Budget glossary

This glossary defines all the key terms for the 2008 UK budget. The content is provided by KPMG’s tax specialists.

Alcohol and Tobacco Duties
Business Premises Renovation Allowance
Capital Allowances
Capital Gains Tax
Child Tax Credit
Child Trust Fund
Climate Change Levy
Community Investment Tax Relief
Controlled Foreign Companies
Corporation Tax
Cross-border Loss Relief
Disclosure of Tax Avoidance Schemes
Enterprise Investment Scheme
Enterprise Management Incentives
Her Majesty’s Revenue & Customs
Income Tax
Individual Savings Accounts
Income shifting
Individual Savings Accounts
Inheritance Tax and Trusts
International Financial Reporting Standards
IR 35
Managed Service Companies
National Insurance
Pension Credit
Planning Gain Supplement
Pre-owned Assets
Research and Development Tax Credits
Residence and Domicile
Saving Gateway
Stamp Duty and Stamp Duty Land Tax
Taxation of foreign income
Value Added Tax (VAT)
VAT Annual Accounting
VAT Cash Accounting
VAT Flat Rate Scheme

Alcohol and Tobacco Duties

Excise duties are chargeable on beer, wine and spirits according to their volume and/or alcoholic content. For example, since 21 March 2007 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 £54.85 to £237.31 per hectolitre (of wine rather than of alcohol), and the rate on beer has been £13.71 per hectolitre for each percent of alcohol. Duties on most tobacco are set according to weight. Since 21 March 2007, the rate has been £158.24 per kilogram for cigars, £113.74 for hand-rolling tobacco and £69.57 for pipe tobacco. Cigarettes are taxed on 22 percent of the recommended retail price plus £108.65 per thousand cigarettes.

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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. The scheme provides a 100 percent allowance for the costs of renovating business premises in specified areas which have remained vacant for a year or more. Legislation was introduced in the Finance Act 2005 but could not take effect until the scheme had received EU State Aid approval. It was announced at the time of the 2007 Budget that State Aid approval had been given (although with some amendment to the definition of the areas in which the relief would be available) and the allowances came into force on 11 April 2007.

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Capital Allowances

Capital allowances are available on certain categories of expenditure to replace commercial depreciation, for which a tax deduction is not available. Broadly, capital allowances of 25 percent of the reducing balance of expenditure are available on plant and machinery, although special rules apply to some assets including motor vehicles and assets deemed to have either a short or long life. Enhanced ‘First Year Allowances’ are available to small and medium sized businesses in the year in which a qualifying asset is acquired.

Other allowances are available for assets such as industrial buildings and hotels (but see below), ships, industrial and commercial buildings in Enterprise Zones, mines and oil wells, certain energy-saving or environmentally friendly assets, costs relating to the conversion or refurbishment of some flats over shops and of certain business premises, and certain biofuels plants.

In the 2007 Budget changes to the capital allowances system were announced, including:

• From April 2008 the rate of allowance given on plant and machinery in the main pool of expenditure is to be reduced from 25 to 20 percent;

• Also from April 2008, plant and machinery which is categorised as fixtures in a building (so called ‘integral features’) is to be pooled separately and given a reduced allowance of 10 percent;

• The increased First Year Allowance is to be removed, with the introduction of an Annual Investment Allowance providing for a 100 percent allowance for all businesses on the first £50,000 of expenditure on general plant and machinery each year (again from April 2008);

• Allowances for industrial buildings and hotels are in the process of being phased out, and are expected to cease totally in April 2011.

In addition, the Government has been consulting on changes to the way in which allowances are given for motor vehicles, to replace the current system with one where allowances vary depending on the emissions level of the cars.

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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.

