HMRC Statement of Practice.pdf

Statements of Practice Issued up to 30 January 2012 The Civil Partnership Act (CPA) received Royal Assent on 18/11/2004 and became effective from 5 December 2005. The Government’s commitment is that, for all tax purposes, same-sex couples who form a civil partnership will be treated the same as married couples. As part of this commitment to tax parity, from 5 December 2005 all Extra Statutory Concessions (ESCs) or Statements of Practice (SoPs) should be taken as extended to apply equally to civil partners and married couples.

Contents Introduction Abbreviations Part I Index of Statements A: Statements applicable to individuals (income tax and interest on tax) B: Statements applicable to individuals and companies (income tax and corporation tax) C: Statements applicable to companies, etc. (corporation tax and income tax) D: Statements relating to tax on capital gains (individuals and companies) E: Statements relating to inheritance tax (also applicable where the tax charged is Capital Transfer Tax and Estate Duty) F: Miscellaneous G: Statements of administrative practice and procedure Part II Statements issued before 18 July 1978 Part III Statements issued after 18 July 1978

Introduction Statements of Practice explain HM Revenue and Customs interpretation of legislation and the way the Department applies the law in practice. They do not affect a taxpayer’s right to argue for a different interpretation, if necessary in an appeal to an independent tribunal. This guide contains a comprehensive index and the full text of all Statements of Practice issued up to 30 January 2012 except where they have become obsolete. The guide is in three parts. Part I is an alphabetical index of the Statements of Practice, grouped under the following general subject headings. A.

Statements applicable to individuals (Income Tax and interest on tax)

B.

Statements applicable to individuals and companies (Income Tax and Corporation Tax)

C.

Statements applicable to companies etc. (Corporation Tax and Income Tax)

D.

Statements relating to tax on Capital Gains (individuals and companies)

E.

Statements relating to Inheritance Tax (also applicable where tax charged is Capital Transfer Tax)

F. Miscellaneou G.

s

Statements of administrative practice and procedure.

Statements which are obsolete are shown in bold type and those which have changed (no matter how small that change is, unless it is purely a formatting change, e.g. font or alignment) since they were last published are shown with square brackets around the number thus [SP3/94]. Part II gives the full text of Statements issued before 18 July 1978, suitably updated except where a Statement is obsolete, in which case only the title is given in bold type. They are given a letter to correspond with the appropriate subject group A to F above e.g. A1, A2, B1, B2 etc. Part III gives the full text of Statements issued after 18 July 1978 suitably updated except where a Statement is obsolete, in which case only the title is given in bold type. They are in numbered annual series having the prefix ‘SP’ e.g. SP1/78, SP6/81, SP10/92 etc.

Abbreviations CAA

Capital Allowances Act

CGTA

Capital Gains Tax Act

CTTA

Capital Transfer Tax Act

DLTA

Development Land Tax Act

ESC Extra-Statutory

Concession

FA Finance

Act

F (No 2) A

Finance (No 2) Act

ICTA

Income and Corporation Taxes Act

IHTA

Inheritance Tax Act

ITA

Income Tax Act

ITEPA

Income Tax (Earnings and Pensions) Act

ITMA

Income Tax Management Act

ITTOIA

Income Tax (Trading and Other Income) Act

OTA

Oil Taxation Act

TCGA

Taxation of Chargeable Gains Act

TIOPA Taxation

(International and Other Provisions) Act

TMA

Taxes Management Act

VATA

Value Added Tax Act

References to he, him or his may equally be read as she, her or hers where appropriate.

Part I Index of Statements A. Statements applicable to individuals (income tax and interest on tax) Accountancy expenses - Superseded by SP16/91

A28

Airline pilots - Residence - Incidental duties

A10

Approved savings-related share option schemes

SP4/83

Assessing tolerance

A12

Benefits in kind - Scholarship for employee's children

A24

Benefits in kind and VAT

A7

Benefits in kind: Cheap loans: Advances for expenses Benefits in kind: Section 64 FA 1976

SP7/79 A15

Business by telephone – Services for non contact centre customers

SP2/03

Business by telephone - Inland Revenue contact centres

SP3/03

Business by telephone

SP2/98

Business by telephone

SP8/98

Business by telephone – Customs & Revenue Contact Centres

SP1/05

Business by telephone – HMRC Taxes Contact Centres

[SP1/10]

Business Expansion Scheme, Enterprise Investment Scheme, CGT Reinvestment Relief and Venture Capital Trust Scheme: Loans to investors – Superseded by SP6/98

SP3/94

Capital allowances on machinery and plant: amendment of claim by an individual trader

A26

Case V Schedule D Losses - Reclassified as ESC B25

A20

Charitable covenants

SP4/90

Close companies: Income tax relief for interest on loans applied in acquiring an interest in a close company

SP3/78

Correspondence with married women

A23

Covenants in favour of charities: repayment procedure

A5

Deceased persons' estates: Discretionary interests in residue

SP4/93

Deceased persons' estates: Income received during the administration period

SP7/80

Deeds of covenant

A1

Delay in rendering tax returns: Interest charge and penalties

A14

Delay in rendering tax returns: Interest on overdue tax

SP3/88

Delay in rendering tax returns: Interest on overdue tax (TMA 1970,

SP6/89

Section 88) Earnings for work done abroad

A17

Employees resident but not ordinarily resident in the UK: General earnings under Sections 25 and 26 Income Tax (Earnings and Pensions) Act 2003 – superseded by SP1/09

SP5/84

Employees resident but not ordinarily resident in the UK: General earnings chargeable under Sections 15 and 26 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and application of the mixed fund rule under Sections 809Q onwards of the Income Tax Act 2007 (ITA)

SP1/09

Employment Protection Act 1975: Maternity pay

SP1/78

Employment Income – VAT

A6

Enhanced stock dividends received by trustees of interest in possession trusts

SP4/94

Enterprise Investment Scheme and Venture Capital Trust Scheme: Location of activity – Superseded by SP7/98

SP2/94

Enterprise Investment Scheme. Venture Capital Trusts, Capital Gains Reinvestment Relief and Business Expansion Scheme: Loans to investors – Supersedes SP3/94

SP6/98

Enterprise Investment Scheme. Venture Capital Trusts, Capital Gains Tax Reinvestment Relief: Location of activity – Supersedes SP2/94

SP7/98

Exchange rate fluctuations

SP2/02

Exchange rate fluctuations – Now SP2/02

SP1/87

Ex-gratia awards made on termination of an office or employment by retirement or death

SP13/91

Flat rate expenses for manual and certain other employees

SP13/79

Flat rate expenses for manual and certain other employees

SP17/80

Foreign earnings deduction

SP18/91

Goods taken by traders for personal consumption

A32

Incentive awards

SP6/85

Individuals coming to the UK: Ordinary residence

SP3/81

Informal end-of-year adjustments

A11

Investigation settlements: Inclusion of interest clause in letters or offer - Replaced by leaflet IR73, ‘Inland Revenue Investigations. How Settlements are Negotiated’

SP6/86

Investigation settlements: Retirement annuity relief

SP12/79

Investigation settlements: Retirement annuity relief - Superseded by SP9/91

SP9/80

Life assurance premium relief: Children's policies

SP4/79

Life assurance premium relief: Children's policies

SP11/79

Living expenses abroad - Schedule D Cases I and II

A16

Lorry drivers: Relief for expenditure on meals

SP16/80

Maintenance payments under court orders: Retrospective dating

SP6/81

Maintenance payments: Payment of school fees

SP15/80

Mortgage interest relief: Year of marriage

SP10/80

Non-statutory redundancy payments - Superseded by SP1/94

SP1/81

Notification of chargeability to income tax and capital gains tax for tax years 1995-96 onwards

SP1/96

Offshore funds

SP2/86

Partnership mergers and demergers

SP9/86

Partnerships - Change in membership

A4

Partnerships and retirement annuity relief

A18

PAYE Settlement Agreements

SP5/96

Payments on account of disability resulting in cessation of employment

SP10/81

Payments to a non-resident from UK discretionary trusts or UK estates during the administration period: Double Taxation relief

SP3/86

Payments to redundant steel workers

SP2/84

Payments made by employers to employees when in full time attendance at universities and technical colleges

SP4/86

Pooled cars: Incidental private use

SP2/96

Reimbursement of taxpayers' expenses. Replaced By Code of Practice 1 ‘Mistakes by ’ published on 17 February 1993

A31

Relief for interest on loan used to buy land for partnership or company business purposes

SP4/85

Relief for interest payments: Loans applied in acquiring an interest in a partnership

A33

Relief for interest payments: Loans for improvement or purchase of land: inherited properties

A34

Reliefs for non-residents: Treatment of wife's income

SP7/85

Residence in the UK: Visits extended because of exceptional circumstances

SP2/91

Residence in the UK: When ordinary residence is regarded as commencing where the period to be spent here is less than three years

SP17/91

Schedule E assessments: Repayment supplement Section 313 ICTA: Termination payments made in settlement of employment claims Settlements: Benefit to settlor's future spouse Self assessment: Finality and Discovery

A9 SP3/96 A30 SP1/06

Settlements: Part XV, ICTA 1988 (formerly Part XVI, ICTA 1970)

A2

Solicitors deposit interest

A22

Statement clarifying the operation of an existing administrative practice: Case V Schedule D Losses - Superseded by ESC B25

SP2/80

Stock dividends

A8

Tax treatment of directors' fees received by professional partners Reclassified as ESC A37

A29

Taxation of car telephones provided by employers Temporary workers engaged through foreign agencies

SP5/88 A21

The interaction of Income Tax and Inheritance Tax on assets put into settlements

SP1/82

Treatment of certain payments to relocated employees

SP1/85

Venture Capital Trusts: Value of ‘gross assets’ – Superseded by SP5/98

SP7/95

Venture Capital Trusts: Default terms in loan agreements

SP8/95

Venture Capital Trusts and the Enterprise Investment Scheme: Value of ‘gross assets’ – Supersedes SP7/95

SP5/98

Venture Capital Trusts, the Enterprise Investment Scheme, the Corporate Venturing Scheme and Enterprise Management Incentives - Superseded by SP2/06

SP2/00

Venture Capital Trusts, the Enterprise Investment Scheme, the Corporate Venturing Scheme and Enterprise Management Incentives - Supersedes SP2/00

SP2/06

B. Statements applicable to individuals and companies (Income Tax and Corporation Tax) Accident insurance policies: Chargeable events and gains on policies of life insurance

SP6/92

Additional redundancy payments

SP11/81

Advance Agreements Unit – superseded by SP2/12

[SP2/07]

Application of foreign exchange and financial instruments legislation to partnerships which include companies

SP9/94

Business expansion scheme: Overseas activities

SP4/87

Business Expansion Scheme: Overseas activities - Superseded by SP7/86

SP7/83

Capital allowances: Hotels

SP9/87

Capital allowances: Machinery and plant: Short-life assets

SP1/86

Capital allowances: Notification of expenditure on machinery and plant made outside the normal time limit

SP6/94

Compensation for acquisition of property under compulsory powers

SP8/79

Contributions to retirement benefit schemes on termination of employment

SP2/81

Discovery assessments

SP8/91

Double taxation relief: Business profits: Unilateral relief

SP7/91

Exchange rate fluctuations

SP3/85

Expenditure on farm drainage

SP5/81

Expenditure on producing films and certain similar assets

SP9/79

Finance lease rental payments

SP3/91

Furnished lettings: Wear and tear allowance - Replaced by ESC B47

A19

Goods sold subject to reservation of title

B6

Industrial buildings allowance: Industrial workshops constructed for separate letting to small businesses

SP4/80

Inward Investment Support

[SP2/12]

Liability under Chapter II of Part XIII, ICTA 1988, on gains arising on life and capital redemption policies and life annuities

