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Your guide to ‘L-day 2014’

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Since 2010, it has become the norm for draft tax legislation to be published late in the calendar year for eventual inclusion in the following year’s Finance Bill. This is published about a week after the Chancellor’s Autumn Statement, and the publication date has generally become known amongst tax practitioners as ‘legislation day’. This year, legislation day was on 10 December.

We have divided our commentary on the legislation amongst seven subject areas: income tax & NICs, corporation tax, capital gains tax, inheritance tax, VAT, stamp duty & miscellaneous and tax administration and compliance. Our commentary does not attempt to cover everything for which legislation was published. Instead, and to avoid excessive duplication of matters fully discussed only a week ago, we have opted to cover mainly those matters of significance on which there is now more detail available than on Autumn Statement day (3 December).

Draft legislation can always be amended both before and after it is introduced to the House of Commons. It should also be borne in mind that we may no longer have a Conservative/Lib Dem coalition after the general election next May, and it is therefore possible that not all of the draft legislation now published will make it to the statute book. The likelihood is that there will be a truncated Finance Act before the election followed by a further Finance Bill when the new Parliament is convened. There is even the possibility of three Finance Acts in one calendar year as was the case in 2010.

Income Tax

Benefits-in-kind and expenses

Following the Office of Tax Simplification’s review of employee benefits-in-kind and expenses, a number of changes are being made as set out below. In all cases the primary legislation will be in the next Finance Bill but only in the first case will the change apply for 2015/16.

Statutory exemption for trivial benefits

A statutory exemption is to be introduced for 2015/16 onwards which will allow employers to identify and treat certain low value benefits provided to employees or former employees as trivial. These benefits will then be exempt from income tax and Class 1A national insurance contributions (NICs) and will not need to be reported to HMRC. Currently, employers can apply to HMRC for agreement to exclude benefits on the grounds that they are trivial, but these arrangements are purely concessionary under HMRC’s collection and management powers. Under the new rules, a benefit will be trivial if it meets four conditions.

  • Condition A is that the benefit is not cash or a cash voucher.
  • Condition B is that the cost of providing the benefit does not exceed £50. If a benefit is provided to more than one person, and it is impracticable to calculate the cost of providing it to each person, one should calculate the average cost per person of providing the benefit and measure this against the £50 maximum.
  • Condition C is that the benefit is not provided pursuant to relevant salary sacrifice arrangements (as defined) or any other contractual obligation.
  • Condition D is that the benefit is not provided in recognition of particular services performed by the employee or in anticipation of such services.

Abolition of £8,500 threshold

The £8,500 threshold that determines whether employees pay income tax on all of their benefits-in-kind and expenses, and whether employers pay Class 1A NICs, is to be abolished for 2016/17 onwards.

Currently, an employee in so-called lower-paid employment (i.e. whose earnings for the tax year are less than £8,500) pays tax only on certain employee benefits, e.g. living accommodation, vouchers and credit-tokens. Other benefits are exempted in his hands. Similarly an employer has no liability to Class 1A NICs on benefits in these circumstances. The abolition of the £8,500 threshold will mean all employees will be taxed on their benefits and expenses in the same way. The employer’s NIC treatment will continue to follow the income tax treatment, so that benefits will become chargeable regardless of level of earnings.

A new exemption will be introduced to cover benefits for ministers of religion earning less than £8,500, so that the current exemption to income tax and NICs is maintained for such ministers. There separate exemptions (in ITEPA 2003, ss 290A, 290B) for ministers of religion in lower-paid employment will be retained. A further exemption will be introduced for employees who are carers; this will cover board and lodging on a reasonable scale that is provided in the home of the person being cared for.

Real Time collection of tax on benefits and expenses via voluntary payrolling

Primary legislation is to be introduced to allow HMRC to make changes to the PAYE Regulations to provide for voluntary payrolling of benefits-in-kind. The intention is that employers will be able to opt to payroll benefits for cars, car fuel, medical insurance and gym membership for 2016/17 onwards. Where employers do so, they will not have to make a return on Form P11D for these benefits. Instead, they will report the value of these benefits through Real Time Information, and the value will count as PAYE income liable to deduction using the PAYE Tax Tables; the amending Regulations will determine the value to be placed on the benefit for this purpose.

Simplifying the administration of employee expenses

Legislation will be introduced to exempt from income tax for 2016/17 onwards expenses payments and benefits provided to employees where the employee would have been eligible for a deduction had he incurred and paid the equivalent expense himself. The exemption will also allow the employee to be paid a scale rate in respect of a qualifying expense, rather than being reimbursed the expense he has actually incurred. This can either be a rate set by HMRC in secondary legislation or a rate that the employer has agreed with HMRC following an application made by him for that purpose. The exemption will not, however, apply to expenses payments or benefits that are provided as part of a salary sacrifice arrangement. Amendments to Regulations will be made to mirror these changes for NICs purposes.

The current system whereby an employer can apply to HMRC for a dispensation to pay qualifying expenses and benefits free of tax will be scrapped.

Trading income: fixed deductions

FA 2013, Sch 5 introduced the optional fixed rate deduction scheme whereby all unincorporated businesses are able to deduct certain types of expenditure on a simplified flat rate basis in computing taxable business income. It covers expenditure on vehicles, on use of home for business purposes, and on premises used both as a home and as business premises. It is not restricted to smaller businesses using the cash basis.

The scheme was always intended to apply to partnerships as it does to individuals, provided all the partners are themselves individuals. The next Finance Bill will contain amendments effective for 2015/16 onwards to clarify how the scheme should be applied for partnerships as regards use of premises.

As regards use of home as business premises (ITTOIA 2005, s 94H), the fixed deduction is available for use of a partner’s home for work done by a partner, or any employee of the firm, in the partner’s home wholly and exclusively for business purposes. Where more than one person does work in the same home at the same time, any hour spent on that work can be taken into account only once in calculating the fixed rate deduction. Where a firm makes a fixed rate deduction under ITTOIA 2005, s 94H for a period of account in respect of the use of a partner’s home, the only other deduction which the firm may make for that period for the use of any other partner’s home is a deduction under section 94H.

