Autumn Tax Update

• Changes for Non-Doms and Non-Residents
• Patent Box
• Closing Companies - tax changes in respect of companies being struck off
• Seed Enterprise Investment Scheme (SEIS)
• Changes to the Enterprise Investment Scheme (EIS)
• Research and Development (R & D) tax relief to be improved
• Capital Allowances changes
• Feed-in tariffs & the renewable heat incentive
• More disclosure for certain SDLT avoidance plans
• Land Remediation Relief Stays!
• Cost Sharing Exemption (CSE)
• Moving more VAT online
• Non- Established Persons
• Air Passenger Duty
• Fuel Duty

Autumn tax updates and draft Finance Bill 2012

Introduction

A very considerable amount of draft legislation and other paperwork was published today and in fact there are over 30 detailed releases on a wide variety of topics that affect trusts and businesses.  An "overview" of all of this has been published by HM Revenue & Customs and even this amounts to 298 pages!  The tax rates and allowances for 2012/13 have been announced and there is no mention, as expected, of any diminution in the top 50% tax rate.

We have prepared detailed commentaries on a number of aspects of the changes that affect clients, but beyond this we have seen the draft legislation published on the proposed lower 36% Inheritance Tax Rate where an individual leaves 10% or more of their estate to charity and dies after 5 April 2012.  This certainly is a welcome measure, particularly for individuals already planning to leave a significant portion of their estate in this manner.

For a minority of clients is the welcome news that for individuals, 30% tax relief may be given for gifts of eminent Works of Art to qualifying UK institutions.  This follows a period of consultation and yet seems quite generous for those able to part with such works.  The 20% relief given to companies also seems a helpful provision, which will hopefully assist in boosting the collections of our national institutions.  This however will not take effect until next summer when Royal Assent is given to the Finance Bill 2012. 

Less significant changes include the ending of special excise duties for black beer, believed to be enjoyed mainly by 'over 65s' in Yorkshire . . . this will not take effect until April 2013 so plenty of time to build up stocks!

The tax world is always changing, not always for the better, so please feel free to contact us should you wish to discuss any of the points covered in this bulletin or indeed any tax matter, however big or small.

The draft clauses are all open to consultation until 10 February 2012 and may therefore be amended before being enacted.

BREAKING NEWS . . . CHANGES FOR NON DOMS AND NON RESIDENTS?

The big news from today's announcement (6 December 2011) is that the helpful and interesting changes proposed from 6 April 2012 for a Statutory Definition of Tax Residence have been shelved for a year and are expected to now take effect from 6 April 2013 with draft legislation in the 2013 Finance Bill.

Unfortunately, the postponement creates another year of uncertainty for taxpayers who are unclear whether they are resident or non resident in the current difficult climate created by Court decisions such as that in Gaines Cooper (see attached).  It is more than possible that, in the next year, the Revenue will look to closely review the affairs of mobile executives and high net worth individuals to endeavour to show that they have not "left the UK" and hence are fully subject to UK tax on their worldwide income and gains.

The Government has stated that the consultation on tax residence had raised "a number of detailed issues which will require careful consideration to ensure the legislation achieves its important aim of providing certainty for individuals and businesses."  The wording here is a little odd since this is a statutory test for individuals rather than businesses.  (Proposed changes affecting persons not ordinarily resident are also deferred until 6 April 2013). 

Readers will no doubt be relieved to hear that an exemption from UK tax is to be granted on related earnings of non resident footballers and team officials (but not referees?!) participating in the 2013 Champions League Final at Wembley.

There is more positive news on the non dom front where all the proposed changes are being implemented with some very useful detail being provided on the ability for non doms to make tax free remittances of overseas income and gains to invest in "UK business."

The draft legislation headed up "Remittance for Investment Purposes" proposes that from April 2012, subject to stringent conditions, such remittances can be made to invest in unquoted trading companies or those which expect to start carrying on a commercial trade within the next two years.  It is made clear that the carry on of activities of research and development may well be treated as a commercial trade for this purpose, as will the letting of commercial property in the UK.  Fortunately, the rules about making the remittance and then taking any proceeds from the investment out of the UK have been relaxed, such that a 45 day deadline is now prescribed. 

Example

Boris makes a remittance of offshore income of £100,000 to invest in an eligible UK company on 8 April 2012.  Presently this would be subject to Income Tax but provided he invests in an eligible trading company say, Boris Limited, there is no tax to pay.  If say on 10 July 2014, he sells Boris Limited for £500,000, an amount equivalent to the original investment needs to be taken out of the UK within 45 days (i.e. 24 August) in order that there is not a claw back of the original relief given. 

Whether this measure will encourage investment in UK business, and whether someone in Boris' position might be better off making the investment through an offshore trust which could actually make tax free gains on the investment, remains to be seen. 

