1. finance

Finance Act 2015
Lexis PSL Tax analysis
®
The views expressed
by our Legal Analysis
interviewees are not
necessarily those of
the proprietor.
The Chancellor gave his last Budget of the previous Parliament on 18 March 2015. The
Finance (No.2) Bill 2015 was published on 24 March 2015 and given Royal Assent a
mere two days later so that the legislation could be enacted prior to the dissolution of
Parliament on 30 March 2015 in advance of the general election.
The Lexis®PSL Tax team has approached a panel of experts from across the tax
profession and gathered their practical insights and considered reflections on the
Finance Act, with a focus on how the enacted legislation compares to the draft
Finance Bill legislation published on 10 December 2014. This document collates a
series of articles, initially published on Lexis®PSL Tax, to provide a critical overview of
the importance and likely impact of the enacted legislation.
As expected, the diverted profits tax (DPT) provisions were included in the Finance
Act 2015 and have effect from 1 April 2015. The Chancellor indicated in the Budget
2015 documents and a subsequent written statement whether provisions would be
included in the pre-election Finance Bill 2015 or held back for a second, or possibly
even third, Finance Bill later in 2015. The measures deferred to a future Finance Bill
include the modernisation of the tax treatment of corporate debt and derivative
contracts, the rules on direct recovery of debts, the proposed new statutory
exemption from income tax for trivial benefits-in-kind and provisions to simplify link
company requirements for consortium relief claims.
See links below to other free to download documents in our Budget 2015 series,
including:
•
Budget 2015 summary
•
Budget 2015—views from the market
•
Why is there more than one Finance Bill in an election year?
Finance Act 2015 — Lexis®PSL Tax analysis
Contents
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Contents
The following
commentary items
originally appeared in
Lexis®PSL Tax.
• Finance Act 2015—consortium relief provisions deferred
For a free trial, see:
Lexis®PSL Tax: free
trial.
• Finance Act 2015—capital gains tax and wasting assets
Business and Enterprise
• Finance Act 2015—diverted profits tax
• Finance Act 2015—blocking B share schemes
• Finance Act 2015—entrepreneurs’ relief
• Finance Act 2015—oil and gas Finance
• Finance Act 2015—avoidance using carried-forward losses
• Finance Act 2015—corporate debt provisions deferred
• Finance Act 2015—disguised investment management fees
• Finance Act 2015—withholding tax exemption
Employment taxes
• Finance Act 2015—employee benefits and expenses
Real estate taxes
• Finance Act 2015—ATED
• Finance Act 2015—CGT on disposals of UK residential property
interests by non-residents
Tax avoidance and evasion
• What more does HMRC need to do to tackle avoidance?
• Finance Act 2015—inheritance tax charges on trusts
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Finance Act 2015— Lexis®PSL Tax analysis
Business and Enterprise
Business and Enterprise
Diverted profits tax
Heather Self, partner at Pinsent Masons LLP, examines the
aspects of the Finance Act 2015 (FA 2015) which concern
diverted profits tax (DPT).
Were the DPT provisions included in FA 2015 and, if
so, from when do these provisions have effect?
The provisions are included in FA 2015, Pt 3. This means that
they have not been properly considered by Parliament, as the
340 pages of the Finance Bill were debated for only one day–so,
unsurprisingly, there was no time to look at the detail of the
drafting. This is very unsatisfactory and it is hard to see why the
provisions could not have been included (and properly debated)
as part of the post-election Finance Bill, particularly as the
projected yield for 2015/16 is only £25m. However, the political
imperative of the general election has led to this being rushed
through.
Interestingly in the House of Commons debate on the Finance
Bill, Shabana Mahmood, the Shadow Exchequer Secretary,
acknowledged that the rushed consideration of the Finance Bill
was not satisfactory, but said that if Labour was in power after
the General Election they would ‘seek to remedy any defects that
prevent [DPT] from being both effective and strong’ in the postelection Finance Bill.
The provisions apply from 1 April 2015. They apply for accounting
periods beginning on or after 1 April 2015, but for companies with
accounting periods which straddle 1 April, the periods before and
after 1 April are treated as separate accounting periods.
HM Revenue & Customs (HMRC) published interim guidance on
the new tax on 30 March 2015–only two days before the new tax
came into force.
Have any changes been made to the legislation since
the draft Finance Bill 2015 provisions published
in December 2014? If so, what changes have been
made (and why)?
The legislation now contained in FA 2015 has been redrafted
and reordered from the version that was published in draft in
December.
One welcome change is that companies will not need to notify
if it is ‘reasonable to assume’ that there will be no charge to DPT.
Under the original draft legislation affected companies were
obliged to notify HMRC within three months of the end of an
accounting period in which it was ‘reasonable to assume’ that
diverted profits ‘might arise’. There had been concerns that this
could lead to unnecessary notifications.
The notification requirement will now apply only where there is
a significant risk that a charge to DPT will arise and where HMRC
does not know about the arrangements. The emphasis has been
changed so that notification will not be required if it is reasonable
for the company to assume that a charge to diverted profits tax
will not arise. There will be no duty to notify for any accounting
period if it is reasonable for the company to conclude that it
has supplied sufficient information to enable HMRC to decide
whether to give a preliminary notice for that period and that
HMRC has examined that information or HMRC has confirmed
that there is no duty to notify because the company or a
connected company has supplied such information and HMRC
has examined it.
The period allowed for initial notification when the tax comes into
force has also been extended from three months to six months
after the end of the first relevant accounting period. This means
that a company with a 31 December 2015 year end will not have to
notify until 30 June 2016.
Another change to the legislation makes it clear that a charge to
DPT does not generally arise if a full transfer pricing adjustment
has been made. In many circumstances, a company will be able
to ensure that it is not liable to DPT by ensuring that it has an
agreed transfer pricing policy. However, one important point to
note about DPT is that, at least in HMRC’s view, it looks not just at
whether, for example, a royalty paid to a company in a tax haven is
reasonable given the value of the intellectual property (IP) rights,
but whether it is reasonable given the economic substance (or
lack thereof) of the group’s activities in the tax haven. The interim
guidance says, at DPT1169, that where profits from UK sales
ultimately flow to a territory where little or no tax is paid, then it
is ‘very likely’ that the amount of any royalty is inflated above an
arm’s length rate.
The provisions now make it clear that credit against a potential
DPT liability is available where another group company has paid
tax or where the company has paid a CFC charge. However, the
provisions are quite restrictive and there is a time limit for the
credit so that tax paid after the end of the review period will not
count.
A less welcome change to the legislation makes it clear that DPT
applies to sales of property in the same way as to other goods
and services. This was not entirely clear under the original draft.
For oil and gas companies with ring fence activities an unpleasant
change is that the 25% rate of tax is increased to 55% as 25%
would not be a significant deterrent for oil and gas companies,
which pay corporation tax at a basic rate of 30%, with a
supplementary charge of a further 20%.
Finance Act 2015 — Lexis®PSL Tax analysis
3
Business and Enterprise
What concerns remain about DPT?
Although the FA 2015 version of the legislation is an improvement
from the original draft, businesses will continue to be concerned
about the wide ambit of the new tax and the fact that it could still
catch unintended targets.
It is clearer from the legislation that trading rather than
investment transactions are covered. However, in the real estate
context, development projects involving offshore owned UK
property may be caught by DPT.
Other structures that could be caught include captive insurance
companies, intra-group treasury operations, shared service
centres, and Europe-wide sales and marketing structures. There
are still concerns about whether DPT breaches the UK’s double
tax treaty obligations and whether it is compatible with EU law.
It is not clear whether other jurisdictions will give credit for DPT
against their corporation taxes. However, of more concern is
the precedent that this kind of unilateral action sets to other
countries.
Until DPT was introduced, the UK only taxed overseas companies
doing business with UK customers if those companies had a UK
‘permanent establishment’ (PE). This is also the principle on
which the OECD has operated. DPT seems to be an attempt to
unilaterally amend the definition of permanent establishment.
There are significant concerns that DPT undermines the OECD’s
base erosion and profit shifting (BEPS) process. Indeed one of
the OECD’s action points relates to amending the definition of
PEs and in December 2014 the OECD published a discussion
draft on this issue. It is expected to give its recommendations
by the end of the year so it is not as if nothing was happening
internationally to address the concerns that the definition of PE
was not suitable for the digital age.
While it is reasonable for the government to want to tax
economic activity being carried on in the UK, the ‘pay now, review
later’ provisions mean that companies may choose to adjust
their transfer pricing to avoid the risk of a DPT charge in the UK.
Ultimately this is likely to lead to more transfer pricing disputes,
and the risk of double taxation. If other jurisdictions also act
unilaterally, the chances of double taxation for UK businesses
operating overseas are increased. Australia is understood to be
already considering a similar move.
The previous news analysis on this topic, published on 5 January
2015, can be found here: Unpicking the Finance Bill 2015–
diverted profits tax.
Interviewed by Alex Heshmaty.
Blocking B share schemes
Sara Stewart, senior associate at Herbert Smith Freehills LLP,
says provisions blocking B share schemes included in the Finance
Act 2015 (FA 2015) are much the same as when the draft form of
the legislation was published in December 2014.
Were the provisions blocking B share schemes
included in FA 2015 and, if so, when do these
provisions have effect from?
The provisions blocking B share schemes and similar structures
were included in FA 2015, s 19 and have effect in relation to
amounts received on or after 6 April 2015 (even if the choice to
receive them was made before that date).
Have any changes been made to the legislation since
the draft Finance Bill 2015 provisions published
in December 2014? If so, what changes have been
made (and why)?