Amendments are also made as regards premises used both as a home and as business premises ( ITTOIA 2005, s 94I) so that the fixed rate deduction applies to premises used mainly for carrying on the business but also by a partner as a home. Once a deduction is made under ITTOIA 2005, s 94I for a period of account in respect of particular premises, the only other deduction which the firm may make for that period for the use of any other premises used both for home and business is a deduction under section 94I.

Special purpose share schemes

Companies may use special purpose share schemes (often called ‘B share schemes’) to offer shareholders the option to receive, instead of a dividend, a similar amount via an issue of new shares. The shares issued are subsequently purchased by the company or are sold to a pre-arranged third party. Under legislation to be included in the next Finance Bill, any amount thus received by a shareholder after 5 April 2015 will be charged to income tax as an ‘alternative receipt’.

A shareholder will have received an ‘alternative receipt’ if:

  • the company has given the shareholder the choice to receive either a dividend or something else;
  • the shareholder has chosen to receive, from the company or a third party, something else which is of the same or substantially the same value as the dividend; and
  • that receipt would not otherwise be subject to income tax.

The receipt will be treated as a distribution made to the shareholder by the company in the tax year in which it is received. It will qualify for a dividend tax credit to the same extent that an actual distribution by the company to the shareholder would have qualified.

It does not matter if the choice given to the shareholder is subject to any conditions being met or to the exercise of any power. Where a person is offered one thing subject to a right to choose another thing instead, he is treated as making a choice if he abandons or fails to exercise the right. For example, where a shareholder will receive a bonus B share if he so elects and a bonus C share if he fails to elect, a failure to elect counts as a choice to receive the C share.

If at any time a tax other than income tax (e.g. capital gains tax) is charged in relation to the alternative receipt, then in order to avoid a double charge to tax, the recipient may make a claim for consequential adjustments to be made in respect of the other tax.

Investment managers: disguised fee income

Legislation will be introduced in the next Finance Bill to introduce a new Chapter 5E into ITA 2007, Pt 13 to confirm the treatment of sums received by managers for investment management services. The new Chapter will provide that where an individual provides investment management services for a collective investment scheme through an arrangement involving partnerships, then any sums received for those services will be treated as profits of a trade, unless already charged to income tax. Sums will not be caught if they represent a return which varies by reference to profits on funds, or represent a return on investments by the managers.

Where one or more ‘disguised fees’ arise to an individual in 2015/16 or any subsequent tax year from one or more collective investment schemes, the individual will be liable for income tax in respect of the disguised fees as if he were carrying on a trade for the tax year and the disguised fees were the profits of the trade.

A ‘disguised fee’ arises to an individual in a tax year from a collective investment scheme if:

  • the individual performs investment management services directly or indirectly in respect of the scheme under any arrangements;
  • the arrangements involve at least one partnership;
  • under the arrangements a management fee arises (in whatever form) to the individual in the tax year directly or indirectly from the scheme; and
  • at least some part of the management fee falls neither to be taxed on the individual as employment income nor taxed as profits of a trade or profession of his. That part is the disguised fee.

Any sum which arises to an individual directly or indirectly from a collective investment scheme under any arrangements is a management fee, except insofar as it:

  • constitutes ‘carried interest’;
  • is by way of return or repayment of an investment made by the individual in the scheme; or
  • is a commercial return (as defined) on an investment made by the individual in the scheme.

‘Carried interest’ is broadly a sum paid to an individual from scheme profits after all (or substantially all) of the investments and ‘preferred return’ have been paid to participants in the scheme. ‘Preferred return’ is an amount at least equivalent to compound interest on an investment at 6% per annum for the whole of the period during which the investment was invested in the scheme.

In determining whether the above charge applies in relation to an individual, no regard is to be had to any arrangements a main purpose of which is to secure that the charge would not apply.

There is allowance for the avoidance of double taxation on sums charged as above. This enables the individual to claim a consequential adjustment if at any time income tax or another tax is charged under another tax provision in respect of the disguised fee. The consequential adjustment cannot exceed the lesser of the two charges. Where the disguised fee arises to the individual by way of a loan or advance, there is similar allowance for avoidance of double taxation where tax is charged on an amount arising to the individual under the main arrangements for the purpose of enabling the individual to repay the loan or advance.

Corporation Tax

Incorporation: restricting relief for internally-generated goodwill transfers between related parties.

As announced at Autumn Statement, legislation will be introduced in Finance Bill 2015 to restrict corporation tax relief for internally-generated goodwill and customer-related intangible assets acquired by a company from individuals who are related to the company. The change will apply for transactions and contracts entered into on or after 3 December 2014 and to contracts entered into and not completed before 3 December 2014.

Under current rules, where individuals or partnerships transfer a business to a newly set up company, the company can claim corporation tax relief for any goodwill or other intangible assets that it acquires as part of that business, based on the assets’ market value. The Autumn Statement removes a company’s ability to claim this relief where relevant assets, typically goodwill or intangible assets related to goodwill (e.g. customer information), are acquired from an individual or partnership with a defined relationship with the company (e.g. a close company and participator relationship). The change will ensure that for all relevant incorporations on or after 3 December 2014, relief for the relevant asset will be calculated when the asset is disposed of by the company rather than at the time the expenditure is incurred.

Where the transferor acquired the relevant asset by a ‘third party acquisition’, there is an apportionment calculation required which prevents a deduction for a proportion of amortisation or splits any realisation of the asset between trading and non-trading debits. This effectively limits the relief available to the company to what would have been available to the transferor had they been entitled to relief on intangible fixed assets under CTA 2009, Part 8. Any acquisition which has a main purpose as obtaining a tax advantage is deemed to be a third party acquisition.

Where the transferor did not acquire the relevant asset by a ‘third party acquisition’, no deduction is allowed for debits relating to amortisation of the intangible asset. Any loss made on realisation of the asset is treated as a non-trading loss.

