issue will be how the rules will work in practice as there is much detail.

The most fundamental change is the new idea of a gateway test to filter out the majority of companies from the CFC regime. Additionally, safe harbours provide a more straightforward means of exempting overseas profits even where the gateway fails. I think this approach to exemption is a good one. Where profits of a CFC are not exempted under the main gateway or safe harbour, then there are a number of entity specific exemptions.

We will have the new Finance Company Partial Exemption. Up until now profits from financing activities were generally fully subject to the CFC rules. The ability to get a partial (75% in fact!) exemption is very good news for UK headquartered business wanting to finance their overseas operations and brings the UK more in line with comparable regimes.

Looking at where the challenges may be, while the gateway test should significantly reduce the compliance burden; working out whether you meet the tests may be far from straightforward. Despite the safe harbours, those companies having to rely on entity specific exemptions could face a tougher regime. There is a new commercial activities exemption, but overall there are fewer and narrower specific exemptions than previously. The removal of the motive test with no new equivalent is likely to cause concern for some businesses. It seems inevitable with a mechanical set of exemptions, that some sort of safety net will be required.

There’s good news for banks and insurance groups as they can now benefit from the finance company rules and will have updated exemptions. This is a boost for the competitiveness for those sectors and should make the UK a more attractive headquarter location.

We are now in a period of consultation which closes on 10 February 2012. There are various details that are still under consideration and the real possibility of further improvements before the proposals become law. I don’t doubt though that the reforms will transform the UK tax landscape.

Debt cap changes

Robert Langston, Senior Manager, Saffery Champness

Unlike some parts of the draft Finance Bill, the changes to the worldwide debt cap are broadly in line with what was proposed in the (informal) consultation published earlier this year.

These changes address problems with the rules which should have been identified prior to their introduction in FA 2009. It is therefore disappointing that the changes will only apply to accounting periods ending on or after Royal Assent, and do not have retrospective effect.

The changes include:

  • Groups will be able to elect to disapply the de minimis exemption in respect of specific loans. This will remove a mismatch which can arise where a debtor company has net financing expenses below the de minimis threshold but the creditor company has net financing income which is not below the threshold.
  • Anti-avoidance rules which will prevent a group from avoiding the debt cap if it has no ‘relevant group companies’. The rules will only apply where there is an avoidance scheme in place, and commercial structures will be unaffected. This issue typically arises where a group controls subsidiaries but does not hold more than 75% of the shares.
  • A number of changes which deal with companies joining or leaving groups (including as a result of mergers), and the calculation and allocation of relevant amounts to those companies.
  • Dormant companies will not need to sign elections to appoint representative companies, which should reduce the compliance burden in groups with a number of dormant subsidiaries.

Some of the changes proposed in the consultation have not been included in the Finance Bill, but HMRC has indicated that the changes in respect of partnerships will be dealt with in regulations, and guidance will confirm that an average exchange rate (rather than a spot rate) should be applied when translating foreign currency amounts.

Patent Box

Jonathan Bridges, Associate Partner, KPMG

Publication of the draft clauses of Finance Bill 2012 provides us with further details on the new Patent Box regime. Aimed at making the UK a more attractive IP holding location and incentivising companies to perform innovative R&D and high tech manufacturing activities in the UK, the regime introduces a 10% tax rate on profits derived from patent interests (and certain other qualifying rights).

The clauses incorporate a number of changes to the proposals put forward in the June 2011 consultation document. However, the core design characteristics remain broadly the same. Key features include:

  • An elective regime;
  • Start date – the preferential rate will be phased in annually from 1 April 2013;
  • Qualifying Patents – UK and European Patent Office (EPO) granted patents. (We also expect a white list of European Patent offices to be published as the rules are introduced.) Also, supplementary protection certificates, regulatory data, and plant variety rights;
  • Ownership interests – legal and beneficial owners of granted patents or holders of licence interests (subject to certain exclusivity criteria);
  • Qualifying income includes:
    - sales income from patent protected products, including spare parts;
    - licence fee or royalty income from licensing of patent rights;
    - patent right sale proceeds; and
    - patent right damages for infringement.
  • Quantification of profits eligible for the 10% rate – a three-stage mechanical process involving:
    - stage 1: Identification of relevant IP income and profits;
    - stage 2: Deduction of routine profit;
    - stage 3: Deduction of any IP profits relating to marketing intangibles; and
    - active ownership and development criteria and anti-avoidance rule.
  • Clearance procedure.

