Alcohol and Tobacco Duties
Excise duties are chargeable on beer, wine and spirits according to their volume and/or alcoholic content. For example, since 20 March 2005 the rate of tax on spirits and some high-alcohol wines has been £19.56 per litre of pure alcohol, the rate on other wines has been from £51.69 to £223.62 per hectolitre (of wine rather than of alcohol), and the rate on beer has been £12.92 per hectolitre for each percent of alcohol. Duties on most tobacco are set according to weight. Since 16 March 2005, the rate has been £149.12 per kilogram for cigars, £107.18 for hand-rolling tobacco and £65.56 for pipe tobacco. Cigarettes are taxed on 22 percent of the recommended retail price plus £102.39 per thousand cigarettes.
Business Premises Renovation Allowance
At the time of the 2004 Pre-Budget Report the Government published a consultation document, with draft legislation, for a Business Premises Renovation Allowance scheme. Subject to EU State Aid approval, this will provide 100 percent capital allowances for the costs of renovating business properties in Enterprise Areas that have been vacant for at least a year. The consultation period ended on 1 March 2005 and legislation was included in the Finance Act 2005. However, it will not be brought into effect until EU approval has been obtained.
Capital Gains Tax (CGT)
A tax on chargeable gains of individuals, trustees and personal representatives of deceased persons. A person is liable to CGT for any tax year (year to 5 April) during all or part of which he or she is resident or ordinarily resident in the UK (but years of arrival and departure may be split into chargeable and non-chargeable periods in certain circumstances). Companies are not subject to capital gains tax, but are liable to corporation tax on their chargeable gains on the same principles as for CGT (but with certain significant differences). Broadly, the gain on an asset is calculated by reference to the difference between the sales proceeds and the acquisition cost. The rate of CGT is broadly equivalent to the rate of income tax which would be chargeable if the capital gains for the year were part of the individual’s savings income. Taper relief may be available which can reduce the effective rate of tax depending on how long the asset has been held. This relief is not available to companies, which are instead eligible for indexation allowance.
Child Tax Credit
A credit available from April 2003 which consolidated the previous income-related child benefits into a single tax credit. It replaced the child elements of Income Support, the Job Seeker’s Allowance, the Working Families’ Tax Credit and the Disabled Person’s Tax Credit, and also the Children’s Tax Credit (which was an allowance given in determining taxable income, rather than a benefit payable by the Government). It is payable to the main carer of the child, usually the mother. The tax credit is available whether or not the recipient pays tax. The amount is reduced as income increases, but is available for family incomes up to a level in excess of £55,000.
Child Trust Fund
For all children born on or after 1 September 2002, the Child Trust Fund provides an initial endowment of £250 at birth, or £500 for children from low-income families who also qualify for the full Child Tax Credit. A further payment will be made when the child reaches the age of seven, in an amount yet to be decided (but proposed to be, again, £250 in general and £500 for low-income families). In the 2005 Budget the Government announced consultation on further payments at ‘secondary school age’. Parents, other family members and friends are allowed to make additional contributions to the fund up to an annual limit (for all such contributions) of £1,200. The assets of the fund will be accessible without restriction when the child reaches 18 years of age.
Climate Change Levy
The climate change levy is charged on electricity, coal (including hydrocarbon derivatives) and natural/petroleum gas supplied to industrial and commercial consumers. Suppliers are required to register and collect the tax. The levy is calculated at different rates for different fuels; e.g., 0.43 pence per kilowatt hour of electricity and 1.17 pence per kilogram of coal. Supplies for domestic and transport use are excluded.
Community Investment Tax Relief
Community Investment Tax Relief (CITR) is available to individuals and companies that invest in accredited intermediary organisations (Community Development Finance Institutions or CDFIs), which in turn invest in enterprises operating within or for disadvantaged communities.
The tax relief reduces the investor’s income liable to income tax or corporation tax by up to 25 percent of the sum invested, spread over five years. To obtain maximum relief investors must hold the investment for at least five years, but if in the course of that period they receive some return of the sum invested they will not necessarily forfeit the relief in full. Reasonable commercial payments of interest and dividends are permitted.
There is no limit to the amount of investment on which a single investor may claim relief under the scheme. However, there are limits on the amount of investment that can be raised by any single CDFI.
Companies are subject to corporation tax, which is levied on business profits and other forms of income, as well as on chargeable gains accruing to companies.
Corporation tax is charged on the profits of ‘financial years’ which run from 1 April. The profits of a company are calculated by reference to its accounting periods and are then, where necessary, apportioned on a time basis between the financial years in which the accounting period falls.