In the 2007 Pre-Budget Report, the Chancellor announced that, for disposals on or after 6 April 2008, there would be a reform of the CGT regime for individuals, trustees and personal representatives of deceased persons. Draft legislation has now been issued. The changes are to be included in Finance Bill 2008 and some of these are:

• There will be a single CGT rate of 18 percent;

• The following will be abolished:

- taper relief, which may currently reduce the effective rate of capital gains tax to as low as 10 percent in certain circumstances, or

- the historic indexation allowance which prevents the taxation of inflationary gains

• Individuals and trustees with qualifying gains will be able to benefit from a reduced rate of CGT of 10 percent for capital gains of up to £1,000,000. For capital gains above this threshold, the tax rate will be at 18 percent. The £1,000,000 threshold will be a lifetime limit per taxpayer. Gains in respect of certain assets qualify for this, Entrepreneurs Relief, provided specific conditions are met.

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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 £58,000.

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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, (again of £250, or £500 for children from low-income families). In the 2005 Budget the Government announced consultation on further payments at ’secondary school age’, and in the 2006 Pre-Budget Report announced additional payments to children in care. 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.

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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., 0.44 pence per kilowatt hour of electricity and 1.20 pence per kilogram of coal. Supplies for domestic and transport use are excluded. These rates are as increased on 1 April 2007, and further increases are due to take effect from 1 April 2008.

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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.

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Controlled Foreign Companies

The UK Controlled Foreign Company (CFC) tax regime applies, broadly, to companies controlled in the UK but resident in an overseas territory in which they are subject to a lower level of tax (less than 75 percent of the tax which would have been charged had the company been UK resident). Exemptions apply, but where a company is deemed a CFC the relevant portion of its profits is brought into UK tax in the computations of its UK resident corporate shareholders.

The CFC regime has been the subject of litigation in Cadbury Schweppes plc and Cadbury Schweppes Overseas Limited v Commissioners of Inland Revenue, which was referred to the European Court of Justice (ECJ) by the Special Commissioners. In September 2006 the ECJ found that the UK’s CFC rules constituted a restriction to the right to freedom of establishment set out in the EC Treaty, and that the scope of any such rules should be restricted to ‘wholly artificial’ cases. The Government responded to this in the 2006 Pre-Budget Report, and legislation has been introduced allowing companies with EU and EEA subsidiaries which would otherwise be caught by the CFC legislation to, broadly, make an application for it not to apply. Certain conditions need to be met in order for an application to be successful.

The consultation document on the taxation of foreign profits, issued at the time of the 2007 Budget (see Taxation of foreign income below), proposed a more fundamental change to the current CFC regime. Under proposals in that document, the CFC regime would be replaced with a new ‘controlled companies’ regime which would focus on certain types of ‘mobile’ income in designated ‘controlled companies’. The ‘controlled companies’ regime would be linked to the exemption of certain foreign dividends from UK tax and would not apply to small companies.

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Corporation Tax

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.

Companies with taxable profits of up to £300,000 pay tax at a 20 percent small companies’ rate, with marginal relief up to £1,500,000. Companies with profits of £1,500,000 or more pay tax at the full rate of 30 percent. All these limits are reduced where there are associated companies. From 1 April 2008 the full rate of corporation tax will be reduced to 28 percent, and the small companies’ rate will increase to 21 percent. The small companies’ rate will rise further to 22 percent from April 2009.

A nil rate band (the ’starting rate’) applied to companies with taxable profits up to £10,000, with marginal relief up to £50,000, prior to 1 April 2006. Also, between 1 April 2004 and 1 April 2006 profits distributed to non-corporate shareholders were charged at a minimum rate of 19 percent even where they would otherwise have been taxed at a lower rate.

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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 (see Capital Allowances above) instead of commercial depreciation.

Dividends are not deductible, whereas interest and royalties generally are.

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Cross-border Loss Relief

The availability of cross-border loss relief within the EU has been the subject of litigation in Marks & Spencer v Halsey (which was referred to the ECJ by the High Court) and by other companies under the loss relief Group Litigation Order (GLO). In December 2005 the ECJ ruled in the Marks & Spencer case that relief should be available for cross-border losses where they are unrelievable in their country of origin.