One of the key changes to the proposals relates to the stage 3 calculation. Claimants will now have the option of performing a bespoke marketing intangibles valuation in order to arrive at a notional royalty amount to be extracted from residual IP profits giving the final patent profit figure to be taxed at 10%.

Welcome changes to stage 2 focus on narrowing the cost base on which a routine profit calculation is based (in particular excluding R&D costs from the base) and reducing the cost plus percentage from 15% as previously proposed to 10%.

It is also worthwhile noting that while the regime will have general application across industry sectors, income streams arising from lending activity and financial assets are excluded. This may limit the extent to which banks and other financial institutions can benefit from the regime to the extent that they hold qualifying patent interests.

Research & development reliefs

Frank Buffone, Head of R&D Tax, Ernst & Young

Overall, the draft Finance Bill 2012 R&D changes will be a great fillip for industry and will provide a much needed impetus at this delicate time for the economy. The proposals reaffirm the government’s continued commitment to encouraging both SME and large companies to spend more on R&D in order to promote innovation and productivity, and should encourage an increase in activity. HM Treasury expects these changes to cost approximately £60m a year, although it is anticipating that they will benefit the UK economy more widely through positive spillover effects.

The increase in the rate of R&D relief for SMEs from 100% to 125% had previously been announced and will benefit all of the 7,000 SMEs within the UK that currently make an R&D claim. The accompanying reduction in the R&D tax payable credit from 12.5% to 11% is necessary to ensure that the SME scheme continues to meet the criteria for State Aid Approval. The new rates take effect from 1 April 2012 and it is refreshing to see that HMRC has had the foresight to receive State Aid approval for these increases in September 2011, which will ensure that there isn’t a delay in implementation.

The abolition of the PAYE/NIC limit and the £10,000 minimum expenditure limit will further increase the attractiveness of the SME R&D scheme to companies that are eligible to claim the repayable tax credit or undertake smaller R&D projects. Alongside this is the proposed clarification of the definition of when a company is a going concern. This is a sensible proposal by HM Treasury whereby companies in administration or liquidation should be excluded from the relief and it ensures that the relief is not used to pay creditors rather than finance R&D activities.

The draft proposals also confirmed the removal of vaccine research relief (VRR) for SME companies, although this was not a surprise given its slow uptake. Instead a new measure in the form of a grant may be more effective.

Proposed changes to the rules defining externally provided workers are intended to broaden the scope for inclusion of eligible external specialists. This is welcome news and should allow the inclusion of commercial arrangements with additional parties to be considered. The associated simplification of the administration of the R&D scheme will positively impact the incentive and will be useful for both large companies and SMEs.

Company distributions: distributions in specie

Ashley Greenbank, Partner, Macfarlanes

The government has published legislation to correct some of the anomalies in the treatment of distributions in specie which arose following the changes to the distribution rules in 2009.

Those changes (now in CTA 2009 Part 9A) introduced an exemption regime for most distributions received by UK resident companies whether from another UK resident company or from a company resident in a jurisdiction outside the UK.

That regime still uses the old definition of ‘distribution’ which is now found in CTA 2010 Part 23. That definition has various limbs, but the two that might seem most applicable to distributions in specie are para B of CTA 2010 s 1000(1) (distributions out of assets) and para G (transfers of assets to members). However, certain transfers of assets by a UK company are excluded from those limbs of the definition: these include a transfer by a 51% subsidiary to its UK resident parent; and certain transfers to other resident companies which are not under common control (CTA 2010 ss 1002 and 1021).

These exclusions are relics of the old ACT regime (where they were essentially relieving provisions), but the first of them causes particular problems for intra-group distributions in specie under the new regime. If the transfer is excluded from the definition of distribution, it cannot fall within Part 9A. That might not appear to be an unwelcome result, but the distribution is then potentially taxed as a capital distribution unless an exemption (such as the substantial shareholding exemption) is available.

