The Olswang Tax Blog

Olswang Budget Blog 2012 – Detailed Analysis

Olswang — Thu, 22 Mar 2012 10:41:07 +0000

Our more detailed reports on the 2012 Budget can be found by clicking on the links below and on the right-hand side of the Blog:

General Business Taxation
Creative and Innovative Industries
Property Taxes
Employee Incentives
Pre-Budget Gambling Duty
Post-Budget Gambling Duty

To discuss how these changes affect you or your business, please contact a member of the Olswang tax group.

IR35 / Personal Service Companies

Stephen Hignett, Tax Partner, Olswang — Wed, 21 Mar 2012 21:24:44 +0000

Following the recent news coverage concerning senior civil servants being paid gross (i.e. without the deduction of PAYE or NICs) through personal service companies, it is perhaps unsurprising that the Government has today announced that it is bringing forward a package of measures to tighten up on tax avoidance through the use of personal service companies.

These measures will include HMRC strengthening its specialist compliance teams and consulting on proposals which would require office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged.

Exactly how this new proposal will operate is not yet clear. The suggestion would seem to be that it will be the company to which the services are provided (and not the personal service company “through” which the services are provided – as is generally the case under the current personal service company rules) which will bear the PAYE and NICs risk. If this is the case, albeit that the new proposed rules may only apply to very senior personnel, the party contracting for the services of the senior person will have to consider carefully the PAYE / NICs treatment and will not, as is often the case today, be able effectively to shelter behind the worker’s personal service company, safe in the knowledge that that personal service company will bear any risk of a deemed PAYE liability.

The Government has also undertaken to simplify the way in which the existing personal service companies legislation (also known as ‘IR35′) is administered.

Non-domiciled individuals

Stephen Hignett, Tax Partner, Olswang — Wed, 21 Mar 2012 20:59:24 +0000

Following consultation throughout the summer of 2011, and the publication of draft legislation in December 2011, legislation will be introduced in the Finance Bill 2012 (which will take effect from 6 April 2012) to make certain changes to the taxation of UK-resident non-UK domiciled individuals who elect to be taxed on the remittance basis. In particular, the changes will:

increase the existing £30,000 annual charge to £50,000 for such individuals who have been resident in the UK in 12 or more of the last 14 tax years; and
allow such individuals to remit their overseas income and gains to the UK without triggering a UK income tax or capital gains tax charge, provided (broadly) that the remitted amounts are used to make a commercial investment in a qualifying trading company.

The latter relief from tax charges on remittances of overseas income and gains represents a valuable addition to the remittance basis rules, which the Government hopes will stimulate inward investment by UK resident non-domiciliaries via UK trading companies.

There will also be consultations on proposed legislation to:

increase the amount that a UK domiciled individual can transfer to their non-UK domiciled spouse or civil partner without making a chargeable transfer for inheritance tax purposes; and
allow individuals who are non-UK domiciled and who have a UK domiciled spouse or civil partner to elect to be treated as domiciled in the UK for the purposes of inheritance tax.

Any legislation on these issues will be introduced in Finance Bill 2013.

Statutory residence test

Stephen Hignett, Tax Partner, Olswang — Wed, 21 Mar 2012 20:57:33 +0000

In the last Budget the Government announced its intention to introduce a statutory residence test for individuals with effect from April 2012. However, in December 2011, following a public consultation over the summer of 2011, the Government announced that the statutory residence test would instead be enacted in Finance Bill 2013 and take effect in April 2013, so as to allow further time to finalise the detail of the test. This postponement of the introduction of a statutory residence test for individuals is regrettable, not least because the Supreme Court’s decision in the case of Gaines-Cooper in October 2011 failed materially to clarify the case law tests of residence. The Government today announced that a summary of responses and draft legislation for consultation will be published after Budget 2012.

The Government is also progressing its plans to abolish the concept of “ordinary residence” for tax purposes. It had previously been announced that the introduction of any such reform would be postponed until April 2013. Today, it was confirmed that legislation will be introduced in Finance Bill 2013 (to take effect from 6 April 2013) in which ordinary residence will be abolished, subject to the following proviso.

The scenario where individuals who are UK-resident, but not ordinarily UK-resident, are exempt from tax on their employment income from non-UK duties to the extent that it is not remitted to the UK, is commonly known as “Overseas Workday Relief”. The Government today confirmed that, notwithstanding the abolition of ordinary residence for tax purposes (from 6 April 2013), Overseas Workday Relief will be retained and placed on a statutory footing.

Personal tax reliefs restricted

Cliona Kirby, Tax Partner, Olswang — Wed, 21 Mar 2012 20:36:47 +0000

Interestingly, the Government will restrict an individual’s ability to claim income tax reliefs on an annual basis with effect from 6 April 2013. A new cap of the greater of £50,000 and 25% of income will apply to any individual seeking to claim more than £50,000 in tax reliefs. Importantly, we understand that the new cap will not apply to tax reliefs such as EIS/VCT and pensions which already have annual limits.

This is an interesting development. Over the years there have been a number of structured products which have enabled individuals to access trading losses in a number of different sectors including film, real estate and renewable energy and use such trading losses to mitigate personal tax liabilities. HMRC has introduced a raft of different legislation aimed at counter-acting such structures with limited effect.

However, the new cap will effectively make this practice less attractive. The draft legislation has not yet been published but unless any specific exemptions are included, we cannot see why the new rules will not impose a limit on the following tax reliefs (amongst others):

(a) trading losses that can be accessed by an individual by way of sideways loss relief (even if the individuals are actively involved in the trade);

(b) interest relief on certain borrowings;

(d) enhanced capital allowances.

We will provide a further update as soon as the draft legislation is published.

SEIS – attracting investment in start up companies ?