These amendments will make it fairer to all businesses that did not have access to the original reliefs. In particular the change will benefit:

  • small businesses that do not incorporate their business and are therefore currently at a disadvantage compared to those who do;
  • ostart-up businesses that have always been operated within a company and who cannot access the relief for internally-generated goodwill, and that are currently at a disadvantage when compared to those that incorporate their business.

These provisions should not prevent individuals incorporating their businesses for commercial reasons on a tax-neutral basis from claiming ‘incorporation relief’ to the extent that they receive shares in consideration for the transfer of the business. The change should therefore only affect individuals who would have intended to benefit from triggering a capital gains tax disposal on incorporation.

Accelerated payments and group relief

The accelerated payments rules (which were introduced by Finance Act 2014) allow HMRC to require upfront payment of tax due in certain circumstances, before tax enquiries or disputes have been resolved. This includes situations where the tax treatment adopted is subject to the Disclosure of Tax Avoidance Schemes (DOTAS) regime or is being counteracted by HMRC under the General Anti-Abuse Rule (GAAR).

Currently an accelerated payment notice can only require a person to pay over the amount in dispute, or prevent a person postponing the payment of the amount in dispute. These powers will be extended to enable HMRC to issue an accelerated payment notice requiring that an asserted surrenderable amount may not be surrendered as group relief while the dispute is in progress. An asserted surrenderable amount is the amount that would be available for surrender if the taxpayer’s arrangements were to achieve their objective but which HMRC considers will not be so available if those arrangements fail to achieve their objective.

Where HMRC has given a notice to the effect that a specified amount may not be surrendered, the company may not consent to surrender that amount. As a result, this means that no company in the group may claim that amount as group relief. If any amount has been claimed, the claimant must amend its return to reflect the new situation. The time limit for amending a company tax return is relaxed for this purpose.

Where the final result of a dispute is to allow some or all of the amounts that had originally been surrendered (or which could have been surrendered but for the issue of an APN) as group relief, a company in the group (not necessarily the original group relief claimant) may make a claim within 30 days of the final determination of the amount available.

This provision will have effect from the date that Finance Bill 2015 receives Royal Assent and will be applicable to all cases involving group relief where there is an open enquiry or open appeal on or after the day of Royal Assent. The intention behind this change is simply to ensure that disputed tax will sit with the Exchequer during a dispute.

Diverted profits tax

A new tax, known as the diverted profits tax, will be introduced from 1 April 2015 and will apply to diverted profits arising on or after this date, with apportionment rules for accounting periods that straddle 1 April 2015. It is intended that this tax will deter multi-national groups of companies from implementing aggressive tax planning which seeks to divert profits away from the UK, in order to minimise the group’s overall corporation tax bill.

The DPT effectively operates by applying a 25% tax charge on diverted profits relating to UK activity and applies to companies that:

a) design their activities to avoid creating a taxable presence (a permanent establishment) in the UK; or
b) create a tax advantage by using transactions or entities that lack economic substance. Note this rule also applies where a non-UK resident company (‘the foreign company’) trades through a UK permanent establishment.

The first rule comes into effect if a person is carrying on activity in the UK in connection with supplies of goods and services by a non-UK resident company to customers in the UK, provided that certain detailed conditions are met. However this rule will not apply if the PE and the foreign company are small or medium-sized enterprises or the sales revenues of the company and connected companies from all supplies of goods and services to customers in the UK are no more than £10 million in a 12-month accounting period. Further if the PE falls within the independent status rules (CTA 2010, s 1142) or the alternative finance regime (CTA 2010, s 1144) they will not, subject to meeting certain conditions, fall within the DPT regime.

The second rule applies to certain arrangements which lack economic substance involving entities with an existing UK taxable presence. The primary function is to counteract arrangements that exploit tax differentials and will apply where certain detailed conditions, including those on an ‘effective tax mismatch outcome’ are met. This rule also will not apply where the two parties to the arrangements are SMEs.
For both rules it is provided that the DPT will not reflect any profits relating to transactions involving only loan relationships.

Draft legislation, explanatory notes and guidance were issued by HMRC on 10 December 2014. The HMRC guidance provides several useful examples as to what arrangements they anticipate will be caught by the new tax.

The initial onus to notify liability falls on the relevant company; it must notify HMRC if it is potentially within the scope of DPT within 3 months after the end of the accounting period. If the company does not notify liability it may potentially be liable to a penalty. However, and irrespective of any initial notification by the company, if HMRC have reasonable grounds for believing that the DPT will apply, they must issue a preliminary notice within 2 years of the end of the accounting period (extended to 4 years if the company had not made any initial notification). A preliminary notice will be issued explaining, among other things, the reasons, the amount of the charge and the basis on which it has been calculated (including the details of the amount of the taxable diverted profits).

The recipient has 30 days to make representations and the designated HMRC officer may consider certain specified matters within a further 30 day period before either issuing a charging notice on the original or a revised amount, or confirming that no charge arises. Where specific conditions are met and the designated HMRC officer considers that certain expenses otherwise deductible may be greater than they would have been at arm’s length; the diverted profit charge will initially reflect a 30% disallowance of those expenses. The charging notice will require the payment of the diverted profits tax within 30 days. Penalties will apply for late payment.

Following the due date for payment, there is a 12-month review period during which the charge may be adjusted based upon evidence. At the end of the review period the business has a further 30 days to appeal against any resulting charge. The review period can be brought to a conclusion earlier with the agreement of both parties. There can be no postponement of the disputed tax during the review period or due to any subsequent appeal.

Bank Loss Relief

As detailed in our Autumn Statement announcement published last week, legislation will be introduced in Finance Bill 2015 to restrict the proportion of annual taxable profits generated by banks and building societies which can be offset by certain brought forward losses that accrued prior to 1 April 2015. The stated aim of this legislation is to reduce the tax benefit received from the significant losses arising in the banking sector during the financial crisis, which could otherwise be utilised to eliminate the corporation tax payable on recovering profits.

Where a company’s accounting period straddles 1 April 2015, the accounting period is split into two notional periods, with the restriction applying to relevant reliefs accruing before 1 April 2015. Anti-forestalling rules apply though from 3 December 2014 to arrangements entered into from that date and target banking companies accelerating recognition of their own profits or the transfer-in of profits from a connected company.