This has been a trap for the unwary. The cautious approach has been to restructure distributions in specie so that they are cash dividends satisfied by a transfer of assets. In that way, they can fall within CTA 2010 s 1000(1) para A (dividends) and so fall within Part 9A.

The exclusions in ss 1002 and 1021 are to be removed. The result should be that most intra-group distributions in specie will naturally fall within Part 9A without having to be restructured as dividends – and will be exempt from tax, if they fall within one of the exempt classes of distribution.

There is still work to be done. Other areas of uncertainty remain: principally the treatment of individuals and trusts in receipt of dividends and distributions from companies and groups that have previously undertaken a reduction of capital and the tax treatment of distributions from non-UK companies.

Real Time Information

Mark Groom, Tax Partner, Deloitte

hortly before the Autumn Statement, HMRC published draft Regulations on Real Time Information (RTI) and made a request for another 1,300 employers to join the pilot in July 2012 and 250,000 in November 2012. Three hundred employers are already registered to join in April 2012. The aim is to smoke out all potential issues to ensure a smooth implementation when RTI becomes mandatory between April and October 2013, phased according to employee numbers. HMRC also confirmed that RTI is on track, quashing earlier press speculation.

RTI marks the biggest change to PAYE reporting since it was introduced, with the aims of simplifying administration, achieving greater accuracy, and supporting the DWP in the administration of Universal Credit.

The Regs are comprised of three parts, dealing separately with PAYE, NIC and the Construction Industry Scheme. They are draft at this stage and open for consultation until 9 January 2012. While the pilot study is collaborative, reg 2A(2) empowers HMRC to direct employers to submit RTI returns before 6 October 2013, although it is not entirely clear when this will be invoked. Reg 67D provides two exemptions: where electronic submission is incompatible with religious beliefs, and for individuals employing carers at home. In such cases, submission will be required manually within 14 days of a tax period, rather than electronically every time a payment is made, as will be the case for other employers. Reg 67E allows for corrections to be made within the first return following the discovery of an error, and a supplementary return for errors not corrected by 20 April each tax year.

P35s and P14s will be abolished but P60s will continue and P45s will be replaced by ‘Leaver Statements’, essentially a P45 dispensed with the requirement to provide HMRC with a copy.

Late RTI submissions will be subject to the penalty regime for special returns under TMA 1970 s 98A, which will overlay in-year penalties for late/incorrect payments. However, for tax year 2012/13, there will be a ‘soft touch’ with RTI penalties only applying to the last RTI submission for the year. It is intended that thereafter, penalties will apply to all late-in-year RTI submissions, pending further legislation yet to be published.

RTI is at full steam ahead toward a new tax reporting (and benefits) system for the 21st century. Employers will need to identify and start tackling their systems, data and compliance challenges at the earliest opportunity.

Capital allowances: fixtures

Ian Mackie, Managing Director, FTI Consulting European Tax services

The results of this summer’s consultation which proposed radical changes to the rules relating to capital allowances and fixtures are included in the draft Finance Bill 2012 legislation. The latest proposals look somewhat different from those originally set out, but, if enacted, are more likely to achieve their stated objective as they are better targeted on the perceived problem.

HMRC was concerned about the number of retrospective claims for plant and machinery allowances on commercial property acquisitions which did not take account of the restrictions that the legislation potentially placed on the value of such claims, where earlier claims had been made by prior owners. The original consultation proposals included, among other things, a time limit requiring qualifying expenditure on all fixtures to be pooled within one or two years and a formal record of agreement of the part of the sale price attributable to fixtures. One wonders why a mandatory pooling requirement was needed for all fixtures when the concern was with property acquisitions, and the suggested record of agreement would have been an unwelcome and possibly an unworkable administrative burden.

It is pleasing to see that both the mandatory pooling requirement for all fixtures and the record of agreement have now gone.

