UK: Tax Focus - A Summary Of Current Tax Issues For Companies, November 2007

On 9 October, Alistair Darling announced his first Pre-Budget Report (PBR).

CGT reform
The Government announced a number of significant changes to capital gains tax (CGT) in the PBR. Most significantly, both taper relief and indexation relief have been abolished for individuals, trustees and personal representatives, effective for disposals made on or after 6 April 2008. The current CGT rules will continue to apply for disposals made up to 5 April 2008. There are no changes to the CGT regime for corporates.

Taper and indexation relief will be replaced by a flat rate of CGT at 18% for individuals, trustees and personal representatives on the gain arising. The abolition of taper relief means there will no longer be a distinction between the rates of tax payable on business assets and non-business assets, and the period of ownership of an asset will cease to be relevant.

Although the removal of taper and indexation relief will help to simplify the CGT regime, the changes will have a significant impact on entrepreneurs and owner-managed businesses.

The main trade bodies are putting pressure on the Chancellor to reconsider the impact of the proposed changes on entrepreneurs and business owners facing retirement. Thus further developments may follow in due course. Nevertheless, taxpayers currently in a position to benefit from a 10% rate, i.e. on business assets, should still consider crystallising the disposal of these assets before 5 April 2008. Additionally, they should consider delaying disposals until 6 April 2008 where the new 18% flat rate would be lower than the CGT rate they would otherwise have been subject to (i.e. on non-business assets and business assets that have been held for less than two years).

Other highlights
Although relatively quiet on the corporate front, some key proposals that may impact on companies included:

• measures for simplifying the tax affairs of related companies with respect to chargeable gains and groups, Corporation Tax Self Assessment and filing and transfer pricing rules, all of which were put forward for consultation

• a number of anti-avoidance measures dealing with leased plant and machinery, disguised interest and spreading relief for pension contributions

• small changes dealing with fire safety capital allowances, hedging foreign exchange risks, National Insurance Contributions on holiday pay, income shifting and fuel benefit charges

• changes to the remittance basis for non-domiciled individuals. This may impact upon businesses that second international employees to the UK where tax equalisation packages are in place.

In April 2007, recognising the need to make information widely and easily available, HM Revenue & Customs (HMRC) became one of the first Government departments to launch a podcast service.

It has recently uploaded two new podcasts. You can now listen to HMRC’s director general Dave Hartnett respond to agents’ questions, and chairman Paul Gray’s assessment of the organisation’s online services. The podcasts can be downloaded from www.hmrc.gov.uk/podcasts

In Topps Tiles, the court agreed with HMRC and held that the rounding of VAT should be up or down to the nearest penny, and on each supply.

However, JD Wetherspoon has recently been referred to the European Court of Justice, questioning whether rounding up is actually permitted, and whether it should take place on an individual item basis or by each basket of goods sold. Clearly, the greatest savings would arise where VAT is rounded down and calculated per item.

Retailers and similar businesses should consider submitting claims in accordance with the JD Wetherspoon decision.

In the April edition of Tax Focus, we highlighted the change to HMRC’s interpretation of the exemption for the provision of late night taxis for employees. HMRC has recently published draft guidance to clarify its view.

• 60 journeys per year per employee is the ceiling on the number of exempt trips allowed, even where the relevant conditions are satisfied.

• If late night working, even as infrequently as one night a month, falls on a predetermined day each month, it will be considered regular and therefore not satisfy the conditions.

• Where public transport is available after 9pm, the exemption is unlikely to apply unless the journey time exceeds the ‘daytime’ commute by at least 60 minutes due to evening timetables, frequency of service, etc. HMRC considers it reasonable to expect employees to be aware of this and to plan accordingly.

• Adequate records must be kept to ensure the relevant conditions are satisfied in each case.

HMRC is consulting representative organisations regarding the draft guidance, which is subject to change. We will keep you informed of any developments.

In July, HMRC introduced new regulations that provided an exemption for the benefit of free health screening and/or medical check-ups. HMRC explained that the regulations were necessary as it had received advice indicating that its past practice – to regard a medical as not conferring a benefit on an employee – was incorrect.

The new regulations replace the nonstatutory treatment previously set out in HMRC guidance. Unfortunately, they limit the scope of the exemption to cases where an employer provides the screening and/or medical check-up on the same basis to all employees. The ‘available-to-all’ condition is common for the tax exemption of benefits, but it was not the way this treatment had worked prior to the new regulations.

Based on a number of representations made, HMRC announced on 12 October that, despite the new regulations, it would continue to apply the old non-statutory treatment for the 2007/08 tax year because "some existing health screening schemes could be affected in a way that was not envisaged".

HMRC will be consulting over the next few months and we can expect a further-revised regime to take effect on 6 April 2008.

Have you ever reclaimed VAT from HMRC and wondered why any interest supplement relating to the claim has been low? HMRC calculates interest payments on a simple basis at a self-determined rate. However, following recent direct tax and VAT cases, there is now an opportunity to recalculate interest claims either on a compound basis or at the company’s commercial borrowing rate.

HMRC has published a new Business Leasing Manual to provide guidance on long-funding leases of plant and machinery. This manual supports the guidance outlined in a technical note issued in August 2006, after new rules were announced in the Finance Act 2006.

Broadly speaking, the commercial substance of a long-funding lease is considered to be more akin to a loan than a lease as it performs a financing function and generally has a term of more than five years.

The Finance Act 2006 seeks to tax such leases in a similar way to loans – although not under the loan relationship rules – in order to align more closely the tax treatment with the economic reality of the transaction. The new rules generally apply to leases entered into on or after 1 April 2006.

The manual also includes guidance on lease accounting, the sale of lessor companies and similar transactions, and updated material from the existing Finance Leasing Manual.

In Business Brief 52/07, HMRC confirmed its VAT policy in relation to the sale and/or trading of emissions allowances. But while trading of these allowances in the UK is now subject to VAT, the question remains as to the VAT treatment of the increasingly popular carbon offsetting schemes. Are these schemes ‘donations’ of money and therefore outside the scope of VAT, or are they sales of specified services to customers wishing to offset their carbon footprint?

We have sought an opinion from leading tax counsel for a client in this sector, and we are working with HMRC to clarify the situation.

If you buy or provide carbon offsetting services, you should consider the VAT implications associated with these supplies, and whether you need to restructure your business to take account of any associated VAT costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.