The restriction will operate by limiting carried forward trading losses, non-trading loan relationship deficits and management expenses that accrued before 1 April 2015, such that they can only be offset against 50% of the relevant profits of the company.

A company has to perform the following calculation to establish its relevant profits:

(1) Calculate its trading profits and its non-trading profits before relief for restricted brought forward trading losses/non-trading loan relationship deficits but after relief for unrestricted brought forward reliefs.
(2) Calculate any in-year reliefs that the company will use, such as group relief, but ignoring management expenses brought forward and relief carried back from later periods and split that relief against total profits proportionately between the trading and non-trading profits calculated as above - this produces the relevant trading profits and relevant non-trading profits.
(3) Relief for restricted brought forward trading losses/non-trading loan relationship deficits is then limited to 50% of the relevant trading/non-trading profits.
(4) Relief for brought forward management expenses is limited to the balance of 50% of the total relevant profits (trading and non-trading together) after relief given for restricted brought forward trading losses and non-trading loan relationship deficits.

Other reliefs brought forward (such as capital losses, or UK property losses) are not included in the restriction and can be brought forward and relieved in full.

Note that the restriction does not enable the company to override the existing rules for the automatic use of reliefs brought forward. A company with trading losses or management expenses must use them up to the maximum restricted amount allowed by the calculation (albeit the maximum restricted amount may be reduced by claiming more relief against total profits than would normally be available). The existing rules for claiming to carry forward non-trading deficits on loan relationships still apply.

This restriction has notable effect on the following existing rules:

Group relief

Under existing rules group relief can only be claimed after all other reliefs of the current and previous periods. Under the restriction, however, the relevant reliefs can be effectively displaced by group relief. This means that a company under the restriction may potentially be able to claim more group relief, because at the stage it is claimed the company’s profits will not be reduced by the relevant reliefs. Doing so, however, will reduce the profit figure used for calculating the available amount of relevant relief. To the extent that a company surrenders any relief of the current period as group relief these amounts will not be reflected in that company’s profits when calculating the allowable reliefs it can bring forward.

Qualifying charitable donations

Under existing rules qualifying charitable donations can only be claimed after all other reliefs (apart from group relief and relief from future periods), and only to the extent that it reduces the profits to nil. Under the restriction, brought forward reliefs are given after relief for qualifying charitable donations. Similarly to group relief, this means that a company under the restriction may potentially be able to use more relief for qualifying charitable donations, because at the stage it is given the company’s profits will not be reduced by the relevant reliefs. The qualifying charitable donations will, however, reduce the profit figure used for calculating the available amount of relevant relief.

Management expenses

Management expenses brought forward are treated as management expenses of the period, and under the current rules relief is given for these before any other relief from total profits. As a consequence of this restriction, relief for most other reliefs from total profits could be given in preference over restricted management expenses brought forward, as described for group relief and qualifying charitable donations.
Draft legislation (for consultation) and a technical note, which contains detailed examples as to how HMRC envisage the restriction operating, were issued on 3 December 2014.

Oil and Gas Industry: Cluster area allowance

As announced in last week’s Autumn Statement, Finance Bill 2015 will introduce a new high pressure, high temperature cluster area allowance which will exempt an amount of a company’s profit from the supplementary charge. This measure will have effect from 3 December 2014 in respect of capital expenditure incurred on or after this date.

A cluster area is defined widely as an offshore area, as determined by the Secretary of State, and does not include any previously authorised oil fields. Oil fields authorised for development before the cluster area determination date (other than a decommissioned oil field) are specifically excluded from the allowance. A determination has effect from the day on which it is published.

The cluster area allowance is intended to operate in a similar manner to the existing field allowances, by exempting a portion of a company’s profits from the supplementary charge - reducing the effective tax rate on that portion from 62% to 30% at current tax rates. The allowance will remove an amount equal to 62.5% of capital expenditure incurred by a company in relation to a cluster area from its adjusted ring fence profits which are subject to the supplementary charge. Capital expenditure includes exploration and appraisal costs, but excludes decommissioning costs. Capital expenditure is not relievable if it is incurred in relation to the acquisition of an asset, which has already generated an allowance for any company.

The allowance will allow a company’s adjusted ring fence profits for an accounting period to be reduced (but not below zero) by the total amount of activated allowance in that period. Any unused activated allowances are carried forward to the next accounting period. A company can elect to transfer a specified amount of cluster area allowance on disposal of an equity share in a licensed area or sub area, subject to a minimum and maximum transferable amount.

Capital Gains Tax

Capital gains tax: Non-resident charges on UK residential property and changes to private residence relief for residents and non-residents

The scope of capital gains tax is to be extended to include disposals by non-UK residents of a UK residential property interest. The charge will apply to both individuals and certain companies. Some changes are also being made to private residence relief. The legislation will be included in Finance Bill 2015 and the new charge will apply to disposals made on or after 6 April 2015.

A UK residential property interest is broadly land that at any time from the date of acquisition, or 6 April 2015 if later, to the day before the date of disposal has consisted of or included a dwelling or subsists under a contract for an off-plan purchase.

Certain types of accommodation including care homes, hospitals, hotels and inns, purpose built student accommodation, and residential accommodation for school pupils will also be excluded from the scope of the charge.

Unit trust schemes and open-ended investment companies which meet the widely-marketed funds condition, and diversely-held companies may make a claim for the charge not to apply. A company is not a diversely-held company, and is therefore a closely-held company, if it is under the control of 5 or fewer participators, or if 5 or fewer participators would be entitled to the greater part of the assets of the company on a winding up. There are certain exceptions where one of the 5 or fewer participators is itself a diversely-held company or a qualifying institutional investor. The charge can apply to a division of a company in some circumstances. Any arrangements entered into, one of the main purposes of which is to avoid the charge, are to be ignored in determining whether a company is a closely-held company or whether a unit trust scheme or open-ended investment company meets the widely-marketed funds condition.