The new rules, as set out in the draft legislation, will now only apply where a person has acquired fixtures which are treated as having been owned by another person who incurred ‘historical expenditure’ on its provision and was entitled to claim an allowance on that expenditure. The meaning of ‘entitled’ in this context will become a key issue. The value of the allowances to the new owner will be nil unless both a ‘pooling requirement’ and a ‘fixed value requirement’ are satisfied.

There is no time limit attached to the new pooling requirement but ‘historic expenditure’ must be allocated to a pool in a chargeable period beginning on or before the date of disposal. The fixed value requirement requires that the parties enter into a CAA 2001 s 198 election, or one of them applies to the First-tier Tribunal to determine the disposal value, within two years of the transaction. The draft legislation also makes it explicit that it is down to the new owner to show whether the new requirements are both met before they can claim allowances.

HMRC therefore achieves its goal by denying allowances to a property buyer unless the seller has claimed allowances where they are entitled to do so, and making the use of s 198 elections mandatory. There will undoubtedly be some allowances lost as a result of these new rules, but the problems of either over, or double claiming should be significantly reduced.

Real Estate Investment Trusts (REITs)

John Challoner Partner, Norton Rose

The draft Bill contains the long-awaited provisions relaxing some of the rules which govern REITs. Most of these changes had already been announced. In particular, the ‘entry charge’ which companies have to pay when they join the REIT regime (2% of the value of their property portfolio) is to be abolished. It was also known that REITs would be allowed three years from joining the regime in which to satisfy the test which provides that they cannot be close companies. Under the present regime, a company must cease to be a close company before it joins the regime. In addition to this change, it will also now be easier for REITs to satisfy the close company test as the draft rules provide that a close company will not be prevented from being a REIT if the only reason for it being close is that it has an institutional investor, such as an authorised unit trust or OEIC (or their non-UK equivalents), a pension fund or a long-term insurance business.

The draft Bill puts flesh on the bones of the other changes which had been announced. At present a REIT must be ‘listed’ on a recognised stock exchange. This has now been relaxed so that a company’s shares will qualify if they are ‘admitted to trading’ on a recognised exchange. This will permit companies whose shares are traded on platforms such as AIM and PLUS markets to qualify. Another current requirement is that 75% by value of a REIT’s assets must comprise land and buildings. It is now proposed that cash and gilts will also qualify as a ‘good asset’ for this purpose, permitting companies to qualify before actually investing in land. It was anticipated that this might be time-limited but there is no indication of that in the draft.

Finally, a REIT is restricted in its ability to borrow as there are tax penalties if the profits from its property business are less than 1.25 times its ‘financing costs’ in any accounting period. The definition of financing costs is now being amended so that only interest will be taken into account for this test. Also, the penalty for breach (a tax charge on the amount by which the interest exceeds the permitted profits level) is limited to 20% of the profits of the property business.

Asset-backed pension contributions

Dominic Robertson Associate, Slaughter and May

In the Autumn Statement, the government recognised that asset-backed pension contributions play a valuable role in dealing with pension deficits. However, following concerns that such transactions can generate excessive tax relief, the government has limited the availability of tax relief for employers which make asset-backed pension contributions.

The new rules took effect immediately, and apply to existing structures as well as to new contributions.

For these purposes, an ‘asset-backed pension contribution’ does not mean a straightforward contribution of assets, such as gilts, to a pension scheme. Rather, it refers to more complex arrangements, in which the pension fund acquires an interest in a vehicle which generates a cash return over a number of years (eg, from leasing properties to the employer). Credit support is provided for that return using assets previously belonging to the employer (in the example above, the properties themselves).

Future asset-backed pension contributions will qualify for up-front tax relief only if the transaction is accounted for as giving rise to a financial liability owed to the pension scheme, rather than being accounted for as equity.

Where the transaction is accounted for as a financial liability, it will generally fall within the existing ‘structured finance arrangement’ rules, which, broadly, give relief only for the finance charge element of future payments into the structure (eg, rental payments). In effect, the tax position reflects that if an employer had borrowed to fund a cash contribution into its pension scheme. If the transaction is not accounted for as a financial liability, the employer would obtain no up-front relief for the pension contribution, but would be entitled to full relief for future payments into the structure. In practice, the long duration of most asset-backed transactions mean that few, if any, employers would be willing to forgo the benefits of up-front tax relief in return for higher ‘pay as you go’ relief spread over, say, 15–20 years.