The current rate of corporation tax (for the year to 31 March 2006) is 30 percent. This rate applies to all profits where the total is above £1.5 million. There is also a starting rate of zero percent where total profits are up to £10,000 and a small companies’ rate of 19 percent where they are up to £300,000.
Where total profits fall in the bands £10,001 to £50,000 and £300,001 to £1,500,000 marginal relief is available, and detailed rules apply to its calculation. The £10,000, £50,000, £300,000 and £1,500,000 limits are split where there are associated companies. Certain investment holding companies pay corporation tax at the full rate irrespective of the level of profits.
Corporation Tax Deductions
In general, in order to arrive at the taxable trading profits for a company, expenses are deductible provided that they are of a revenue rather than a capital nature and that they are wholly and exclusively laid out or expended for the purposes of the trade.
There are special provisions disallowing the deduction of expenses for business gifts and business entertainment. Exceptions apply for certain small gifts.
Capital allowances are available for certain categories of expenditure (e.g., plant and machinery and industrial buildings) instead of commercial depreciation.
Dividends are not deductible, whereas interest and royalties generally are.
Cross-border Loss Relief
The European Commission announced in November 2003 that it would consult with Member States with a view to presenting an initiative in late 2004/early 2005 to tackle the current limits on cross border loss relief within the EU. No further announcements have been made by the Commission.
The availability of such losses is also the subject of litigation in Marks & Spencer v Halsey (which has been referred to the European Court of Justice (ECJ) by the High Court, and in which the Advocate General gave his Opinion in favour of the taxpayer in April 2005), and by other companies under the loss relief Group Litigation Order (GLO).
At a meeting of ECOFIN (the EU’s Economic and Finance Council of Ministers) on 7 June 2005 the German Finance Minister, Hans Eichel, proposed that a high-level committee of tax experts be set up to consider the implications of ECJ cases affecting national tax systems, in particular to make contingency plans in case the ECJ adopted the Advocate General’s opinion in favour of the taxpayer in Marks & Spencer. The UK Government agreed to set up such a committee during its presidency of the EU from July to December 2005. The exact status of the committee is unclear; the Financial Secretary to the Treasury has referred to it as “an informal high-level discussion among Member States” .
While this is a most significant issue, in practice the Government seems unlikely to take action on this matter before the result of the ECJ case is known.
Disclosure of Tax Avoidance Schemes
The Finance Act 2004 introduced measures that, together with subsequent regulations, require ‘promoters’ of certain tax avoidance schemes to provide HMRC with details within five days after the scheme is made available (or, in the case of ‘bespoke’ arrangements, within five days of becoming aware that any relevant transaction has been implemented).
HMRC register notified schemes and allocate each a reference number. In most cases taxpayers are required only to include on their tax return the registration number of the scheme. However, where (i) a UK taxpayer has used a scheme purchased from an offshore promoter, or (ii) the scheme has been devised in-house rather than purchased from a promoter; or (iii) the promoter has not disclosed on the ground of legal professional privilege, taxpayers themselves must provide details of the scheme to HMRC within five days (or a longer period in case (ii)).
The National Insurance Contributions Bill currently before Parliament, among other measures, gives HM Treasury power to extend the disclosure rules to national insurance avoidance schemes.
Enterprise Investment Scheme
Subject to detailed conditions, the Enterprise Investment Scheme (EIS) gives income tax relief to individuals at 20 percent on qualifying investments in unquoted trading companies up to £200,000 in any tax year, and exempts from capital gains tax any gain on the disposal of qualifying shares on which income tax relief has been given (and not withdrawn). Where a loss arises on disposal, the investor can claim income tax relief. While investors have to be unconnected with the company up until the time of the investment, this does not prevent them becoming paid directors subsequently. Only those companies or groups with gross assets of less than £15 million before an investment and no more than £16 million after it can participate in the scheme.
In addition, capital gains arising on other assets may be deferred against acquisitions of investments meeting the qualifying conditions under the EIS. The rules prohibiting connection with the company do not apply for this purpose.
Enterprise Management Incentives
A scheme designed with the aim of helping small higher risk companies attract and retain key employees by rewarding them with share options. To participate in the scheme companies must be either trading companies or holding companies of trading groups and must have gross assets (for the company or the group as the case may be) no greater than £30 million. Each eligible employee can hold options to acquire shares with an initial value of up to £100,000 and the total initial value of shares over which options are granted must not exceed £3 million. Provided various conditions are met, the grant and exercise of the options do not attract a tax charge, and the capital gains tax charge on the final disposal of shares may be lower than for disposals outside the scheme.