The charge will apply to non-resident persons who are partners and to non-resident trusts, subject to private residence relief if applicable. The charge will take precedence over existing anti-avoidance provisions that attribute gains to settlors or beneficiaries of non-resident trusts.

The main approach for calculating the gain will be to rebase the property to its market value at 6 April 2015 so that only the gain realised over that value (after deduction of any allowable costs incurred after then) is subject to the charge. Alternatively, provided the disposal is not also subject to ATED-related CGT, the taxpayer can make an irrevocable election to either time apportion the whole gain over the period of ownership, or to compute the gain over the whole period of ownership. The resulting gains are apportioned to reflect the number of days when the asset is used as a dwelling.

Non-resident companies will benefit from indexation. To the extent that a gain is ATED-related then ATED-related CGT will continue to apply at 28%. The remaining part of the gain post 6 April 2015 will be subject to the extended CGT charge on non-residents.Losses on disposals of UK residential property will generally be ring-fenced for use against gains on such properties arising to the same non-UK resident person, but unused losses accrued when non-UK resident will be general allowable losses for use against chargeable gains when UK-resident.

The rules for private residence relief are also changing in relation to disposals on or after 6 April 2015. A dwelling house will not be treated as occupied as a residence for the purposes of private residence relief in a tax year or partial tax year during the period of ownership in which the individual was not resident in the territory in which the dwelling house is situated, unless in a full tax year he (or his spouse or civil partner) spends at least 90 days in the dwelling, and in a partial tax year he spends at least the appropriate proportion of 90 days there. For these purposes an individual is resident in an overseas territory if he is liable to tax in that territory by reason of his domicile or residence, unless he is only liable on income from sources in that territory or capital situated there.

The changes will apply to both a UK tax-resident disposing of a residence in another country and a non-UK tax-resident disposing of a UK residence.

Entrepreneurs’ relief on deferred gains

Legislation in Finance Bill 2015 will extend the scope of entrepreneurs’ relief to gains relating to a relevant business disposal which has previously been deferred under either the enterprise investment scheme or social investment tax relief scheme, and a chargeable event triggers the gain. The extension applies to gains which have as their source a qualifying business disposal on or after 3 December 2014.

If a gain has been deferred more than once, it is the initial gain which must relate to a relevant business disposal.

Where part of a deferred gain has previously accrued without a claim to entrepreneurs’ relief being made in respect of it, it is not possible to claim relief under these new provisions when another part of the same gain subsequently accrues.

The relief must be claimed by 31 January following the tax year in which the gain accrues.

Inheritance Tax

Inheritance tax: relevant property trusts

Following the Government’s consultation on proposals for changes to the inheritance tax regime for relevant property trusts, the draft legislation for the Finance Bill 2015 includes a number of measures as described below.

  • In calculating the rate of IHT for the purposes of the ten-year charge and the exit charge, the requirement in IHTA 1984, ss 66, 68 and 69 to include certain property which is not relevant property in the notional transfer of value is removed for charges arising on or after 6 April 2015.
  • A new rule is introduced for ten-year anniversary charges, exit charges and charges on 18/25 trusts under IHTA 1984, s 71F arising on or after 6 April 2015. Where property is added to two or more settlements on the same day (and after the commencement of those settlements), then, in calculating the rate of tax for any of those settlements, the value of the property so added to the other settlements, together with the value of property added to those settlements at the date of their commencement, must be included in the notional transfer of value. The new rule does not apply if any of the settlements is a settlement created before 10 December 2014, provided that either the settlor has made no transfers of value to the settlement on or after that date or the only such transfer is a transfer on the settlor’s death before 6 April 2016 under provisions of the settlor’s will that are in substance the same as they were immediately before 10 December 2014.
  • Changes are made to the exemption from the ten-year charge under IHTA 1984, s 79 for property which has been designated as heritage property under IHTA 1984, s 31. Currently, the claim for designation must be made and the designation must be approved before the date of the ten-year charge for the exemption to apply. For ten-year charges which would otherwise arise on or after the date of Royal Assent to Finance Act 2015, the claim for designation can be made within the two years following the date of the ten-year anniversary.
  • The scope of IHTA 1984, s 80, as it applies to settlements made before 22 March 2006, is to be restricted. Currently the rule is that where a settlor or his spouse or civil partner has an interest in possession in settled property immediately after it was added to the settlement, the property is not treated as comprised in a settlement for the purposes of the relevant property trusts regime until neither the settlor nor the spouse or civil partner has an interest in possession. Where, on or after the day after the date of Royal Assent to Finance Act 2015, one party to the couple succeeds to the interest in possession of the other, the settled property will then come within the relevant property trusts regime unless the successor’s interest is an immediate post-death interest, a disabled person’s interest or a transitional serial interest.
  • For deaths on or after 10 December 2014, an amendment is made to IHTA 1984, s 144 so that where property is left in a relevant property trust and an appointment is made of that property to the spouse or civil partner of the testator, that appointment is read back into the will and exemption from IHT can apply even where the appointment is made in the three months following death.

Inheritance tax exemptions

Legislation in the Finance Bill will extend two existing inheritance tax exemptions.

The existing exemption for decorations and awards for valour or gallantry is extended to include all decorations and awards by the Crown or by another country or territory outside the UK to the armed forces, emergency services personnel and to individuals in recognition of their achievements and service in public life. The change will apply to transfers of value on or after 3 December 2014. Decorations or awards which have been the subject of a disposition for money or money’s worth are excluded from the exemption.

The exemption from IHT for the estates of members of the armed forces whose death is caused or hastened by injury on active service is also extended. The changes will apply with retrospective effect to deaths on or after 19 March 2014.

The estates of emergency service personnel and humanitarian aid workers who die as a result of responding to an emergency will be exempt from IHT, as will the estates of police constables and armed service personnel who die as a result of being attacked due to their status.

The new exemptions apply not only to the estate but also to any additional IHT due on death for lifetime transfers and potentially exempt transfers. The existing exemption for members of the armed forces is also amended to include such additional IHT.

Value Added Tax

Power to make refunds to named bodies

Government departments are permitted to obtain refunds of VAT which they incur in relation to non-business activities. However, this does not extend to Non-Departmental Public Bodies and similar arms-length bodies.