The two changes made since the draft Finance Bill 2015
provisions were published in December 2014 are:
• first, certain consequential amendments to make it clear that
the new rules also apply to the extent that the receipts are held
in a trust, and
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Finance Act 2015— Lexis®PSL Tax analysis
• second, FA 2015 clarifies the commencement provisions–ie
that the 6 April 2015 trigger is determined by reference to when
the amounts are received and not when the choice to receive
them in capital form was made
The previous news analysis on this topic, published on
20 January 2015, is available in full below.
Unpicking the Finance Bill 2015–blocking B share
schemes
How does the introduction of measures to prevent taxpayers
gaining tax advantages from special purpose B share schemes
fit in with the wider efforts to tackle avoidance? Sara Stewart,
senior associate at Herbert Smith Freehills, assesses the plans.
What was announced at Autumn Statement 2014 in
relation to structures such as B share schemes?
The Autumn Statement 2014 announced that the government
‘will legislate to remove the unfair tax advantage provided by
special purpose share schemes, commonly known as ‘B share
schemes’ (para 2.152 of the Autumn Statement 2014).
Business and Enterprise
The ‘unfair tax advantage’ in question is the ability of a
shareholder to choose to receive a return of value as ‘capital’
rather than ‘income’ which is of particular benefit for additional
rate taxpayers who pay capital gains tax at 28% instead of an
effective income tax rate on dividends of 30.56%. The effective
rate of income tax on dividends for higher rate taxpayers is 25%–
however, a return of value in the form of capital is still likely to be
favourable due to the annual exempt amount for capital gains
(currently £11,000).
Why do you think this change was introduced?
This change was introduced as part of the government’s
commitment to ‘continue to be relentless in tackling avoidance
and aggressive tax planning where it arises within the UK’ (para
1.245 of the Autumn Statement 2014).
Why do you think this change was not subject to
consultation?
It was a surprise announcement to most tax practitioners,
especially as it is included as an ‘acceptable’ structure in the
general anti-abuse rule (GAAR) guidance–see HMRC guidance
para 2.3.2.
There were other surprises in the Autumn Statement 2014
relating to other measures which tax practitioners had thought
safe–for example the imposition of stamp duty on UK takeovers
undertaken by ‘cancellation’ schemes of arrangement.
The government’s stated motivation for such changes is its
commitment to close down tax avoidance opportunities–on this
basis it feels justified in making these changes without any period
of consultation.
How does the draft Finance Bill 2015 legislation
implement this change?
Finance Bill 2015 introduces a new s 396A and consequential
amendments to the Income Tax (Trading and Other Income)
Act 2005 (ITTOIA 2005) which applies in circumstances where
an individual shareholder has a choice to receive a distribution
of a company or an ‘alternative receipt’ which is of the same or
substantially the same value and but for the new section, would
not be charged to income tax. In these circumstances, if the
shareholder chooses the ‘alternative receipt’ then ITTOIA 2005,
s 396(2) deems it to be a distribution in respect of which income
tax is chargeable.
Which taxpayers will be most affected by this
change?
Individual UK tax resident additional and higher rate taxpayers
are most affected by this change.
Note that UK tax resident companies are unaffected by the
change and are likely to continue to favour a return of value by
way of a dividend in order to utilise the dividend exemption in the
Corporation Tax Act 2009, Pt 9A.
Individual UK tax resident basic rate taxpayers are also likely to
continue to favour a return by way of a dividend on the basis that,
after taking into account the tax credit, no tax is payable by them
in respect of dividends.
Do you think the draft Finance Bill 2015 legislation
could have any unintended consequences?
Potentially–a common complaint of tax practitioners of draft
legislation is that it is too widely drafted and ITTOIA 2005, s 396A
is no exception. There may well be circumstances in which a
shareholder has a choice to receive a dividend or another receipt
of the same or substantially the same value which the legislation
was not intended to catch (for example an indirect share
buy-back programme announced in circumstances where the
company has clear dividend commitments to shareholders).
How do you think this will impact on transactions to
return value to shareholders?
Companies will need to decide whether to structure a return
of value as return which is treated as income in the hands of
shareholders (for example a dividend) or as capital (for example
an indirect buy-back of shares). Any return which is structured as
giving shareholders a choice as to the manner of the return will
not achieve the desired result anymore.
In practice given that:
• UK corporate shareholders and UK individual basic rate
shareholders will continue to favour a return by way of a
dividend,
• a return of value by way of dividend is a simpler procedure
from a corporate law perspective than an indirect buy-back of
shares or other return of value which achieves a return which is
treated as capital in the hands of the shareholders, and
When does this change take effect?
• a return of value by way of dividend does not give rise to costs
for the company such as stamp duty which arises on a buyback of shares,
From 6 April 2015 (ie from the income tax year 2015/16 onwards–
see ITTOIA 2005, s 396A(8)).
it is likely that returns of value will commonly take the form of a
special dividend.
Interviewed by Anne Bruce.
Finance Act 2015 — Lexis®PSL Tax analysis
5
Business and Enterprise
Consortium relief provisions deferred
Ben Jones, partner at Eversheds, explains the context to the
proposed changes to the rules on consortium relief and ‘link
companies’. The changes were not in the (first) Finance Act 2015
but are still expected to be legislated in due course.
Were the consortium relief provisions included in FA
2015?
The original draft of the Finance Bill 2015, published on 10
December 2014, included legislation amending the consortium
relief tax loss surrender rules in relation to what are known as
‘link companies’. A ‘link company’ is a company that is a member
of a consortium and also a member of a group relief group. As
the name suggests, this company can act as a link between a
consortium company (and its group) and the wider group relief
group of the consortium member, allowing tax losses to be
surrendered between the consortium company (and its group)
and the linked group of the consortium member. Under current
legislation, such surrenders are only permitted where the link
company is either UK resident or established in the EEA and,
where established in the EEA, all intermediate group companies
are also established in the EEA. Recent EU case law has indicated
that such restrictions are contrary to EU law and consequently it
was proposed in the original Finance Bill 2015 that these location
requirements be removed.
However, despite this, these provisions were not included in the
final draft of the Finance Bill 2015 and are therefore not included
in FA 2015.
Why were these provisions not included in FA 2015?
Do you think they will be included in a future Finance
Bill this year?
On the day of the Budget 2015, HM Treasury released a
document entitled ‘Overview of Tax Legislation and Rates’ which
explained that, in recognition of the accelerated parliamentary
process applicable to the Finance Bill 2015 by reason of the
impending general election, a number of measures included in
the original draft of the Finance Bill 2015 were being deferred. The
consortium relief link company provisions were identified as one
of the measures being deferred.
The Treasury briefing makes it clear that the intention is for
these provisions to be legislated in a future Finance Bill. This
will obviously be after the general election and so subject
to the political position at that time. Regardless of the delay,
given that the intention of the legislation is to address potential
incompatibility with EU law, there should be no reason why these
provisions will not be legislated in due course.
The previous news analysis on this topic can be found here:
Unpicking the Finance Bill 2015–consortium relief.
Interviewed by Julian Sayarer.
Entrepreneurs’ relief
John Endacott, a tax partner at Francis Clark LLP, looks at the
Finance Act 2015 (FA 2015) in relation to entrepreneurs’ relief.
What are the changes being made to the entrepreneurs’ relief
provisions?
The government has introduced measures to:
• prevent entrepreneurs’ relief being available on the value of
goodwill realised on incorporation so enabling future profits to
be extracted at 10% (PSL practical point: for the background
to this measure see our previous news analysis, Unpicking the
Finance Bill 2015–restricting relief for incorporations)
• prevent land sales to developers being structured as an
associated disposal by combining it with a contrived reduction
in an interest in a partnership (usually)–often farming
• prevent contrived business structuring to enable individuals
who would not otherwise qualify to benefit from the relief
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Finance Act 2015— Lexis®PSL Tax analysis
The rules in each case go wider than those highlighted but these
examples highlight what it is all about. Many of the issues here
are due to the rushed original legislation that was introduced in
2008 and the inadequate consideration given to the risk to the
Exchequer when the lifetime limit was raised from £2m and the
rate of capital gains tax increased from 18% to 28% in June 2010.
Was the market surprised by any of these changes?
The announcement on goodwill in the Autumn Statement in
December last year was unexpected but has been accepted
without much comment or objection. A few years ago it would
have caused something of an uproar but tax advisers are now
more sanguine about such things.
This was followed up by the announcements in the March Budget.
The implication is that the current government is prepared to
continue with entrepreneurs’ relief as long as it does not cost
the Exchequer too much. Therefore as soon as any element of it
Business and Enterprise
becomes disproportionately expensive or appears to be being
abused in any way then a legislative change is to be expected.
It is possible that a new government could look to much more
significantly restrict or abolish entrepreneurs’ relief but even if
that does not happen then a ‘tweaking’ of the entrepreneurs’
relief rules is to be expected at each forthcoming Budget. Anyone
who appears to be pushing at the boundaries of the relief or
contriving arrangements can expect resistance by HMRC and
in view of Ministerial comment, a challenge under the GAAR is
foreseeable. We’ve been warned!
Of the changes included in FA 2015, which will have
the biggest impact?
This is difficult to say and the Red Book analysis on the impact
on future tax revenue suggests that the government doesn’t
really know. It really depends on the economy and the market for
business sales and development land transactions in future. The
goodwill restriction is probably likely to have a more widespread
application and concern more tax advisers but the amounts
on average are likely to be smaller. The business structuring
restrictions are aimed at arrangements that could be viewed as
more marketed schemes. However, the largest amounts in terms
of tax impact to the Exchequer are likely to be encountered on
the changes to the associated disposal rules.
It is important not to overlook that there is also an extension
to entrepreneurs’ relief in FA 2015 to allow it to apply to certain
deferred gains. This is a useful addition to the relief but the rules
on deferred gains are already complex and there have been
different rules since 2008 that can already result in confusing
outcomes. This is unlikely to have a big impact and will add to the
capital gains tax minefield aspect of deferred gains.
Do the changes damage the integrity of the relief?
