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Publications

UK Budget 2010: our analysis

 

25 March 2010

Tax charges on banks remain on the agenda with a commitment to work towards an internationally coordinated  systemic risk tax covering all financial institutions that might contribute significantly to systemic tax risk.  

As regards technical issues, after uncertainties had arisen as to the correct tax treatment of certain dividends received by UK companies, it has been confirmed that draft legislation will be included in the first Finance Bill to be introduced after the Election seeking to clarify the position. 

The delay in introducing the legislation is unexpected as is a proposal which it is understood the Government is considering to align the test of whether distributions from overseas companies are income or capital with the test applying to distributions from UK companies. 

Anti-avoidance rules are to be further tightened through changes to the disclosure regime coming into effect in the autumn, rules to prevent the abuse of double tax relief and rules to be introduced in the employment area aimed at share options and incentive plans as well as earnings paid through trusts or other entities. In addition, there is to be consultation on whether a principles based rule should be introduced to counter the use of loans or derivatives by group companies to create tax mismatches. Consultation on the reform of the CFC rules continues, the intention being to introduce the new regime alongside a reformed branch tax regime in the Finance Bill 2011.  All in all, no huge surprises.

View the following sections:

Banking
Corporate
Anti-avoidance
Employment taxation
Leasing
International capital markets
Real Estate
Funds
Capital gains tax
Insurance
Oil
VAT

Banking

Bank payroll tax (BPT)

It has been confirmed that revised draft legislation will be published in the Finance Bill.  It has also been announced that the draft legislation will make the following revisions:

  • Clarification regarding the types of company which are within the scope of BPT: These will be only:

    • deposit-taking banks (including UK branches of foreign banks)
    • companies other than deposit-takers, if they are both BIPRU730K and full-scope investment companies within the relevant FSA definitions, including UK branches of foreign companies (companies in this category will be exempt from BPT if their capital resources requirement is less than GBP100m)
    • building societies
    • certain companies in the same corporate group as companies listed above (a corporate group which carries on certain insurance, asset management or related activities or non-financial activities but which also includes a taxable company will not be liable to BPT where 90 per cent or more of the group’s trading income in a specified period of account arises from those activities).
  • Additions to the list of companies specifically excluded: certain special purpose vehicles involved in insurance/reinsurance activities, exempt BIPRU commodities firms (as defined for BIPRU purposes) and firms that carry on a specified range of regulated activities (broadly, pension scheme management, certain activities related to insurance or asset management, trading in commodities and related derivatives and spread-betting) will be exempt from BPT.
  • Clarification regarding whether a bonus is awarded within the chargeable period: changes will be made to the provisions which determine whether a bonus has been awarded within the chargeable period and therefore whether BPT applies in respect of that bonus (the intention appearing to be to give legislative effect to certain "frequently asked questions" and answers published by HMRC in December 2009 and February 2010).
  • Clarification regarding employees who are temporarily in the UK: if relevant duties are performed by an employee who visited the UK for 60 days or less in the tax year 2009/10, BPT will not apply to a bonus awarded to that employee (again, the intention appears to be to give legislative effect to the answer to a "frequently asked question" published by HMRC and which dealt with this issue).

Systemic risk tax

Although there is no firm announcement in the Budget that it will introduce an additional levy on the profits of banks, the Government has made known its belief that early progress could be made on an internationally coordinated systemic risk tax.  The Government states that:

  • the tax should be coordinated internationally to minimise competitive distortions
  • the tax should complement and take account of regulatory and other reform initiatives aimed at addressing systemic risk and strengthening financial stability
  • the proceeds of the tax should go to national governments and be available for general purposes (rather than, for example, being hypothecated to funding the costs of financial crises)
  • the tax should be designed taking into account the timing and strength of economic recovery so that the impact of the tax is proportionate and measured
  • the tax should be as simple as possible whilst at the same time taking account of the characteristics of the taxpayer's business that give rise to systemic risk
  • the tax should cover all financial institutions that might contribute significantly to systemic risk.

Remuneration in the financial services sector

It has been announced that, upon enactment of the Financial Services Bill, there will be formal consultation on regulations to be made under that legislation which would implement the recommendations of the Walker Review relating to enhanced disclosure of remuneration in the financial services sector.

The Government also intends to consult on what practical measures can be identified which would have the effect that shareholders would need to consent to executive remuneration packages in the financial services sector.

