Tax Update - Monday 5 December 2011

1. General news

   1.1. Autumn Statement

   Under the Government's Tax Policy Framework the main event in the calendar for tax changes will be the Spring Budget. Consequently there was little new tax news in the Autumn Statement, except the following:

   The CGT annual exemption has been frozen at £10,600 for 2012/13. This is disappointing but nevertheless it remains a potentially valuable relief worth up to almost £3,000 in tax savings. The planned increase in fuel duty due to take place in January has been cancelled. The bank levy will become a permanent tax set at 0.088%. Following a consultation, Government has announced that there will be a new Seed Enterprise Investment Scheme (SEIS) to encourage investment in new start-up companies. SEIS will provide income tax relief of 50 per cent for individuals who invest in shares in qualifying companies, with an annual investment limit for individuals of £100,000 and cumulative investment limit for companies of £150,000. In addition, there will be a capital gains tax exemption on gains realised on disposal of an asset in 2012/13 and invested through SEIS in the same year. EIS will be simplified by relaxing the connected person rules and the definition of shares that qualify for relief. The Government will tighten the focus of the schemes by introducing a new test to exclude companies set up for the purpose of accessing relief, exclude acquisition of shares in another company and exclude investment in Feed-in-Tariffs businesses. In addition to these changes that were consulted on, the Government will remove the £1 million investment limit per company for VCTs to reduce the administrative burdens of the scheme.

   The SDLT first time buyers relief has proved ineffective in its aims and so will end on 24 March 2012. A new 'above the line' research and development tax credit will be introduced in 2013 to encourage research and development (R&D) activity by larger companies. The Government will consult on the detail at Budget 2012 and will ensure that SME R&D incentives are not reduced as a result of this change. Further details of the Patent Box and of its reform of the Controlled Foreign Company rules and R&D tax credits will be published on 6 December 2011. Measures were announced to restrict tax relief for certain asset backed pension contributions (see business tax item 5.5). VAT and cost sharing: legislation will be introduced in Finance Bill 2012 implementing Article 132(1)(f) of the Principal VAT Directive (The VAT Cost Sharing Exemption) into UK law. The mandatory exemption allows businesses and organisations making VAT exempt and/or non-business supplies (such as banks, charities, housing associations, insurance companies, residential care homes, universities and further education colleges) to form groups to achieve cost savings and economies of scale. http://cdn.hm-treasury.gov.uk/autumn_statement.pdf

2. Private Clients

   2.1. Certificate of UK tax residence - new online form available

   In order to claim relief or exemption from foreign tax at source under a double taxation agreement, some countries require UK residents to complete a claim form but others ask for a certificate of tax residence status. HMRC has set up a new online form to apply for such a certificate of residence. The form is both completed and submitted online.

   www.hmrc.gov.uk/news/cert-of-residence.htm

   2.2. Tax and tax credit rates and thresholds for 2012/13

   Alongside the Autumn Statement, HM Treasury published detailed tables of the tax allowances, National Insurance rates and thresholds and Tax Credit rates effective from 6 April 2012 where the amounts are required to be increased in line with either the September Retail Price Index (RPI) or Consumer Price Index (CPI). All other rates, allowances, thresholds for the tax year 2012-13 will be announced by the Chancellor in his Budget 2012.

   As announced in the Budget earlier this year the personal allowance is actually increased by £630 to £8,105 rather than the £420 uplift based on the September RPI figure of 5.6%. It should be noted that the basic rate band is being reduced by a similar amount of £630 so that the Basic Rate Threshold remains at £42,475. This will bring more people within the 40% tax band and reduce the effectiveness of the inflationary personal allowance for higher rate taxpayers with income under £100,000.

   http://cdn.hm-treasury.gov.uk/as2011_rates_and_thresholds_201213.pdf

   2.3. Annual allowance - carry forward rules for the transitional years

   HMRC has reconsidered its interpretation of how the carry forward rules work for the pension savings annual allowance applies for the transitional years of 2008/09, 2009/10 and 2010/11.

   As a result of this review the guidance on how carry forward works for the transitional years has been revised and can be accessed by following the link below. There is no change to the guidance for the carry forward rules outside these transitional years.