Anti-avoidance rules will, naturally, be introduced to curb attempts to circumvent the new legislation.

The new rules also contain transitional provisions, which apply to any existing asset-backed structure if up-front relief would have been denied had the new rules been in force at the time of the original contribution. The effect of the transitional rules is twofold. First, tax deductions for any ongoing deductible payments into the structure (or the tax benefit if any income falls outside the charge to tax as a result of the transaction) will be deferred until the transaction terminates. Second, the original (deductible) contribution will be compared against any (non-deductible) bullet payment on termination – and any difference will be taxed or relieved at that time.

The Seed Enterprise Investment Scheme  

 Erika Jupe, Partner, Osborne Clarke

The Seed Enterprise Investment Scheme (SEIS) is a most welcome development for UK investors. Designed to help start-up companies, it will be a great way of matching new businesses which are finding it increasingly difficult to borrow from conventional sources, with investors who may be interested in taking genuine business risk in exchange for up-front tax relief and the possibility of tax free capital gains.

HM Treasury listened to stakeholder views in response to this summer's EIS consultation, leaving the SEIS open for all third party investors, not just professional ‘angel’ investors as originally suggested.

The main highlights of the new scheme (which is similar in many respects to the existing EIS) are:

  • 50% income tax relief on investments of up to £100,000 per year and CGT exemption for 2012/2013 capital gains which are reinvested in the same year (investors effectively receive shares of £100,000 in value for an investment of £22,000).
  • Applies to investments in ordinary shares issued on or after 6 April 2012 and before 6 April 2017.
  • Investment monies must be utilised within three years and SEIS relief cannot be claimed until at least 70% of the money raised in the share issue has been spent.
  • The company must have less than 25 employees (including directors) and gross assets of £200,000 or less immediately before investment.
  • Directors of the company are able to invest provided they do not have a stake of 30% or more in the company.

Paid directors, but not employees, can qualify for SEIS but care will be needed if they want to qualify for EIS relief in the future, as any remuneration may prevent EIS relief being available on future investments.

Care must also be taken when start-ups use shelf companies to incorporate. The SEIS rules state that a company must not have been in existence more than two years before the qualifying shares are issued.

The investment limits are disappointingly low: £100,000 per individual investor per year and a total of £150,000 SEIS investment per start-up. However after 75% of the SEIS monies have been used a start-up can seek EIS or VCT funding. SEIS relief will be available for 4 years as currently drafted, after this the Treasury can assess whether the new SEIS scheme is meeting its objectives and if not make adjustments to ensure it does achieve its aims.

SEIS is a welcome and generous relief for investors, but would ideally have higher investment limits to allow companies to raise meaningful levels of start-up capital and will hopefully make clear that paid directors will not be prevented from obtaining EIS relief on future investments.

Statutory residence test

Jonathan Schwarz, Barrister, Temple Tax Chambers; Booth and Schwarz: Residence Domicile and UK Taxation; Schwarz on Tax Treaties

Taxpayers and their advisers have welcomed the proposal to introduce a carefully crafted statutory determination of the single most important connecting factor between individuals and the UK tax system. The certainty of a rule endorsed by Parliament to replace the inexactitude of old case law and the vicissitudes of administrative practice shows the way towards a better tax system as a whole.

The consultation initiated in June promised draft legislation in November or December this year. Professionals combing the draft Finance Bill 2012 legislation for the statutory residence text were in for a surprise. The promised statutory residence test was missing. Diligent detectives will have discovered, coyly placed at para 2.10 of the overview of the draft legislation, a statement announcing that ‘the government has decided to allow further time to finalise the detail of the test’. The statutory residence test will now be introduced with effect from 6 April 2013 and enacted in Finance Bill 2013. Draft legislation is promised to be published around Budget 2012.

