Finance and Tax Blog for individuals and companies

Last Thursday, 26 July, the UK Government issued a joint statement with the governments of France, Germany, Italy, Spain and the United States, announcing the publication of the Model Intergovernmental Agreement (IGA) to improve tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA). This will be of interest to financial institutions outside the US dealing with investments and financial products sold to US persons. Such parties will need to look at their respective responsibilities in order to comply with the regulations.

On 21 June 2012 HM Treasury published the summary of responses to the Statutory Definition of Tax Residence consultation document issued last June along with draft legislation. It now invites all interested parties to respond fully and work with the Government to ensure that the draft legislation meets its objectives. It intends to introduce the SRT and reforms to ordinary residence in Finance Bill 2013 which means that the new regime will come into effect from 6 April 2013 (tax year 2013/14).

In December 2011 the Exchequer Secretary to the Treasury, David Gauke, announced that the introduction of the SRT, which was to have been included in Finance Bill 2012 would be delayed until Finance Bill 2013. He stated that the consultation process had ‘raised a number of detailed issues which will require careful consideration to ensure the legislation achieves its important aim of providing certainty for individuals and businesses’.

It has been reported that there is circa £213bn secured against property in the UK of which £153bn has to be refinanced by the end of year 2016 (source Financial Times 5th June 2012). New financial products are being introduced into this sector of the debt finance market.

Many UK banks are locked into rebuilding their balance sheets following recent financial market turmoil. This appears to be affecting available finance for the UK mortgage market. However, it is apparent that the gap left by banks is being addressed by institutional finance from pension funds, insurance companies and specialist investment funds. These investors are looking to generate a premium on cash investment like products compared to the current low yield on UK gilts.

Professional investors look more closely at the quality and covenant of the underlying borrowers and/or tenants. The mortgage bonds are structured to match the liability profile of the lending institution and in effect create a sound base for funding long term debt compared to banks who typically fund their mortgage liabilities with retail deposits with on demand withdrawals and the inter-bank market with periodic roll over’s.

A UK approved investment trusts could be used to facilitate mortgage finance. The Trust concerned would raise money from retail and institutional inventors. The shares could be listed on the UK stock exchange. Under the Interest Streaming Regulations an investment trust is allowed to make certain distributions as interest distributions instead of normal dividend distributions. This enables UK pension funds, ISAs and other tax exempt investors to receive the interest from the underlying investment trust without deduction of UK withholding tax.

An approved UK investment trust could also be used for infrastructure finance and another article will be published on this topic.

HMRC is set to launch an investigation into the widespread practice of civil servants working ‘off payroll’ under IR35 (personal; service companies). It is estimated that HMRC will raise £100m form top earners who, in many cases, have been told by government departments and agencies to use personal service companies. Also their advisers may be put under the spotlight and drawn into such investigation of their clients.

HMRC has reportedly told Exaro – an investigative news website – that it will start its probe into the ‘highest-risk cases’ of suspected tax underpayment by senior public officials within months.

It follows on from a review by Danny Alexander, chief secretary to the Treasury in May 2012, that discovered over 2,400 senior civil servants earning more than £58,200 a year were ‘off payroll’, some for more than 10 years.

Senior officials were able to reduce their tax and national insurance when government departments and agencies paid them – without deducting tax at source – and routing their pay through personal-service companies. HMRC will focus on potential breaches of IR35, a rule requiring so-called ‘disguised employees’ with personal-service companies to pay full tax.

Being paid through a service company ensures the beneficiary can be taxed at the corporation tax rate of 21 per cent rather than up to 45% income tax under Pay As You Earn. The company also saves employers national insurance of up to 13.8%.

On Monday HMRC published a document which sets out the governance process around communication and escalation procedures in any case where HMRC has concerns about a particular bank’s compliance with its commitments under Code of Practice on Taxation for Banks.

In line with its statement of 9 December 2009, HMRC has published annual details of progress in implementing the Code, split into the following categories:

• the top 15 banks
• the rest of the banks in the Large Business Service
• banks in Local Compliance

HMRC has also published further guidance on the terms ‘promote’ and ‘facilitate’ and how these should be read in regard to the Code of Practice on Taxation for Banks.