Cliona Kirby, Tax Partner, Olswang — Wed, 21 Mar 2012 20:15:46 +0000

We are pleased to see the Government confirm their intention to introduce a new tax relief for seed investment in start up companies. Obtaining seed capital has been challenging for digital media and technology companies. To recap the new relief provides 50% income tax relief on investments up to £100,000 per annum per individual. There is also a maximum amount that can be raised from SEIS of £150,000 per company.

Another attractive element of the new regime is that any gains on disposal of the shares will be tax free provided the individual has held the shares for 3 years. For one year only in 2012-2013 an individual can roll over capital gains of up to £100,000 into an SEIS investment.

The good news is that there will be an advance assurance process similar to the existing EIS regime. Although HMRC will give an early indication of whether the SEIS rules are met they will not provide a binding assurance until after the Finance Bill receives Royal Assent which could result in investors waiting to invest until July/August.

We also understand that it should be possible to raise an SEIS fund which can then invest up to £150,000 per company which would help to spread the investor’s risk across a number of companies.

However, if a company is looking to combine SEIS and EIS/VCT monies then it will need to have spent 70% of the monies raised from the SEIS investment first.

Increasing reliance on Transfer Pricing principles?

Batanayi Katongera, Head of Transfer Pricing — Wed, 21 Mar 2012 19:43:49 +0000

The Budget did not signal any changes to the Transfer Pricing rules which is most welcome at this time as there is a packed schedule of initiatives over the next 12 months for transfer pricing at the OECD level, chief of which is the review and likely re-write of Chapter VI (Special Considerations for Intangible Property) and Chapter VIII (Cost Contribution Arrangements) of the OECD Transfer Pricing Guidelines.

However the Budget suggests an increasing reliance on the part of the Government on using transfer pricing principles to assist in tackling thorny corporate tax issues. A key example in this Budget is the forthcoming CFC legislation which makes use of transfer pricing principles in determining the relevant profits attributable to UK ’significant people functions’ in the context of CFCs. It is also quite possible that transfer pricing principles will be relied upon in fashioning an effective GAAR although we will of course have to await the outcome of the consultation process. (see Graham’s blog here).

As regards CFCs, whilst there may well be further changes to the latest February 2012 draft that may be contained in the Finance Bill when it becomes law, the current draft aims to use transfer pricing principles set out in Articles 7 and 9 of the OECD Model Tax Convention to ensure that only companies that have a majority of their economic ownership of an asset attributable to the UK or bear an economic risk attributable to the UK are caught by the CFC legislation. Click here for previous Finance Bill 2012 update.

Perhaps this is a statement of faith in the arm’s length principle on the part of the UK government – in which case did we actually require additional CFC legislation or would a more definitive application of the arm’s length principle have sufficed? Supporters of the move will point to the effectiveness of relying on already established transfer pricing while sceptics may fear an increasing array of armour at the disposal of HMRC.

Bank Levy

Mark Joscelyne, Tax Partner, Olswang — Wed, 21 Mar 2012 19:06:03 +0000

Finance Bill 2012 will increase the bank levy to 0.105 per cent. (0.0525 per cent. at the half rate) with effect from 1 January 2013. This increase is intended to off-set the benefit to banks of the reduction in the rate of corporation tax and to ensure that the bank levy raises its target revenue of £2.5 billion per year.

As announced in the Autumn Statement, Finance Bill 2012 will also increase the rates to 0.088 per cent. and 0.044 per cent. with effect from 1 January 2012 in order to ensure that the bank levy raises its target revenue.

Transfer of Assets Abroad and Section 13 TCGA

Mark Joscelyne, Tax Partner, Olswang — Wed, 21 Mar 2012 19:04:46 +0000

These anti-avoidance provisions seek to prevent individuals avoiding tax by holding assets through non-UK resident structures. The European Commission considers the legislation to be incompatible with EU law and has requested that it be amended, presumably to prevent or restrict its application where the non-UK structures are in EU Member States. There will now be a consultation process, with a view to amendments being introduced in Finance Bill 2013. A consultation document and draft legislation will be published after the Budget. The changes may well go beyond addressing the EU law concerns, so will be of particular interest. The capital gains articles of double tax treaties have often been used to prevent the application of section 13 TCGA (attribution of capital gains) and so it will be interesting to see whether any attempt is made to introduce treaty override provisions.

Controlled foreign companies

Mark Joscelyne, Tax Partner, Olswang — Wed, 21 Mar 2012 19:02:57 +0000

As expected, the government has announced that a full reform of the controlled foreign companies (“CFC”) regime will be legislated for in Finance Bill 2012, with the new rules to take effect for accounting periods beginning on or after 1 January 2013.

The current CFC regime has been heavily criticised by business in recent years for its broad scope and the uncertainty of its application. In response, the government passed some intermediate reforms in Finance Act 2011 and has been conducting extensive consultation about a complete reform of the rules. The aim of the reforms is to make the CFC regime more targeted and, in turn, to make the UK’s tax regime more internationally competitive.

The draft legislation published during the consultation period introduces a much more territorial-based regime, the intention being that companies should only come within the regime to the extent that they are involved in the artificial diversion of profits from the UK. The draft legislation is centred around a number of “gateway” tests for (broadly) business profits derived from UK activities. The legislation contains various safe harbour provisions and broader, entity-level exemptions. It also introduces a partial exemption for most intra-group financing profits (taxing only 25% of such profits, an effective tax rate of only 5.50% once the main rate of corporation tax comes down to 22% in 2014) and a complete exemption for certain narrowly defined finance profits. The proposed new rules have been generally welcomed although concerns have been expressed over the complexity of the proposed gateway tests. Last month the government published revised draft legislation to address these concerns, and this revised draft legislation is expected to form the basis for the provisions which will appear in the Finance Bill.