TAX NEWS - DECEMber 2009
U.K. Tax: U.K. government issues Pre-Budget Report
As anticipated, a one-off tax of 50%, payable by banks, was announced on bonuses exceeding GBP 25,000. A number of other revenue-raising measures were announced, including the increase in the headline rate of VAT back to 17.5% as planned, a further 0.5% increase in National Insurance Contribution (NIC) rates and various anti-avoidance measures.
On a more positive note for business, a new 10% "patent box" regime will be introduced as from 2013, there will be consultation on an exemption regime for overseas branches of U.K. companies and the R&D tax credit for small and medium-sized enterprises (SMEs) will be improved.
The main rate of corporation tax and capital gains tax remain unchanged (the increase in the corporation tax rate for small companies from 21% to 22% will be deferred until 2011), no restrictions on the carry forward of losses were announced and the next stage of the consultation on the U.K.'s controlled foreign companies regime will not be published until January 2010.
Business tax
Bank payroll tax – Finance Bill 2010 will include a provision for a special Bank Payroll Tax that will broadly apply to employees performing "banking services" who are either U.K. resident or perform U.K. duties and are awarded a bonus between 9 December 2009 and 5 April 2010. The tax will not apply where the payer has no discretion as to the amount of the bonus due to a contractual obligation existing as at 9 December 2009. The tax liability will fall on the bank and will be chargeable at the rate of 50% on the amount by which the bonus exceeds GBP 25,000. The payroll tax will be payable on 31 August 2010 and will not be deductible when calculating the bank's taxable profits or losses.
Capital gains rules – HMRC has announced that it will issue a consultation document that will detail proposals to simplify the capital gains regime for groups of companies. While no date has been announced, this is expected to be published soon.
Worldwide debt cap – The worldwide debt cap rules will be introduced for periods beginning on or after 1 January 2010, largely as planned. Draft legislation has been published to address several areas of technical difficulty identified in the rules. The changes are as outlined in the U.K. tax authorities' (HMRC) technical note published on 10 November 2009 and relate largely to issues relating to securitization companies, partnerships, group treasury companies and guarantee fees. The problems relating to the treatment of derivatives under the debt cap rules have not yet been addressed and are still under consideration by HMRC.
Patent box – A new "patent box" regime is to be implemented as from April 2013. Income from U.K.-registered patents will be taxed at 10%, but the regime will be restricted to patents granted after the legislation is passed. There will be consultation on this measure in time for Finance Bill 2011.
Taxation of foreign branches – HMRC has announced that it will engage in preliminary discussions concerning the possibility of a move to a U.K. tax exemption for foreign branches. No time frame has been given. Currently, the U.K. imposes corporation tax on all foreign branches, with credit for any foreign taxes paid.
Controlled foreign company reform – In last year's PBR, the government announced the separation of the CFC reform from the review of taxation of foreign profits. The government has now announced that details on the proposed shape of the new CFC regime will be published in January. It is expected that the new regime will become law in 2011 although no exact start date has been confirmed.
R&D changes – The requirement in the SME regime for intellectual property (IP) derived from R&D expenditure to be owned by the claimant company is abolished. Thus, affected companies undertaking their own R&D work will be able to claim under the SME regime without considering their IP ownership. In addition, more SMEs carrying out subsidized R&D will be able to claim the large company R&D benefit. This change simplifies the rules for SMEs and removes a condition that has caused confusion and concern. It will have effect for expenditure incurred by SMEs on R&D in accounting periods ending on or after 9 December 2009.
Stamp duty and Stamp Duty Reserve Tax – The government has confirmed it will legislate in response to the European Court of Justice decision in the HSBC Holdings Plc case, in which the Court declared the 1.5% SDRT charge on the issue of U.K. shares into EU clearance services to be illegal. The government does not plan to reverse the decision but wants to counteract arrangements under which EU clearance services or depositary receipt systems could be used to route U.K. shares into non-European equivalents free of the 1.5% stamp duty and SDRT charges. This measure will be backdated to take effect from 1 October 2009, the date the ECJ issued the decision.
Leasing – New measures will be introduced to prevent a potential inequity in the Sale of Lessor Companies provisions. These provisions impose a charge and provide a matching relief designed to recoup the tax timing benefit enjoyed by the selling group and return the benefit to the buying group. In certain cases, companies have had difficulty in utilizing this relief. The PBR announces measures designed to overcome this, as well as measures to tackle specific avoidance schemes.
Excess capital allowances – Draft legislation has been published in respect of measures announced on 21 July 2009 that seeks to prevent companies buying a company with "excess" capital allowances. Measures will be introduced to restrict the utilization of any excess allowances purchased, subject to a main purpose test, with effect from 9 December 2009.