In summary the Code covers:

1. HMRC may at any time take one of three views about a bank’s compliance with
   the code of practice:
   1. it has not expressed concerns over a bank’s compliance with the code
   2. it has expressed concerns over compliance which are being discussed
   3. it’s concerns over compliance have not been adequately addressed and it
      considers that the bank has not complied with the code
2. If HMRC has concerns about compliance with the code then the CRM or
   equivalent will raise them with the bank at the earliest opportunity, once this
   action has been approved at deputy director level
3. If discussion between the CRM and the bank does not resolve the concerns,
   HMRC (normally at or above deputy director level) will escalate them to the
   bank’s Board for further discussion at this level
4. HMRC will only take the view that the bank has not complied with the code if
   its concerns still remain unresolved. If this is the case, it will
   1. tell the bank that it considers that the bank is not complying with its
      undertakings under the code; and
   2. explain what it considers the bank should do in order to comply
5. Where HMRC has told a bank that it considers it to not have complied with its
   code undertakings HMRC would expect the bank to acknowledge this in any
   public pronouncements it makes on its operation of the code
6. Some smaller banks have been asked to adopt section 1 of the code only. This
   allows them a more flexible approach to documenting and governing their
   strategy towards tax. However the principles underpinning that strategy should
   be the same as for larger banks that adopt the code in its entirety

HMRC announced on 26 April 2012 that it has been working with the commercial software industry to provide simple mobile record keeping applications (apps) for small businesses and the self-employed who are below the current VAT threshold of £77,000.

These applications may help a taxpayer with maintaining good records and include links to HMRC guidance related to record keeping that they may find useful. It is understood that the majority of these applications are free.

The first of these apps from the IT software providers is now available and the list can be obtained from HMRC website.

From 6th April 2012 HMRC introduced the seed enterprise investment scheme (SEIS) for smaller, early stage companies raising equity, and individuals investing in such companies. The measure will support the Government’s growth agenda by helping smaller, riskier, early stage UK companies, which may face barriers in raising external finance, to attract investment, making it easier for these companies to be established and to grow.

This measure introduces a new tax-advantaged venture capital scheme, similar to the
Enterprise Investment Scheme (EIS) and will focus on:

• smaller, early stage companies carrying on, or preparing to carry on, a new business with 25 or fewer employees and assets of up to £200,000
• in a qualifying trade
• The scheme will make available tax relief to investors who subscribe for
  shares and have a stake of less than 30 per cent in the company
• give income tax relief worth 50 per cent of the amount invested to individual investors
• This relief will apply to investments made on or after 6 April 2012
• For the first year of the new scheme, the Government will offer a capital gains tax (CGT) holiday
• provide for an exemption from CGT on gains on shares within the scope of the SEIS
• apply to an annual amount of investment of £100,000 per investor, with unused annual amounts able to be carried back to the previous year, as under EIS
• provide for relief within an overall tax favoured investment limit of £150,000 for the company. To give the greatest degree of flexibility, this will be a cumulative limit, not an annual limit;
• provide for an exemption from CGT on gains realised from disposals of assets in 2012-13, where the gains are reinvested through the new SEIS in the same year

The Extra-Statutory Concession, also known as ESC-C16, was a concession granted by HMRC that allowed directors to wind up a solvent company without appointing a liquidator and pass the surplus funds to the shareholders as a capital distribution rather than dividend income. This was a tax efficient way to wind down a solvent business (even more so if Entrepreneurs’ Relief was applied) and avoid liquidation costs.

With immediate effect from 1st March 2012, this relief is no longer a concession that is applied for, rather it is now automatic under the new legislation and a £25,000 cap has been imposed on distributions in anticipation of company dissolution.

A distribution to shareholders above this amount in such a scenario would be treated as dividend income and therefore subject to a higher tax charge.

The way to benefit from a lower tax charge on distributions over £25,000 now (and possibly also take advantage of Entrepreneurs’ Relief) is through the process of a solvent liquidation, also known as a Members Voluntary liquidation, whereby any distribution made in respect of share capital is treated as capital receipts of the shareholders for the purpose of calculating any chargeable gains arising.

Typical examples where this could substantially mitigate taxation liabilities are:-

• Company Reconstructions
• Shareholder Disputes
• Tax Planning generally
• Retirement or Demise of Shareholders

TSA Admin – Our thanks to SPW Business Rescue for the content for this Post. See their contact details on their website www.streetsspw.co.uk

The Chancellor of the Exchequer, George Osborne, today announced his Budget which maintains the Government’s strategy to reduce the deficit, announces far-reaching tax reforms, and support for growth and to reward work. It sets out the actions the Government will take in three areas – creating a stable economy, a fairer, more efficient and simpler tax system, and further reforms to support growth.