No explanation is given for this delay. There is no suggestion in the statement that the purpose of the further time is to consider whether the proposals will produce a rule that is suitable for the realities of 21st-century life. The current proposal largely reflects what HMRC believed or wanted the existing law and its practice to reflect. Many individuals who do not plan their lives around tax rules will be surprised to discover that quite limited connections with the UK, particularly in terms of time present, are likely to continue to result in UK residence and, with it, worldwide taxation. If that is the case, the consultation and the extension has been a missed opportunity.

Tax professionals and others who contributed to the consultation might feel not well served by a process that required their representations to be made during the summer holiday season from 17 June to 9 September 2011 only to find that the end product has not been delivered as promised some three months later.

Clarity on the single most important factor connecting individuals with the UK tax system is a prerequisite of ‘the most competitive tax system in the G20’. For now, individuals coming to or leaving the UK can look forward to another uncertain year governed by Grace v HMRC [2009] EWCA Civ 1082, HMRC 6 and Davies & Anor, R (on the application of) v HMRC [2011] UKSC 47.

Non-UK domiciled individuals

Wendy Walton, Partner, BDO

Non-UK domiciled individuals who have been resident in the UK in 12 out of the previous 14 tax years will have to pay an increased charge of £50,000 from 6 April 2012 if they wish to claim the benefit of the remittance basis of taxation.

However, other proposed changes from that date will benefit many non-doms:

  • A welcome change is an exemption which will allow non-doms to use non-UK source income and capital gains to invest in qualifying UK businesses without creating an immediate taxable remittance. This will allow non-doms living in the UK to use offshore monies to invest in the UK tax efficiently. Further, it appears that investment in companies developing or letting commercial property will also qualify – which is a welcome addition to the proposals in the original consultation document. However, the overall benefits are somewhat limited by the fact that investment can only be made into corporate bodies and not other investment vehicles, such as partnerships, which may be more attractive to non-doms.
  • The proposed exemption from CGT on currency movements on foreign currency bank accounts held by individuals, trustees and personal representatives is a welcome change, for both taxpayers and their advisers. It will significantly reduce the amount of administration required to calculate gains and losses to ascertain the annual exposure to CGT.
  • The proposed amendment to the nominated income rules to allow individuals to remit up to £10 of overseas nominated income or capital gains without being subject to complicated and penal identification rules is another helpful simplification. Unfortunately it will still be necessary for an individual claiming the remittance basis to go through the annual process of identifying up to £10 of offshore income or capital gains to nominate.
  • Post 6 April 2012 it should be possible for non-doms to bring items purchased out of offshore income and gains to the UK to be sold without incurring a tax charge on those funds used to acquire the asset. This is particularly relevant to art and antiques. However, great care will be required to comply with the numerous qualifying conditions, and it appears that a CGT charge will still arise if the asset itself is standing at a gain. However, if the asset is held by a non-resident trust it can be sold in the UK without any immediate CGT charge arising.


 Francesca Lagerberg, Head of Tax, Grant Thornton

Inheritance Tax: Given the growing disquiet about whether IHT works effectively as a modern tax, it was perhaps a missed opportunity to see little radical offered on this issue. Instead there was confirmation that the nil rate band will stay static at £325,000 until 2014/15 and then be linked to the less attractive Consumer Prices Index rather the Retail Price Index going forward.

With little on offer for succession planning, the only crumb offered was in relation to encouraging gifts to charity. For those who want to give to charity on death, the government is proceeding with a reduced rate for estates which leave 10% or more to charity. Where the conditions are satisfied, the rate of IHT will be reduced from the normal rate of 40% to 36%. Where the estate comprises different elements, and the 10% test is met for just one element, it is intended that the reduced rate can apply to that element. The legislation will also include a power for the personal representatives of the deceased to elect for the reduced rate not to apply if they consider that the benefit of the reduced rate would be outweighed by the cost of obtaining valuations for the assets left to charity.

Setting the bar at 10% does mean that the draft legislation will do little to excite those who want to give a little to charity but also want to leave behind far more to friends and family.