This is an interesting question as if there are further restrictions in
forthcoming Budgets then the relief may become quite unwieldy
and arbitrary which in turn will make a wider reform (or abolition)
more likely. Specifically:
• The relief isn’t available on a transfer of goodwill on
incorporation but is available on the transfer of other assets,
such as land and buildings. This means that the tax planning
that is being targeted can still work as long as the right
combination of assets is in the business. Perhaps SDLT is
seen as a disincentive and in any case amortisation/capital
allowances are not available in the same way but the slightly
perverse outcome is that it now could suit the taxpayer for
goodwill to be inherent in a building. It does also highlight the
problem attitude of HMRC to goodwill more generally and the
lack of a clear definition in the new legislation doesn’t help.
to qualify for entrepreneurs’ relief. Despite badly drafted and
unclear legislation, Ministerial statement made clear that
there was not. So for a company a minimum interest of 5%
was required but not for a partnership. Now for a partnership,
entrepreneurs’ relief is still available on a disposal of less than
5% but the benefit of the associated disposal rules is only
available where the partnership disposal is at least 5%. It is hard
to reconcile the logic here.
• In a similar way, there is a mantra for entrepreneurs’ relief
as far as share disposals are concerned: 5% of the ordinary
shares and 5% of the votes. However, for associated disposals
involving a share disposal it is now also necessary to consider
whether the shares disposed of constitute 5% of the value as
well.
• The changes to the definition of joint venture companies for
entrepreneurs’ relief means that there are now different tests
for whether a company is a trading company for the purposes
of hold-over relief and substantial shareholdings exemption
than for entrepreneurs’ relief. A trap for the unwary if ever there
was one. So much for simplification!
Altogether, these changes make it vital that advisers go back to
the specific legislation and don’t make assumptions (which may
in fact be more logical than the actual rules).
What structures is the measure related to JVs aimed
at?
Where employee shareholders would otherwise have less than
5% of the share capital and votes in a company then it was
possible to use a management company to invest in the trading
company. As long as this held at least 10% of the shares in the
trading company then the shareholders in that management
company could in turn qualify if they held at least 5% of the
shares in that company. Not an easy arrangement to put in place
but now blocked.
Also, trading status for entrepreneurs’ relief cannot be achieved
by investing through partnerships (perhaps marketed by a
provider).
Both these changes reflect the view that anything that smacks of
a marketed tax scheme is unacceptable.
When do the changes take effect?
They are already in force–either from 3 December 2014 (the date
of the Autumn Statement) or Budget Day (18 March 2015). There
is no period of grace, so it is important to think about business
structures that are currently being advised on or that are already
in place.
Interviewed by Kate Beaumont.
• One of the issues back in 2008 was whether there was a
minimum disposal of a partnership interest required in order
Finance Act 2015 — Lexis®PSL Tax analysis
7
Business and Enterprise
Oil and gas
Ronan Lowney, managing associate at Bond Dickinson LLP, looks
at the changes to oil and gas provisions included in the Finance
Act 2015 (FA 2015) and says some welcome changes have been
made since the draft form of the legislation was published.
greater than expected, take effect from 1 January 2015 and
the new investment allowance, which can be set against the
supplementary charge, takes effect from 1 April 2015 on
expenditure from that date.
Were the oil and gas provisions included in FA 2015
and, if so, when do these provisions have effect
from?
Have any changes been made to the legislation since
the draft Finance Bill 2015 provisions published
in December 2014? If so, what changes have been
made (and why)?
As expected, there were substantial oil and gas provisions
included in FA 2015. These covered areas which had been
announced earlier in the Autumn Statement, but also included
further welcome provisions which obviously followed further
consideration of the sector. Certain provisions are treated
as having retroactive effect from 3 December 2014, when
introduced by the Autumn Statement. This includes the
extension of periods for which the ring fence expenditure
supplement is utilised from six to ten. This extension took
effect for periods which had commenced from 5 December
2013. The cluster area allowance also has effect on expenditure
from 3 December 2014. The rate reductions, which were
Yes, but as mentioned this has been positive. The reduction in
the rate of petroleum revenue tax from 50% to 35% is welcome,
as is the higher than expected reduction of supplementary
charge (instead of being reduced from 32% to 30%, it will now
be reduced to 20%). There has also been a fleshing out of
the provisions regarding the cluster area allowance. The main
principles of this were introduced from consultation conclusion
documents, but legislation is now in place.
The previous news analysis on this topic can be found here:
Unpicking the Finance Bill 2015–oil and gas.
Interviewed by Anne Bruce.
Capital gains tax and wasting assets
Andrew Roycroft, senior associate at Norton Rose Fulbright LLP,
examines the aspects of the Finance Act 2015 (FA 2015) which
concern capital gains tax on wasting assets, and the related
Henderskelfe case.
What, in brief, was the Henderskelfe case about and
what did the Court of Appeal decide?
In Revenue and Customs Comrs v Executors of Lord Howard
of Henderskelfe (deceased) [2014] EWCA Civ 278, [2014] STC
1100, the Court of Appeal had to decide whether a gain made on
the sale of a valuable painting qualified for the exemption from
capital gains tax for a disposal of tangible moveable property
which is a ‘wasting asset’. This exemption is in the Taxation of
Chargeable Gains Act 1992, s 45 (TCGA 1992). The Court of
Appeal agreed that this exemption applied, so that no capital
gains tax was due.
The painting in question was a valuable 225-year-old portrait by
Sir Joshua Reynolds, of a South Sea islander. It was sold for £9.4m
and, at first sight, the Court of Appeal’s decision might seem
surprising given that TCGA 1992, s 44(1)(a) defines a wasting
asset as an asset with a predictable life not exceeding 50 years.
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Finance Act 2015— Lexis®PSL Tax analysis
The issue at stake–was the portrait ‘plant’?
The reason why the Court of Appeal, and the Upper Tribunal
before it, decided that the gain was exempt from tax is TCGA
1992, s 44(1)(c). That provision states that:
‘plant and machinery shall in every case be regarded as having
a predictable life of less than 50 years’
and the arguments before the court centred around whether the
portrait was ‘plant’ in the hands of its owner.
The portrait had been owned by the executors of Lord Howard
of Henderskelfe since his death in 1984, and both they (and Lord
Howard before them) had permitted the portrait to be exhibited
at Castle Howard since 1952 (except for a short period when
it was exhibited in Paris, London and York). Significantly, that
activity–of opening part of Castle Howard to the public–was
carried on as a trade by a company, and Lord Howard (and, later,
his executors) made the portrait available to that company
for the purposes of its trade. This enabled the portrait to be
characterised as ‘plant’, because it was used for the promotion of
that trade.
HMRC’s main argument against this conclusion centred on
the fact that the company, rather than Lord Howard (or his
executors), carried on the trade in question. This was rejected by
Business and Enterprise
the Court of Appeal, who decided that the exemption does not
only apply to the person who is using the plant in its trade. It also
applies to a person who allows another to use the asset in that
other person’s trade.
HMRC also pointed to the absence of any formal lease or licence
of the portrait to the company (whose right to use the portrait
was terminable at will), arguing that this prevented the portrait
from having the requisite degree of permanence to be plant.
This was also rejected, on the ground that it is the asset–rather
than the trader’s interest in it–which has to pass the Yarmouth v
France (1887) 19 QBD 647 test of ‘permanence’.
What changes has FA 2015 made to this analysis?
FA 2015 has not abolished the CGT exemption for wasting assets.
Nor has it removed the rule which deems plant and machinery to
be a wasting asset, even if it has a predictable life of more than 50
years. This is not surprising, as both provisions provide protection
for HMRC against taxpayers claiming allowable losses, or reduced
capital gains, on the sale of tangible moveable property (a form of
property which more usually will depreciate in value, rather than
appreciate).
Instead, FA 2015, s 40 inserts new provisions (TCGA 1992, s
45(3A)-(3D)) which deny (or ‘disapply’, in the terminology of the
legislation) the exemption in cases where the asset in question
would not have been a wasting asset in the hands of the taxpayer
but for being used for the purposes of a trade, profession or
vocation carried on by another person.
To complicate matters further, there is an exception to this–
that is, the exemption can still apply–if the asset is plant used
for the purpose of leasing under a long funding lease. If so, the
exemption remains available on disposals during the term
of the lease, or on the deemed disposal (by the lessor) on
the termination of the lease. Allowing the exemption in such
circumstances supports the fiction that the lessee is the real
owner of the asset during the term of such a lease.
When do the changes take effect?
For capital gains tax purposes, this amendment takes effect for
disposals on or after 5 April 2015. As with other changes to capital
gains tax, such as the latest restrictions on entrepreneurs’ relief,
there is no protection for gains which accrued, but were not
realised, before the effective date.
As the exemption also applies to companies which dispose
of tangible moveable property which is a wasting asset, this
amendment also applies for corporation tax purposes. However,
this is effective from an earlier date–for disposals on or after 1
April 2015 (that is, from the beginning of financial year 2015).
Do you think that the government was right to be
concerned that taxpayers would take advantage of
the Henderskelfe judgment?
The capital gains tax legislation does generate a surprising
number of anomalies, of which this is just one. As was noted in
Briggs LJ’s judgment, the separate exemption for passenger
road vehicles allows classic cars to be disposed of free of capital
gains tax. Arguably the executors of Lord Howard were no less
deserving than the owners of such cars.
It is debateable how many other taxpayers might have been able
to avail themselves of this exemption by making appreciating
tangible moveable assets (not just paintings, but also some
antiques etc.) available to others to use in a trade–for example,
to display in corporate head offices. However, there is unlikely
to be much public sympathy for the owners of such assets, or
any arguments as to how little tax might be saved by further
complicating the capital gains legislation or the merits of
encouraging the public display of such assets (particularly as
the conditional exemption from inheritance tax encourages
the display of certain important assets). As Rimer LJ noted, in
response to the hypothetical question of whether the executors
should pay capital gains tax on this gain:
‘The reasonable man would ask: why not? If he had been skilful
enough to acquire an iconic picture...that he was later able to
sell for a price representing a gain, he would have to pay CGT.
