CORPORATE AND BUSINESS TAX
Income shifting
In July 2007 Mr and Mrs Jones won their case in the
House of Lords. The profits of Arctic Systems (their company) which were paid
equally to them by means of dividends would be taxed on each of them rather
than solely on Mr Jones. The government believes it is unfair for one person to
arrange their affairs so that their income is diverted to a second person,
subject to a lower tax rate, to obtain a tax advantage.
The government has announced that draft legislation to
take effect from 2008/09 to address income shifting will shortly be issued for
consultation. The legislation will work alongside the existing rules on
businesses deductions and settlements, and will seek to remove the tax
advantage obtained from income shifting. It would only apply when the income is
in the form of distributions from a company (dividends) or partnership
profits.
HMRC will provide ‘practical guidance’ on
the legislation as to the circumstances which may not be caught by the
legislation. Relevant factors to consider when establishing whether or not
income shifting has taken place could include the work done by the individuals
in the business, the investments made and the risks to which they are subject
through the business.
Income from employment, interest on savings and any
other source will not be affected.
Comment
Legislation was widely expected following the
Arctic Systems case. We await the publication of the draft legislation with
interest!
Tax simplification reviews
The government has announced the start of a
‘significant programme of tax simplification’. Three reviews will
be started in the autumn where HM Treasury and HMRC will work in partnership
with business to evaluate how a range of tax policies could be simplified.
These initial reviews will cover:
- how to simplify VAT rules and administration in the
UK and the EU
- how anti avoidance legislation can best meet the
aims of simplicity and revenue protection
- how to simplify the corporation tax rules for
related companies.
VAT rules and administration
Areas where simplification will be of most
significance to all VAT registered business include:
- Partial Exemption and the Capital Goods Scheme
- the frequency with which businesses submit
returns
- VAT retail schemes.
Comment
There are 1.9 million VAT registered organisations
in the UK. The VAT system already contains a wide range of schemes and methods,
many targeted at smaller businesses, designed to simplify administrative
requirements. However business has told the government that it would like to
see further simplification.
Corporation tax rules for related companies
Areas where simplification will be of most
significance to UK companies include:
- associated company rules for small companies
corporation tax rate
- group aspects of corporation tax on chargeable
gains
- corporation tax self assessment filing and payment
for groups
- the burden of the transfer pricing rules.
Comment
There are over one million active companies in the
UK, many of which have related companies, either as part of a wider company
group, or because of association through common ownership. These relationships
may complicate their tax affairs, and simplifying the corporation tax treatment
of related companies could help reduce administrative and compliance
burdens.
Spreading of tax relief for pension
contributions
Employers generally get tax relief against their
taxable profits for contributions paid to a registered pension scheme. Relief
is given for the accounting period in which the contributions are paid. Tax
relief for some large contributions above £500,000 maybe spread over a
period of up to four years.
Legislation will be introduced in Finance Bill 2008 to
ensure that the rules that spread tax relief for large employer pension
contributions relative to their contribution in the previous year cannot be
circumvented. This measure will have effect for payments made on or after 10
October 2007 under binding obligations entered into on or after 9 October
2007.
The measure will ensure that the spreading of
contributions cannot be avoided by routing them through a new company.
Other anti-avoidance measures
Action is being taken to counter various avoidance
schemes:
- financial products - disguised interest (and thus
taxable) as dividends (which are exempt from tax for companies)
- abusing the availability of interest relief through
the payment of interest in advance
- avoidance involving the sale and finance leaseback
of plant or machinery and attempts to exploit long funding leases to create a
tax loss where there is little or no commercial loss.
Company gains on life policies
Legislation will be introduced in Finance Bill 2008 to
bring all life insurance policies and life annuity contracts to which a company
is a party, other than protection-type policies, within the loan relationships
legislation that is used to tax debts and debt-like instruments.
The special legislation that currently applies to such
policies held by companies (‘the chargeable events’ rules) will
therefore be repealed.
Comment
In practice very few companies own life policies
and annuity contracts partly because of the archaic chargeable event rules.
Where such policies and contracts are used for investment, economically they
resemble debt-like instruments. Under this measure they will be taxed as such
under the loan relationships legislation which is a far more sensible taxation
system.
Tax relief for business cars
In March 2007 the government issued a second
discussion document about business expenditure on cars.
The proposals are that:
- the existing 100% first year allowances for cars
with CO2 emissions up to 120g/km be retained
- the general plant and machinery capital allowances
pool will be used for cars with CO2 emissions between 121 and 165g/km
- a new car pool would be introduced with a lower
writing down allowance than the general plant and machinery pool for other
cars.
As a consequence there would no longer need to be a
specific distinction between cars costing more or less than £12,000.
The government has issued a summary of the responses
to the proposals. The majority of the respondents supported reform of the
current system but views were divided as to what would be a preferable system.
In the light of this, the government has not indicated its next steps to
modernise the tax relief system.
Fire safety capital allowances
Legislation extending capital allowances to
expenditure on building alterations, made in response to a notice from a Fire
Authority, is to be repealed for expenditure from April 2008.
Relief for expenditure on fire safety equipment such
as fire alarms and sprinkler systems will continue to be available for all
businesses.
Comment
The repeal sounds more severe than it actually is.
The rules giving relief for fire safety alterations were introduced in 1974 to
encourage businesses to ensure that existing buildings met fire safety
standards. But since that date fire safety legislation has been reformed and
now operates on a self-assessment basis. The tax relief provision applies only
to those who have not complied with fire safety requirements and, as a result,
are issued with a prohibition notice by a Fire Authority. To ensure that this
does not encourage businesses to delay vital safety improvement work, the
relief is being removed.
VAT and housing
Currently VAT is chargeable at 5% on renovations or
alterations to residential properties that have been empty for at least three
years.
Eligibility for this reduced VAT rate will, on and
after 1 January 2008, apply to renovations or alterations carried out to
residential properties that have been empty for at least two years. |