Corporate

Taxation of Distributions

In line with the ministerial statement on 24 February 2010, the Government has confirmed that it intends to clarify the tax treatment of certain distributions received by UK companies from other companies following uncertainty which had arisen in relation to dividends which might be considered to have a capital source. This legislation will not now be introduced until after the election, but once it is introduced it will have retrospective effect, subject to provisions allowing companies to elect for it not to apply to them retrospectively.

The legislation is expected to establish on a statutory basis the long-standing practice that all UK distributions are income in nature unless there is a specific provision to the contrary.  It is considered necessary to correct a defect in the current legislation which resulted from the re-write of the income tax rules in 2005, which had caused this long-standing practice to be called into question at the end of 2009.  Although no draft legislation has been published, it is understood that HMRC are considering aligning the test as to whether distributions from overseas companies are income or capital with the test which applies to distributions received from UK companies.

Worldwide debt cap

Following recent consultation, the Government has announced further changes to the debt cap rules, to be included in the first Finance Bill after the Election but (with one exception) taking effect from 1 January 2010. Two of the changes relate specifically to securitisations: first, a group's "available amount" is to be calculated as if the results of companies within the special corporation tax regime for securitisation companies were excluded from the group's consolidated accounts; second, under new powers, regulations may be made enabling companies in capital market arrangements, which incur additional corporation tax liability as a result of the debt cap, to transfer the liability to another group company. 

Other changes include a clarification that a limited liability partnership cannot be the "ultimate parent company" of a group for debt cap purposes, and a requirement, for the purposes of the "gateway test", to take account of assets and liabilities that do not have the legal form of loans but are economically equivalent to loans and give rise to an interest-like return.

Controlled foreign companies (CFCs) and branch taxation

The Government has reaffirmed its intention to introduce a new CFC regime in the Finance Bill 2011, following the ongoing consultation. Discussions of the reform of foreign branch taxation (which the Government had previously said were merely exploratory) appear to have acquired a firmer footing: the Government has now indicated that these are to be brought forward alongside those relating to the CFC regime, with any resulting legislative change also scheduled for Finance Bill 2011.

Consortium Relief

It has been announced that two changes will be made to the law relating to surrenders of consortium relief. The first change is necessary to bring the existing rules into line with EU law following the decision in the Philips Electronics case and allows a consortium member in another EEA jurisdiction to pass on to its other UK subsidiaries losses surrendered by UK consortium companies; currently the rules require the "link" company itself to be a UK taxpayer. The second change is intended to counter artificial arrangements that use different classes of consortium share to give certain members access to disproportionate amounts of losses. The rules in relation to the allocation of losses will therefore look not only to economic ownership tests, but also to the level of effective control that each consortium member enjoys over the consortium company.

Anti-avoidance

Anti-Avoidance Schemes

Legislation will be introduced in the Finance Bill to deal with some specific avoidance schemes relating to double tax relief (DTR). These changes will apply to:

  • arrangements involving claims for DTR in circumstances where the gross amount of foreign income (in respect of which the relief is sought) is not actually brought into a company's UK tax computation
  • arrangements involving claims for DTR in respect of certain manufactured dividend arrangements and
  • schemes which circumvent some of the existing avoidance provisions contained in Schedule 28AB of the Taxes Act 1988 (as rewritten in the Taxation (International and Other Provisions) Act 2010).

Overhedging and Underhedging (Risk Transfer Schemes)

Following a consultation period and as announced in the PBR, legislation in relation to Risk Transfer Schemes will be included in the Finance Bill. Risk Transfer Schemes are, broadly, schemes where the taxpayer is not, in effect, exposed to any material economic loss as a result of the post tax effect of the hedging arrangement. The draft legislation applies to instruments that are treated as loan relationships or derivatives for tax purposes. Measures will also be included in the Finance Bill to enable regulations to be laid to extend the scope of the Risk Transfer Schemes legislation  to other instruments in addition to loans and derivatives in the case of financial traders.

Group Mismatch Rules

The Government has announced that there will be a consultation on whether to introduce a generic, or principles based, rule to counter schemes creating tax mismatches within a group in relation to loans or derivatives whereby one company in the group recognises a tax loss while the other does not recognise the corresponding taxable profit.

Disclosure of Tax Avoidance Schemes (DOTAS)

Following a consultation period, the Government has announced that it will go ahead with the proposed package of changes to the DOTAS Rules (as announced in the PBR). The changes relate to the timing of disclosure, new disclosure obligations, amendments to the disclosure hallmarks and increased penalties for non-compliance. Various concerns were raised during the consultation and the Government has indicated that some of these will be taken into account and reflected in the final legislation. We will have to wait and see what the drafting looks like to ascertain the extent to which the issues raised have been addressed. The revised rules are expected to come into force in the autumn. 