The bad news is that the proposals continue to prevent a tax free remittance for investment in a UK trading partnership, but the Government will consider whether to permit this from April 2013.

The other changes announced in June are to be implemented as follows:

•    Increase in £30,000 charge to £50,000 from April 2012 for those who have been resident here for 12 or more of the previous 14 years.

•    Technical changes to the treatment of nominated income and to gains on assets remitted to and sold in the UK.

A related change is that individuals, trustees and personal representatives of deceased persons will not need to pay Capital Gains Tax on exchange differences arising from withdrawals of money from foreign currency bank accounts on or after 6 April 2012.

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Other changes

Patent Box

As announced in November 2010, a preferential regime (known as a Patent Box) for profits arising from patents and certain other qualifying intellectual property is to be introduced from 1 April 2013. Companies which elect to be in the regime will able to apply a 10% corporation tax rate to profits from these sources.

The aim of this legislation is to keep what are considered to be potentially mobile profits in the UK – other jurisdictions such as the Netherlands already have favourable regimes for such profits. In practice, this change is most likely to be of use to companies involved in high-tech R & D.

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Closing Companies – tax changes in respect of companies being struck off

Where a company has ceased trading, the shareholders may wish to close it and can choose either to appoint a liquidator or apply for it to be struck off and dissolved (which is usually cheaper and simpler). If there are surplus assets once all liabilities have been settled, these are distributed to shareholders. If the liquidation route is adopted, this is treated as a capital distribution and so subject to Capital Gains Tax. Under a dissolution, the distribution will be subject to Income Tax which will usually result in shareholders paying more tax.

By concession (known as ESC C16), where application has been made in advance and certain assurances given, HMRC have in the past allowed dissolution distributions to be treated as capital distributions, but because of perceived tax avoidance, the conditions under which this treatment applies are now being restricted.

With effect from 1 March 2012, the total distribution that can be made by a company being struck off that can be treated as capital is limited to £25,000. Companies with surplus assets above this amount will need to be formally liquidated in order to have all distributions treated as capital.

We recommend that anyone intending to close a company in the near future should speak to us to discuss the best way of achieving this in order to minimise the tax impact on the shareholders.

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Seed Enterprise Investment Scheme (SEIS)

A new tax-advantaged venture capital scheme, similar to the EIS, is being introduced. It is designed for smaller, early-stage companies carrying on or preparing to carry on a qualifying trade. To qualify, a company will need to have 25 or fewer employees and assets of less than £200,000. SEIS will enable such a company to raise up to £150,000 from investors by offering generous tax incentives.

Investors, including directors, who have a stake of less than 30%, will be able to claim income tax relief of 50% on an investment of up to £100,000 with the ability to carry back relief to the previous tax year. There will be no CGT on gains on the SEIS shares for these investors and for 2012-13, there will be a CGT exemption where assets are sold and the gains are reinvested in SEIS in the same year.

SEIS will apply for qualifying companies issuing shares to qualifying investors on or after 6 April 2012.

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Changes to the Enterprise Investment Scheme (EIS)

Following consultation, a number of changes are being proposed to the EIS and VCT's.

•    There will be a new disqualifying purpose test which will apply to shares issued on or after 6 April 2012 to prevent access to tax relief where the benefit of the investment is passed to another party or the business activity is carried on by another party

•    Acquiring shares in another company will be excluded as a qualifying activity for shares issued on or after 6 April 2012, or investment in a VCT on or after that date

•    For both EIS and VCT's, FiTs (Feed-In Tariffs) based activity will be excluded as a qualifying trade where shares are issued on or after 6 April 2012 and where shares have been issued between 23 March 2011 and 6 April 2012, but the company has not commenced subsidised electricity generation by 6 April 2012.

There will also be some relaxation of certain conditions which currently apply, to take effect for shares issued from 6 April 2012 for EIS and 1 April 2012 for VCTs:

•    The connection test which currently takes account of both share capital and loans will be amended to exclude loans
•    Qualifying shares will be allowed to carry a preferential right to a dividend subject to  certain conditions
•    The £1 million limit for VCT investment in a single company will be removed (except for companies in partnership or a joint venture) 

In addition, new limits for the size of companies that can use these schemes to raise capital will be effective from 6 April 2012. These proposals were first announced in the 2011 Budget.

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Research and Development (R & D) tax relief to be improved

The Government has been consulting about changes to the system of R&D tax relief.

The current system gives qualifying companies an additional tax deduction for R&D expenditure of between 30% to 200% depending upon the size of the company. The Government is proposing to change this to an above the line (ATL) credit which would be a straight percentage of the R&D expenditure. A new ATL credit for R&D will become effective from April 2013. At the Budget 2012 a consultation will be launched on the design of the credit.

In addition, the draft Finance Bill contains draft legislation to increase the rate of relief for SME's from 200% to 225% and removal of the PAYE/NIC's cap for tax credit repayments. For all companies, the draft legislation removes the minimum spend requirement.