Why should the executors be in a different position? ‘
Are the changes likely to affect anyone who wasn’t
planning a ruse based on the judgment?
There is no suggestion that this was a ‘ruse’; indeed, the
executors originally filed their tax return on the basis that the gain
was taxable. It was only subsequently that they filed an amended
return to (belatedly) claim the exemption.
As noted above, if the legislation had been left unchanged, it
might have encouraged the owners of valuable artworks and
antiques to make those assets available for display. Again, it is
difficult to view such activity as a ruse, although doubtless there
would have been some who might have been tempted to claim
the exemption for assets which are made accessible only to a
few.
On a more positive note, there are unlikely to be many taxpayers
who are inadvertently denied the exemption which (as noted
above) also performs the role of denying relief for losses on
depreciating assets.
Interviewed by Alex Heshmaty.
Finance Act 2015 — Lexis®PSL Tax analysis
9
Finance
Finance
Avoidance using carried-forward losses
Catherine Richardson, associate at Cadwalader, Wickersham &
Taft LLP, examines the aspects of the Finance Act 2015 (FA 2015)
which concern targeting avoidance using carried-forward losses.
What is the target for the new rule countering tax
avoidance involving carried-forward losses?
Where losses for tax purposes arise within a company within a
given year, such losses may be able to be offset against profits
from other activities or surrendered to another company
within the corporate group. When losses for tax purposes are
not utilised in the year in which such losses arose, the ability of
the company to utilise these losses going forward is generally
restricted to the company and the activity in relation to which
the losses arose. To this extent, the losses are ‘carried forward’.
As a result, current year losses are regarded as more flexible
and valuable than carried-forward losses. Arrangements have
therefore been devised which ‘refresh’ older carried-forward
losses into newer, in-year losses.
FA 2015 introduces new rules (at FA 2015, s 33 and Sch 3) aimed
at restricting the ability of companies to use tax-motivated
arrangements to ‘refresh’ carried-forward losses.
These new rules are intended to target contrived arrangements
rather than normal tax planning around mainly commercial
transactions.
HMRC’s Technical Note on the new rules, published on 18 March
2015, distinguishes between arrangements which utilise trapped
losses by either shifting profits around the group or changing the
timing of receipts and arrangements which go further by also
creating a new in-year loss in the group such that the carriedforward loss is a new and more versatile loss. It is only this latter
type of arrangement which is being targeted and, even then,
only when it is reasonable to assume that the value of the tax
advantage obtained will exceed any other economic benefits
referable to the arrangement.
It is interesting to note that the use of arrangements to utilise
‘trapped’ non-trade deficits was expressly included in the general
anti-abuse rule (GAAR) guidance as an example of a legitimate
arrangement which would fall short of the reach of the GAAR.
When did this rule come into effect?
Although FA 2015 received Royal Assent on 26 March 2015, the
new rules preventing the refreshing of corporate losses applies
for the purposes of calculating taxable profits of companies for
accounting periods beginning on or after 18 March 2015 (being
the date of the Chancellor of the Exchequer’s Budget speech)
but may apply in respect of arrangements entered into prior to
this date.
10
Finance Act 2015— Lexis®PSL Tax analysis
Profits arising within an accounting period which straddles 18
March 2015 will be allocated to a notional period beginning on
18 March 2015, apportioned on a time basis or other just and
reasonable basis.
How hard do you think this rule will be for companies
to monitor, given they need to consider what was
‘reasonable to assume’, whether securing a tax
advantage was a main purpose and comparing the
tax value of the arrangements against their non-tax
value?
The question of identifying whether the new rules will need
to be considered in greater detail should be somewhat
straightforward for companies to monitor as companies should
be able to easily identify when carried forward losses exist and
when consideration is being given as to how best to utilise such
carried forward losses. At the same time, the relatively novel
and highly subjective nature of the conditions to be satisfied
has the potential to become a time consuming and complicated
exercise. It is also worth noting that the ‘reasonable to assume’
test appears (albeit in a different context) in the new diverted
profits tax legislation which was also enacted in FA 2015.
Some comfort may be able to be taken from the fact that the
‘reasonable to assume’ condition is determined at the time when
the arrangement was entered into and accordingly should not
require the company to continue to monitor the relative tax and
non-tax values of the arrangements although determining the tax
and non-tax values will present its own challenges.
Could the impact of this rule be wider than
anticipated?
Most definitely. The risk of the rules being wider than intended is
likely to be a legitimate concern for corporation taxpayers and
their advisers. While it is not the intention of the government that
normal tax planning around commercial transactions should
fall within the scope of the new rules, the broad terms in which
the new rules are drafted and, specifically, the subjectivity
deployed in the conditions (as noted above) has the potential to
inadvertently capture legitimate tax planning and the utilisation
of carried-forward losses.
The new rules will also likely impact upon distressed restructuring
and reorganisation transactions where the utilisation of losses for
tax purposes is a significant factor in commercial negotiations.
The new rules will not only need to be considered by companies
in the context of their own tax planning and structuring but also,
for example, in the context of M&A tax indemnities in relation to
the circumstances in which carried-forward losses have been
utilised historically.
Finance
If the rule applies, what happens to the carriedforward losses?
How do these rules interact with the new rules
restricting carry-forward loss relief for banks?
If all the necessary conditions for the carried-forward loss refresh
prevention rules to apply are satisfied, the company to which
the profits arose as a result of the arrangement will be denied a
deduction against those profits for any amount in respect of the
relevant carried-forward losses. It is significant that this is a denial
of the deduction in whole rather than allowing any apportionment
or deduction on a ‘to the extent’ basis but is arguably consistent
with the policy intentions and motivations behind the new rules.
FA 2015 also includes new rules which seek to restrict to 50%
of taxable profits the extent to which carried-forward losses
can be utilised by banks and building societies (FA 2015, s 32
and Sch 2). These restrictions on banks and building societies
will take precedence over the restrictions on the refreshing of
carried-forward losses for corporation tax purposes. This is the
case as one of the tests to be satisfied in determining whether
the offsetting of corporation tax carried-forward losses will be
denied requires that the tax arrangements are not arrangements
in respect of which a deduction would be denied by virtue of the
limitation imposed on banks and building societies.
It is, though, worth noting that although the rules prevent a
deduction against the relevant profits arising as a result of the
arrangements, the carried-forward losses are not lost altogether
and may still be available to be used in accordance with the
normal rules for their use against profits not arising as a result of
the arrangements.
Interviewed by Alex Heshmaty.
Corporate debt provisions deferred
Lexis®PSL Tax looks at the reasons for these changes being left
out of the (first) Finance Act 2015 (FA 2015), and the prospects
for their revival after the general election.
What is the background to this measure?
The rules on the taxation of corporate debt (loan relationships)
were originally introduced in 1996, and the derivative contract
rules in 2002. Since their introduction there have been significant
changes in accounting practice, in addition to which the rules
have been amended from time to time, for instance to address
particular avoidance schemes. As a result the regimes have
grown more complex and piecemeal and were both much in need
of an update.
At Budget 2013, the government announced a review of the
corporate debt and derivative contracts rules with the intention
of making them simpler, clearer and more resistant to tax
avoidance. A technical consultation followed, and draft legislation
was published in December 2014 as part of the suite of measures
to be included in Finance Bill 2015. The new rules were intended
to take effect for accounting periods starting on or after 1 January
2016. The proposed changes were not, however, included in
Finance Bill 2015 and so do not form part of FA 2015.
What changes were proposed?
Some of the more significant proposed changes were:
• a general relief for corporate rescues, to ensure that tax
charges do not arise where debt of a borrower in financial
distress is restructured or released
• tying the measure of taxable profit and loss more closely
to items appearing in the income statement, thereby
strengthening the general principle that the tax should follow
the accounts
• a targeted anti-avoidance rule that is applicable specifically to,
but across the whole of, the loan relationships and derivative
contracts regimes, and
• changes to the rules on connected party debt to ensure that
the tax result follows the accounting result in more cases
Why did these provisions not make it into FA 2015?
By the time of the Budget on 18 March 2015, there were only 12
days left before parliament was due to be dissolved ahead of
the general election, and only five of these were days on which
parliament would be sitting. Given the necessity to pass the
Finance Bill before parliament was dissolved, the government
had to reduce the size of the Bill in order to get it through the
‘wash up’ (the process for expediting any legislation still in
progress at the end of a parliament). In the event the House of
Commons had just one day in which to consider Finance Bill 2015
(on Wednesday 25 March 2015).
The legislation modernising the corporate debt and derivatives
contracts rules was long, technical and probably not perceived
to be urgent. It was therefore a prime candidate to be dropped in
the interests of passing the Bill in time. There were no published
comments suggesting that there was an ulterior motive or change
of heart by the government in choosing not to include these
measures at this time.
Finance Act 2015 — Lexis®PSL Tax analysis
11
Finance
A measure that did survive the cull was the repeal of the ‘late
paid interest’ rule as it applied to loans made to a UK company
by a connected company in a non-qualifying territory. This was
enacted as FA 2015, s 25 and took effect from 3 December 2014
in respect of loans made on or after that date.
Will businesses be pleased or displeased at the
omission?
That probably depends on how the business in question would
be affected by the changes, for instance whether they were
nervous about the scope and application of the new regimewide anti-avoidance rule, or keen on the new corporate rescue
provisions. In general businesses will dislike the uncertainty of not
knowing when or whether the changes will be made.
What are the prospects for these measures being
legislated later in 2015?
At Budget 2015 the current government restated its intention
to include the changes in a future Finance Bill. If the balance
of power in the new government following the election is
unchanged, it would be reasonable to expect the legislation
to feature in a post-election Finance Bill, although it is unclear
whether the start date of 1 January 2016 would remain.