SP11/80

Non-statutory lump sum redundancy payments

SP1/94

Offshore trusts

SP2/86

Payment of life assurance premiums on which commission is payable to the policyholder - replaced by SP5/95

SP3/79

Profit-related pay: Use of pool determination formulae

SP7/92

Section 124, ICTA 1988: Interest on quoted eurobonds

SP8/84

Securities dealt in on the Stock Exchange Unlisted Securities Market: Status and valuation for tax purposes Small workshops allowance

SP18/80

SP6/80

Stock and work in progress: Changes in accountancy practice (SSAP9)

B5

Stock and work in progress: Changes in the basis of valuing long term contract work in progress

B4

Stock relief: completed work in progress of builders

B7

Stock relief: Deferment of recovery charges: Definition of net indebtedness in Paragraph 1(5), Schedule 7, FA 1980

SP8/80

Stock relief: Recovery charges when level of trading is negligible

SP4/81

Stock relief: treatment of VAT

B2

Stock relief: Withdrawal of claim

B3

Stocks and long-term contracts

SP3/90

Tax treatment of expenditure on films

SP1/98

Tax treatment of expenditure on films and certain similar assets

SP2/83

Tax treatment of expenditure on films and certain similar assets

SP2/85

Tax treatment of expenditure on films and certain similar assetReplaced by SP1/98

SP1/93

Tax treatment of transactions in financial futures and options

SP3/02

Tax treatment of transactions in financial futures and options

SP14/91

Taxation of commission, cashbacks and discounts

SP4/97

Taxation of receipts of insurance and personal pension schemes commissions – Superseded by SP4/97

SP5/95

Treatment of Investment Managers and their overseas Clients

SP1/01

Treatment of investment managers and their overseas clients Replaced by SP1/01 Treatment of Value Added Tax

SP15/91 B1

C. Statements applicable to companies, etc. (corporation tax and income tax) Advance Thin Capitalisation Agreements under the APA Legislation – Superseded by SP1/12 Advance Thin Capitalisation Agreements under the APA Legislation Advanced Pricing Agreements (APAs) – Superseded by SP2/10

[SP4/07] [SP1/12 SP3/99

Advance Pricing Agreements (APAs)

SP2/10

Application of local currency rules in Finance Act 2000 to partnerships which include companies

SP2/01

Application of loan relationships, foreign exchange and financial instruments legislation to partnerships which include companies

SP4/98

Associated companies for small companies' relief and Corporation Tax starting rate: Holding companies

SP5/94

Authorised unit trusts, approved investment trusts, and open-ended investment companies: Monthly savings schemes – Superseded by SP2/99

SP2/97

Building licences granted under the Community Land Act 1975: Stock relief

SP8/78

Business Expansion Scheme: Overseas activities - Superseded by SP4/87

SP7/86

Claims to loss relief, capital allowances and group relief outside limit

SP5/01

Claims to loss relief under Section 393(1), ICTA 1988 Close companies: General statement Close companies: Non-resident participators: Apportionment Close companies: Paragraph 3(1)(a) Sch 19, ICTA 1988, ‘Reasonable time’

C11 C4 SP2/78 C3

Close company apportionment

SP2/87

Close company apportionment: Member of a trading group

SP8/87

Company residence

SP1/90

Company residence - Superseded by SP1/90

SP6/83

Company taxation: Interest paid in a foreign currency

C9

Corporate Venturing Scheme: applications for advance clearance under Part X, Schedule 15, FA 2000

SP1/00

Company's purchase of own shares: ICTA 1988

SP2/82

Corporation Tax: A major change in the nature or conduct of a trade

SP10/91

Corporation Tax Self Assessment. Enquiries and chargeable gains Valuations

SP1/02

Country-risk debts

SP1/83

Definition of Financial Trader for the purposes of S177(1), FA 1994 Superseded by SP4/02

SP3/95

Definition of Financial Trader for the purposes of paragraph 31 Schedule Finance act 2002

SP4/02

Demergers: Sections 213-218, ICTA 1988

SP13/80

Double taxation: Dividend income: Tax credit relief

SP12/93

Enterprise Investment Scheme, Venture Capital Trusts, Corporate Venturing Scheme and Management Incentives and Capital gains Tax Reinvestment Relief – Supersedes SP7/98 General rules as to deductions not allowable: Valuation fees for compliance with Companies Act 1985, Sch 7 para 1(2)

SP3/00

C10

Group relief: Consortia: S.413(8), ICTA 1988

C6

Group relief: Section 410, ICTA 1988

C7

Group relief: Section 410, ICTA 1988 - Superseded by SP3/93 Group relief: Section 412(1)(c), ICTA 1988 Groups of companies: Arrangements Income Tax: ‘In the ordinary course’ of banking business

SP5/80 C2 SP3/93 SP12/91

Income tax: Interest paid in the ordinary course of a bank’s business

SP4/96

Insurance companies: Transfers of long term business

SP7/93

Interest paid to a bank in the UK on a loan made in foreign currency Replaced by SP1/95

C5

Interest payable in the United Kingdom

SP1/95

Investment trusts investing in authorised unit trusts Superseded by SP3/97

SP7/94

Investment trusts investing in authorised unit trusts - Superseded by SP7/94

SP5/91

Investment trusts investing in authorised unit trusts or open-ended investment companies

3/97

Long term insurance business: Computations of profit for tax purposes Lotteries and football pools Mining companies: Expenditure on planning permission applications Monthly savings in investment funds – Supersedes SP2/97 Non-resident lessors: Section 830, ICTA 1988 Partnerships including companies: Application of loan relationships, foreign exchange and financial instruments legislation – Supersedes SP9/94

SP4/95 C1 SP4/78 2/99 SP6/84 4/98

Payment of tax credits to non-resident companies

SP2/95

Relief for Underlying Tax

SP3/01

Stamp Duty: Group relief

3/98

Surrender of Advance Corporation Tax

SP7/89

Tax treatment of forward currency transactions by investment trusts Superseded by SP14/91

SP1/88

Tax treatment of transactions in financial futures and options Superseded by SP14/91

SP4/88

Taxation of profits of subsidiaries of UK companies

C8

Tonnage Tax

SP4/00

Trade unions: Provident benefits: Legal and administrative expenses

SP1/84

Trade unions: Provident benefits: Legal expenses paid for members Superseded by SP1/84

SP6/78

Transactions within Section 765A, ICTA 1988: Movements of capital between residents of EC member states

SP2/92

Transfer pricing, mutual agreement procedure and arbitration

SP1/11

Valuation of oil disposed otherwise than at arm's length: Paragraph 2, Schedule 3, Oil Taxation Act 1975

SP14/93

D. Statements relating to tax on capital gains (individuals and companies) Allowable expenditure: Expenses incurred by personal representatives and corporate trustees – see SP2/04

SP8/94

Allowable expenditure: Expenditure incurred by Personal and corporate trustees

SP2/04

representatives

Asset of negligible value: Time limit for claims - Superseded by ESC D28

D13

Capital Gains Tax: Exercise of a power of appointment over settled property

SP7/78

Closure of business followed by sale of assets or liquidation of company

SP6/79

Company's purchase of own shares: Capital gains treatment of distribution received by corporate shareholder

SP4/89

Compulsory acquisition of freehold or extension of lease by tenant

SP13/93

Compulsory acquisition of freehold reversion by tenant - Superseded by SP13/93

SP7/90

Corporation Tax Self Assessment Enquiries and chargeable gains valuations

SP1/02

Discovery Assessments

SP8/91

Division of a company on a share for share basis

SP5/85

Division of a company on a share for share basis - Superseded by SP5/85

D14

Double taxation relief: Chargeable gains

SP6/88

Enhanced stock dividends received by trustees of interest in possession trusts

SP4/94

Exercise of a power of appointment or advance over settled property

SP7/84

Exercise of a power of appointment over settled property - Superseded by SP7/84

SP9/81

Exemption of companies’ gains on substantial shareholdings sole or main benefit test – Paragraph 5 Schedule 7AC Taxation of chargeable Gains Act 1992

SP5/02

Family company: Sale of assets in anticipation of liquidation

SP5/79

Finance Act 1965, Section 29(2) Houses owned by occupants of tied accommodation

D17 D8

Indexation Initial repairs to property: Section 38(1), TCGA 1992 (CGTA 1979, Section 32(1)) Losses on irrecoverable loans in the form of qualifying corporate bonds: Loss on early redemption Non-resident company: Section 13, TCGA 1992 (Section 15, CGTA 1979)

SP3/82 D24 SP8/90 D23

Non-resident trusts

SP5/92

Offshore funds

SP2/86

Part disposals of land Partnerships Partnerships: Assets owned by individuals Partnerships: Assets owned by partner

D1 D12 D5 D11

Partnerships: Extension of Statement of Practice D12 - See also SP1/89

SP1/79

Partnerships: Further extension of SPD12

SP1/89

Rebasing and indexation: Shares held at 31 March 1982

SP5/89

Rebasing elections - Superseded by SP4/92

SP2/89

Relief for losses on loans to traders: Time limit for claims Superseded by ESC D36

SP3/83

Relief for owner-occupiers Relief for replacement of business assets: Employees and office holders Replacement of business assets in groups of companies Residence exemption: Separated couples Retirement relief - Change in business during 10 years before disposal

SP14/80 SP5/86 D19 D9 D20

Rollover relief for replacement of business assets: Trades carried on successively

SP8/81

Self Assessment enquiries and Capital Gains Tax Valuations

SP1/99

Short delay by owner-occupier in taking up residence: Sections 222224, TCGA 1992 (Sections 101-103, CGTA 1979) - Replaced by ESC D49

D4

Superannuation funds

D2

Time limit for an election for valuation on 6 April 1965 under paragraph 17, Schedule 2, TCGA 1992 (paragraph 12, Schedule 5, CGTA 1979): Company leaving a group: Section 178, TCGA 1992 (Section 278, ICTA 1970)

D21

Transfer of a business to a company - Superseded by ESC D22

D22

Treatment of VAT Unquoted shares or securities held on 6 April 1965 Value shifting: Section 30, TCGA 1992 (Section 26, CGTA 1979)

D7 SP14/79 D18

E. Statements relating to Inheritance Tax (also applicable where the tax charged is Capital Transfer Tax), and Estate Duty Age of majority

E8

Associated operations

E4

Business property relief: ‘Buy and sell’ agreements Charities Close companies Close companies - Group transfers Death benefits under superannuation arrangements Deduction for reasonable funeral expenses Employee trusts Estate Duty: Calculation of duty payable on a chargeable event affecting heritage objects previously granted conditional exemption Excluded property

SP12/80 E13 E5 E15 SP10/86 SP7/87 E11 SP11/84 E9

Incidence of tax

E17

Interests in possession

D16

Leases for life

E10

Missives of sale

E16

Orders in matrimonial proceedings

E12

Partial disclaimers of residue

E18

Pools etc syndicates

E14

Power for trustees to allow a beneficiary to occupy a dwelling house

SP10/79

Power to augment income

E6

Powers of advancement

E2

Powers of appointment

E1

Protective trusts

E7

Superannuation schemes

E3

The interaction of Income Tax and Inheritance Tax on assets put into settlements

SP1/82

Treatment of income of discretionary trusts

SP8/86

F. Miscellaneous Artificial separation of business activities

F4

Close companies: Apportionment of income and the consequentials for Capital Gains Tax: Close companies in liquidation - Superseded by ESCs A36 and D12

F3

Development Land Tax: Double taxation conventions

SP4/84

Development Land Tax: Negotiations on liability

SP2/79

Double Taxation relief: Status of the UK’s double taxation conventions with the former USSR and with newly independent states

SP4/01

Double Taxation relief: Status of the UK’s double taxation conventions with the former Socialist Federal Republic of Yugoslavia – Superseded by SP3/07

SP3/04

Double Taxation relief: Status of the UK's double taxation conventions with the former Socialist Federal Republic of Yugoslavia - Supersedes SP3/04