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Capital Allowances changes

The Government wants to tighten the rules applying to the claim for capital allowances on fixtures in buildings.

The Government's first proposal that fixtures would have to be claimed and pooled within one to two years has been amended so that a business owner only needs to pool the value of his expenditure on fixtures, if he wants to pass on an entitlement to claim to another person i.e. before sale or transfer.

The Government's second main proposal was that sellers and purchasers of second-hand fixtures should record the figure they have agreed for the fixtures and notify HMRC within a set timescale. The Government has modified this to a requirement that the seller and purchaser should, within two years of the sale, adopt or invoke one of the two existing procedures to fix their agreement about the value of the fixtures. These existing procedures are:

•    the section 198/199 CAA facility for the seller and purchaser to jointly elect to fix the fixtures value

Or, if the parties cannot reach agreement -

•    the facility to refer the matter to the First Tier Tribunal for an independent determination.

Subject to transitional provisions these changes will take effect for expenditure incurred on or after 1 April 2012 for CT and 6 April 2012 for IT.

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Feed-in tariffs & the renewable heat incentive

At the Budget 2011, the Government announced that there would be consultation on the appropriate capital allowances treatment of expenditure on plant and machinery that generates electricity or heat from a renewable source and therefore attracts tariffs under either of the Feed-in Tariff (FITs) or Renewable Heat Incentive (RHI) regimes.

The Government proposes that 100% Enhanced Capital Allowances (ECAs) will be denied where FITs or RHI tariffs are paid. However the proposal to designate all expenditure on FITs and RHI technologies as 'special rate' i.e. an 8% written down allowance will not proceed apart from expenditure on solar panels which will be specifically designated as special rate.

These changes come into effect for expenditure incurred on or after 1 April 2012 for companies, or 6 April 2012 for other businesses.

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More disclosure for certain SDLT avoidance plans

As part of the continued attack on tax avoidance, certain (Stamp Duty Land Tax) SDLT avoidance plans which were formerly not covered by the DOTAS regime will now need to be disclosed to HMRC.

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Land Remediation Relief Stays!

Due to the responses given to the consultation on the abolition of a number of tax reliefs, it has been decided that land remediation relief will not, after all, be abolished. This valuable relief, which gives a tax deduction of 150% of the cost of cleaning up contaminated land, has proved to be very useful to purchasers of brown field sites, not least because it includes removal of asbestos from buildings as well as cleaning up land.

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The abolition of 36 tax reliefs

The Government announced earlier this year that it was considering the abolition of 36 tax reliefs. The tax exemption for employees who are provided with late night taxis is to remain. However, amongst the reliefs being abolished is Flat Conversion Allowance, which gives 100% relief in the year of expenditure on the costs of converting business premises back to residential accommodation. This relief is to be abolished with effect from 1 April 2013 for Corporation Tax and 6 April 2013 for Income Tax.

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VAT

Cost Sharing Exemption (CSE)

HMRC have finally confirmed they will adopt the Cost Sharing Exemption in 2012 from the date of Royal Assent (likely July 2012).

Businesses and organisations looking for cost efficiencies may work with others to share costs and resources through a cost sharing group (CSG). Many previous arrangements have led to VAT charges arising, which become an obstacle where members are unable to recover VAT, for example: charities, housing associations and other not-for profit organisations.

The new CSG will remove the obstacle and allow such businesses to make savings through joining larger buying groups able to obtain better value and pricing without incurring a related irrecoverable VAT charge. Members will have to make exempt or non-business supplies to qualify to be a member of a CSG and must use 85% of the supply by the CSG for the exempt or non-business purpose. HMRC are drafting guidance expected to be released before early April 2012.

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Moving more VAT online

HMRC are focusing on moving more paper/manual procedures online as they consider it provides speed, security and convenience for customers, as well as efficiency benefits for HMRC. From 1 April 2012, all VAT registered businesses will be legally required to file VAT returns on line and pay VAT electronically. For registration issues, HMRC will continue to encourage applications, de registrations and changes to registration details to be made online, but have stated they will not remove the paper channel. More development will go into adding the de registration and variations procedures online.

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Non- Established Persons

Changes in the Finance Bill 2012 will mean Non-UK established businesses will no longer be able to benefit from the UK VAT registration threshold. A business which makes taxable supplies in the UK, but has no establishment here will have to register for VAT as soon as they reasonably anticipate making taxable supplies in the next 30 days.

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Other Indirect taxes

Air Passenger Duty

This will be extended to business jets of 5.7 tonnes or more from 1 April 2013 and the rate raise due from 1 April 2012 is confirmed.

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Fuel Duty

The 1 January 2012 rate rise will be deferred until 1 August 2012 and the further rate rise proposed for 1 August 2012 will be cancelled.

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