Changes to UK GAAP: Acceptable accounting policies for computing taxable profits are those contained within International Accounting Standards and UK Generally Accepted Accounting Practice (GAAP). The Accounting Standards Board announced in October 2010 that it intends to significantly change what constitutes UK GAAP during 2012.

There are a number of areas where the proposed new UK GAAP differs from current UK GAAP, resulting in one-off accounting adjustments on transition.

Current tax law would not apply to the accounting transition adjustments arising from the changes to UK GAAP. Therefore new legislation will be introduced in Finance Bill 2012 which will ensure that the current tax rules dealing with changes of accounting policy do apply. The measures are expected to apply to changes in accounting policy where accounts are prepared after 1 January 2012, including accounting periods starting before 1 January 2012. This continues a move to ensuring income should be taxed once and expenditure relieved once only.

 Indirect tax changes

Lorraine Parkin, Head of Indirect Tax, Grant Thornton

Of the 18 proposed changes to indirect tax, six relate to VAT, five relate to Climate Change Levy and the rest are a miscellany of other taxes ranging from Air Passenger Duty to Stamp Duty Land Tax. Looking specifically at the VAT clauses, they reflect matters that were well trailed in advance.

The proposed introduction of a Cost Sharing VAT exemption is not unexpected and follows on the heels of the formal consultation during the summer. The draft clauses to the Finance Bill 2012 essentially replicate the wording of the VAT Directive. In brief, where organisations are involved in making VAT exempt supplies or are not engaged in business activities, they may form a cost-sharing group to provide services between members of the group that are necessary for the furtherance of their exempt or non-business activities. There are, however, two further stipulations – the services must be supplied by the group at cost and, the exemption for the supplies must not lead to distortion of competition.

This is a positive move. The measure will be of benefit to all sectors undertaking exempt or non-business activities including charities, universities, further education colleges, banks, housing associations and insurance businesses. However, in practice, the establishment of a group is likely to be resource intensive and take-up may, therefore, be more limited in the early stages.

The Finance Bill also includes measures to combat what HMRC considers to be unacceptable exploitation of the Low Value Consignment Relief provisions. Over the last few years, some businesses selling goods directly to consumers are regarded as having established themselves in the Channel Islands specifically to take advantage of the exemption from VAT for goods of low value. Typically, such goods as ‘Plug’ plants, CDs, DVDs, vitamins and food supplements are shipped directly to consumers in the UK VAT free. From 1 April 2012, supplies of goods supplied under a ‘distance selling’ arrangement – defined as transactions, under which the person to whom the goods are sent receives them from a supplier without the simultaneous physical presence of the person and the supplier at any time during the transaction – will not be exempt where the goods have been sent from the Channel Islands.

One other noteworthy change is the proposed removal of the VAT registration threshold for non-UK established businesses. Currently, a non-UK business is not liable to register for UK VAT until such time as it exceeds the VAT registration threshold. However, following a recent ECJ case, which confirmed that a business without an establishment in a Member State is prohibited from benefiting from that State’s VAT registration threshold, non-UK established businesses making any taxable supplies in the UK after 1 December 2012 will have to register for UK VAT irrespective of the level of taxable turnover.

 HMRC's extended information powers

Aileen Barry, Director, DLA Piper

The draft provisions are considerably more restrained than as feared and as outlined in the various consultation documents previously issued by HMRC. Nevertheless, they still have far reaching implications.

Basically, the new power will enable HMRC to obtain from a data holder, generally expected to be a bank, ‘identifying’ information, such as name, address and date of birth of a person, where HMRC already holds sufficient information to enable such details to be readily ascertained.

Currently, HMRC can only obtain details of a taxpayer whose identity is not known, when they can persuade a tribunal to approve the issue of a Notice, on the basis of a serious likelihood of tax loss as a result of the taxpayer ( or class of taxpayer) having failed or being likely to fail to be tax compliant. The new provisions do not require tribunal approval, nor any expectation of serious tax loss.

Ostensibly, the new power will bring the UK up to the international standard as required by the Global Forum on Transparency and Exchange of Information. However, it is likely to have greater benefit for HMRC domestically, to counter tax evasion and obtain details of persons transferring funds to tax havens.