SP3/07

Double Taxation relief: Status of UK/USSR convention for the avoidance of double taxation – Superseded by SP4/01

SP3/92

Stamp Duty and VAT: Interaction

SP11/91

Stamp Duty and VAT: Interaction - Superseded by SP11/91

SP6/91

Stamp Duty: Convertible loan stock

SP3/84

Stamp Duty: Conveyance in consideration of a debt

SP5/78

Stamp duty: Conveyances and leases of building plots - Superseded by SP8/93

SP10/87

Stamp duty: Conveyances and transfers of property subject to a debt Section 57, Stamp Act 1891

SP6/90

Stamp Duty – Disadvantaged Areas Relief

SP1/03

Stamp Duty Land Tax : Disadvantaged Area Relief

SP1/04

Stamp Duty: New buildings

SP8/93

Stamp Duty: Treatment of securities dealt in on the Stock Exchange Unlisted Securities Market

SP9/84

The construction industry tax deduction scheme: Carpet fitting United Kingdom branches of foreign banks - Superseded by Section 67, FA 1982

SP12/81 F2

United Kingdom/Czechoslovakia Double Taxation Convention

SP5/93

United Kingdom/Yugoslavia Double Taxation Convention Superseded by SP3/04

SP6/93

VAT Strategy: Input Tax deduction without a valid VAT invoice

SP1/07

G. Statements of administrative practice and procedure Acceptance of property in lieu of Inheritance Tax, Capital Transfer Tax and Estate Duty

SP6/87

Accountancy expenses arising out of accounts investigations

SP16/91

Accountants' working papers Accounts on a cash basis

SP5/90 A27

Allowable expenditure: Expenses incurred by personal representatives – Superseded by SP8/94

SP7/81

Allowable expenditure: Expenses incurred by personal representatives and corporate trustees – see SP2/04

SP8/94

Allowable expenditure: Expenditure incurred by Personal representatives and corporate trustees

SP2/04

Barristers - The cash basis

A3

Business tax computations rounded to nearest £1,000

SP15/93

Capital Gains Tax: Rebasing elections

SP4/92

Civil tax penalties and criminal prosecution cases

SP2/88

Company liquidations: Shareholders' CGT Completion of return forms by attorneys

D3 A13

Corporation Tax Pay and File: Claims to capital allowances and group relief made outside the normal time limit

SP11/93

Corporation Tax Pay and File: Corporation Tax returns

SP9/93

Corporation Tax Pay and File: Special arrangements for groups of companies

SP10/93

Directors' and employees' emoluments: Extension of time limits for relief on transition to receipts basis of assessment

SP1/92

Foreign bank accounts

SP10/84

Furnished lettings: Wear and tear allowance - Replaced by ESC B47

A19

Guidance notes for migrating companies: Notice and arrangements for payment of tax

SP2/90

Independent taxation: Mortgage interest relief: Time limit for married couples' allocation of interest elections

SP8/89

Inheritance Tax: The use of substitute forms

SP2/93

Investigation settlements: Retirement annuities and personal pension relief

SP9/91

Legal entitlement and administrative practices

SP6/95

Legal entitlement and administrative practices - Superseded by SP6/95

SP1/80

Limitations of Inland Revenue advice to taxpayers - Replaced by Inland Revenue Code of Practice No 10 ‘Information and advice’ published in May 1995

F1

Part disposals of land

D1

Partnerships: Circumstances in which late elections will be accepted Replacement of business assets: Time limit

SP9/92 D6

Repayment of tax to charities on covenanted and other income

SP3/87

Section 707, ICTA 1988: Cancellation of tax advantages from certain transactions in securities: Procedure for clearance in advance

SP3/80

Separate taxation of wife's earnings: Sections 187-288, ICTA 1988 Extension of time limits

A25

Small companies' rate of Corporation Tax and corporation Tax starting rate

SP1/91

Tax returns

SP4/91

Tax returns: The use of substitute forms

SP5/87

Termination of life interest in settled property (Sections 71 and 72, TCGA 1992)

D10

The Electronic Lodgement Service

1/97

Time limit for an election for valuation on 6 April 1965 under paragraph 17, Schedule 2, TCGA 1992 (paragraph 12, Schedule 5, CGTA 1979): Company leaving a group: Section 178, TCGA 1992 (Section 278, ICTA 1970)

D21

Unit trust and investment trust monthly savings schemes superseded by SP2/97

SP3/89

Use of schedules in making personal tax returns

SP5/83

Valuation of assets in respect of which Capital Gains Tax gifts holdover relief is claimed

SP8/92

Part II. Statements issued before 18 July 1978 The statements are grouped under the following general subject headings: A.

Statements applicable to individuals (Income Tax and interest on tax)

B.

Statements applicable to individuals and companies (Income Tax and Corporation Tax)

C.

Statements applicable to companies etc. (Corporation Tax and Income Tax)

D.

Statements relating to tax on Capital Gains (individuals and companies)

E.

Statements relating to Inheritance Tax (also applicable where tax charged is Capital Transfer Tax)

F. Miscellaneou

s

A. Statements applicable to individuals (Income Tax and interest on tax) A1.

Deeds of covenant

A guidance booklet about tax repayment claims on deeds of covenant is available from HM Revenue and Customs - Centre for Non-Residents, St John's House, Merton Road, Bootle, Merseyside, L69 9BB. A2.

Settlements: Part XV, ICTA 1988 (Formerly Part XVI ICTA 1970)

A3.

Barristers: The cash basis - Obsolete. See now S48, FA 1998

A4.

Partnerships: Change in membership

A5.

Covenants in favour of charities: Repayment procedure

New repayment procedures were introduced on 1 July 1992. A booklet explaining them is available from - HM Revenue and Customs Centre for Non-Residents, St John's House, Merton Road, Bootle, Merseyside L69 9BB A6.

Employment Income: VAT

The introduction of VAT on 1 April 1973 affected, in some instances, the amount of the emoluments chargeable to income tax under Schedule E, and the amount to which the PAYE procedure should be applied. The main circumstances in which this situation will arise are summarised below, and it is anticipated that all of the relevant information will be available to the employer in the records which he will maintain for general VAT purposes. 1. Expenses incurred by employees etc and reimbursed by their employer The amount to be entered by an employer on his return of expenses payments on Forms P9D and P11D, or by an employee etc when claiming a deduction for expenses, should include any amount paid in respect of VAT, which is reimbursed, whether or not the employer may subsequently recover all or part of that VAT by repayment or set-off. 2. Benefits etc Where a director or employee is liable to income tax in respect of payments made to him or on his behalf by his employer or in respect of expenses incurred by the employer in providing him with a benefit the liability is on the full amount of the expenditure incurred, inclusive of VAT. This is so whether or not the employer may subsequently recover all or part of the VAT by repayment or set-off. 3. Sums paid for services to certain professional persons Section 94 (4), VATA 1994 provides that a person who, in the course of carrying on a trade, profession or vocation, accepts an office, other than a public office, is subject to VAT in respect of any services supplied by him as the holder of the office. Where the earnings payable to such a person are subject to tax as employment income, deductible under PAYE, and also to VAT, the earnings to which PAYE is applied should not include VAT element of any payment. A7.

Benefits in kind and VAT

A8.

Stock dividends

There are special rules when share capital is issued to an individual, personal representative or trustee of an accumulation or discretionary trust in the form of a stock dividend (Sections 249 to 251 ICTA 1988). Such issues are usually made as an alternative to a cash dividend. The recipient is treated as having received income which has borne an amount of income tax. The amount of that income is the sum of either the relevant cash dividend or the market value of the share capital, plus the tax which the income is treated as having borne. For this purpose the amount of the cash dividend is used unless that amount is substantially greater or substantially less than the market value of the share capital (Section 251(2)(a)). In interpreting ‘substantially greater or substantially less’, the practice of HM Revenue and Customs is generally to use the market value of the share capital when that value exceeds the amount of the cash dividend by 15 per cent or more of the market value of the share capital, or when that value is less than the amount of the cash dividend by 15 per cent or more of the market value of the share capital. However, HM Revenue and Customs is normally prepared to use the amount of the cash dividend when the difference between the market value of the share capital and the cash dividend is no more than one or two percentage points greater than 15 per cent. In other cases, the amount of the cash dividend is used. A9.

Schedule E assessments 1995/96 and earlier: Repayment supplement – Obsolete

A10.

Airline pilots: Residence: Incidental duties – withdrawn with effect from 6 April 2009

A11.

Informal end of year adjustments

A12.

Assessing tolerance

A13.

Completion of return forms by attorneys

Section 8(2) TMA 1970 requires that every return should include ‘a declaration by the person making the return to the effect that the return is to the best of his knowledge correct and complete’. For tax years before the introduction of income tax self assessment (1995/6 and earlier) Section 42(5) of that Act provided for a ‘declaration’ by the person making the claim. The Commissioners for Her Majesty’s Revenue and Customs consider that the obligation to make declarations under these Sections is within the class of statutory duties which the person making the return of income, or the claim, cannot delegate. Accordingly, it is the normal practice to insist that the return of income or claim should be signed by the taxpayer or claimant personally, and not by his attorney. However, HM Revenue and Customs- HM Revenue and Customs recognise that there may be difficulties where, owing to the age or physical infirmity of the taxpayer, he is unable to cope adequately with the management of his affairs or where for the same reason the taxpayer's general health might suffer if he were troubled for a personal signature. In such special circumstances the Revenue will be willing to consider the matter sympathetically and where possible accept the signature of an attorney who has full knowledge of the taxpayer's affairs. A14.

Delay in rendering tax returns: Interest charge and penalties

A15.

Benefits in kind: Section 64 FA 1976

A16.

Living expenses abroad: Schedule D Cases I and II

Where an individual who is resident in the UK and assessable under Case I or II of Schedule D in respect of a trade, profession or vocation (either alone or in partnership) spends time abroad on business, the costs of living abroad personal to him will not be disallowed under Section 74(1)(a) or (b) ICTA 1988 if the absence abroad is for the purpose of the trade, profession or vocation. Private expenditure e.g. on holidays taken in the course of a business trip will not be allowed. Living expenses are regarded as including the cost of accommodation, food and drink attributable to the individual, trader or partner. If he is accompanied by his family or other dependants the costs attributable to them will not be allowed. A17.

Earnings for work done abroad

A18.

Partnerships and retirement annuity relief

A19.

Furnished lettings: Wear and tear allowance - Replaced by ESC B47

A20.

Case V Schedule D Losses - Re-classified as ESC B25

A21.

Temporary workers engaged through foreign agencies

A22.

Solicitors' deposit interest

A23.

Correspondence with married women

A24.

Benefits in kind: Scholarship for employees' children

A25.

Separate taxation of wife's earnings: Section 287-288, ICTA 1988: Extension of time limits – Obsolete

A26.

Capital allowances on machinery and plant: Amendment of claim by an individual trader - Rendered Obsolete by the introduction of self-assessment

A27.

Accounts on a cash basis - Obsolete. See now S 42 ff FA98 -

A28.

Accountancy expenses - Superseded by SP16/91

A29.

Tax treatment of directors' fees received by professional partnerships - Reclassified as ESC A37.

A30.

Settlements: Benefit to settlor's future spouse

A31.

Reimbursement of taxpayers' expenses - Replaced By Code of Practice 1 ‘Mistakes by HM Revenue and Customs’ published on 17 February 1993.

A32.