Her Majesty’s Revenue & Customs
Previously, indirect taxes (such as VAT and excise duties) were under the control of HM Customs & Excise, while direct taxes (such as income tax and corporation tax) were the responsibility of the Inland Revenue. The merger of the two departments was recommended in 2004 in Financing Britain’s Future – Review of the Revenue Departments, the report of a review chaired by Mr Gus O’Donnell, then Permanent Secretary to the Treasury and now (as Sir Gus O’Donnell) the Cabinet Secretary. The necessary legislation was included in the Commissioners for Revenue and Customs Act 2005 and two departments merged with effect from 18 April 2005.
A tax on the income of individuals and trusts. Income includes emoluments from employment, profits from a trade carried on by an individual (either alone or in partnership), pensions, and investment income such as interest, dividends and rents. The rates of income tax are the starting rate (currently 10 percent) on the first £2,090 of taxable income, the basic rate (22 percent) on the next £30,310, and the higher rate (40 percent) on the excess. Savings income is subject to tax at 20 percent rather than 22 percent to the extent that it does not exceed the basic rate limit, treating such income as the top slice. Any excess savings income is taxed at the higher rate. Special rates apply to dividend income: 10 percent on dividend income in the basic rate band and 32.5 percent on the excess. Various deductions can be claimed for income tax purposes such as certain losses, subscriptions to professional bodies and donations to charities. Individuals who are resident in the UK are entitled to a personal allowance; i.e., a tax-exempt band. For individuals below the age of 65 this is £4,895 for the tax year to 5 April 2006.
Individual Savings Accounts
An Individual Savings Account (ISA) is a savings account on which the return is tax-free, and which need not be declared in the investor’s tax return. There are two components: (i) cash; and (ii) stocks and shares, and life insurance policies.
An investor can have a ‘maxi-ISA’ with an overall annual investment limit of £7,000, of which no more than £3,000 can be in cash (i.e., all £7,000 can be in stocks and shares, and life assurance policies, if the investor wishes).
Alternatively the investor can have one or two ‘mini-ISAs’, with the same or different managers. The maximum investment is £4,000 for a stocks and shares and life insurance mini-ISA, and £3,000 for a cash mini-ISA.
From 6 April 2006 the limits of £7,000 and £3,000 were due to fall to £5,000 and £1,000 respectively. However, it was announced in the 2005 Budget that the higher limits were to be extended to 2009/10.
Prior to 6 April 2005 there were separate components for stocks and shares and for life assurance policies (i.e., there were three components, and three categories of mini-ISA, in total), with separate limits.
Inheritance tax is charged on the transfer of property passing on death (chargeable transfers) subject to various exemptions and reliefs, notably for certain business and agricultural property. It is also levied (subject to tapering relief) on certain gifts made within the seven years before an individual’s death (potentially exempt transfers). The scope of inheritance tax is further extended by the inclusion of gifts made outside that seven-year period where the deceased has not been entirely excluded from the benefit of the property concerned for the seven years prior to death (gifts with reservation). Certain transfers (to companies and some trusts) are taxed at the time of transfer (life-time transfers).
Inheritance tax is calculated on a cumulative basis. When a chargeable transfer is made, tax is calculated at the rate in force at that date taking into account the cumulative total of chargeable transfers made by the individual in the preceding seven years. Inheritance tax is charged at the rate of 20 percent in respect of lifetime transfers and 40 percent where it arises as a result of death (including tax on potentially exempt transfers). Tax is chargeable at zero percent on the first £275,000 of cumulative chargeable transfers – this is known as the ‘nil rate’ band. There is an exemption for most intra-spouse transfers.
International Financial Reporting Standards
An EU regulation requires listed companies in Europe to adhere to International Financial Reporting Standards (IFRS) from financial years commencing on or after 1 January 2005 when preparing their consolidated accounts. In implementing this in UK legislation the Government has not made the use of IFRS compulsory for any further categories of accounts, but the legislation permits all companies to use them for individual and consolidated accounts if they wish.
Changes were made in the Finance Act 2004, the Finance Act 2005 and the Finance (No 2) Act 2005 to accommodate these new rules for tax purposes. Further changes have been made by statutory instrument.
The ‘IR 35’ legislation on the provision of services via an intermediary applies where a person (the worker) is made available to work for another person (the client) by a third party (the intermediary), and where the worker would have been an employee rather than an independent contractor if he or she had worked under a direct contract with the client. In most cases the intermediary is the worker’s own limited company. Very broadly, the legislation puts such workers in the same position for income tax and national insurance purposes as they would have been in if they had been an employee of the client. The legislation was introduced in 2000 and is referred to as ‘IR 35’ because it was first announced in an Inland Revenue (now HMRC) press release numbered IR 35 issued at the time of the 1999 Budget.