Employment taxation

Several measures have been announced which will impact on the operation of employee share plans. The Government is to introduce changes in the Finance Bill to counter avoidance arrangements that use Company Share Option Plans (CSOPs) and Share Incentive Plans (SIPs). Under certain CSOPs, options are granted over shares which are subject to “geared growth” arrangements. The shares subject to the option have no rights, or limited rights, at the time the options are granted, but do have rights over all subsequent growth in value.  This allows an option to be granted over a large number of low value shares within the GBP30,000 limit, with potentially high growth in the future.  Draft legislation has been published to counter this arrangement by restricting the type of shares which can be used in CSOPs. It will no longer be possible to grant options over shares in a company under the control of a listed company. 

Options granted before 24 March 2010 will not be affected by the draft legislation which also includes provisions for a six month transitional period in order to enable companies to amend their CSOPs.

Draft legislation was also announced giving HMRC the power to deny a corporation tax deduction to companies who make payments to SIP trustees to acquire shares but where the main purpose of making the payment is to obtain a corporation tax deduction with no corresponding benefit to participants. Such arrangements involve companies entering into transactions which alter the share capital or the rights attached to the shares, thus removing the value of shares held in the SIP trust. The legislation also strengthens provisions which allow HMRC to withdraw approval of SIPs where alterations to share capital or changes in rights attaching to shares materially affect the value of shares held by SIP trustees.

It was also announced that:

  • The Government will be taking action to prevent attempts to avoid income tax and National Insurance contributions through the use of Employee Benefit Trusts and other arrangements to mask payments of remuneration. No draft legislation has been announced but anti-avoidance measures will take effect from 6 April 2011
  • HMRC will review and consult, during 2010, on the taxation of "geared growth arrangements" used in connection with employment related securities, in order to ensure employment income is subject to the correct income tax and National Insurance contributions.
  • Companies granting EMI options will now be required to have a permanent establishment in the UK. This measure amends the requirement that a company granting qualifying EMI options to its employees must operate “wholly or mainly” in the UK.

Leasing

Sale of Lessor Companies - Option to elect

Where a leasing company is sold, it may be charged to tax on a deemed amount of income. A corresponding expense also arises to the company after the sale. The Government announced as part of last year's PBR that, with effect from 9 December 2009, leasing companies would be entitled to elect for an alternative treatment whereby no such deemed income or expense would arise, but instead the future profits of the company's leasing business would be ring-fenced. In particular, the company would in general be prevented from claiming capital allowances in respect of future expenditure.

With effect from 9 December 2009, a company which has elected into the alternative regime will not be prevented from claiming capital allowances in respect of expenditure incurred under a contract which was finalised before 9 December 2009. Three anti-avoidance measures have also been announced which take effect from today and relate to leasing companies owned by consortia, leasing companies acquired by tonnage tax groups and leasing companies which are controlled foreign companies.

International Capital Markets

Clarification of stamp duty relief for clearing houses

Legislation is to be introduced in the Finance Bill to clarify the availability of stamp duty and stamp duty reserve tax (SDRT) reliefs which apply to prevent transactions cleared through a central counterparty or clearing house giving rise to multiple charges.  With retrospective effect, the legislation will make it clear that the relief applies to members of clearing houses and their nominees.

ISAs

As previously announced, from 6 April 2010, the annual ISA subscription limit will be increased for all savers to GBP10,200, of which GBP5,100 can be invested in a cash ISA. It has also been announced that from 6 April 2011, the annual ISA limits will be increased annually in line with the Retail Prices Index (with the cash ISA limit continuing to be half the value of the stocks and shares ISA limit).

Islamic finance

The Government has announced that it will clarify how the capital allowances regime interacts with existing tax legislation aimed at facilitating the development of Islamic finance in the UK. 

Real Estate

Stamp Duty Land Tax – rates for residential property

Alongside the announcement that the threshold for residential property is to be doubled for first time buyers from GBP125,000 to GBP250,00 with effect from midnight, the Chancellor has announced that the rate for residential properties where the price exceeds GBP1 million will be increased to 5 per cent, but this increase will only apply to transactions where the effective date is on or after 6 April 2011.

Stamp Duty Land Tax – anti-avoidance using partnerships
This change relates to an SDLT planning technique that reduces SDLT on acquisition of a property by relying on the specific SDLT rules relating to the acquisition of land by partnerships. The change itself is highly technical in nature and relates to the interplay between the specific SDLT rules for partnerships and the SDLT general anti-avoidance rule, but the effect is intended to be to stop this type of planning with immediate effect.