Goods taken by traders for personal consumption

The case of Sharkey v Wernher 1955 36TC 275 establishes the principle that where a trader takes stock from his business for private use or enjoyment or disposes of stock otherwise by sale in the normal course of trade, the transfer should be dealt with for taxation purposes as if it were a sale at market value. Inspectors of Taxes have been authorised to take a reasonably broad view in applying this principle. The decision is not considered to apply to:

a.

services rendered to the trader personally or to his household which should be dealt with in accordance with Section 74(1)(b) ICTA 1988;

b.

the value of meals provided for proprietors of hotels, boarding houses, restaurants etc and members of their families which should also be dealt with on the basis that Section 74(1)(b) ICTA applies;

c.

expenditure incurred by a trader on the construction of an asset which is to be used as a fixed asset in the trade.

A33.

Relief for interest payments: Loans applied in acquiring an interest in a partnership (ICTA 1970, Section 59; FA 1969 Section 21; FA 1974, Schedule I paragraphs 11 and 12; ICTA 1988, Sections 362 and 363).

The –commissioners for Her Majesty’s Revenue and Customs are advised that the above provisions extend to salaried partners in a professional firm who are allowed independence of action in handling the affairs of clients and generally so to act that they will be indistinguishable from general partners in their relations with clients. A34.

Relief for interest payments: Loans for purchase or improvement of land: Inherited properties (ICTA 1970, Section 57; FA 1969 Section 19; FA 1972, Section 75 and Schedule 9; FA 1974, Section 19 and Schedule 1; ICTA 1988, Sections 353 and 354).

Where a property subject to mortgage passes from A to B under a will or on intestacy, then if A was entitled to tax relief for the mortgage interest B will also be so entitled; and B will also be entitled (while he remains the owner of the property) to relief for the interest on a fresh loan, whether secured on the property or not, so far as applied in paying off the inherited mortgage. If, however, A was not entitled to relief for the mortgage interest (because the mortgage moneys were not used for a qualifying purpose), B will not be entitled to relief either for that interest or for interest on a fresh loan raised to pay off the mortgage.

B. Statements applicable to individuals and companies (Income Tax and Corporation Tax) B1.

Treatment of VAT

A. Income Tax and Corporation Tax 1.

A person carrying on a business who is not a taxable person for VAT.

This broadly covers persons whose output is wholly exempt from VAT and those whose taxable output (including that which is zero-rated) does not exceed a certain limit each year. (This limit is increased periodically.) Such persons will suffer VAT on much of their business expenditure. Where an item of expenditure is allowable as a deduction in computing income for income tax or corporation tax purposes, the VAT related to that expenditure will also be allowable. If the expenditure qualifies for capital allowances, those allowances will be based on the cost inclusive of the related VAT. 2.

A taxable person for VAT whose output is wholly taxable (whether at the standard rate of VAT or zero-rated)

There is no essential difference for this purpose between taxable and zero-rated output. It is expected that in general a VAT account will be kept on the lines recommended in the HM Customs and Excise Notice No. 700 setting VAT on outputs against VAT on inputs and accounting for (or reclaiming) the difference. In computing income for direct tax purposes in these circumstances it would be correct to take into account both income and expenditure exclusive of the related VAT. VAT on inputs is set off whether it relates to capital or revenue expenditure and it would follow that capital allowances would be determined upon the cost exclusive of VAT. There are certain categories of VAT on inputs which are non-deductible notably that relating to the cost of motor-cars and entertaining. This VAT will no doubt be included in the accounts of the business as part of the expenditure to which it relates. So far as the motor-cars are concerned capital allowances will be computed on the cost inclusive of the VAT and the entertaining expenditure which is not allowed as a deduction for direct tax purposes will be the expenditure inclusive of VAT. If a trading debt becomes bad it may well include the VAT related to the sale. To the extent that this tax has been accounted for to HM Customs & Excise and cannot be recovered from them, the full amount of the debt including VAT may be allowed as a trading expense for direct taxation purposes. Where a trader does not maintain a separate VAT account the adjustments to be made in computing income and capital allowances for direct taxation purposes would be such as to achieve the corresponding result. 3.

A partly exempt person.

As explained in HM Customs and Excise Notice No. 706, a taxable person whose output is partly exempt and partly taxable may set off only part of his VAT on inputs against his VAT on outputs. In such a case the computation of income for direct tax purposes will follow the general principles set out in 1 and 2 above. The VAT on inputs which cannot be set off may comprise two elements: (a)

that which is non-deductible because it relates to motor-cars or to business entertainment; and

(b)

that which is referable to the exempt output.

The treatment for direct tax purposes of non-deductible VAT on inputs under (a) will be the same as for a wholly taxable person, as explained above. VAT on inputs within (b) should be allocated to the categories of expenditure giving rise to it, and its treatment in computing income for direct tax purposes will be the same as the treatment of the expenditure to which it relates. In many cases the extent to which a partly exempt person ultimately bears VAT on goods and services supplied to him will be determined in accordance with a working arrangement with HM Customs and Excise (such as the special schemes for retailers set out in Notice No. 727). It follows that some approximation may be necessary in allocating the VAT ultimately borne to the various items of expenditure to which it was related. Inspectors of Taxes will be prepared to consider any reasonable arrangements for allocation which follow the general principles set out above. In certain circumstances traders may also decide that the cost of keeping records of some items of VAT on inputs is excessive in relation to the ultimate set-off to be obtained and will not make any claim. Where a trader ultimately bears additional VAT in consequence this may be treated as a part of the relevant expense or capital outlay for direct tax purposes. B. Capital Gains Tax If VAT has been suffered on the purchase of an asset but that VAT is available for set-off in the purchaser's VAT account, the cost of the asset for capital gains tax purposes will be the cost exclusive of VAT. Where no VAT set-off is available, the cost will be inclusive of the VAT borne. Where an asset is disposed of, any VAT chargeable will be disregarded in computing the capital gain. B2.

Stock relief: Treatment of VAT

B3.

Stock relief: Withdrawal of claim

B4.

Stock and work in progress: Changes in the basis of valuing long term contract work in progress

B5.

Stock and work in progress: Changes in accountancy practice (SSAP9)

B6.

Goods sold subject to reservation of title

Certain traders sell goods on special terms whereby they retain the title to the goods until payment is made. The accountancy bodies have advised their members that, for accountancy purposes, if the circumstances indicate that the reservation of title is regarded by the parties as having no practical relevance except in the event of the insolvency of the buyer, the goods should, notwithstanding the strict legal position, normally be treated as purchases in the accounts of the buyer and sales in the accounts of the supplier. HM Revenue and Customs- HM Revenue and Customs has agreed that for sales subject to reservation of title the above recommended accountancy treatment will be accepted for tax purposes provided that both parties to the contract follow it. The sale of goods subject to reservation of title as described above is to be distinguished from the supply of goods as consignment stocks e.g. on a sale or return basis. Goods supplied as consignment stocks are normally to be treated as stock in the hands of the supplier until disposed of by the consignee.

B7.

Stock relief: Completed work in progress of builders

C. Statements applicable to companies etc. (Corporation Tax and Income Tax) C1.

Lotteries and football pools

Where a football pool or small lottery is to be run by a supporters club or other society on the basis that a stated percentage or fraction of the cost of each ticket will be given to a club or body conducted and established wholly or mainly for one or more of the purposes specified in Section 5(1) of the Lotteries and Amusements Act 1976, HM Revenue and Customs will accept that the donation element as stated in the cost of each ticket may be excluded in computing for tax purposes the profits of the trade of promoting the pool or lottery. A football pools run by a supporters' club had its appeal against tax assessment upheld by the Special Commissioners. When this question was raised in Parliament on 14 December 1956, Mr Henry Brooke said: ‘The football pool in this case was organised on the basis that a specified percentage of the sum received from each competitor would be paid as a gift to the football club. The Special Commissioners have held that this donation element formed no part of the receipts to be taken into account in computing for income tax purposes the profits of the trade of promoting the pool. This decision will be accepted by the Revenue as governing all cases where a football pool or small lottery is run by a supporters' club or other society on the basis that a stated percentage or fraction of the cost of each ticket or chance will be given to a club or body established and conducted wholly or mainly for one or more of the purposes specified in subsection (1) of Section 1 of the Small Lotteries and Gaming Act 1956.’ C2.

Group relief: Section 412(1)(c) ICTA 1988

C3.

Close companies: Paragraph 3(1)(a) Schedule 19 ICTA 1988 ‘reasonable time’

C4.

Close companies: General statement

C5.

Interest paid to a bank in the UK on a loan made in foreign currency - Replaced by SP1/95

C6.

Group relief: Section 403C ICTA 1988

Under Section 403C ICTA 1988 a consortium member's share in a consortium company for any accounting period is measured by reference to the lowest of the member's percentage interests in the share capital, profits and assets of the consortium company. Where any of those percentages has varied the legislation says that the average percentage over the accounting period concerned should be taken. In determining that average percentage, HM Revenue and Custom’s practice is that a weighted average taking into account the length of time involved should be used. C7.

Group relief: Section 410 ICTA 1988

C8.

Taxation of profits of subsidiaries of UK companies

C9.

Company taxation: Interest paid in foreign currency

C10.

General rules as to deductions not allowable: Valuation fees for compliance with Companies Act 1985, Schedule 7, Paragraph 1(2)

Costs incurred by companies for the purpose of valuations made to comply with Schedule 7, Paragraph 1(2) of the Companies Act 1985 are regarded as allowable expenses under Sections 74(1)(a) and 75(1) of ICTA 1988. C11.

Claims to loss relief under section 393(1) ICTA 1988

D. Statements relating to tax on Capital Gains (individual and companies) D1.

Part disposals of land

To save work for taxpayers and their advisers where part of an estate is disposed of (e.g. on the sale of a field) The Commissioners for Her Majesty’s Revenue and Customs will accept that the cost of the part can be calculated on the alternative basis set out in this note instead of under the general rule which requires the unsold part to be valued in order to apportion the total cost of the estate. Instructions about the alternative basis have been issued to Inspectors of Taxes who will be glad to give information about its application to particular cases. Under the alternative basis the part disposed of will be treated as a separate asset and any fair and reasonable method of apportioning part of the total cost to it will be accepted - e.g. a reasonable valuation of that part at the acquisition date. Where the market value at 6 April 1965 or 31 March 1982 is to be taken as the cost, a reasonable valuation of the part at that time will similarly be accepted. The cost of the part disposed of will be deducted from the total cost of the estate (or balance of the total cost) to determine the cost of the remainder of the estate; thus the total of the separate amounts adopted for the parts will not exceed the total cost. The cost attributed to each part must also be realistic in itself. The taxpayer can always require that the general rule should be applied (except in cases already settled on the alternative basis). If he chooses the general rule it will normally be necessary to apply this rule to all subsequent disposals out of the estate; but where the general rule has been applied for a part disposal before the introduction of the alternative basis and it produced a result broadly the same as under the alternative basis, the alternative basis may be used for subsequent part disposals out of the estate. So long as disposals out of an estate acquired before 6 April 1965 are dealt with on the alternative basis, each part disposal will carry a separate right to elect for acquisition at market value on 6 April 1965. Similarly where part is sold with development value the mandatory valuation at 6 April 1965 will apply only to that part. Even where the part is to be treated as acquired at market value on 6 April 1965 or 31 March 1982, however, it will still be necessary to agree how much of the actual cost should be attributed to the part disposed of: first, to ensure that any allowable loss does not exceed the actual loss, and second, to produce a balance of total cost for subsequent disposals. The alternative basis will not apply to part disposals between 6 April 1967 and 22 July 1970 where development value was involved; and in other cases the Commissioners for Her Majesty’s Revenue and Customs reserve the right to apply the general rule if they are not satisfied that the apportionments claimed are fair and reasonable. Taxpayers who wish to adopt the alternative basis will still be able to claim under existing statutory provisions that certain small disposals out of an estate should be deducted from cost instead of being assessed. The disposal proceeds will then be deducted from the total cost (or balance of total cost) available for subsequent disposals. D2.

Superannuation funds

D3.