If there is a different government, any prediction would be pure
speculation, although given the technical nature of the changes
the outcome is likely to depend more on legislative priorities than
ideology.
The previous news analysis on this topic, published on 14 January
2015, can be found here: Unpicking the Finance Bill 2015–
modernising corporate debt and derivatives.
Disguised investment management fees
Laura Charkin and Stephen Pevsner, partners at King & Wood
Mallesons, discuss the Finance Act 2015 (FA 2015) measures
concerning disguised investment management fees.
Were provisions to deal with disguised investment
management fees included in FA 2015 and, if so,
when do these provisions have effect from? Are
there any provisions for the interim period?
Provisions dealing with disguised investment management fees
were included in FA 2015; these have been significantly modified
from the original consultation draft that came out following the
Autumn Statement in December. HMRC has also published a
Technical Note providing guidance on the rules and clarifying
some points of interpretation and practical application. There
is no grandfathering of existing arrangements which give rise to
disguised fee income and the new rules will apply to all relevant
sums arising on or after 6 April 2015, irrespective of when the
arrangements were put in place. Consequently, the effect on all
existing arrangements will have to be considered.
What changes have been made to the legislation
since the draft Finance Bill 2015 provisions were
published in December 2014?
A number of key changes have been made to the draft legislation,
along with other changes, tidying up various points and adding
further points of detail. In terms of the ‘big picture’ however, the
key changes broadly fall into three categories (set out below) and
are all aimed at making the legislation work in the way that was
originally intended. They address practical problems raised on
the original drafting as part of the wide consultation process that
HMRC undertook.
12
Finance Act 2015— Lexis®PSL Tax analysis
Refinement of exclusions
The legislation has retained its broad ‘catch all’ approach of
defining ‘disguised fee income’ as everything arising from the
provision of investment management services which is not
otherwise subject to tax as employment income or trading
income (the ‘if it’s not out it’s in’ approach) and then relying on
specific exclusions for amounts arising from ‘carried interest’
and executive investment interests in funds which are not within
the scope of the rules. Significant changes have been made to
both of these exclusions so that they better reflect the wide
range of ‘normal’ carried interest and management investment
arrangements seen in funds operating across different asset
classes. In particular, the original definition of carried interest,
requiring a 6% preferred return for external investors before any
carried interest is payable, remains as a ‘safe harbour’ but there
is also now a more flexible alternative and generic ‘profit related
return’ test. This new test should include most commerciallynegotiated carried interest arrangements which only make
payments if the fund in question generates profits. Where part
of a carried interest return is ‘profit related’ and some is not, only
the part which is not is subject to the rules and taxed as trading
income.
In terms of executives’ investment in funds, this now deals
appropriately with returns from self-funded investments which
are broadly on similar terms to those of third party investors.
Where executive investments are leveraged, the position remains
less clear and the ultimate result will depend on the facts in each
case, which will need to be considered carefully. In contrast to
carried interest, if an executive investment arrangement does
not fall within the terms of the exclusion (or of that for carried
interest) then all of the sums arising from it–other than the
Finance
repayment of the investment made by the executive–are treated
as disguised fee income and taxed as trading income.
Investment trusts
New provisions have been added to ensure that the rules also
apply in relation to management of investment trusts in addition
to collective investment schemes, although there is still a
requirement for at least one partnership (including a limited
liability partnership) to be involved in the arrangements under
which the disguised fee income is paid.
Jurisdictional scope
The rules still apply to both UK residents and non-residents,
but now amounts are treated as deriving from a trade in the UK
(so subject to UK tax for everyone) to the extent the relevant
investment management services are performed in the UK,
and as deriving from a trade outside the UK (so subject to tax
only for UK residents) to the extent the services are performed
outside the UK. In practical terms, this means that the permanent
establishment article in a number of the UK’s double tax treaties
is expected to mitigate these tax charges for some non-UK
residents.
The previous news analysis on this topic can be found here:
Unpicking the Finance Bill 2015–disguised investment
management fees.
Interviewed by Julian Sayarer.
Withholding tax exemption
Lexis®PSL Tax explains the changes made to the primary
legislation concerning the qualifying private placement security
exemption.
Have any changes been made to the legislation
since the draft Finance Bill 2015 provisions were
published in December 2014? If so, what changes
have been made and why?
The Finance Bill 2015 received Royal Assent on 26 March 2015
and became the Finance Act 2015 (FA 2015).
FA 2015 includes the exemption from the duty to deduct tax from
interest on qualifying private placements which had originally
been included in the draft Finance Bill last December, but with
a few changes. The exemption is found at FA 2015, s 23 which
inserts a new section, s 888A, into the Income Tax Act 2007 (ITA
2007).
Removing the three-year minimum term of the qualifying private
placement security was the only substantial change made to the
primary legislation, ie the new ITA 2007, s 888A. This condition,
which had been included in sub-section (4) (and had been known
as Condition B) in the December draft, was removed following a
consultation that closed on 27 February 2015. The other changes
were minor and mostly involved reorganising the text, such as
the deletion of sub-sections (3) and (5) (that were known as
Conditions A and C respectively) that had been included in the
December draft, which are now found in sub-section (2) of ITA
2007, s 888A, although the drafting has been revised slightly.
It is important to keep in mind that the exemption is not
yet available to use. It will only take effect from a date to be
determined by regulations. Those regulations have not yet
been made. Since a general election is coming up in May, it is
also possible that no such regulations will be made by the next
government. At the Labour Party conference in 2014, Ed Balls
mentioned that a Labour government would stop companies
from using the quoted eurobond exemption to pay interest out
of the UK on a tax-free basis. The quoted eurobond exemption
currently applies to exempt interest on any security that is listed
on a recognised stock exchange from the duty to deduct UK
income tax. The qualifying private placement exemption was
brought in to provide a similar withholding tax exemption for
unlisted securities. There is therefore a risk that if whoever comes
into power in May does not like the quoted eurobond exemption,
the qualifying private placement exemption may not be switched
on.
Even if the exemption is given effect by regulations, ITA 2007, s
888A also enables the Treasury to make regulations to restrict
or specify further conditions that must be met for the qualifying
private placement exemption to apply. There is, strictly, nothing
preventing the three-year minimum term from creeping back in
via further regulations.
The previous news analysis on this topic, published on 19
December 2015, is available in full below.
Unpicking the Finance Bill 2015–withholding tax
exception
With a new withholding tax exception for interest on qualifying
private placements to be introduced after Royal Assent of the
Finance Bill 2015, Deepesh Upadhyay, a senior associate in
Evershed’s London tax team, examines the draft legislation
Finance Act 2015 — Lexis®PSL Tax analysis
13
Finance
for the new exception and the government’s proposals for
regulations to restrict its scope.
HMRC invites comments on its proposals for the regulations until
27 February 2015.
What does the draft legislation propose?
What is the purpose behind the new exception?
Borrowers, including issuers of debt securities, are required to
deduct a sum representing UK income tax (currently at a rate
of 20%) from payments of UK source yearly interest made to
lenders and investors. Although there are currently a number
of exceptions from this duty to deduct UK tax, the draft clause
proposes to introduce a new targeted withholding tax exception
for interest payable on qualifying privately placed debt (a form of
long term unlisted debt).
The new exception is designed to unlock a new source of
financing for mid-sized UK companies and for infrastructure
projects. It is hoped the withholding tax exception will remove
an obstacle to the development of the UK private placement
market by removing UK withholding tax as a potential cost of
raising finance and also removing some of the administrative
aspects related to withholding tax (such as double tax treaty
relief applications). The new exception also offers issuers an
alternative to issuing listed debt (ie ‘Quoted Eurobonds’) in
circumstances where listing debt on a stock exchange is not a
feasible option for them.
The statutory conditions as currently drafted
seem simple and straightforward. What further
conditions are likely to be introduced by way of
regulations?
Who do you think will benefit from the exception?
The draft clause turns on the meaning of a ‘qualifying private
placement’ since interest on such a placement will not suffer
UK withholding tax. According to the draft clause, a security is
a qualifying private placement if, broadly, it is an unlisted debt
security issued by a company for a minimum of three years.
Having an active and more developed UK private placement
market will benefit both issuers and potential investors, so this
exception is helpful to both. However, the devil will be in the detail
of which issuers and investors will be able to benefit from this
exception.
The draft clause, however, enables HM Treasury to add further
conditions, by way of regulations, to the meaning of a ‘qualifying
private placement’. HMRC issued a technical note on 10
December 2014 which sets out a number of further conditions
and areas they would like to cover in the regulations, including:
As already noted, the proposed regulations currently seek to
restrict the exception to issuers that are trading companies and
that issue a minimum of £10m of qualifying debt and a maximum
of £300m of such debt.
• the type of issuer and investor that can rely on this exception
• the type of privately placed debt which falls within the scope of
this exception, and
• safeguards to prevent the exception being abused
If HMRC’s proposed additional conditions were to be adopted:
• the issuer would have to be a trading company
• the investor could not be connected to the issuer and would
need to be a qualifying UK regulated financial institution or
equivalent non-UK entity that would need to certify that it
meets the investor conditions on acquisition of the relevant
unlisted debt security and at specified intervals thereafter, and
• the exception would only apply to interest on plain vanilla
unlisted debt securities denominated at or above £100,000
provided they are held for genuine commercial reasons
The proposed regulations also contain a number of restrictions
in respect of the type of investor that can qualify under the
exception. For example, at present it is proposed that only UKregulated financial institutions or equivalent non-UK entities
located in a jurisdiction which has a relevant double tax treaty
with the UK (and who are unconnected to the issuer) should
benefit from this exception.
The Investment Management Association has welcomed the
proposals and have stated that a number of their members
(including Allianz Global Investors, Aviva, Friends Life, Legal
& General, Prudential and Standard Life) intend to make
investments of around £9bn in private placements.
When will this exception take effect?