The Government included legislation incorporating the outcome of this case in the Finance Act 2006. It also introduced anti-avoidance legislation designed to prevent groups taking steps to render losses unrelievable in their country of origin.

The Marks & Spencer case returned to the UK courts which have clarified some particular points including the time at which the conditions need to be met for loss relief to be available. It is possible that the courts’ findings could lead to further changes in the legislation, as there appear to be areas where it does not accord with the ECJ’s judgment.

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Disclosure of Tax Avoidance Schemes (DTAS)

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. Taxpayers are required to include on their tax return the registration number of the scheme. Schemes are generally disclosed to HMRC by promoters. 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)).

From 1 August 2006 the legislation applies to income tax, corporation tax and capital gains tax, broadly, where there are arrangements which generate a tax advantage and where the arrangements fall within one or more specific hallmarks. It was further extended to cover National Insurance Contributions from 1 May 2007. Different disclosure rules also apply to certain Stamp Duty Land Tax and VAT arrangements.

Finance Act 2007 introduced measures giving HMRC the power to investigate a scheme where they believe that a promoter has failed to disclose in accordance with the regulations.

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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 £400,000 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 and for three years afterwards, this does not prevent them becoming paid directors subsequently. Only those companies or groups with gross assets of less than £7 million before an investment and no more than £8 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.

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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.

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Her Majesty’s Revenue & Customs

The department created from the merger of HM Customs & Excise (which had responsibility for indirect taxes such as VAT and excise duties) and the Inland Revenue (which had responsibility for direct taxes such as income and corporation tax).

Since the merger, a number of consultations looking at the workings of HMRC and its relationship with the taxpayer have been launched. Some of the areas covered by these include improved online filing and payment systems, changes to HMRC’s powers to deal with criminal investigations, changes to the penalty regime for late or incorrect filing of tax returns (all of which have resulted in changed legislation) and, more recently, payments, compliance checks and taxpayer safeguards.

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Income Tax

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 for 2007/08 are the starting rate (currently 10 percent) on the first £2,230 of taxable income, the basic rate (22 percent) on the next £32,370, and the higher rate (40 percent) on the excess. In the 2007 Budget it was announced that the starting rate is to be abolished (other than for dividend and savings income) from April 2008, with the basic rate being reduced to 20 percent from the same date.

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 £5,225 for the year ended 5 April 2008. For 2008/09, this figure will be £5,435.

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Income shifting

In July 2007 the House of Lords found in favour of the taxpayer in the Jones v Garnett (or Arctic Systems) case. This concerned a husband and wife company in which one spouse owned shares and received dividends without being employed by or contributing to the company. The House of Lords ruled that the dividends of the non working spouse should be taxed as their own income. HMRC had argued that anti-avoidance legislation allowed them to treat this income as that of the spouse generating the business profits. Where the working spouse is liable to income tax at the 40 percent higher rate, and the other is not, this would increase the overall tax due.

In the October Pre Budget Report HMRC introduced ‘income shifting’ – whereby an individual shares income with another person (e.g. a spouse or civil partner) in order to take advantage of the personal allowance /lower tax bands of that other person. Draft legislation has been issued which in principle would act to reverse any tax advantage obtained by “income shifting”. The new rules are intended to apply to dividends or profits paid on or after 6 April 2008.

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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 2008 the ISA limits are to change, with the overall annual investment limit rising to £7,200, and the portion which can be invested in cash increasing to £3,600 (half of the total allowance).

Further changes to the ISA system were announced in the 2006 Pre-Budget Report and are also to be introduced from April 2008. These simplify the current regime, including removing the current mini/maxi distinction, allowing transfers from the cash to the stocks and shares component and allowing the rollover of Child Trust Funds into ISAs.

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Inheritance Tax

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 (currently) the first £300,000 of cumulative chargeable transfers – this is known as the ’nil rate’ band. The Government has previously announced that the nil rate band will rise to £312,000 at 6 April 2008. There is an exemption for most intra-spouse transfers.