Company liquidations: Shareholders' CGT

1. During the liquidation of a company the shareholders often receive more than one distribution. For capital gains tax each distribution, other than the final one, is a part disposal of his shares by the shareholder, and the residual value of the shares has to be ascertained in order to

attribute a proportion of the cost of the shares to the distribution (unless the Inspector of Taxes accepts that the distribution is ‘small’ and can therefore be deducted from cost). It has been represented to The Commissioners for Her Majesty’s Revenue and Customs that the making and formal agreement of these valuations is holding up the agreement of liabilities and that little if any change in the total tax is involved in the majority of cases. 2. Where the shares of a company are unquoted at the date of the first or later interim distribution, therefore, the Commissioners for Her Majesty’s Revenue and Customs are prepared to authorise Inspectors of Taxes to accept any valuation by the taxpayer or his agent of the residual value of the shares at the date of the distribution, if the valuation appears reasonable and if the liquidation is expected to be completed within two years of the first distribution (and does not in fact extend much beyond that period). The valuation need not include a discount for deferment; and if the distributions are complete before the capital gains tax assessment is made, the Revenue will accept that the residual value of shares in relation to a particular distribution is equal to the actual amount of the subsequent distributions. In the normal way the Revenue will not raise the question of capital gains tax on an interim distribution until after 2 years from the commencement of the liquidation unless the distribution, together with any previous distributions, exceeds the total cost of the shares. 3. Where time apportionment (shares acquired before 6 April 1965) applies to a case within the scope of this practice, the Commissioners for Her Majesty’s Revenue and Customs are prepared to calculate the gain on each distribution by applying the time apportionment fraction as at the date of the first distribution without further adjustment under paragraph 16(8) Schedule 2 TCGA 1992 (paragraph 11(8) Schedule 5 CGTA 1979). D4.

Short delay by owner occupier in taking up residence: Sections 222-224 TCGA 1992 (Sections 101-103 CGTA 1979) - Replaced by ESC D49

D5.

Partnerships: Assets owned by individuals

D6.

Replacement of business assets: Time limit

Where new town corporations and similar authorities acquire by compulsory purchase land for development and then immediately grant a previous owner a lease of the land until they are ready to commence building, the Commissioners for Her Majesty’s Revenue and Customs will be prepared to extend the time limit for rollover relief under Sections 152-158 TCGA 1992 to 3 years after the land ceases to be used by the previous owner for his trade, provided that there is a clear continuing intention that the sale proceeds will be used to acquire qualifying assets; assurances will be given in appropriate cases subject to the need to raise a protective assessment if the lease extends beyond the statutory 6 year time limit for making assessments. This practice may be applied to all cases where the capital gains tax computations have not been settled at 17 January 1973. D7.

Treatment of VAT

If VAT has been suffered on the purchase of an asset but that VAT is available for set-off in the purchaser's VAT account, the cost of the asset for CGT will be the cost exclusive of VAT. Where no VAT set-off is available, the cost will be inclusive of the VAT borne. Where an asset is disposed of, any VAT chargeable will be disregarded in computing the capital gain. D8.

Houses owned by occupants of tied accommodation

D9.

Residence exemption: Separated couples

D10.

Termination of an interest in possession in settled property (Sections 71 and 72, TCGA 1992)

1. Where an interest in possession in part of settled property terminates and the part can properly be identified with one or more specific assets, the –Commissioners for Her Majesty’s Revenue and Customs will accept that the deemed disposals and reacquisitions under Section 71 and 72 Taxation of Chargeable Gains Act 1992 apply to those specific assets, and not to any part of the other assets comprised in the settled property. Corresponding treatment will apply where, within a reasonable period (normally three months) immediately following the termination, specific assets are appropriated by the trustees to give effect to the termination. In either case, the treatment must be consistent with that adopted for Inheritance Tax purposes. 2. In particular, Inspectors will be prepared to agree with the trustees lists of assets properly identifiable with the termination of an interest in possession, and any such agreement will be regarded as binding on the Revenue and the trustees. 3. This practice applies on any act or event which terminates an interest in possession whether voluntarily or involuntarily. D11.

Partnership: Assets owned by a partner

Provided that the other conditions of Sections 152-158 TCGA 1992 (Sections 115-121 CGTA 1979) are satisfied, relief is available to the owner of assets which are let to a trading or professional partnership of which he is a member and which are used for the purposes of the partnership trade or profession. D12.

Partnerships

This statement of practice was originally issued by The Commissioners for Her Majesty’s Revenue and Customs on 17 January 1975 following discussions with the Law Society and the Allied Accountancy Bodies on the Capital Gains Tax treatment of partnerships. This statement sets out a number of points of general practice which have been agreed in respect of partnerships to which TCGA92/S59 applies. The enactment of the Limited Liability Partnership Act 2000, has created, from April 2001, the concept of limited liability partnerships (as bodies corporate) in UK law. In conjunction with this, new Capital Gains Tax provisions dealing with such partnerships have been introduced through TCGA92/S59A. TCGA92/S59A (1) mirrors TCGA92/S59 in treating any dealings in chargeable assets by a limited liability partnership as dealings by the individual members, as partners, for Capital Gains Tax purposes. Each member of a limited liability partnership to which S59A (1) applies has therefore to be regarded, like a partner in any other (non-corporate) partnership, as owning a fractional share of each of the partnership assets and not an interest in the partnership itself. This statement of practice has therefore been extended to limited liability partnerships which meet the requirements of TCGA92/S59A (1), such that capital gains of a partnership fall to be charged on its members as partners. Accordingly, in the text of the statement of practice, all references to a ‘partnership’ or ‘firm’ include reference to limited liability partnerships to which TCGA92/S59A (1) applies, and all references to ‘partner’ include reference to a member of a limited liability partnership to which TCGA92/S59A (1) applies. For the avoidance of doubt, this statement of practice does not apply to the members of a limited liability partnership which ceases to be ‘fiscally transparent’ by reason of its not being, or its no longer being, within TCGA92/S59A (1).

1. VALUATION OF A PARTNER’S SHARE IN A PARTNERSHIP ASSET Where it is necessary to ascertain the market value of a partner's share in a partnership asset for Capital Gains Tax purposes, it will be taken as a fraction of the value of the total partnership interest in the asset without any discount for the size of his share. If, for example, a partnership owned all the issued shares in a company, the value of the interest in that holding of a partner with a one-tenth share would be one-tenth of the value of the partnership's 100 per cent holding. 2. DISPOSALS OF ASSETS BY A PARTNERSHIP Where an asset is disposed of by a partnership to an outside party each of the partners will be treated as disposing of his fractional share of the asset. In computing gains or losses the proceeds of disposal will be allocated between the partners in the ratio of their share in asset surpluses at the time of disposal. Where this is not specifically laid down the allocation will follow the actual destination of the surplus as shown in the partnership accounts; regard will of course have to be paid to any agreement outside the accounts. If the surplus is not allocated among the partners but, for example, put to a common reserve, regard will be had to the ordinary profit sharing ratio in the absence of a specified asset-surplus-sharing ratio. Expenditure on the acquisition of assets by a partnership will be allocated between the partners in the same way at the time of the acquisition. This allocation may require adjustment, however, if there is a subsequent change in the partnership sharing ratios (see paragraph 4). 3. PARTNERSHIP ASSETS DIVIDED IN KIND AMONG THE PARTNERS Where a partnership distributes an asset in kind to one or more of the partners, for example on dissolution, a partner who receives the asset will not be regarded as disposing of his fractional share in it. A computation will first be necessary of the gains which would be chargeable on the individual partners if the asset has been disposed of at its current market value. Where this results in a gain being attributed to a partner not receiving the asset the gain will be charged at the time of the distribution of the asset. Where, however, the gain is allocated to a partner receiving the asset concerned there will be no charge on distribution. Instead, his Capital Gains Tax cost to be carried forward will be the market value of the asset at the date of distribution as reduced by the amount of his gain. The same principles will be applied where the computation results in a loss. 4. CHANGES IN PARTNERSHIP SHARING RATIOS An occasion of charge also arises when there is a change in partnership sharing ratios including changes arising from a partner joining or leaving the partnership. In these circumstances a partner who reduces or gives up his share in asset surpluses will be treated as disposing of part of the whole of his share in each of the partnership assets and a partner who increases his share will be treated as making a similar acquisition. Subject to the qualifications mentioned at 6 and 7 below the disposal consideration will be a fraction (equal to the fractional share changing hands) of the current balance sheet value of each chargeable asset provided there is no direct payment of consideration outside the partnership. Where no adjustment is made through the partnership accounts (for example, by revaluation of the assets coupled with a corresponding increase or decrease in the partner's current or capital account at some date between the partner's acquisition and the reduction in his share) the disposal is treated as made for a consideration equal to his Capital Gains Tax cost and thus there will be neither a chargeable gain nor an allowable loss at that point. A partner whose share reduces will carry forward a smaller proportion of cost to set against a subsequent disposal of the asset and a partner whose share increases will carry forward a larger proportion of cost. The general rules in TCGA92/S42 for apportioning the total acquisition cost on a part-disposal of an asset will not be applied in the case of a partner reducing his asset-surplus share. Instead, the cost of the part disposed of will be calculated on a fractional basis.

5. ADJUSTMENT THROUGH THE ACCOUNTS Where a partnership asset is revalued a partner will be credited in his current or capital account with a sum equal to his fractional share of the increase in value. An upward revaluation of chargeable assets is not itself an occasion of charge. If, however, there were to be a subsequent reduction in the partner's asset-surplus share, the effect would be to reduce his potential liability to Capital Gains Tax on the eventual disposal of the assets without an equivalent reduction of the credit he has received in the accounts. Consequently at the time of the reduction in sharing ratio he will be regarded as disposing of the fractional share of the partnership asset represented by the difference between his old and his new share for a consideration equal to that fraction of the increased value at the revaluation. The partner whose share correspondingly increases will have his acquisition cost to be carried forward for the asset increased by the same amount. The same principles will be applied in the case of a downward revaluation. 6. PAYMENTS OUTSIDE THE ACCOUNTS Where on a change of partnership sharing ratios payments are made directly between two or more partners outside the framework of the partnership accounts, the payments represent consideration for the disposal of the whole or part of a partner's share in partnership assets in addition to any consideration calculated on the basis described in 4 and 5 above. Often such payments will be for goodwill not included in the balance sheet. In such cases the partner receiving the payment will have no Capital Gains Tax cost to set against it unless he made a similar payment for his share in the asset (for example, on entering the partnership) or elects to have the market value at 6 April 1965 treated as his acquisition cost. The partner making the payment will only be allowed to deduct the amount in computing gains or losses on a subsequent disposal of his share in the asset. He will be able to claim a loss when he finally leaves the partnership or when his share is reduced provided that he then receives either no consideration or a lesser consideration for his share of the asset. Where the payment clearly constitutes payment for a share in assets included in the partnership accounts, the partner receiving it will be able to deduct the amount of the partnership acquisition cost represented by the fraction he is disposing of. Special treatment, as outlined in 7 below, may be necessary for transfers between persons not at arm's length. 7. TRANSFERS BETWEEN PERSONS NOT AT ARM’S LENGTH Where no payment is made either through or outside the accounts in connection with a change in partnership sharing ratio, a Capital Gains Tax charge will only arise if the transaction is otherwise than by way of a bargain made at arm's length and falls therefore within TCGA92/S17 extended by TCGA 92/S18 for transactions between connected persons. Under TCGA92/S286 (4) transfers of partnership assets between partners are not regarded as transactions between connected persons if they are pursuant to genuine commercial arrangements. This treatment will also be given to transactions between an incoming partner and the existing partners. Where the partners (including incoming partners) are connected other than by partnership (for example, father and son) or are otherwise not at arm's length (for example, uncle and nephew) the transfer of a share in the partnership assets may fall to be treated as having been made at market value. Market value will not be substituted, however, if nothing would have been paid had the parties been at arm's length. Similarly if consideration of less than market value passes between partners connected other than by partnership or otherwise not at arm's length, the transfer will only be regarded as having been made for full market value if the consideration actually paid was less than that which would have been paid by parties at arm's length. Where a transfer has to be treated as if it had taken place for market value, the deemed disposal will fall to be treated in the same way as payments outside the accounts.