Risk transfer schemes ("under" and "over"-hedging) – Following a period of consultation, the government has published revised draft legislation to combat certain structures that hedge exposure to risk (usually foreign exchange risk) using the group's taxable profits, thereby "transferring risk" to HMRC. The new draft legislation attempts to ring-fence any "uneconomic" losses arising so they can only be brought into account for tax purposes to the extent the group has taxable profits from the same arrangement. It will apply from 1 April 2010. Comments on the draft legislation are invited by 31 January 2010.
Unallowable purpose tests consultation – HMRC has published a summary of responses to the consultation document on the simplification of unallowable purpose tests that was published in July 2009. The document sets out a framework for the design of new purpose tests and includes draft guidance on the interpretation of purpose tests. In response to the consultation, HMRC will redraft the proposed framework to strengthen the practical impact of the guidance and clarify when a purpose test is appropriate. The revised framework will be available from summer 2010.
Transactions in securities (TIS) consultation – HMRC has published a summary of responses to the TIS consultation document published on 31 July 2009. HMRC anticipates that legislation implementing the income tax changes will form part of Finance Bill 2010. HMRC is also considering representations that the TIS legislation should be repealed in its entirety for companies. It is unlikely that that this would form part of Finance Bill 2010.
Accounting standards on financial instruments – The government has announced that additional powers will be granted in the Finance Bill enabling the Treasury to make regulations to amend the corporation tax treatment of financial instruments in response to unwelcome effects of proposed accounting reforms. The reforms relate to the classification and measurement of financial assets and liabilities, de-recognition, impairment and hedge accounting. The government is consulting informally on the nature and extent of any necessary regulations.
Personal and employment taxes
National Insurance contributions rates and thresholds – NIC rates and thresholds will be unchanged, with a few limited exceptions, for 2009/10 and 2010/11. From 2011/12, in addition to the 0.5% increases that were announced in PBR 2008, the government has now confirmed that there will be a further increase of 0.5% to each of those rates, bringing the total increases for Class 1 and Class 4 NICs to 1%. The primary threshold and lower profits limits will also be raised by GBP 570. This is intended to compensate lower earners for the additional increase in NIC rates, so that no one earning less than GBP 20,000 will be worse off.
Pensions – In Budget 2009, the Chancellor announced that, as from 6 April 2011, higher rate tax relief for pension contributions would be restricted for those with "relevant income" over GBP 150,000. At the same time, measures were introduced with effect from 22 April 2009 to prevent individuals increasing their regular contributions to circumvent this change. There will now be a reduction in the anti-forestalling threshold from GBP 150,000 to GBP 130,000. Tax relief will remain available for those with income below GBP 130,000. As a result, for individuals with income over GBP 130,000 who have increased their regular pattern of pension savings, tax relief may be restricted if total pension savings for the year exceed GBP 20,000 or, in certain circumstances, GBP 30,000. The measure will apply to increases in pension savings on or after 9 December 2009.
Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) – HMRC has changed its interpretation on the availability of EIS reliefs where the company concerned trades through a partnership. Relief will no longer be available for investment in such companies. HMRC's new view is that, because the other partners also carry on the trade, the investment does not meet the qualifying conditions. Changes have also been introduced to EIS and VCTs to effectively target relief at small companies. Other minor changes will be made to reflect the requirements of the European Commission when agreeing that these schemes do not constitute state aid.
Indirect taxes
VAT rate – In his pre-Budget report, the Chancellor confirmed that, as planned, the VAT rate will return to 17.5% with effect from 1 January 2010. No additional increases were announced. As a result of the return of the VAT rate to 17.5% in January, the simplified VAT flat rate scheme that can be used by businesses with a turnover of up to GBP 150,000 is being revised. The percentages applied by businesses using the scheme will be increased to take account of the rate rise and various other technical changes. The new rates will have effect from 1 January 2010.
Climate change levy – The reduced rate of climate change levy, which is available to energy-intensive businesses under climate change agreements, is to be increased from 20% of the main rate to 35% of the main rate. The change is expected to be made in Finance Bill 2010, to take effect from 1 April 2011. Affected businesses will need to issue new certificates to their suppliers to confirm entitlement to the revised rate.
Compliance and administration
Offshore evasion – Following a series of incentives for taxpayers to report offshore income, HMRC has announced it will be consulting on a package of deterrents and new tools to help tackle offshore tax evasion. This includes a notification requirement for certain new offshore bank accounts and a tougher approach to penalties for offshore noncompliance.
Business Payment Support Service (BPSS) – The BPSS, introduced 12 months ago and which allows businesses facing temporary financial difficulties more time to pay their tax bills as part of the "Time to Pay" arrangements, will continue. Agreements to defer more than GBP 4 billion have been agreed and more that GBP 3 billion already repaid. Businesses seeking time to pay arrangements worth GBP 1 million or more will be required to provide an independent business review to support their request. It is expected that this new requirement will be implemented from April 2010.
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