The government intends to introduce the new withholding tax
exception in Finance Bill 2015. The new legislation will take effect
after the date of Royal Assent to the Finance Bill 2015.
Interviewed by Julian Sayarer.
14
Finance Act 2015— Lexis®PSL Tax analysis
Employment Taxes
Employment Taxes
Employee benefits and expenses
Karen Cooper, partner in Osborne Clarke’s tax team and head of
the firm’s employee incentives practice, looks at the Finance Act
2015 (FA 2015) in relation to employee benefits and expenses.
Were the employee benefits and expenses
provisions included in FA 2015 and, if so, when do
these provisions take effect?
FA 2015 contains provisions which implement some (but
not all) of the measures recommended by the Office of Tax
Simplification and announced at Autumn Statement 2014 in
relation to employee benefits and expenses.
These include:
Reimbursed expenses exemption/the abolition of the
dispensation regime (FA 2015, ss 11 and 12)
FA 2015 introduces a new reimbursed expenses exemption,
which will replace the current expenses dispensation regime
from the beginning of the tax year 2016-17.
A new exemption for paid or reimbursed expenses (see Chapter
7A of Part 4 of the Income Tax (Earnings and Pensions) Act
2003 (ITEPA 2003)) is to be introduced and ITEPA 2003 will be
amended to remove s 65 (dispensations relating to benefits for
certain employees) and s 96 (dispensations relating to vouchers
or credit tokens).
The new exemption for reimbursed expenses will not be available
if used in conjunction with salary sacrifice arrangements.
Abolition of the £8,500 threshold for benefits in kind (FA 2015, s
13)
At Autumn Statement 2014, the government announced that it
would abolish the threshold for the taxation of benefits in kind for
employees earning less than £8,500, with action to mitigate the
effects on any vulnerable groups disadvantaged by the reforms.
The general exclusion of lower paid employees (earning less
than £8,500 per year) from the benefits code is removed by FA
2015. Specific exemptions are retained for certain cases such as
lower-paid ministers of religion and in respect of board or lodging
provided to certain carers. These amendments take effect from
the tax year 2016-17 onwards.
Collection of income tax on benefits in kind in real time PAYE
(payrolling) (FA 2015, s 17)
FA 2015 contains provisions which give HMRC the power to
introduce a system of voluntary payrolling of benefits in kind from
the tax year 2016-17 onwards.
ITEPA 2003, s 684 is amended to extend the list specified by the
Income Tax (Pay As You Earn) Regulations 2003, SI 2003/2682
to allow deductions in respect of specified benefits in kind from
payments made of PAYE income of an employee. We understand
that initially this will cover benefits such as car and car fuel,
private medical insurance and subscriptions. Regulations
governing voluntary payrolling will be consulted on during
summer 2015.
However, FA 2015 does not contain the statutory exemption for
trivial benefits in kind which was due to come in on 6 April 2015–
this was a surprising omission.
Why was this measure not included in FA 2015? Do
you think it will be included in a future Finance Bill
this year?
The government announced at Autumn Statement 2014 that
it would introduce a statutory trivial benefits exemption of up
to £50 for benefits in kind from 6 April 2015. The Budget 2015
papers confirmed that the government would provide such an
exemption, with the inclusion of an annual cap relating to office
holders of close companies.
However, somewhat surprisingly, this measure was not included
in FA 2015.
HMRC has indicated that, as part of the parliamentary process, it
was decided not to include the new exemption for trivial benefits
in kind in Finance Bill 2015 and instead will legislate in a future
Finance Bill.
Accordingly, we would expect these measures to be included in a
future Finance Bill, but it is not yet clear when this will be.
The previous news analysis on this topic can be found here:
Unpicking the Finance Bill 2015–employee benefits and
expenses.
With more than a decade’s experience advising clients on the
design, implementation and communication of a broad range
of employee benefits and share schemes, Karen’s work includes
advising on tax-efficient structures and corporate governance.
She has authored articles and chapters in key industry
publications on subjects such as directors’ remuneration and
employee share schemes, and is a regular speaker at industry
conferences.
Interviewed by Kate Beaumont.
Finance Act 2015 — Lexis®PSL Tax analysis
15
Real Estate Taxes
Real Estate Taxes
ATED
Stephen Hemmings, corporate tax director at Menzies, explains
it is not surprising to see largely unchanged annual tax on
enveloped dwellings (ATED) provisions in the Finance Act 2015
(FA 2015).
Were the ATED provisions included in FA 2015 and, if
so, when do these provisions have effect from? Are
there any provisions for the interim period?
The Finance Bill 2015 received Royal Assent on 26 March 2015
and became FA 2015.
FA 2015 carries the ATED provisions which had originally been
included in the draft Finance Bill last December, and are effective
from 1 April 2015. As expected, no changes were made from the
previous draft in respect of ATED.
Interviewed by Julian Sayarer.
The previous news analysis on this topic, published on 19
December 2015, is available in full below.
Unpicking the Finance Bill 2015–ATED
Stephen Hemmings, corporate tax director at Menzies, examines
what the Autumn Statement and subsequent draft Finance Bill
2015 legislation have in store for the Annual Tax on Enveloped
Dwellings (ATED).
What was announced at Autumn Statement in
relation to ATED?
The Autumn Statement brought two announcements in relation
to ATED:
• an expected change to the annual compliance requirements,
and
• an unexpected increase in rates for entities paying ATED on
properties worth more than £2m
Compliance requirements
The government announced plans to simplify the administrative
burden created by ATED. For entities which qualify for a relief
from the annual charge, there will be changes to their filing
obligations and information requirements with effect from 1
April 2015. Such changes were expected following a government
consultation in the summer. It is believed an additional 36,000
taxpayers will fall into the regime as a result of the changes to
reduce the threshold from £2m to £500,000 by 1 April 2016. The
government acknowledged it would need to do something in
respect of how the regime is administered–both to reduce the
administrative burden for entities qualifying for a relief but still
16
Finance Act 2015— Lexis®PSL Tax analysis
subject to a filing obligation, and also reduce the work of its own
compliance department.
The result is something called a ‘relief declaration return’, which
will be less detailed than the existing ATED return and need only
be filed once each year, provided additional properties falling into
ATED in the year also qualify for the same relief.
Rate increases
The second announcement was that the annual ATED charges
will rise by 50% above inflation for residential properties worth
more than £2m for the chargeable period from 1 April 2015. As a
consequence, an entity paying ATED with a value of above £2m
and up to £5m will pay an annual charge of £23,350. At the very
highest end, properties worth more than £20m will be subject
to an annual charge of £218,200. Coupled with the increase of
the highest standard rate of stamp duty land tax (SDLT) to 12%
(previously 7%), it was not a good day for a number of taxpayers
owning or buying high-end residential property.
What impact do you think the increase in ATED rates
will have and do you think this is ‘fair’?
When the government first introduced the ATED regime, their
stated intention was that the new rules would act as a deterrent
to prevent people continuing to hold residential property in
corporate structures for non-commercial reasons. Published
Treasury figures since ATED was brought in show the regime has
generated around five times as much revenue as was originally
anticipated. Such statistics indicate that the stated intention has
not been achieved and that, to date, taxpayers have accepted
the payment of the charge as a preferred alternative to deenveloping.
It is yet to be seen what effect the rate increase will have on
high-end residential property owners. What is clear is that the
increase is relatively significant. The annual rate for properties
valued up to £5m has increased from £15,400 to £23,350, and at
the highest level the rate on £20m properties from £143,750 to
£218,200. This may still not be enough to encourage significant
amounts of existing structures to de-envelope their property.
However, transferring a property into such a structure, now and
in future, will become even less desirable. Having said that, it may
be that the new 12% SDLT charge on non-enveloped high-value
residential property, coupled with a potential future mansion tax,
may mean that holding high-value UK residential property in any
way is highly taxed, and that, overall, the ATED regime does not
put entities in a materially worse position.
The government stated in its explanatory note that this increase
in rates is to ensure entities holding UK residential property
Real Estate Taxes
‘pay a fair share of tax’. This is obviously a highly subjective
and emotive point, especially with a forthcoming election, and
the average person will be welcoming a reduction in SDLT on a
future purchase of their home rather than worrying about this
additional tax on very high-end property. However, the idea that
this rate hike is ‘fair’ is definitely one which is open to challenge.
HMRC also confirmed it is in the process of developing a ‘more
robust’ online filing/payment system which should also assist
the compliance process. Several concerns were raised in the
consultation about the current system. These included such
things as inability to save the return prior to submission, and lack
of acknowledgment of receipt of a return/and or payment.
The original rates were brought in to penalise entities holding
relevant property, and there is no real justification to further
increase this above consumer price index (CPI). It is also well
documented that property is often held in corporate structures
for non-tax related reasons–one key reason being anonymity.
In such circumstances, and where no other tax benefit is being
obtained from holding property in such a structure, it would not
seem fair that such a high and recurring rate be applied for just
holding the property.
This simplification should definitely reduce the compliance
burden, both for entities currently within the regime as well as
those who will fall in shortly. That said, the reforms have not
gone as far as some people would have liked. The previously
mentioned consideration of an exemption status was one that
was generally supported by businesses during the consultation
and this would have helped businesses further–both because it
would not have required an annual filing and also as it would have
covered all reliefs. The current proposals are slightly strange in
that if one property in the company qualifies for property trader
relief, one for property developer relief and one for property
rental relief an entity would still be required to file three annual
returns.
How does the draft legislation deal with simplifying
the administration of ATED for businesses that hold
properties eligible for relief from ATED? Do you think
these provisions go far enough?
There was some concern that, following the previously
announced reduction in regime thresholds to £500,000, a
large number of commercial entities would fall into the regime
for the first time. The legislation was never intended to penalise
commercial businesses and so relief from the related charges
was available, but the entities were still subject to a fairly onerous
compliance regime.