8. ANNUITIES PROVIDED BY PARTNERSHIPS A lump sum which is paid to a partner on leaving the partnership or on a reduction of his share in the partnership represents consideration for the disposal by the partner concerned of the whole or part of his share in the partnership assets and will be subject to the rules in 6 above. The same treatment will apply when a partnership buys a purchased life annuity for a partner, the measure of the consideration being the actual costs of the annuity. Where a partnership makes annual payments to a retired partner (whether under covenant or not) the capitalised value of the annuity will only be treated as consideration for the disposal of his share in the partnership assets under TCGA92/S37 – (3), if it is more than can be regarded as a reasonable recognition of the past contribution of work and effort by the partner to the partnership. Provided that the former partner had been in the partnership for at least ten years an annuity will be regarded as reasonable for this purpose if it is no more than two-thirds of his average share of the profits in the best three of the last seven years in which he was required to devote substantially the whole of this time to acting as a partner. In arriving at a partner's share of the profits regard will be had to the partnership profits assessed before deduction of any capital allowances or charges. The ten year period will include any period during which the partner was a member of another firm whose business has been merged with that of the present firm. For lesser periods the following fractions will be used instead of two-thirds: Complete years in partnership 1–5 6 7 8 9

Fraction

16/60 24/60 32/60

1/60 for each year 8/60

Where the capitalised value of an annuity is treated as consideration received by the retired partner, it will also be regarded as allowable expenditure by the remaining partners on the acquisition of their fractional shares in partnership assets from him. 9. MERGERS Where the members of two or more existing partnerships come together to form a new one, the Capital Gains Tax treatment will follow the same lines as that for changes in partnership sharing ratios. If gains arise for reasons similar to those covered in 5 and 6 above, it may be possible for roll-over relief under TCGA92/S152 to S158 to be claimed by any partner continuing in the partnership insofar as he disposes of part of his share in the assets of the old firm and acquires a share in other assets put into the ‘merged’ firm. Where, however, in such cases the consideration given for the shares in chargeable assets acquired is less than the consideration for those disposed of, relief will be restricted under TCGA92/S153. 10. SHARES ACQUIRED IN STAGES Where a share in a partnership is acquired in stages wholly after 5 April 1965, the acquisition costs of the various chargeable assets will be calculated by pooling the expenditure relating to each asset. Where a share built up in stages was acquired wholly or partly before 6 April 1965 the rules in TCGA92/SCH2/PARA18, will normally be followed to identify the acquisition cost of the share in each asset which is disposed of on the occasion of a reduction in the partnership's share; that is, the disposal will normally be identified with shares acquired on a ‘first in, first out’ basis. Special consideration will be given, however, to any case in which this rule appears to produce an unreasonable result when applied to temporary changes in the shares in a partnership,

for example those occurring when a partner's departure and a new partner's arrival are out of step by a few months. 11. ELECTIONS UNDER TCGA92/SCH2/PARA4 Where the assets disposed of are quoted securities eligible for a pooling election under paragraph 4 of TCGA92/SCH2, partners will be allowed to make separate elections in respect of shares or fixed interest securities held by the partnership as distinct from shares and securities which they hold on a personal basis. Each partner will have a separate right of election for his proportion of the partnership securities and the time limit for the purposes of Schedule 2 will run from the earlier of – a)

the first relevant disposal of shares or securities by the partnership

and b)

the first reduction of the particular partner's share in the partnership assets after 19 March 1968.

12. PARTNERSHIP GOODWILL AND TAPER RELIEF This paragraph applies where the value of goodwill which a partnership generates in the conduct of its business is not recognised in its balance sheet and where, as a matter of consistent practice, no value is placed on that goodwill in dealings between the partners. In such circumstances, the partnership goodwill will not be regarded as a ‘fungible asset’ (and, therefore, will not be within the definition of ‘securities’ in section TCGA92/S104 (3) for the purpose of Capital Gains Tax taper relief under TCGA92/S2A. Accordingly, on a disposal for actual consideration of any particular partner’s interest in the goodwill of such a partnership, that interest will be treated as the same asset (or, in the case of a part disposal, a part of the same asset) as was originally acquired by that partner when first becoming entitled to a share in the goodwill of that partnership. The treatment described in the preceding paragraph will also be applied to goodwill acquired for consideration by a partnership but which is not, at any time, recognised in the partnership balance sheet at a value exceeding its cost of acquisition nor otherwise taken into account in dealings between partners. However, such purchased goodwill will continue to be treated for the purpose of computing capital gains tax taper relief as assets separate from the partnership’s self-generated goodwill. On a disposal or part disposal for actual consideration of an interest in such purchased goodwill by any particular partner, that interest shall be treated for taper relief purposes as acquired either on the date of purchase by the partnership or on the date on which the disposing partner first became entitled to a share in that goodwill, whichever is the later. D13.

Asset of negligible value: Time limit for claims - Superseded by ESC D28

D14.

Division of a company on a share for share basis - Superseded by SP5/85

D15.

Accommodation let by owner-occupier - Superseded by SP14/80

D16.

Interests in possession

D17.

Finance Act 1965 Section 29(2)

D18.

Value shifting: Section 30 TCGA 1992 (Section 26 CGTA 1979)

The Revenue Law Committee of the Law Society raised with the Commissioners for Her Majesty’s Revenue and Customs a problem arising out of the widely drawn provisions of Section 30, which problem was causing concern among those dealing with agricultural properties. The Committee pointed out that there are instances where a farmer who owns the land he farms may decide to retire and may wish to hand over the farming business, possibly to his son, while raising capital for himself. He therefore enters into two transactions: (a)

lease of the farm at a rack-rent to his son on normal agricultural terms; and

(b)

sale of the freehold, subject to the lease to the son, to an outside investor, often an institutional buyer.

The market price paid by the institutions is for the tenanted value of the property and this is the value on which the retiring farmer pays capital gains tax. He will undoubtedly have reduced the value of his asset by the grant of the tenancy and as a result paid capital gains tax on a tenanted rather than vacant possession value basis. The Commissioners for Her Majesty’s Revenue and Customs have now confirmed that in the precise circumstances mentioned above they would take the view that Section 30 cannot and should not apply and accordingly that they do not regard that section as giving rise to an increased charge to capital gains tax when a farmer enters into the two transactions mentioned. D19.

Replacement of business assets in groups of companies

To obtain the benefit of Section 175 TCGA 1992, the company making the gain during the replacement of business assets by a group of companies must be a member of a group and the company carrying out the complementary transaction must be a member of the same group, as defined by Section 170(2) TCGA 1992, when the transaction is carried out. The Consultative Committee of Accountancy Bodies raised with HM Revenue and Customs the problem of defining the membership of a group of companies for the purpose of replacement of business assets bearing in mind that the replacement acquisition may take place at any time within a period beginning twelve months before and ending three years after the disposal (or such longer period as the Commissioners for Her Majesty’s Revenue and Customs may be notice in writing allow). The Revenue take the view that to obtain the benefit of s175 the company making the gain or the qualifying replacement must be a member of a group and the company carrying out the complementary transaction must be a member of the same group when that transaction is carried out. The concept of ‘same group’ is as defined in Section 170(10) TCGA 1992. Thus, if company A makes a gain at a time when it is a member of the X group of companies then that gain may only be rolled over against an acquisition by company B if at the time of that acquisition company B is a member of the X group. Therefore, company B need not have been a member of the group at the time that company A made the disposal but must be a member of the group by the time that company B makes its acquisition. Similarly, company A must be a member of the group at the time that it makes its disposal but need not be a member of the group at the time that company B makes the corresponding acquisition. D20.

Retirement relief: Change in business during 10 years before disposal

D21.

Time limit for an election for valuation on 6 April 1965 under Paragraph 17, Schedule 2, TCGA 1992 (Paragraph 12 Schedule 5 CGTA 1979): Company leaving a group: Sections 178 and 179 TCGA 1992 (Section 278 ICTA 1970)

The time limit for the making of an election for valuation on 6 April 1965 under Paragraph 17 Schedule 2 TCGA 1992 is two years from the end of the year of assessment or accounting period within which the disposal took place, or such further time as The Commissioners for Her Majesty’s Revenue and Customs may allow. The Commissioners for Her Majesty’s Revenue and Customs will exercise their discretion under paragraph 17(3) to extend the time limit as appropriate where a company ceases to be a member of a group of companies and as a result a chargeable asset acquired from another member of the group within the past six years is deemed to have been disposed of (and reacquired) immediately after the acquisition (Sections 178 and 179 TCGA 1992). D22.

Transfer of business to a company - Superseded by ESC D22

D23.

Non-resident company: Section 13, TCGA 1992

Where a United Kingdom participator in a non-resident company which would be a close company if resident in the United Kingdom is chargeable to capital gains tax on a proportion of a capital gain accruing to that company, tax credit relief may be given against United Kingdom capital gains tax for the appropriate proportion of any overseas tax payable by the company in the country where it is resident in respect of its gain under Section 277 TCGA 1992; alternatively, under Section 278 TCGA 1992, the appropriate proportion of the overseas tax may be deductible in computing the participator's gains to the extent that the overseas tax has not qualified for relief under Section 277 TCGA 1992. D24.

Initial repairs to property: Section 38(1), TCGA 1992

Expenditure on initial repairs to a property (including expenditure on decorations), undertaken in order to put it into a fit state for letting and not allowable for the purposes of Schedule A, is regarded as allowable expenditure for capital gains tax purposes under Section 38(1) TCGA 1992.

E. Statements relating to Inheritance Tax (also applicable where tax charged is Capital Transfer Tax) and Estate Duty El.

Powers of appointment

1. It is not necessary for the interests of individual beneficiaries to be defined. They can for instance be subject to powers of appointment. In any particular case the exemption will depend on the precise terms of the trust and power concerned, and on the facts to which they apply. In general, however, the official view is that the conditions do not restrict the application of Section 71 IHTA 1984 to settlements where the interests of individual beneficiaries are defined and indefeasible. 2. The requirement of Section 71(1)(a) IHTA 1984 is that one or more persons will, on or before attaining a specified age not exceeding twenty five, become beneficially entitled to, or to an interest in possession in, the settled property or part of it. It is considered that settled property would meet this condition if at the relevant time it must vest for an interest in possession in some member of an existing class of potential beneficiaries on or before that member attains 25. The existence of a special power of appointment would not of itself exclude Section 71 if neither the exercise nor the release of the power could break the condition. To achieve this effect might, however, require careful drafting. 3. The inclusion of issue as possible objects of a special power of appointment would exclude a settlement from the benefit of Section 71 if the power would allow the trustees to prevent any interest in possession in the settled property from commencing before the beneficiary concerned attained the age specified. It would depend on the precise words of the settlement and the facts to which they had to be applied whether a particular settlement satisfied the conditions of Section 71(1). In many cases the rules against perpetuity and accumulations would operate to prevent an effective appointment outside those conditions. However the application of Section 71 is not a matter for a once-for-all decision. It is a question that needs to be kept in mind at all times when there is settled property in which no interest in possession subsists. 4. Also, a trust which otherwise satisfies the requirement of Section 71(1)(a) would not be disqualified by the existence of a power to vary or determine the respective shares of members of the class (even to the extent of excluding some members altogether) provided the power is exercisable only in favour of a person under 25 who is a member of the class. Annex To SPE1 Practical illustrations of Section 71 IHTA 1984. The examples set out below are based on a settlement for the children of X contingently on attaining 25, the trustees being required to accumulate the income so far as it is not applied for the maintenance of X's children. Example A The settlement was made on X's marriage and he has as yet no children. Section 71 IHTA 1984 will not apply until a child is born and that event will give rise to a charge for tax under Section 65 IHTA 1984. Example B The trustees have power to apply income for the benefit of X's unmarried sister. Section 71 IHTA 1984 does not apply because the conditions of subsection (1)(b) are not met.