Real Estate Investment Trusts

Real Estate Investment Trusts (REITs) are subject to rules requiring them to distribute at least 90 per cent of the income profits of their property investment business for each accounting period. The Government has announced that it intends to legislate to allow REITs to give shareholders the option of receiving shares in lieu of a cash dividend in satisfaction of this rule. The change will have effect from the date of enactment of the Finance Bill.

Funds

Tax transparent funds

The Government has announced a formal consultation with a view to introducing a new tax transparent fund vehicle next year.

Investment trust companies

The Government is to consult on modernisation of the rules for investment trusts. The consultation will start this summer with the issue of a consultation document.

Offshore contract based funds

Finance Act 2009 contained legislation treating certain contractual non-UK fund vehicles as if they were companies and therefore opaque for the purposes of taxing UK resident participants in relation to capital gains. However, application of the new rules to participants who were companies was deferred. The Government has announced that the new rule will apply for corporate investors from 1 April 2010.

Capital gains tax

There is no change in the rate at which capital gains tax is charged (18 per cent). The annual exempt amount for capital gains tax will be held at its current level (GBP10,100) for the coming tax year. The lifetime limit for entrepreneurs relief (which provides an effective 10 per cent capital gains tax rate on gains made on qualifying disposals) will be increased so that, for qualifying gains made after 5 April 2010, it will apply to the first GBP2 million of gains made over a lifetime (increased from the previous limit of GBP1 million).

Insurance

The PBR announced legislation, which will be introduced in the Finance Bill, to change the rules relating to the apportionment of income and gains for certain types of life insurance companies to prevent the use of an avoidance scheme and ensure that amounts representing deferred profits are always taxed on an appropriate basis when they are brought into account for tax purposes. An anti-avoidance rule will also be introduced to prevent companies from avoiding the modified rules by a transfer of a business from one non-profit fund to another.

Revised legislation has also been published, which will apply with effect from 24 March 2010, to close a loophole through which fees are artificially carved out of a taxable insurance contract with an individual to avoid insurance premium tax.

A consultation was launched on 10 March 2010 to explore the implications of the EU Solvency II Directive on the taxation of UK insurers (both life insurance companies and general insurers). The Government has also announced that it intends to modify the transfer of business rules for life insurance companies as soon as possible in the next Parliament.

Oil

Finance Act 2009 included a helpful capital gains tax rollover relief where the disposal proceeds of certain oil related assets were reinvested in new oil trade assets. This capital gains tax rollover relief is to be extended so that it will also be available where the disposal is made by one company in a group and the acquisition is made by another company in the same group.

Following acceptance that capital expenditure on cushion gas can constitute plant and qualify for capital allowances, measures will be included in the Finance Bill to ensure that:

  • leases of cushion gas are treated as funding leases so that where cushion gas is leased for more than five years the lessor will be taxed by reference to the commercial substance of the transaction and the lessee will have the option of claiming capital allowances and
  • cushion gas qualifies for writing down capital allowances at the 'special rate' of 10 per cent a year.

VAT

Although all of the VAT measures were expected i.e. no increase in rate and reverse charge imposed for cross-border supplies of emissions allowances, one particular change is being made earlier than had been hoped.

For some time the UK has applied a very relaxed interpretation of the exemption for the sale and hire of aircraft. Currently, the only test is weight related and that has meant that almost any aircraft that seats more than 8 people qualifies for zero-rating. The EU VAT Directive links the exemption to the status of the customer and the Commission recently 'suggested' to the UK that it might like to change its rules.

If the budget proposal is passed in a post-election Finance Bill the UK rules will change from 1 September this year. From that date, only aircraft used by airlines which operate for reward chiefly on international routes will qualify. This will in theory bring the UK into line with other Member states but there are many different interpretations of this wording in the Directive, so we will need to see exactly how the UK drafts the legislation before we will know the full impact. However it is almost certain that executive jets will fall outside the exemption.

It may well also impact on supplies made to non-airline lessors. Although in most cases any VAT charged will be recoverable, there will be considerable cash flow implications if lessors have to pay VAT on the purchase of aircraft.

The other change that may have an impact is that the exemption enjoyed by Royal Mail for its supplies of postal services is being curtailed so that some previously exempt services will now become taxable, thereby removing an advantage currently enjoyed by the Royal Mail. Partially exempt businesses using Royal Mail may well find their costs will increase in future with the addition of VAT to a wider range of services.

Further information

Find out more about our UK tax group.

 

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