A classic example would be a residential property developer who
potentially would be required to file numerous returns each year
as relevant property fell into (and out of) the regime.
HMRC released a consultation document which suggested
two alternative proposals to simplify the compliance burden
of ATED for such entities. The first involved allowing exempt
taxpayers to apply for an approved status, removing an annual
filing obligation. This would then be reviewed on a periodic basis.
The second required a filing of a return on 30 April with just one
amended return at year end, to include all additional reportable
property during the year.
Following consultation, the government came up with a plan
which it believes combines the best elements of these two
options.
‘Relief declaration returns’ can be filed on an annual basis by any
entity eligible for an ATED relief. This return will not require any
further details in respect of the individual properties qualifying
for the relief. This one return will also cover any additional
properties within the entity falling into the regime in the financial
year in which the return is filed, but eligible for the same relief. For
the financial year commencing 1 April 2015 there is also a one off
relaxation on the filing date, which is pushed back to 1 October
2015 (rather than the usual 30 April).
What is the effect of the provisions regarding
changes to the taxable value?
Proposals have been made to correct one unintended
consequence of the existing legislation. This is in respect of
the five-yearly valuation dates and how they are applied to the
regime. The proposals insert a further clause so that the fiveyear valuation dates apply to the next five chargeable periods
beginning the following 1 April. As the legislation currently exists,
if a property falls within ATED, following a revaluation on 1 April
2017, the entity would be required to file a return for that financial
year and pay any related tax charge by 30 April 2017. These
changes will mean that the entity will now first have to file a return
for the chargeable period beginning 1 April 2018, giving just over a
year for the entity a year to value their property at 1 April 2017 and
then submit a return.
This change will be welcomed by relevant entities which may
not have even been aware of the requirement. On the basis that
HMRC has actively been applying penalties for late filings to date,
it could significantly reduce the amount of entities subject to the
penalty regime in 2017 when further entities fall into the regime
because of the valuations.
What is the effect of the provisions regarding
changes to interests held by connected persons?
The ATED rules contain provisions which act to aggregate the
value of interests where the relevant property is held together
by connected persons. Currently, there is an exemption from the
aggregation rules where the connected person is an individual
and the company’s interest is valued at £500,000 or less. Going
forward, the threshold for this exemption will be reduced to
£250,000. The reduction in the threshold for this exemption
follows the falling value in the ATED bandings.
Finance Act 2015 — Lexis®PSL Tax analysis
17
Real Estate Taxes
Do you think the proposed amendments to the
ATED regime will achieve its aim of ensuring fairness
of tax on residential property?
The ATED regime on its own cannot itself ensure the fairness of
tax on residential property–there are many other contributing
aspects to the property tax regime as a whole, and many
arguments as to its overall merits.
Looking specifically at ATED, this was originally brought in to
target situations where offshore entities were being used to avoid
liability to UK stamp taxes on the transfer of properties. This was
a hot topic in the media following a number of high profile cases
at the time, not least surrounding the acquisition structuring of
a number of properties in the One Hyde Park development in
Central London. There is an obvious argument that it was not
fair that someone purchasing a property directly should be
paying the highest rate of SDLT on a property purchase while
an individual buying an offshore company holding the property
would not be subject to any UK stamp taxes–the ATED rules
aimed to correct this.
However, it is clear since the rules have been brought in that a
great number of entities are not holding UK residential property
for these purposes–it can be argued, therefore, that they
have become collateral victims of the rules. The government
would argue that they should de-envelope, but this in itself is
often an expensive process. Disposal taxes may apply within
the structure, as well as associated tax and SDLT charges for
the investor (depending on how the property is transferred to
them). There can also be negative IHT implications for non-UK
domiciles.
In respect of the new provisions:
• the rate hike for relevant properties above £2m does appear to
be an unashamed attempt to raise additional taxes, there is no
real explanation for this increase above CPI, and
• the compliance simplification should improve a regime which
seems to have been hastily introduced without significant
practical consideration–arguably, the detail and time spent in
improving the compliance aspects is both a sign that initially
the rules were imposed as a deterrent rather than as an
ongoing tax regime, and also, conversely, that the government
now has long term plans for the regime and perhaps even plans
for its reach to expand further in future years
Some may contend the ATED rates increase–combined with
the new proposals to tax all non-residents holding residential
property–will discourage international investors from investing in
high level UK residential property and that this will have a knockon effect on the UK residential property market (particularly in
London and the South East). At this high level, I am not sure these
changes will necessarily impact on buying behaviour with other
considerations such as political and worldwide economic factors
often being key. It may be that these changes become a further
contributing factor to the already cooling London property
market. If this is the case, ultimately there will be few who think
this a bad thing, and this will certainly not be of concern to the
majority of UK voters whom the government will be hoping votes
for them in 2015.
Interviewed by Julian Sayarer.
CGT on disposals of UK residential property interests by
non-residents
James Dudbridge, associate at Burges Salmon, says CGT
provisions included in the Finance Act 2015 (FA 2015) are much
the same as when the draft form of the legislation was published
in December 2014.
Have any changes been made to the legislation since
the draft Finance Bill 2015 provisions published
in December 2014? If so, what changes have been
made (and why)?
Were the CGT provisions included in FA 2015 and, if
so, when do these provisions have effect from?
The new CGT provisions have been published in largely
unamended form, so there has been little in the way of last
minute surprises for practitioners (and non-residents) to
contend with.
The provisions published in the draft Finance Bill on 10 December
2014 extending the scope of CGT to non-residents on the sale of
UK residential property have been included in FA 2015.
18
Finance Act 2015— Lexis®PSL Tax analysis
One esoteric point of difference from the draft provisions in
the Finance Bill relates to the application of principal private
residence relief (PPR). Under the new PPR regime, individuals will
only be able to elect for the relief to apply to a specific property
if they spend 90 nights during the tax year in the property
in question or if they are tax resident in the country in which
the property is located. This latter test raises the problem of
what constitutes tax residence in countries other than the UK,
Real Estate Taxes
especially where a country has no equivalent concept. In their
wisdom, the legislature decided that in such circumstances the
UK statutory residence test should be applied in reverse, as if
references in the test to the UK were references to the relevant
overseas territory. This amendment is not likely to affect many
clients, but it should be an issue practitioners are aware of,
particularly if their dual resident clients’ overseas properties are
standing at a large gain!
Those who are likely to be affected by the new CGT charge and
who intend to retain their UK property interests would be well
advised to obtain a valuation of their properties as at 5 April
2015. This will ensure that any future gain can be calculated with
certainty and, perhaps more importantly, an informed decision
can be made as to how the gain is calculated in light of the three
different options provided for in the legislation.
The previous news analysis on this topic is available in full below.
Unpicking the Finance Bill 2015–CGT on disposals of
UK residential property interests by non-residents
How will the changes to capital gains tax (CGT) on disposals of
residential property play out in practice? James Dudbridge of
Burges Salmon assesses the draft legislation for the Finance Bill
2015.
What does the draft legislation propose?
The new legislation extends the scope of CGT to non-UK
residents on the sale of UK residential property. The charge will
apply to all UK residential properties regardless of value, so there
will be no tie-in with the annual tax on enveloped dwellings (ATED)
thresholds. Tax rates for non-residents are in line with their UK
equivalents, so non-resident individuals will suffer tax at 18% or
28% (depending on the individual’s tax position for that year),
while non-resident companies and trustees will be subject to
rates of 20% and 28% respectively.
Importantly, in conjunction with the extended CGT regime, the
government has restricted the availability of principal private
residence relief. To qualify, individuals will now need to be either
tax resident in the country where the property is located, or
spend a minimum of 90 days in the property during the tax year.
Helpfully, days spent by a spouse or civil partner in a property are
included for the purposes of the latter test.
Is the scope of the CGT charge clear?
Most elements of the new regime are clear. The new charge will
apply from 6 April 2015, but only future gains will be caught so
any affected properties will be effectively rebased on that date.
However, a taxpayer may elect for the gain to be calculated on a
time apportionment basis, if it is preferable to do so.
The charge covers properties ‘suitable for use as a dwelling’ as
well as properties in the process of being constructed or adapted
for use as a dwelling (including in both cases any garden or
grounds), although building land where construction has not
commenced is not included.
The new regime will affect all non-resident individuals, as well
as non-resident trustees of all forms of trusts and personal
representatives of non-resident deceased persons. Partnerships
will be treated as transparent, so non-resident partners will be
personally liable to pay the tax. Non-UK resident institutional
investors that are diversely owned and companies that are not
controlled by five or fewer persons will, however, be exempt from
the charge. Whether another ‘close company’ type definition is
helpful is certainly a matter for debate.
The new regime will inevitably overlap to some extent with the
ATED-related CGT regime. In such cases, ATED-related CGT will
take precedence. Existing anti-avoidance rules for trusts and
companies also remain in place and may override 2015 rebasing.
Will non-UK charities be affected by the charge?
The draft legislation includes no specific mention of charities. It
is therefore expected that the normal charitable rules will apply–
namely that those non-UK charities which satisfy the definition
of a charity in the Finance Act 2010 would be exempt from CGT,
provided the proceeds are used for general charitable purposes.
This is a complex area, so any non-UK charities which are likely to
be affected should ensure that they are confident of their status.
Are there any surprises in the draft legislation?
The government took on board most of the issues raised during
the consultation period, although the continued existence of
ATED-related CGT, while perhaps not a surprise, does constitute
a minor gripe.
How do you think the structuring of UK residential
property ownership will be affected by the CGT
charge?
We are unlikely to see wholesale restructurings due to the new
charge, but much will depend on the facts of each specific case.
The lower rate of CGT and potential inheritance tax benefits of
corporates may, for certain cases, enhance the attraction of
corporate holding structures–although the annual ATED charge,
where it bites, will continue to be an important factor.
Do you have any concerns about how the CGT
charge will apply in practice?