Example C X has power to appoint the capital not only among his children but also among his remoter issue. Section 71 IHTA 1984 does not apply (unless the power can be exercised only in favour of persons who would thereby acquire interests in possession on or before attaining age 25). A release of the disqualifying power would give rise to a charge for tax under Section 65 IHTA 1984. Its exercise would also give rise to a charge under Section 65 IHTA 1984. Example D The trustees have an overriding power of appointment in favour of other persons. Section 71 IHTA 1984 does not apply (unless the power can be exercised only in favour of persons who would thereby acquire interests in possession on or before attaining age 25). A release of the disqualifying power would give rise to a charge for tax under Section 65 IHTA 1984. Its exercise would also give rise to a charge under Section 65 IHTA 1984. Example E The settled property has been revocably appointed to one of the children contingently on his attaining 25 and the appointment is now made irrevocable. If the power to revoke prevents Section 71 IHTA 1984 from applying (as it would for example, if the property thereby became subject to a power of appointment as at C or D above), tax will be chargeable under Section 65 IHTA 1984 when the appointment is made irrevocable. Example F The trust to accumulate income is expressed to be during the life of the settlor. As the settlor may live beyond the 25th birthday of any of his children, the trust does not satisfy the condition in subsection (1)(a) and Section 71 IHTA 1984 does not apply. E2.

Powers of advancement

E3.

Superannuation schemes

1. This Statement clarifies the inheritance tax liability of benefits payable under pension schemes. 2. No liability to inheritance tax arises in respect of benefits payable on a person's death under a normal pension scheme except in the circumstances explained immediately below. Nor does a charge to inheritance tax arise on payments made by the trustees of a superannuation scheme within Section 151 IHTA 1984 in direct exercise of discretion to pay a lump sum death benefit to any one or more of a member's dependants. It is not considered that pending the exercise of the discretion the benefit should normally be regarded as relevant property comprised in a settlement so as to bring it within the scope of IHTA 1984 Part III. The protection of Section 151 IHTA 1984 would not of course extend further if the trustees themselves then settled the property so paid. 3.

Benefits are liable to inheritance tax if:

(a)

they form part of the freely disposable property passing under the will or intestacy of a deceased person. This applies only if the executors or administrators have a legally enforceable claim to the benefits: if they were payable to them only at the discretion of

the trustees of the pension fund or some similar persons they are not liable to inheritance tax); or (b)

the deceased had the power, immediately before the death, to nominate or appoint the benefits to any person including his dependants.

4. In these cases the benefits should be included in the personal representatives’ account (schedule of the deceased’s assets) which has to be completed when applying for a grant of probate or letters of administration. The inheritance tax (if any) which is assessed on the personal representatives’ account has to be paid before the grant can be obtained. 5. On some events other than the death of a member information should be given to the appropriate office of IR Capital Taxes. They are: (i)

the payment of contributions to a scheme which has not been approved for income tax purposes;

(ii)

the making of an irrevocable nomination or the disposal of a benefit by a member in his or her lifetime (otherwise than in favour of a spouse) which reduces the value of his or her estate (e.g. the surrender of part of the pension or lump sum benefit in exchange for a pension for the life of another);

(iii)

the decision by a member to postpone the realisation of any of his or her retirement benefits.

6. If inheritance tax proves to be payable the IR Capital Taxes will communicate with the persons liable to pay the tax. 7. See

also:

• Statement of Practice 10/86; and • Tax Bulletin No. 2 of February 1992; the article ‘INHERITANCE TAX - Retirement Benefits Under Private Pension Contracts: Section 3(3) Inheritance Tax Act 1984’. E4.

Associated operations

Life assurance policies and annuities are regarded as not being affected by the associated operations rule if, first, the policy was issued on full medical evidence of the assured’s health and, second, it would have been issued on the same terms if the annuity had not been bought. E5.

Close companies

The Commissioners for Her Majesty’s Revenue and Customs consider that the general intention of Section 101 IHTA 1984 is to treat the participators as beneficial owners for all the purposes of that Act. Consequently, the conditions of Sections 52(2) and 53(2) IHTA 1984 are regarded as satisfied where it is the company that in fact becomes entitled to the property or disposes of the interest.

E6.

Power to augment income

This statement sets out the effect for inheritance tax of the exercise by trustees of a power to augment a beneficiary’s income out of capital. In the normal case, where the beneficiary concerned is life tenant of the settled property this will have no immediate consequences for inheritance tax. The life tenant already has an interest in possession and under the provisions of Section 49(1) IHTA 1984 is treated as beneficially entitled to the property. The enlargement of that interest to an absolute interest does not change this position (Section 53(2) IHTA 1984) and it is not affected by the relationship of the beneficiary to the testator. In the exceptional case, where the beneficiary is not the life tenant, or in which there is no subsisting interest in possession, the exercise of the power would give rise to a charge for tax under Section 52(1) IHTA 1984, although on or after 17 March 1987 this may be a potentially exempt transfer, or a charge under Section 65(1)(a) IHTA 1984. But if the life tenant is the surviving spouse of a testator who died before November 13 1974, exemption might be available under paragraph 2 Schedule 6 IHTA 1984. The exercise of the power would be regarded as distributing the settled property rather than as reducing its value, so that Sections 52(3) and 65(1)(b) IHTA 1984 would not be in point. E7.

Protective trusts

In the Commissioners for Her Majesty’s Revenue and Customs view, the reference to trusts ‘to the like effect as those specified in Section 33(1) of the Trustee Act 1925’ - contained in Sections 73 and 88 IHTA 1984 - is a reference to trusts which are not materially different in their tax consequences. The Commissioners for Her Majesty’s Revenue and Customs would not wish to distinguish a trust by reason of a minor variation or additional administrative duties or powers. The extension of the list of potential beneficiaries to, for example, brothers and sisters is not regarded as a minor variation. E8.

Age of majority - Obsolete. See now Begg-McBrearty (Inspector of Taxes) v Stilwell [1996] STC 413

E9.

Excluded property

Property is regarded, for the purposes of Section 48(3) IHTA 1984, as becoming comprised in a settlement when it, or other property which it represents, is introduced by the settlor. E10.

Leases for life

E11.

Employee trusts

This statement clarifies the application of Section 13(1) IHTA 1984, where employees of a subsidiary company are included in the trust. The Commissioners for Her Majesty’s Revenue and Customs regard Section 13 (1) IHTA 1984 as requiring that where the trust is to benefit employees of a subsidiary of the company making the provision, those eligible to benefit must include all or most of the employees and officers of the subsidiary and the employees and officers of the holding company taken as a single class. So it would be possible to exclude all of the officers and employees of the holding company without losing the exemption if they comprised only a minority of the combined class. But the exemption

would not be available for a contribution to a fund for the sole benefit of the employees of a small subsidiary. This is because it would otherwise have been easy to create such a situation artificially in order to benefit a favoured group of a company’s officeholders or employees. But even where the participators outnumber the other employees the exemption is not irretrievably lost. The requirement to exclude participators and those connected with them from benefit is modified by Section 13(3) IHTA 1984. This limits the meaning of ‘a participator’ for this purpose to those having a substantial stake in the assets being transferred and makes an exception in favour of income benefits. So even where most of the employees are also major participators or their relatives, an exempt transfer could be made if the trust provided only for income benefits and for the eventual disposal of the capital away from the participators and their families. This restriction does not affect the exemptions offered by Section 86 IHTA 1984 from tax charges during the continuance of a trust for employees which meets the conditions of that section. E12.

Orders in matrimonial proceedings

E13.

Charities

1. Sections 23 and 24 IHTA 1984 exempt from inheritance tax certain gifts to charities and political parties to the extent that the value transferred is attributable to property given to a charity etc. Section 25 IHTA 1984 exempts certain gifts for national purposes and for the public benefit. 2. Where the value transferred (i.e. the loss to transferor’s estate as a result of the disposition) exceeds the value of the gift in the hands of a charity, etc. the Commissioners for Her Majesty’s Revenue and Customs take the view that the exemption extends to the whole value transferred. E14.

Pools etc. syndicates

No liability to inheritance tax arises on winnings by a football pool, National Lottery or similar syndicate provided that the winnings are paid out in accordance with the terms of an agreement drawn up before the win. Where for example football winnings are paid out, in accordance with a pre-existing enforceable arrangement, among the members of a syndicate in proportion to the share of the stake money each has provided, each member of the syndicate receives what already belongs to him or her. There is therefore no ‘gift’ or ‘chargeable transfer’ by the person who, on behalf of the members, receives the winnings from the pools promoter. Members of a pool syndicate may think it wise to record in a written, signed and dated statement, the existence and terms of the agreement between them. But HM Revenue and Customs cannot advise on the wording or legal effect of such a statement, nor do they wish copies of such statements to be sent to them for approval or registration. Where following a pools win the terms of an agreement are varied or part of the winnings are distributed to persons who are not members of the syndicate, an IHT liability may be incurred. The same principles apply to premium bonds syndicates and other similar arrangements.

E15.

Close companies: Group transfers

This statement clarifies the position concerning dividend payments and transfers of assets from a subsidiary company to a parent or sister company as appropriate. Whether or not a disposition is a transfer of value for capital transfer tax or inheritance tax purposes has to be determined by reference to Section 3(1), (2) IHTA 1984, and Section 10 provides that a disposition is not a transfer of value if it was not intended to confer any gratuitous benefit on any person, subject to the other provisions of that subsection. In the –Commissioners for Her Majesty’s Revenue and Customs view, the effect is that a dividend paid by a subsidiary company to its parent is not a transfer of value and so Section 94 IHTA 1984 does not start to operate in relation to such dividends. Nor do the – Commissioners for Her Majesty’s Revenue and Customs feel that they can justifiably treat a transfer of assets between a wholly-owned subsidiary and its parent or between two wholly-owned subsidiaries as a transfer of value. E16. E17. E18.

Missives of sale Incidence of tax Partial disclaimers of residue

Under Scots law there are certain circumstances in which a residuary legatee can make a partial disclaimer. Where this is possible the Commissioners for Her Majesty’s Revenue and Customs accepts that the provisions of Section 142 IHTA 1984, which deal with disclaimers, apply.

F. Miscellaneous Fl.

Limitations of Inland Revenue advice to taxpayers - Superseded by Inland Revenue Code of Practice No 10 ‘Information and advice’ published in May 1995.

F2.

United Kingdom branches of foreign banks - Superseded by Section 67 FA 1982.

F3.

Close companies: apportionment of income and the consequentials for Capital Gains Tax: Close companies in liquidation - Superseded by ESCs A36 and D12.

F4.