With effect from Royal Assent to the Finance Bill 2015, a new VATA 1994, s 33E will provide that the Treasury may, by order, name any such bodies as ‘specified bodies’, with the result that they will be able to recover the VAT which they incur on non-business. The aim of the measure is to prevent VAT from being a disincentive to cost-sharing arrangements between such bodies, which currently give rise to irrecoverable VAT.

Any hope of a windfall by a specified body will, however, be short-lived; since the recipient will be government-funded, the extent of the funding will be adjusted downwards to take account of the VAT which is now recoverable.

VAT refunds to search and rescue bodies

With effect from 1 April 2015, VATA 1994, s 33C and s 33D will provide that a ‘search and rescue charity’ may make claims for refunds of VAT on supplies, acquisitions and importations of goods and services which are used by the charity for non-business purposes (other than any VAT which is excluded from recovery under VATA 1994, s 25).

A search and rescue charity is one which:

  • carries out search and rescue activities in the UK or the UK marine area which are coordinated by the MOD, Coastguard, police or other specified body;
  • supports, develops and promotes the activities of such a charity; or
  • provides an air ambulance service in cooperation with the NHS.

A claim must be made within 4 years of the date of the supply, acquisition or importation. Where it is not possible to distinguish between business and non-business use, an appropriate apportionment should be made.

Refunds to strategic highways companies

The Highways Agency, which is entitled to refunds of VAT incurred on non-business activities under VATA 1994, s 41(3), is to be replaced by a strategic highway company under the provisions of the Infrastructure Bill. In order to maintain the current VAT recovery position, the successor company will be added to the list of bodies in s 41(7) which are entitled to refund. This will take effect from 1 April 2015.

Stamp Duty

Stamp Duty Land Tax Reform

A major change is to be made to the way in which SDLT is calculated on purchases of residential property. The change will apply to transactions with an effective date on or after 4 December 2014, subject to the transitional rules outlined below. Rather than being included in the 2015 Finance Bill, the change is to be made by way of a Stamp Duty Land Tax Bill which is currently before Parliament.

Previously, SDLT on purchases of property operated on the so-called ‘slab’ basis under which the tax was charged at a single rate on the entire purchase consideration, the rate being determined according to the band in which the consideration fell. This system will continue for purchases of non-residential and mixed property, but for purchases of wholly residential property a new ‘slice’ basis will apply. Each of the rates set out in the table below will apply to the portion of the consideration falling within each band.

Band of consideration Rate
£0 - £125,000 0%
£125,001 - £250,000 2%
£250,001 - £925,000 5%
£925,001 - £1,500,000 10%
£1,500,001+ 12

The existing 15% rate of SDLT which applies to certain purchases of residential property by non-natural persons under FA 2003, Sch 4A will continue to operate on the slab basis, the whole of the consideration being subject to tax at 15%. The charge under FA 2003, Sch 5 on the net present value of rent (which already operates on a slice basis) is also unaffected by the change.

Where a transaction takes place under a contract which was entered into and substantially performed before 4 December 2014, the purchaser may make an election for the old basis and rates to apply. An election may also be made for transactions taking place under a contract entered into, but not substantially performed, before that date unless:

  • there is a variation of the contract, or assignment or assignation of rights under the contract, on or after 4 December 2014;
  • the transaction results from the exercise on or after that date of any option, right of pre-emption or similar right; or
  • on or after that date there is an assignment, assignation, subsale or other transaction relating to the whole or part of the subject-matter of the contract as a result of which a person other than the purchaser under the contract becomes entitled to call for a conveyance.

An election must be included in the land transaction return or an amendment of the return.

Stamp duty land tax: extension of multiple dwellings relief

The SDLT relief for transactions involving interests in more than one dwelling under FA 2003, Sch 6B is to be extended to include purchases from certain shared ownership bodies of superior leasehold interests in property subject to shared ownership leases where the transaction is part of a lease and leaseback arrangement. The change will apply to transactions with an effective date on or after the date of Royal Assent to the Finance Act 2015.

Multiple dwellings relief applies to transactions involving more than one dwelling and reduces the amount of SDLT payable. The tax is computed by reference to the average consideration for the dwellings as if each dwelling had been acquired separately, subject to a minimum rate of 1%. Currently, superior interests in dwellings subject to a lease granted for more than 21 years are excluded.

That exclusion will no longer apply to a lease and leaseback transaction where the vendor is a qualifying body and the leaseback element of the transaction is exempt under FA 2003, s 57A (exemption on sale and leaseback arrangements).

Qualifying bodies are local housing authorities, housing associations, housing action trusts, the Northern Ireland housing Executive, the Homes and Communities Agency, the Greater London Authority, development corporations and certain private registered providers of social housing.

Annual Tax on Enveloped Dwellings: reducing the administrative burden

Legislation will be introduced in Finance Bill 2015 to reduce the administrative burden on businesses which hold properties eligible for a relief from ATED and for which there is no tax liability. For chargeable periods beginning on or after 1 April 2015 such businesses will be able to submit a relief declaration return. A relief declaration return can only relate to one type of ATED relief, but subject to this it can be made in respect of one or more single-dwelling interests, which do not need to be identified.

For the 2015-16 year only, relief declaration returns must be filed by 1 October 2015. For subsequent years the normal filing date of 30 April will apply.

Where a person has already delivered a relief declaration return for a chargeable period in respect of one or more single-dwelling interests, and on a subsequent day another single-dwelling interest is eligible for the same type of relief in the chargeable period, the existing return is treated as also having been made in respect of that other interest.

Where there has been a failure to make an ATED return in respect of two or more single-dwelling interests and that obligation could have been discharged by making a single relief declaration return, penalties under FA 2009, Sch 55 will be charged as if there were only one failure.

Registration of alcohol wholesalers

Alcohol duty fraud, and in particular the diversion of duty suspended or otherwise unpaid on alcohol products has been identified as an area where there is considerable revenue loss, and much of this loss arises in the wholesale sector. Consequently FA 2015 will introduce provisions which require wholesalers of alcohol to be approved by, and registered with, HMRC. The provisions take the form of a new Part 6A to the Alcoholic Liquor Duties Act 1979 and regulations made thereunder.