The overlap of ATED with the extended CGT regime is
unfortunate. Most practitioners had argued during the
consultation phase for ATED-related CGT to be abolished, with
the new CGT regime effectively taking its place. However, the UK
Finance Act 2015 — Lexis®PSL Tax analysis
19
Tax Avoidance and Evasion
Tax Avoidance and Evasion
government seems intent on holding on to ATED-related CGT,
so some potentially complex calculations may be in order where
both regimes apply.
There is also the issue of compliance when dealing with nonresidents. Under the new regime, a non-resident will need to
notify HMRC of a relevant disposal within 30 days. If the seller is
already within the UK tax system, then the tax will be collected via
their self-assessment, otherwise the seller will be required to pay
the total CGT charge within 30 days of the disposal. This is fine
in theory, but in some instances the enforcement of the regime
against a non-resident with few connections to the UK could
potentially prove a difficult and time consuming exercise.
When will the CGT charge take effect?
The charge will apply from 6 April 2015.
Interviewed by Anne Bruce.
What more does HMRC need to do to tackle avoidance?
Lexis®PSL Tax looks at the anti-avoidance provisions that were,
and were not, in the Finance Act 2015 (FA 2015).
Why were the direct recovery of debt (DRD) rules
not included in FA 2015?
The DRD rules appear to have been one of the casualties of the
process whereby the government had to shorten the Finance
Bill 2015 so that it could be enacted before the dissolution of
parliament ahead of the general election.
What was the background to the DRD proposals and
are they likely to be in a future Finance Act?
The intention of the DRD rules is to empower HMRC to take tax,
and tax credit, debts directly from taxpayers’ bank accounts
where those accounts are in credit, without the need for judicial
approval. The original proposal was heavily criticised, and in
response HMRC proposed that the rules would be subject to
increased safeguards. This included a requirement for HMRC to
hold a face-to-face meeting with the taxpayer before invoking
DRD, although this requirement did not feature in the draft
legislation.
At the time of the Autumn Statement 2014, the government’s
intention was to make DRD available to HMRC from April 2015.
With the dropping of the measure from FA 2015, the timetable
has clearly slipped. At Budget 2015, the government stated that
it still intended to include the measure in a future Finance Bill.
Any new government formed after the general election will make
its own decision, but given the emphasis of all the major political
parties on tax avoidance, taxpayers should not think that the
proposal has gone away.
What are the accelerated payment provisions in FA
2015 and when do they take effect?
FA 2015, Sch 18 amends the accelerated payment rules in the
Finance Act 2014, Pt 4 (FA 2014) so that they work effectively,
from HMRC’s perspective, where the taxpayer is a company
that is a member of a group. The accelerated payment rules
allow HMRC to require a taxpayer who has used a tax avoidance
scheme to make a payment up-front of the disputed tax. Prior to
20
Finance Act 2015— Lexis®PSL Tax analysis
FA 2015, if the scheme purported to produce a loss and this was
surrendered to another group company, an accelerated payment
notice (APN) would be ineffective since the company carrying
out the scheme would not itself be seeking to pay less tax.
FA 2015 addresses this by permitting HMRC to specify, within an
APN, that amounts are not available for group relief. This change
takes effect from Royal Assent to FA 2015, which was on 26 March
2015.
What changes does FA 2015 make to the disclosure
of tax avoidance schemes (DOTAS) rules?
FA 2015 continues the process, which has been ongoing for
several years, of strengthening the rules on DOTAS. The rules
have acquired an increased importance lately because:
• a scheme that is notifiable under DOTAS can be the subject of
an APN, and
• failure to comply with the DOTAS rules can result in the issue of
a conduct notice under the rules on high-risk promoters (also
known as the promoters of tax avoidance schemes, or POTAS,
rules)
FA 2015, Sch 17 includes the following changes to the DOTAS
rules:
• employers taking part in tax avoidance schemes that relate to
their employees must provide information about the scheme
both to the employees and to HMRC (this contrasts with the
basic DOTAS rules under which the requirement to provide
information normally rests with the promoter rather than the
scheme user)
• a power for HMRC to publish details of promoters (naming and
shaming), and of the schemes they promote
• a protection for whistleblowers, disapplying any duty of
confidentiality where a person provides information to assist
HMRC in determining whether there has been a breach of the
DOTAS rules
Tax Avoidance and Evasion
• increased powers for HMRC to require suspected introducers
of tax avoidance schemes to disclose details of the people
they have contacted about a scheme
• a requirement for promoters who have made disclosures
under DOTAS to update HMRC if the name of the scheme
changes, or the promoter has a new name or address
• increased penalties for non-compliance with the DOTAS rules
These changes take effect from Royal Assent to FA 2015 (26
March 2015).
HMRC also consulted last year on revising the hallmarks that
define a notifiable scheme for the purposes of the DOTAS
rules. These changes are potentially significant, particularly the
proposed changes to the financial products hallmark, as they
may widen the scope of DOTAS, with the associated effect
of increasing the number of situations in which an APN can
be issued. In December 2014 the government was proposing
to introduce the revised hallmarks later in 2015, so it will be
interesting to see whether this comes about.
following FA 2015 this will require a tribunal to have ruled on the
matter, or the promoter to have admitted to HMRC in writing
that it did not comply with the rules
• permitting HMRC to issue conduct notices to a wider range of
connected persons, and
• changing the threshold condition relating to professional
misconduct so that it applies where a person is found guilty
of certain types of misconduct, whether or not the decision is
taken by a professional body
Again, these take effect from 26 March 2015.
What are the FA 2015 provisions about offshore
penalties?
What changes does FA 2015 make to the high-risk
promoter rules?
A tougher tax penalties regime applies to non-compliance
involving an offshore matter where the offshore territory
in question is not considered to have the highest level of
information-sharing arrangements. FA 2015 extends this regime
to inheritance tax and ‘offshore transfers’ (where the proceeds
of non-compliance are hidden offshore), and introduces a new
aggravated penalty for moving hidden funds to circumvent
international tax transparency agreements (‘offshore asset
moves’).
FA 2015, Sch 19 makes a number of changes to the rules on highrisk promoters. The high-risk promoter rules were introduced
by FA 2014 and are separate from, but complementary to, the
DOTAS rules.
The new aggravated penalty relating to offshore asset moves
applies from 27 March 2015 (the day after Royal Assent), while
the increased penalties for evasion involving IHT and offshore
transfers are expected to apply from April 2016.
The changes made by FA 2015 include:
The previous news analysis on this topic can be found here:
Unpicking the Finance Bill 2015–what more does HMRC need to
tackle avoidance?
• more detailed rules on how to ascertain that the DOTAS rules
have not been complied with (this is one of the ways in which
a promoter may fall within the high-risk promoter rules)–
Finance Act 2015—inheritance tax charges on trusts
Elizabeth Neale, a partner in the private wealth department at
Bircham Dyson Bell, examines the aspects of the Finance Act
2015 (FA 2015) which concern inheritance tax (IHT) charges on
trusts.
Were the provisions to change IHT charges on
trusts and target IHT avoidance through the use of
multiple trusts included in FA 2015 and, if so, when
do these provisions have effect from?
No–their absence came as something of a surprise to some
commentators, especially given their inclusion in the Autumn
Statement and the fact that a number of separate consultations
have been carried out on the legislation. However, given the
proposed changes to the draft legislation, it is a welcome sign
that priority has been given to enacting workable legislation over
speed of implementation.
Why were these provisions not included in FA 2015?
Do you think they will be included in a future Finance
Bill this year?
Proposals to change the calculation for the rate of IHT on trusts
have undergone various permutations over the past year. One
proposal was to introduce a single settlement nil-rate band
(SNRB), but this was abandoned following consultation–much
to the relief of many practitioners. This proposal was to be
replaced–as announced in the Autumn Statement–with new
rules concerning the addition of property to trusts on the same
day, thereby targeting IHT avoidance through the use of multiple
Finance Act 2015 — Lexis®PSL Tax analysis
21
Tax Avoidance and Evasion
trusts, and it was this legislation that was expected to appear in
FA 2015.
Draft legislation was published on 10 December 2014 with the
announcement that it would be legislated in a future Finance
Bill. However, following feedback from consultation on the draft
legislation, the government made a number of changes to the
rules which it announced in the Budget (see Overview of Tax
Legislation and Rates):
• the rules would only apply when property is added to more
than one relevant property trust on the same day–the draft
legislation did not differentiate between relevant property
trusts and other trusts
• where the value of the addition is £5,000 or less there will not
be a same-day addition–this was in response to concern from
stakeholders that small same-day trust additions, for example
trustee or other professional fees, would result in the property
in the other trusts being aggregated and brought into the tenyear charge calculation
• the period of grace for not applying the new rules about
additions to existing trusts to a will executed before 10
December 2014 is to be extended by 12 months–the exclusion
will therefore now be limited to deaths before 6 April 2017
• non-relevant property is no longer required to be included in
the calculation of trust charges–this is a welcome change as
there were anomalies in the drafting in this area
• changes are also being made in certain areas of the relevant
property trust legislation in order to both close a gap and ease
the effects of the legislation elsewhere
It may be that there was simply not enough time to include
these measures in FA 2015, given that so many changes have
been made to the draft legislation and some of them are
quite technical. However, no timeframe has been given for
their introduction, and whether or not they are included in
a subsequent Finance Bill this year rather depends on the
outcome of the general election and, if re-elected, whether the
existing government sees them as a priority post-election. This
does leave taxpayers and practitioners in something of a limbo
situation but, perhaps, from the government’s perspective that
is a good thing because taxpayers may defer their inheritance
planning until the position is clearer.
The previous news analysis on this topic, published on 18
December 2014, can be found here: Unpicking the Finance Bill
2015–tax avoidance through multiple trusts.
Interviewed by Jenny Rayner.
22
Finance Act 2015— Lexis®PSL Tax analysis
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