Measures announced today which support London

• An increase in the personal allowance by a further £1,100 in April 2013 – the largest increase in the personal allowance in both cash and real terms for the last thirty years. This change will lift an additional 97,000 people in London out of income tax and benefit over 3 million individuals;
• 100 per cent capital allowances for plant or machinery investment will be available in a designated area of the London Royal Docks Enterprise Zone, to help attract capital intensive companies, particularly in the life sciences sector;
• The Greater London Authority will receive an allocation of £70 million from the Growing Places Fund, which the Mayor intends to use to establish a revolving economic development fund.

A stable economy

In line with the Government’s fiscal strategy to ensure that the public finances are returned to a sustainable path, Budget 2012 sets out:

• A Budget with a neutral impact on the public finances; and
• Clear progress in implementing the Government’s fiscal consolidation plan and reforms to welfare and public services, with borrowing £11 billion lower over the forecast period than predicted at the 2011 Autumn Statement.

A fairer, more efficient and simpler tax system
The Government is committed to creating a more sustainable tax system that is fair and supports growth. This Budget announces wide-ranging reforms that support this goal, with measures including:

• An additional one per cent reduction in the main rate of corporation tax. The rate will reduce from 26 per cent to 24 per cent in April 2012, then to 23 per cent in April 2013 and to 22 per cent in April 2014;
• A reduction in the top rate of tax from 50 pence to 45 pence in April 2013, where the direct cost is paid for more than five times over by other measures that affect the best-off;
• The introduction of a limit on all uncapped income tax reliefs. For anyone seeking to claim more than £50,000 of relief, a cap will be set at 25 per cent of income (or £50,000, whichever is greater). This will help ensure that those with the highest incomes pay their fair share;
• The correction of certain anomalies in the VAT system that cause very similar products to be taxed very differently. The Government will also close loopholes in the VAT system to prevent avoidance and ensure compliance;
• A crack down on tax avoidance to protect revenues by closing down schemes which avoid stamp duty land tax, corporation tax, inheritance tax and income tax with effect from today; and
• An increase in the tax charged on high value properties by introducing a new Stamp Duty Land Tax rate of 7 per cent for residential properties over £2 million.

Reforms to support growth

The Government has set out its plan to put the UK on a path to sustainable, long-term economic growth. Significant progress has been made in delivering these reforms, but additional measures include:

• Relaxing Sunday Trading laws during the Olympics and Paralympics to allow retailers to make the most of the occasion;
• Developing a National Roads Strategy, as well as exploring new ownership and financing models for the national roads network to drive up efficiency and leverage in private investment;
• Introducing a package of oil and gas measures to secure billions of pounds of additional investment in the UK Continental Shelf;
• Establishing a UK centre for aerodynamics to open in 2012-13 and support innovation in aerospace technology;
• Supporting Network Rail to invest a further £130 million in the Northern Hub rail scheme to improve transport links between the northern cities of England; and
• Publishing a strategy for gas generation in the autumn, recognising that gas-fired electricity generation will continue to play a major role in UK energy supplies over the next decade and beyond.

The Budget also announces a reduction of the Special Reserve to reflect the end of UK combat operations in Afghanistan by the end of 2014. This is funding held over and above the Ministry of Defence budget. The cost of operations will continue to be paid on the same basis. At the same time, the Government will reinvest £115 million of the reduction in the Special Reserve provision to improve service accommodation and support military personnel and their families.

The Chief Secretary to the Treasury, Danny Alexander, said:

“Today’s Budget takes action to create a fairer, simpler and more efficient tax system. Raising the threshold at which people start paying tax will take a further 97,000 people in London out of income tax altogether. Closing tax loopholes will help ensure that those with the highest incomes pay their fair share of tax, whilst a further reduction in corporation tax will support companies and help make Britain more competitive.

Measures to drive growth and rebalance the economy will support London, with 100 per cent capital allowances at the London Royal Docks Enterprise Zone; an extra £70 million for the Greater London Authority to unblock local projects; and funding to make London a super-connected city.”

Opportunity to join the HMRC pilot – HMRC is putting a new system called Real Time Information (RTI) in place for the future operation of PAYE. RTI will change the reporting requirements for employers so that information about tax and other deductions is collected and transmitted seamlessly to HMRC every time an employee is paid. This means HMRC can respond more efficiently to errors and ensure employee tax deductions are accurate. All employers will be required to use RTI from 6 October 2013.

However HMRC are running a pilot scheme from April 2012 and they are currently looking for employers to help them shape how they will deliver and provide ongoing support for RTI.

Signing up for this pilot means that an employer will have an early opportunity to either develop and test their own or third party software of the operation of the new system.