The registration/approval provisions apply to ‘UK persons’, ie persons who are established in the UK for VAT purposes who carry on a ‘controlled activity’, namely the selling, offering for sale, or arranging the sale of ‘controlled liquor’ on a wholesale basis (as defined). A sale is of ‘controlled liquor’ if it is a sale of dutiable alcoholic liquor on which duty is charged at a positive rate, and the sale takes place on or after the duty point.

A person may not carry on a controlled activity except in accordance with an approval given by HMRC, and a person may not buy controlled liquor from a UK person unless the UK person is so approved. An approval, which may be subject to conditions and restrictions, will only be given where HMRC are satisfied that the person is a ‘fit and proper person’ to carry on the activity. A person who contravenes these requirements is guilty of an offence and is liable, on summary conviction, to a fine. Contravention may alternatively (double jeopardy provisions apply) give rise to a penalty of up to £10,000 depending on the level of culpability and whether disclosure is made (and if so, whether the disclosure was prompted). No penalty arises if there is a reasonable excuse for the contravention.

Regulations will set out the manner in which approval/registration must be sought and granted, and provide for notification, variation and revocation of such approvals. They will also provide for group registration and penalties (including forfeiture) for contravention of the regulations or Part 6A, or any contravention of any condition or restriction imposed by Part 6A.

The provisions come into force generally with effect from Royal Assent to FA 2015. However, the provisions relating to approval apply from 1 January 2016 (application for approval may not be made before 1 October 2015), and the provisions restricting the wholesale purchase of controlled liquor apply from such date as the Treasury may by regulations appoint.

Tobacco duty anti-forestalling provisions

HMRC are to be given greater flexibility to impose limits on the quantity of tobacco products which may be removed from duty suspension to home use in the run-up to an expected increase in the rate of Tobacco Products Duty (‘TPD’).

Where HMRC consider that the rate of TPD may be altered, they may issue an ‘anti-forestalling notice’ specifying a period (the ‘controlled period’) of up to 3 months during which:

  • the quantity of tobacco products which may be removed to home use may be restricted;
  • the quantity of tobacco products which may be removed to home use in a two week or one month period may be restricted.

There are limitations on the restrictions; the total restricted amount must not be less than 80% of the average daily amount removed for home use in the year ended two months before the start of the controlled period, and the restricted amount in any month of the controlled period may be less than 30% of the total restricted amount.

HMRC may extend the controlled period by up to one month by means of an extension notice if it appears to them that the rate of TPD will not be altered within the controlled period, but will be altered within one month thereafter.

A person who fails to comply with an anti-forestalling notice, ie he removes to home use an amount in excess of the restricted amount, will be liable to a penalty equal to 200% of the ‘lost duty’. This the difference between (a) the amount of duty which would have been chargeable had the removal of the excess quantity taken place immediately after the end of the controlled period and (b )the amount of duty which was actually chargeable.

The penalty is reduced to 150% if the person gives an ‘admission notice’, ie a notice admitting that he has failed to comply with the notice and consequently is liable to a penalty.

An admission notice may not be given if:

  • the person has previously given such a notice within 3 years of the commencement of the controlled period;
  • the person has reason to believe that HMRC have discovered or are about to discover that he has failed to comply with the anti-forestalling notice; or
  • the controlled period has expired.

HMRC will normally issue an anti-forestalling notice 150 days before the commencement of the controlled period to enable businesses to prepare.

The legislation will have effect in time to apply to anti-forestalling provisions in relation to the 2016 Budget.

Exemption from Air Passenger Duty for children in standard class

FA 1994, s 31 is to be amended so that, with effect in relation to flights commencing on or after 1 May 2015, a child under the age of 12 will be exempt from Air Passenger Duty. With effect from 1 March 2016, the age limit will be increased to 16.

Aggregates Levy credits: Northern Ireland

The Aggregates Levy Credit Scheme (‘ACLS’) was introduced in April 2004 and credited Northern Ireland operators with 80% of the levy they paid on commercially exploited aggregate, subject to the condition that they met certain environmental standards. The credit was to protect such operators from the distortion in competition arising from operators across the land boundary in the Republic of Ireland. The scheme was suspended in 2010 while the European Commission undertook an investigation into its legality. The Commission decided in 2014 that the scheme complied with the relevant rules, except that aggregate originating in other Member States and commercially exploited in Northern Ireland did not benefit, and should have benefitted, from the scheme.

Consequently FA 2015 makes provision for the extension of ALCS to aggregate imported into Northern Ireland from another Member State. It inserts sections 30B, 30C and 30D into FA 2001 to provide for credits of 80 per cent of the levy where the full rate of levy was paid when the aggregate was commercially exploited in NI during the relevant period following its importation from another Member State. Secondary legislation to be laid before Parliament in Spring 2015 will specify the evidence needed to support claims, including details of the originating quarry. A condition of the credit is that the Department of the Environment in Northern Ireland be satisfied that the environmental standards in the originating quarry broadly match those required of quarries in Northern Ireland for ALCS to apply.

Tax Administration

Direct recovery of debts due to HMRC

Legislation will be introduced in a Finance Bill in 2015, during the next Parliament, to allow HMRC to recover tax and tax credit debts directly from debtors’ bank and building society accounts in credit. The power can only be used to recover debts of more than £1,000, and is subject to a number of statutory safeguards. It will not apply in Scotland.

HMRC must be satisfied that the debtor is aware that the sum is due and payable, and to meet this requirement HMRC will ensure that every debtor will receive a face-to-face visit from HMRC’s agents, before their debts are considered for recovery. Only debtors who have received this face-to-face visit, have not been identified as vulnerable, have sufficient money in their accounts and have still refused to settle their debts will be considered for debt recovery. The debt must be either an ‘established debt’ or one due under the accelerated payments legislation in Finance Act 2014. An established debt is one against which there is no right of appeal or, where there is a right of appeal, the appeal period has either expired or the appeal has been settled or withdrawn.

