Corporate Matters
Tackling the changes

Income shifting

In July 2007 Mr and Mrs Jones won their case in the House of Lords. The profits of Arctic Systems (their company) which were paid equally to them by means of dividends would be taxed on each of them rather than solely on Mr Jones. The Government believes it is unfair for one person to arrange their affairs so that their income is diverted to a second person, subject to a lower tax rate, to obtain a tax advantage.

The Government has announced that draft legislation to take effect from 2008/09 to address income shifting will shortly be issued for consultation. The legislation will work alongside the existing rules on businesses deductions and settlements, and will seek to remove the tax advantage obtained from income shifting. It would only apply when the income is in the form of distributions from a company (dividends) or partnership profits.

HM Revenue & Customs (HMRC) will provide ‘practical guidance’ on the legislation as to the circumstances which may not be caught by the legislation. Relevant factors to consider when establishing whether or not income shifting has taken place could include the work done by the individuals in the business, the investments made and the risks to which they are subject through the business. Income from employment, interest on savings and any other source will not be affected.

Tax simplification reviews

The Government has announced the start of a ‘significant programme of tax simplification.’ Three reviews will be started in the autumn where HM Treasury and HMRC will work in partnership with business to evaluate how a range of tax policies could be simplified. These initial reviews will cover:

How to simplify VAT rules and administration in the UK and the EU.

How anti avoidance legislation can best meet the aims of simplicity and revenue protection.

How to simplify the corporation tax rules for related companies.

VAT rules and administration

Areas where simplification will be of most significance to all VAT registered business include:

Partial Exemption and the Capital Goods Scheme.

The frequency with which businesses submit returns.

Corporation tax rules for related companies

Areas where simplification will be of most significance to UK companies include:

Associated company rules for small companies corporation tax rate.

Group aspects of corporation tax on chargeable gains.

Corporation tax self assessment filing and payment for groups.

The burden of the transfer pricing rules.

Spreading of tax relief for pension contributions

Employers generally get tax relief against their taxable profits for contributions paid to a registered pension scheme. Relief is given for the accounting period in which the contributions are paid. Tax relief for some large contributions above £500,000 maybe spread over a period of up to four years.

Legislation will be introduced in Finance Bill 2008 to ensure that the rules that spread tax relief for large employer pension contributions relative to their contribution in the previous year cannot be circumvented. This measure will have effect for payments made on or after 10 October 2007 under binding obligations entered into on or after 9 October 2007.

The measure will ensure that the spreading of contributions cannot be avoided by routing them through a new company.

Other anti-avoidance measures

Action is being taken to counter various avoidance schemes:

Financial products - disguised interest (and thus taxable) as dividends (which are exempt from tax for companies).

Abusing the availability of interest relief through the payment of interest in advance.

Avoidance involving the sale and finance leaseback of plant or machinery and attempts to exploit long funding leases to create a tax loss where there is little or no commercial loss.

Company gains on life policies

Legislation will be introduced in the Finance Bill 2008 to bring all life insurance policies and life annuity contracts to which a company is a party, other than protection-type policies, within the loan relationships legislation that is used to tax debts and debt-like instruments.

The special legislation that currently applies to such policies held by companies (‘the chargeable events’ rules) will therefore be repealed.

Tax relief for business cars

In March 2007 the government issued a second discussion document about business expenditure on cars. The proposals are that:

The existing 100 per cent first year allowances for cars with CO2 emissions up to 120g/km be retained.

The general plant and machinery capital allowances pool will be used for cars with CO2.

Emissions between 121 and 165g/km a new car pool would be introduced with a lower writing down allowance than the general plant.

And machinery pool for other cars.

As a consequence there would no longer need to be a specific distinction between cars costing more or less than £12,000. The Government has issued a summary of the responses to the proposals. The majority of the respondents supported reform of the current system but views were divided as to what would be a preferable system. In the light of this, the Government has not indicated its next steps to modernise the tax relief system.

Capital gains tax (CGT) reform

The Chancellor surprised everyone with major changes to the CGT regime. Legislation will be introduced next year to give effect to a new single rate of charge to CGT at 18 per cent. A number of changes will be made for disposals made on or after 6 April 2008 to simplify the capital gains tax regime, including:

The withdrawal of taper relief.

The withdrawal of indexation allowance.

Simplification of the share identification rules.

CGT annual exemption

The annual exemption allows the first element of chargeable gains made in a given tax year to be exempt from CGT. An annual exemption will remain in place and for 2007/08 this is currently £9,200.

CGT rates of tax

Individuals making capital gains currently treat those gains as the top slice of income. This means that, currently, tapered gains are charged at 10 per cent where gains plus taxable income do not exceed £2,230; 20 per cent between £2,231 and £34,600; and 40 per cent on any balance. For trustees the rate of CGT is 40 per cent. For 2008/09 there will be a single rate of capital gains tax set at 18 per cent, which will apply to individuals, trustees and personal representatives.

CGT reliefs

Taper relief was introduced for disposals on or after 6 April 1998 and can reduce the amount of the gain chargeable to CGT. The amount of relief available depends on whether the asset is classed as a business or non-business asset and, also, on the length of time an asset has been held since 1998.

For disposals on or after 6 April 2008 and any held over gains coming into charge on or after that date, taper relief will no longer be available. The chargeable gain will be liable to tax at 18 per cent, after deducting allowable losses, any other reliefs and the annual exemption.

Indexation allowance was, for individuals and trustees, the precursor to taper relief and gave relief for the effect of inflation on the costs incurred on assets. Indexation was frozen as at 5 April 1998. Currently, where an asset was held at 6 April 1998 and is disposed of after that date, any gain on the disposal may be eligible for indexation and taper relief. For disposals on or after 6 April 2008 indexation allowance will no longer be available.

Simplification of the share identification rules

The current rules for the identification of shares and securities for CGT purposes require a complex order of identification, which is dependent upon the dates when the assets were acquired. Due to the changes to taper relief and indexation allowance, all shares of the same class in the same company will be treated as forming a single asset from 6 April 2008, regardless of when they were originally acquired. However certain anti avoidance rules will remain.

Need more information? Please email or contact us with your enquiry.