In addition to income tax, the self employed may be liable to pay, and employees may suffer deduction of, national insurance contributions. For employees these are payable where earnings exceed an earnings threshold (£94 for 2005/06). Earnings at or below the threshold do not attract a contribution liability, and contributions are charged for 2005/06 at 11 percent on earnings above the threshold, up to an upper limit (£630 for 2005/06). A further charge applies at a rate of 1 percent on all earnings above the upper limit. If the employee is contracted out of the state earnings-related pension scheme a reduced rate is applicable on earnings below the upper earnings limit (9.4 percent for 2005/06). Employers also pay national insurance contributions on the earnings of their employees, above the earnings threshold. For 2005/06 the employers’ rate is 12.8 percent (with reduced rates below the upper earnings limit where the employee is contracted out).
Contributions for the self-employed consist of a flat rate charge of £2.10 a week for 2005/06 and a charge equal to 8 percent of profits between the lower and upper limits of £4,895 and £32,760 for 2005/06, plus 1 percent of earnings above the upper limit.
National Insurance Contributions Bill
The National Insurance Contributions Bill was introduced in the House of Commons on 11 October 2005 (and will therefore proceed independently of the PBR, Budget and Finance Bill process). It contains measures to:
- Allow anti-avoidance NIC regulations to be made effective retrospectively from the same date as the corresponding anti-avoidance tax measures (back to 2 December 2004 if necessary). The first use of this power will be to impose NIC liability on certain employment-related securities charged to income tax from that date by the Finance (No 2)Act 2005;
- Give HM Treasury the power to extend the tax avoidance disclosure rules to NIC-only avoidance arrangements; and
- Prevent employers passing on to employees, under the existing rules for agreements or joint elections, any NIC liability on past payments of share-based earnings that arises from regulations made under the provisions of the Bill.
A benefit that the Government introduced from 6 April 2003 for pensioners on low and modest incomes, to give them a guaranteed level of income without penalising them for having small amounts of savings. The guaranteed level of income is linked to the growth in average earnings (as opposed to prices).
Planning Gain Supplement
The Barker review of housing supply, Delivering stability: securing our future housing needs , included a proposal for a ‘planning-gain supplement’ (effectively a tax on development gains). The Government indicated in the 2005 Budget that, “Ahead of a full response on Barker review implementation later this year, the Government will consult in the summer on … aspects of the Barker Review package” . The Barker report suggested that the supplement should be levied on owners of greenfield land when they received planning permission for the building of homes. Press reports suggest that this may be widened to include both commercial and residential developments on greenfield or brownfield sites.
The Finance Act 2004 (and subsequent regulations) included provisions aimed at countering avoidance of the inheritance tax (IHT) rules for ‘gifts with reservation’; i.e., (broadly) where the former owner continues to enjoy the benefits of ownership of an asset. In certain circumstances, where these IHT rules do not apply, the new rules impose an income tax charge on the former owner for every year in which the benefit of the assets is enjoyed. The provisions came into effect on 6 April 2005.
Property Investment Funds (and Real Estate Investment Trusts)
A consultation paper on how Property Investment Funds (a new vehicle for collective investment in property) might be introduced in the UK was published at the time of the 2004 Budget. From a legal and regulatory standpoint the document did not specify what form such a fund should take, but discussed a variety of options. Overall, however, the document gave the impression that HM Treasury might support a listed, close-ended and internally managed vehicle with a high distribution requirement for its profits.
The Government published a further consultation document at the time of the 2005 Budget and indicated its intention to introduce legislation in the 2006 Finance Bill. Some press comment has cast doubt on whether this remains the Government’s intention.
Funds for collective investment in property have been operating for some time in the US, where they are known as Real Estate Investment Trusts (REITs).
Research and Development Tax Credits
Tax relief is available in respect of research and development expenditure. The rules are complex but broadly speaking a small or medium-sized company can claim an allowance of 150 percent of revenue expenditure and a large company can claim an allowance of 125 percent, in addition to an allowance of 100 percent in respect of certain capital expenditure. In some circumstances a small or medium-sized company that does not have sufficient profits to utilise the 150 percent allowance can claim a cash payment (an ‘R&D tax credit’). The term ‘R&D tax credit’ is sometimes used loosely to refer to the whole system of allowances.
Residential Property in Self-Invested Pension Plans (SIPPs)
Following earlier consultation the Finance Act 2004 contained the primary legislation for simplifying the taxation of pensions, and this was supplemented by further legislation in the Finance Act 2005. The new system will take effect from 6 April 2006. Many of the detailed rules will be contained in regulations, over 30 sets of which have been published in draft.