In the 2007 Pre-Budget Report, the Chancellor announced that the legislation would be changed to allow any of the nil rate band unused on a person’s death to be transferred to their surviving spouse of civil partner, and then added to their own nil rate band on their death. This ability to transfer unused nil rate band applies where the surviving spouse or civil partner dies on or after 9 October 2007 (the date of the 2007 Pre-Budget Report).

See also Inheritance Tax and Trusts and Pre-Owned Assets

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Inheritance Tax and Trusts

Prior to the 2006 Budget the Inheritance Tax system afforded favourable treatment to certain types of trust (Accumulation and Maintenance and Interest in Possession trusts). Under these rules it was possible to transfer unlimited funds into these types of trust without an inheritance tax charge, provided the transferor survived seven years from the date of the gift.

Following the changes in the 2006 Budget, a charge to inheritance tax applies to all trusts set up after 21 March 2006, with transitional provisions applying to trusts in existence at that date. The charge is 20 percent of the value of the assets transferred into trust in excess of the nil rate band in force at the time of transfer where the transfer takes place during the settlor’s lifetime and 40 percent of the value where the transfer is on death. In addition there is a tax charge on the value of the assets (at up to six percent) every ten years, and a further charge of up to six percent when the assets leave the trust. There are very limited categories of trust to which these charges do not apply, namely certain life interest trusts created on death, very limited Accumulation & Maintenance trusts and trusts created for disabled people (whether on death or during life).

See also Inheritance Tax

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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 have been made to UK tax legislation to accommodate these new rules for tax purposes.

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IR 35

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.

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Managed Service Companies

At the time of the 2006 Pre-Budget Report the Government announced that it would take action to tackle tax avoidance using Managed Service Companies (MSCs). An MSC is an intermediary company through which workers provide services to an employer or agency. In contrast to the ‘IR35’ situation the worker does not exercise control over the MSC, which is instead administered by a third party provider. The changes to the legislation are intended, broadly, to prevent an MSC scheme from being used to avoid the payment of employed levels of tax and national insurance.

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National Insurance

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 (£100 for 2007/08 and £105 for 2008/09). Earnings at or below the threshold do not attract a contribution liability, and contributions are charged for 2007/08 at 11 percent on earnings above the threshold, up to an upper limit (£670 for 2007/08 and £770 for 2008/09). 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 2007/08 and 2008/09). Employers also pay national insurance contributions on the earnings of their employees, above the earnings threshold. For 2007/08 and 2008/09 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 £2.20 for 2007/08 (£2.30 for 2008/09) and a charge equal to 8 percent of profits between the lower and upper limits of £5,225 and £34,840 for 2007/08, plus 1 percent of earnings above the upper limit. For 2008/09, the lower and upper limits will be £5,435 and £40,040 respectively.

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Pension Credit

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).

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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). In the 2005 Pre-Budget Report the Government announced a consultation on the introduction of a planning-gain supplement, which would be chargeable at the point a development commenced. The amount due would be based on the uplift in the value of the land at the point at which planning permission for the development had been granted. Three further consultations were launched at the time of the 2006 Pre-Budget Report and the Government indicated that it would go ahead with the introduction of PGS if it is found to be workable.

In setting out the provisional programme for the forthcoming Parliamentary session, the Prime Minister stated that a Planning Gain Supplement Bill had only provisionally been included and would be deferred if a better alternative had been identified by the time of the 2007 Pre-Budget Report.

In the 2007 Pre-Budget Report, the Government announced that a Planning Gain Supplement would no longer be introduced. In its place, the Planning Bill includes legislation that will allow local Planning Authorities in England to apply new planning charges to new development together with negotiated contributions for site specific matters.

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Pre-Owned Assets

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.