   If an individual has a pension input amount of more than £50,000 for a tax year from 2011/12 onwards they may still not be liable for an annual allowance charge for that year. They can carry forward any annual allowance that they have not used in the previous three tax years to the current tax year, provided they had been a member of a registered pension scheme at some point in the earlier tax. This amount of unused annual allowance can then be added to the current year's annual allowance. This will give them a higher amount of available annual allowance to off-set against that year's pension input amount. This will depend on the amount of contributions that they have been paying in pension input periods that end in the previous three tax years and the amount of unused annual allowance that they have available to carry forward.

   Normally, if one of the previous three years has an input amount of more than the annual allowance then that excess is treated as using up any amount of available annual allowance from the preceding year(s) first and this will reduce the available annual allowance to be carried forward to the current year. However, the position is different for 2008/09, 2009/10 and 2010/11.

   If one of the previous three years that has an input amount of more than £50,000 is 2009/10 and/or 2010/11 then that excess is not treated as using up any amount of available annual allowance from the preceding year(s). This is because any amount of available annual allowance from the preceding tax year(s) would not have had the effect of reducing an amount of annual allowance charge for 2009/10 and/or 2010/11.

   Example

   Bill's pension savings in 2011/12 are £76,000. This is £26,000 more than the annual allowance of £50,000. Bill will have an annual allowance charge on £26,000 if he doesn't have any available annual allowance to carry forward from earlier years.

   His pension savings for the previous three years are:

   2010/11 - £48,000

   2009/10 - £55,000

   2008/09 - £25,000

   Bill has £27,000 available annual allowance to carry forward to 2011-12 (£25,000 from 2008-09 plus £2,000 from 2010/11). Bill's pension saving for 2009/10 is more than £50,000 so he has no available annual allowance from that year. However, the excess of £5,000 for that year is not treated as using up any of his available annual allowance from 2008/09.

   www.hmrc.gov.uk/pensionschemes/annual-allowance.htm

3. PAYE and Employment matters

   3.1. Court of Appeal and PA Holdings (restricted share scheme)

   HMRC has succeeded in overturning the First Tier Tribunal and Upper Tier Tribunal decisions in the case of the tax treatment of dividends received from a restricted share scheme.

   The Upper Tier Tribunal decision (covered at item 2.1 of Informal of 26 July 2010) confirmed the decision of the First Tier Tribunal in relation to income tax that while the dividend income received was clearly linked to services rendered, the treatment of the receipt as a dividend took priority over treatment as an emolument for income tax. They also agreed with the FTT that the same did not apply for national insurance purposes so that the dividend receipt was liable to national insurance.

   The Court of Appeal (judgment given by Lord Justice Moses, with whom Justices Lady Arden and Lord Kay agreed) has concluded that the earlier Tribunals erred in thinking the income could be treated as either a dividend or as an emolument. Dividend treatment was only applicable if a distribution could be identified that was subject to dividend treatment. In terms of the legislation applicable at the time, Lord Justice Moses's comment was:

   "Schedule F [dividends] does not take priority over Schedule E [emoluments]. It does not charge emoluments at all. No question as to the application of section [ICTA] 20(2) arises. The income never came within section 20 at all.".

   In particular Justice Lord Moses commented:

   "40) The First Tier Tribunal asked whether the payments were in reference to the services rendered by the employees, as rewards for services past, present or future (Upjohn J's test in Hochstrasser v Mayes [1959] Ch 22 at 33) and concluded the payments were emoluments or earnings falling within the definition in section 19 ICTA. It relied on a number of features which demonstrated the character of the receipts:-

   i) The purchase of the shares in Ellastone was funded in full by PA, the employer, the dividends and full value of the shares were transferred at no cost to the employees;

   ii) The intention was to motivate and encourage the employees, and payment was represented to them as payment of the bonus for that year;

   iii) Those who left, even after PA had funded funds to Mourant were not eligible;

   iv) That the employees had no right to the payments was irrelevant.

   41) It does not seem to me possible either to impugn the approach of the First Tier Tribunal in law, still less to challenge those findings of fact. That approach owes nothing and need owe nothing to "the law's development, during the past thirty years, in its attitude to...