Recent press comment has focused on the fact that the new rules will allow residential property to be held in self-invested personal pensions. There have been calls for this facility to be removed, or restricted, and for regulation of the activity of promoting such schemes. On 30 September 2005 the Treasury published a consultation document Proposed changes to the eligibility rules for establishing a pension scheme which included proposals in this area.
The Savings Gateway is a savings account for individuals with low incomes, in which the Government matches all money saved, up to a limit. Pilot projects in five areas of the UK ended in February 2005. The Government announced in the 2004 Pre-Budget Report that the preliminary evidence was positive and that a larger pilot project would be launched in 2005 to investigate alternative rates of matching and to measure the impact of matching for a wider range of income groups.
Section 660A of the Taxes Act (taxation of ‘husband and wife’ companies)
HMRC contend that the anti-avoidance legislation dealing with settlements in s660A Taxes Act 1988 allows them, in certain circumstances, to treat as the income of one spouse the dividends which the other receives from his or her shares in a jointly owned company, if the work carried out by the first spouse accounts for the majority of the income of the company. Where the first spouse is liable to income tax at the 40 percent higher rate, and the other is not, this will increase the overall tax due.
This legislation was the subject of an appeal to the Special Commissioners (decided in September 2004) in the case of Jones v Garnett (often referred to as the Arctic Systems case, that being the name of the taxpayer’s company). This was decided in favour of the Inland Revenue (now HMRC), but only by virtue of a casting vote from the more senior of the two Commissioners. The taxpayer lost his appeal to the High Court in April 2005. The Court of Appeal is expected to consider the case in November 2005.
Stamp Duty and Stamp Duty Land Tax
With effect from 1 December 2003 Stamp Duty Land Tax (SDLT) largely replaced stamp duty on UK land and buildings. The charge on leases is substantially higher under the new regime, with the duty being directly proportional to the lease term. The SDLT rates are nil where the price is £120,000 or less (£150,000 for non-residential or mixed use), 1 percent where the price is between £120,001 (or £150,001) and £250,000, 3 percent where the price is between £250,001 and £500,000 and 4 percent where the price is above £500,000.
Stamp duty at 0.5 percent applies to transfers of shares irrespective of value. Stamp Duty Reserve Tax is levied on transactions carried out through electronic share dealing systems (also at 0.5 percent).
Value Added Tax (VAT)
A tax on consumer expenditure and imports into the UK. ‘Output’ VAT on standard-rated supplies of goods and services is charged at each stage of the supply, and if the customers are registered for VAT and use the goods or services for business purposes, they reclaim the VAT on their purchases so that they have, in effect, only accounted for tax on the ‘value added’ by the business activities. The total VAT cost is ultimately borne by the final consumer. Supplies made outside the UK are (broadly) outside the scope of UK VAT, although they may be liable to VAT in another country.
VAT Annual Accounting
Under the annual accounting scheme businesses file only one VAT return each year, two months after the year end. They will normally make nine monthly interim VAT payments during the year, based on their estimated total liability for the year, followed by a balancing payment with the return.
A business may apply to use the scheme at any time on or after the date it is registered for VAT if its taxable turnover is not expected to exceed £150,000 for the year. If its turnover is not expected to exceed £660,000 it can apply as long as it has been registered for 12 months or more. A business already using the scheme can continue to do so until its annual taxable turnover reaches £825,000.
VAT Cash Accounting
Under the cash accounting scheme businesses account for VAT on the basis of payments received and made, rather than on invoices issued and received. Whether or not this is advantageous will depend on the timing of the relevant cash flows. The scheme will effectively give automatic relief for bad debts.
The scheme is open to businesses with an annual turnover of up to £660,000 that meet certain other conditions. A business already using the scheme can continue to do so until its annual taxable turnover reaches £825,000.
VAT Flat Rate Scheme
Under the flat rate scheme a business calculates its VAT liability as a fixed percentage of its turnover. The percentage varies from 2 percent to 13.5 percent depending on the business sector concerned. No deduction is given for VAT incurred on expenditure; this is taken into account in setting the fixed rates. A business in its first year of VAT registration can benefit from a reduction of one percentage point in the applicable flat rate.
A business can join the scheme if its taxable turnover in the next 12 months is not expected to exceed £150,000 and its total turnover (excluding VAT) is not expected to be more than £187,500. Taxable turnover for this purpose means the value of all supplies subject to VAT at the standard, reduced or zero rate. ‘Total turnover’ is the taxable turnover plus any exempt and non-business income. (Non-business income is taken into account in determining eligibility for the scheme, but not in calculating VAT due under the scheme.)
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