HMRC must also always leave a minimum of £5,000 across a debtor’s bank and building society accounts once the debt has been held. Debtors will have 30 days to object before any money is transferred to HMRC, and if they do not agree with HMRC’s decision, they will be able to appeal against it to a County Court on specified grounds, including hardship and third party rights.

The deposit-taker can be liable to penalties if they do not comply with notices given to them by HMRC, or if they warn the debtor.

Secondary Legislation will be published in spring 2015 to introduce the direct recovery process and safeguards.

Enhanced penalties for offshore tax evasion

Legislation will be included in Finance Bill 2015 to strengthen the penalties for offshore compliance. From a date to be specified in a Treasury Order but expected to be 1 April 2016 the offshore penalty regime will be extended to include IHT, to cover cases where the proceeds of domestic non-compliance are situated or held outside of the UK, and to have four levels of penalty instead of three. From the date of Royal Assent to the Finance Act 2015, the regime will include a new type of penalty which is triggered following a movement of offshore assets to continue evading tax.

For Finance Act 2007 Sch 24 (penalties for errors), Finance Act 2008 Sch 41 (penalties for failure to notify) and Finance Act 2009 Sch 55 (penalties for failure to make a return) a new category 0 penalty has been introduced and the category 1 penalty levels have been increased. Category 0 will apply to:

(a) domestic matters;
(b) offshore matters or offshore transfers in relation to category 0 territories involving income tax, CGT (or, for FA 2007, Sch 24 and FA 2009, Sch 55, IHT); or
(c) offshore matters relating to taxes other than income tax, CGT (or, for FA 2007, Sch 24 and FA 2009, Sch 55, IHT).

Category 1 penalties will now apply to offshore matters or offshore transfers involving income tax, CGT (or, for FA 2007, Sch 24 and FA 2009, Sch 55, IHT) in relation to category 1 territories.

The territory classification system will be updated to reflect the new common reporting standard.

The category 0 and category 1 penalties for FA 2007, Sch 24 and FA 2008, Sch 41 will be:

  Category 0 Category 1
Careless action 30% 37.5%
Deliberate but not concealed action 70% 87.5%
Deliberate and concealed action 100% 125%

The reduction for disclosure for the new penalty levels in FA 2007, Sch 24 will be:

Standard % Minimum % for prompted disclosure Minimum % for unprompted disclosure
37.5% 18.5% 0%
87.5% 43.75% 25%
125% 62.5% 40%

The reduction for disclosure for the new penalty levels in FA 2008, Sch 41 will be:

Standard % Minimum % for prompted disclosure Minimum % for unprompted disclosure
37.5% case A: 12.5% case B: 25% case A: 0% case B: 12.5%
87.5% 43.75% 25%
125% 62.5% 40%

The category 0 and category 1 penalties ‘relevant percentages’ for FA 2009, Sch 55 will be:

  Category 0 Category 1
Deliberate but not concealed action 70% 87.5%
Deliberate and concealed action 100% 125%

The reduction for disclosure for the new penalty levels in FA 2009, Sch 55 will be:

Standard % Minimum % for prompted disclosure Minimum % for unprompted disclosure
87.5% 43.75% 25%
125% 62.5% 40%

No change is made to current levels of penalty in relation to inaccuracies falling within categories 2 and 3 in any of the Schedules mentioned.

Disclosure of tax avoidance schemes regime changes

Legislation in Finance Bill 2015 will strengthen the Disclosure of Tax Avoidance Schemes (DOTAS) regime by updating the rules determining what has to be disclosed to ensure avoidance that is being marketed and used now is disclosed; changing the information that must be provided to HMRC; enabling HMRC to publish information about promoters and disclosed schemes; and establishing a taskforce to enforce the strengthened regime. Promoters will be required to notify HMRC within 30 days if the name of a scheme, or the name or address of a promoter, changes after a reference number has been issued.

Employers will be required to provide HMRC with prescribed information (under SI 2012/1836) about each employee to whom they have provided information in relation to notifiable arrangements.

New provisions will enable HMRC to require a person suspected of being an introducer in relation to a notifiable proposal to provide prescribed information about those with whom they have made a marketing contact.

Changes will be made to provide that no duty of confidentiality or other restriction on disclosure (however imposed) can prevent persons from being able to voluntarily provide information or documents to HMRC which they suspect may assist HMRC in determining whether there has been a breach of any of the DOTAS requirements.

HMRC will be able to publish information about promoters and schemes that are notified under the DOTAS regime and which have been issued with a reference number. HMRC must inform a promoter before publishing any information which would identify that person as a promoter to give them an opportunity to make representations about publication, and may not publish any information that will identify scheme users. HMRC will be required to publish information about court rulings that are relevant to earlier publication under this provision.

The penalties for users of tax avoidance schemes who fail to correctly provide information about the reference number etc. to HMRC are increased from an amount not exceeding £100, £500, and £1,000 (depending on the circumstances) to an amount not exceeding £5,000, £7,500 and £10,000 respectively.

The period during which HMRC may issue a scheme reference number will be increased from 30 to 90 days.

The provisions will apply on or after the date that the Finance Act 2015 receives Royal Assent. Certain transitional provisions apply.

Promoters of tax avoidance schemes

Legislation in Finance Bill 2015 will make changes to the regime for promoters of tax avoidance schemes.

It will allow HMRC to issue conduct notices to a broader range of connected persons under the common control of a promoter.

The 3-year time limit for issuing notices to promoters who have failed to disclose avoidance schemes to HMRC under DOTAS will now apply from the date when the failure comes to the attention of HMRC rather than the date of the underlying failure.

The threshold conditions in Finance Act 2014, Sch 34 will be amended to ensure that they take account of decisions by independent bodies in matters of all relevant forms of professional misconduct, and a new threshold condition will be introduced for failing to comply with NICs disclosure requirements.

A small number of other changes are also included in this measure, aimed at ensuring the 2014 legislation functions as intended. It will take effect from the date of Royal Assent to Finance Act 2015.