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Real Estate Investment Trusts (REITs)

A UK REITs regime came into being on 1 January 2007. Under the regime, UK resident companies listed on a recognised stock exchange are eligible for REIT status. REITS are required to distribute at least 90 percent of their taxable profits to investors. Companies which qualify as REITs are not subject to corporation tax on their qualifying rental income or chargeable gains. A conversion charge applies to companies adopting REIT status, equal to 2 percent of the market value of their investment properties at the date of conversion.

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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.

It was announced in the 2007 Budget that the rates of allowance would be increased to 130 percent for large companies and 175 percent for small and medium-sized companies from April 2008 (the change for small and medium-sized companies being subject to EU State Aid approval).

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Residence and Domicile

An individual’s domicile and country of residence determine which of their income and gains are subject to tax in the UK. Domicile is a complex concept of general law and residence is based at least partially on case law. An individual’s residence and domicile position will depend on their particular circumstances.

Broadly, an individual who is both resident and domiciled in the UK will pay tax in the UK on their worldwide income and gains as they arise.

An individual who is resident in the UK but domiciled elsewhere is subject to UK tax on their UK income and UK gains as they arise. At the present time, however, in certain circumstances, they only pay UK tax on their non-UK income and gains when they are brought into (or remitted to) the UK.

An individual who is not resident in the UK is only subject to UK tax on certain UK income.

Determining residence and domicile:

There are (subject to case law and Revenue practice) two basic rules for determining residency in the UK. An individual is regarded as resident if they are physically present in the UK for 183 days or more in a particular tax year. . If an individual visits the UK on a regular basis and spends an average of 91 days or more over 4 consecutive years, they will be regarded as resident in the UK. Under current practice, in determining the number of days that the individual is physically present, the days of arrival in and departure from the UK are ignored

In broad terms, an individual acquires their country of domicile from their father. In certain circumstances, it is sometimes possible for an individual to change their country of domicile, if they change the place they regard as their permanent home, although this requires more than merely relocating to another country. Domicile is distinct from nationality or residence. Whilst an individual can be resident in two countries at one time, one cannot be domiciled in two countries at any given time.

In the 2007 Pre-Budget Report, the Chancellor announced sweeping changes to the existing rules on residence and domicile which will take effect from 6 April 2008. The legislation is intended to be included in Finance Bill 2008 and some of the key changes are:

• The days of arrival and departure will now be counted in deciding whether an individual is resident or not;

• The introduction of a £30,000 charge for non-UK domiciled individuals who have been resident in the UK for more than 7 out of the previous 10 years and who wish to claim the benefit of the remittance basis of taxation (this will not apply to those with overseas income of less than £1,000); and

• Non-domiciled individuals who use the remittance basis will lose their UK personal allowances and annual exempt amount for capital gains (again, this will not apply where overseas income is less than £1,000).

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Saving Gateway

The Saving 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 confirmed in the 2005 Budget that a larger pilot project had commenced. The final evaluation of the second pilot was published in May 2007 and the Government is to make announcements on the next steps in the 2007 Pre-Budget Report.

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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 £125,000 or less (£150,000 for non-residential or mixed use), 1 percent where the price is between £125,001 (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).

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Taxation of foreign income

At the time of the 2007 Budget the Government announced a consultation into changes to the tax treatment of companies’ foreign income. This included proposals to replace the current controlled foreign companies legislation with a ‘controlled companies’ regime (see Controlled Foreign Companies above), along with exempting certain dividends received from foreign companies from UK tax. It is proposed that an exemption system would not apply to small companies, which would continue to operate the current credit system.

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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. The three rates of VAT applicable in the UK are the standard rate of 17.5 percent, the reduced rate of 5 percent and the zero rate, with some items being exempt from VAT.

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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 £1,350,000 for the year. A business already using the scheme can continue to do so until its annual taxable turnover reaches £1,600,000.

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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 £1,350,000 that meet certain other conditions. A business already using the scheme can continue to do so until its annual taxable turnover reaches £1,600,000.

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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.)

Note from KPMG: The content of this tax glossary is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining liability to tax or determining investment strategy in specific circumstances. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

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