Artificial separation of business activities

Part III. Statements issued after 18 July 1978 SP1/78

Employment Protection Act 1975: Maternity pay

SP2/78

Close companies: Non-resident participators: Apportionment

SP3/78

Close companies: Income tax relief for interest on loans applied in acquiring an interest in a close company

1. Section 360 ICTA 1988 provides, subject to certain conditions, for relief from income tax in respect of interest on a loan applied in acquiring any part of the ordinary share capital of a close company or in lending on for use in the business of that or an associated close company. 2. In paragraph 41 of HM Revenue and Custom’s booklet entitled ‘Tax Treatment of Interest Paid’ issued in 1974, it is stated that: ‘The company must have been a ‘close company’ for tax purposes throughout the period beginning immediately after the application of the money and ending with the payment of interest giving rise to the claim for relief.’ The Commissioners for Her Majesty’s Revenue and Customs have now agreed that the statutory provisions may be interpreted as not requiring the company to be close at the time of paying the interest. 3. In future, therefore, Section 360 ICTA 1988 will in effect be construed by HM Revenue and Customs as applying in relation to a company which has ceased to be close after the application of the loan proceeds as they apply in relation to companies which have remained close throughout, provided that the other conditions for relief are satisfied. Claims which have been determined by an agreement taking effect as the determination of an appeal cannot be reopened for the year or years to which the claim related, but subject to this, claims made on the new basis within the statutory time limit will be admitted for all years. SP4/78

Mining companies: Expenditure on planning permission applications

SP5/78

Stamp Duty: Conveyance in consideration of a debt

SP6/78

Trade unions: Provident benefits: Legal expenses paid for members - Superseded by SP1/84

SP7/78

Capital Gains Tax: Exercise of a power of appointment over settled property

SP8/78

Building licences granted under the Community Land Act 1975: Stock relief

SP1/79

Partnerships: Extension of Statement of Practice D12

Paragraph 8 of SP/D12 explains the circumstances in which the capitalized value of an annuity paid by a partnership to a retired partner will not be treated as consideration for the disposal of his share in the partnership assets. The Commissioners for Her Majesty’s Revenue and Customs have now agreed that this practice will be extended to certain cases in which a lump sum is paid in addition to an annuity. Where the aggregate of the annuity and one-ninth of the lump sum does not exceed the appropriate fraction (as indicated in the Statement) of the retired partner's average share of the profits, the capitalized value of the annuity will not be treated as consideration in the hands of the retired partner. The lump sum, however, will continue to be so treated.

This extension of the practice will be applied to all cases in which the liability has not been finally determined at the date of this Notice. See also SP1/89. SP2/79

Development Land Tax: Negotiations on liability

SP3/79

Payment of life assurance premiums on which commission is payable to the policyholder - Replaced by SP5/95

SP4/79

Life assurance premium relief: Children's policies

The Commissioners for Her Majesty’s Revenue and Customs have considered the question of premium relief as it relates to policies effected on the lives of children in the light of the new scheme for premium relief by deduction commencing on 6 April 1979. Relief under Section 266 ICTA 1988 (formerly Section 19 ICTA 1970) is at present confined to premiums on an ‘insurance or contract ... made by (the claimant) and as from 6 April 1979, ‘the individual’. Where a child is of ‘tender years’ the Commissioners for Her Majesty’s Revenue and Customs consider that he cannot reasonably be regarded as having ‘made’ the insurance or contract since he would have insufficient knowledge or understanding of what he was doing. Accordingly the Commissioners for Her Majesty’s Revenue and Customs have decided that no relief is due in respect of premiums on a policy ‘taken out’ by a child of ‘tender years’. For this purpose they regard ‘tender years’ as including a child of less than 12 years of age. In applying this ruling the –Commissioners for Her Majesty’s Revenue and Customs have agreed that: 1. Relief will be allowed by deduction on children's policies which satisfy all the other requirements for relief and which are issued by a company within UK jurisdiction before 1 March 1979. 2. New policies taken out on or after 1 March 1979 by a child of ‘tender years’ on his own life, will not be allowed relief whether or not the premiums are paid out of the child's own income. 3. Where relief is refused in respect of a policy taken out on or after 1 March 1979 by a child of ‘tender years’, it may be granted when the child reaches the age of 12 years if the insurance or contract was made before 1 September 1979. SP5/79

Family company: Sale of assets in anticipation of liquidation

SP6/79

Closure of business followed by sale of assets or liquidation of company

SP7/79

Benefits in kind: Cheap loans: Advances for expenses - This Statement of Practice (SP) has been enacted in section 179 of the Income Tax (Earnings Pensions) act 2003. This SP applies up to and including tax year 2002-03. After this date S179 ITEPA applies

SP8/79

Compensation for acquisition of property under compulsory powers

1. HM Revenue and Customs practice - announced in a statement on 13 December 1972 has been that any element of compensation for temporary loss of profits, which is present in the compensation or price payable by an authority possessing compulsory powers for the acquisition

of property used for the purposes of a trade or profession, is included as part of the consideration for the resulting disposal for the purposes of capital gains. 2. The Commissioners for Her Majesty’s Revenue and Customs have reconsidered this practice in the light of the decision of the Court of Appeal in the recent case of the City of Stoke on Trent v Wood Mitchell & Co Ltd (a Lands Tribunal case). In accordance with this decision any element of compensation received for temporary loss of profits in the circumstances described above falls to be included as a receipt taxable under Case I or II of Schedule D. Compensation for losses on trading stock and to reimburse revenue expenditure, such as removal expenses and interest, will be treated in the same way for tax purposes. 3. The practice described in paragraph 2 will also apply in compensation cases where no interest is acquired (e.g. compensation due to damage, injury or exploitation of land, or to the exercise of planning control). 4. The new practice will apply to all cases in which the liability had not been finally determined at the date of the Court of Appeal's judgement (28 July 1978). SP9/79

Expenditure on producing films and certain similar assets

SP10/79

Power for trustees to allow a beneficiary to occupy a dwelling house

Many wills and settlements contain a clause empowering the trustees to permit a beneficiary to occupy a dwelling house which forms part of trust property on such terms as they think fit. The Commissioners for Her Majesty’s Revenue and Customs do not regard the existence of such a power as excluding any interest in possession in the property. When there is no interest in possession in the property in question the Commissioners for Her Majesty’s Revenue and Customs do not regard the exercise of the power as creating one if the effect is merely to allow non-exclusive occupation or to create a contractual tenancy for full consideration. The Commissioners for Her Majesty’s Revenue and Customs also take the view that no interest in possession arises on the creation of a lease for a term or a periodic tenancy for less than full consideration, though this will normally give rise to a charge for tax under Section 65 (1)(b) IHTA 1984. On the other hand, if the power is drawn in terms wide enough to cover the creation of an exclusive or joint residence, albeit revocable, for a definite or indefinite period, and is exercised with the intention of providing a particular beneficiary with a permanent home, the Revenue will normally regard the exercise of the power as creating an interest in possession. And if the trustees in exercise of their powers grant a lease for life for less than full consideration, this will be regarded as creating an interest in possession in view of Sections 43(3) and 50(6) IHTA 1984. A similar view will be taken where the power is exercised over property in which another beneficiary had an interest in possession up to the time of the exercise. SP11/79

Life assurance premium relief: Children's policies

The Commissioners for Her Majesty’s Revenue and Customs have given further consideration to the question of premium relief as it applies to policies effected on the lives of children. They remain of the opinion that (as specified in the Statement of Practice SP4/79 issued on 28 February 1979) no relief is in strictness due on premiums on a policy taken out by a child of tender years (i.e. a child under age 12), but they are prepared to relax somewhat the terms of that Statement. 1. In view of the special problems of industrial branch business the –Commissioners for Her Majesty’s Revenue and Customs will not contest life assurance premium relief on premiums on all industrial branch juvenile policies and similar policies issued by registered Friendly Societies

as part of their tax exempt business, subject in each case to the limit in paragraph 2(3), Schedule 14, ICTA 1988 (formerly paragraph 11(3), Schedule 4, FA 1976). 2. Where an ordinary branch policy other than a Friendly Society policy referred to above is taken out on the life of a child and is assigned to him or he possesses or acquires the whole interest in the policy, relief on premiums paid by the child may be allowed (provided that the other conditions are satisfied) a.

where the policy was taken out after the child had attained age 12;

b.

where the policy was taken out prior to 1 March 1979 and before the child attained age 12;

c.

where the policy was taken out on or after 1 March 1979 before the child attained age 12 and he has attained that age.

SP12/79

Investigation settlements: Retirement annuity relief

SP13/79

Flat rate expenses for manual and certain other employees

SP14/79

Unquoted shares or securities held on 6 April 1965

1. This Statement concerns the application of paragraph 19, Schedule 2 TCGA 1992 (paragraph 14, Schedule 5, CGTA 1979) to unquoted shares and securities held on 6 April 1965. Where there has been a reorganisation of a company's share capital before 6 April 1965, paragraph 19(1) deems the shares to have been sold and re-acquired at market value on 6 April 1965. Where a reorganisation takes place on or after 6 April 1965, and all or part of the new holding of shares is disposed of without an election for valuation as at 6 April 1965 being made, paragraph 19(2) requires the new shares to be valued as at the date of the reorganisation: time apportionment is applied to the gain or loss up to that date and on a disposal this is brought into account as well as the subsequent gain or loss. 2. For the purposes of paragraphs 19(1) and 19(2) ‘reorganisation of share capital’ includes not only reorganisation of one company's share capital within Section 126 or Section 132 TCGA 1992 (Section 77 or Section 82 CGTA 1979), but also certain takeovers, reconstructions and amalgamations involving more than one company within Section 135 TCGA 1992 (Section 85 CGTA 1979) or Section 136 TCGA 1992 (Section 86 CGTA 1979). 3. Paragraph 19(3) however, prevents the application of paragraphs 19(1), or 19(2) where the new holding differs only from the original shares in being a different number, whether greater or less, of shares of the same class as the original shares. HM Revenue and Custom’s practice has been to treat paragraph 19(3) as capable of covering reorganisations involving more than one company; for example, the exchange of shares of a certain class in one company for shares of the same class in another company. 4. The Commissioners for Her Majesty’s Revenue and Customs have reconsidered this practice in the light of the case of CIR v Dr G W Beveridge. In accordance with opinions expressed in the Court of Session paragraph 19(3) is no longer considered to apply where the shares comprised in the new holding are shares in a different company from the old shares. 5. This interpretation will be applied to all cases in which the liability had not been finally determined at the date of the Court of Sessions' judgement (19 July 1979).

SP1/80

Legal entitlement and administrative practices - Superseded by SP6/95

SP2/80

Statement clarifying the operation of an existing administrative practice: Case V Schedule D Losses - Superseded by ESC B25

SP3/80

Section 707 ICTA 1988: Cancellation of tax advantages from certain transactions in securities: Procedure for clearance in advance

Section 703, ICTA 1988 and the succeeding sections (which provide for the cancellation of tax advantages from certain transactions in securities) contain safeguards against counteraction being taken unwarrantably in respect of transactions which a taxpayer has carried out. In addition, Section 707 provides a procedure for the taxpayer to be told in advance whether The Commissioners for Her Majesty’s Revenue and Customs are satisfied that proposed transactions as described to them, if carried out, would not invoke counteraction. Reasons for refusing clearance 1. Where the Commissioners for Her Majesty’s Revenue and Customs cannot give clearance under Section 707 they are not statutorily required to say why and at one time their practice was to decline to do so. With a view to removing misunderstanding in particular about the scope of Section 703 in relation to transactions with a commercial element, they later modified that practice. Where the applicant has given full reasons for his transactions and clearance has to be refused, the Commissioners for Her Majesty’s Revenue and Customs indicate, where possible, their main grounds for doing so. In appropriate cases where they do not think it right to give reasons the Commissioners for Her Majesty’s Revenue and Customs will invite the principals themselves as well as their advisers to an interview so that the Commissioners for Her Majesty’s Revenue and Customs can be certain they have fully appreciated the position. Significance of refusing clearance 2. The rules of the clearance procedure require the Commissioners for Her Majesty’s Revenue and Customs to say whether in their view Section 703 would not apply. They are not required to say whether in their view the Section definitely would apply. It may not always be practicable to do so in advance of the transaction's actually being carried out, e.g. where the motive for it is a relevant factor. Nonetheless, it is not the practice of the Commissioners for Her Majesty’s Revenue and Customs to withhold consent under Section 707 unless they would, on the information available to them, expect to take counteraction under Section 703. The then Financial Secretary to the Treasury stated this practice in the 1966 Finance Bill debates in the following words: ‘The Revenue's approach is that it will not refuse a [Section 707] clearance unless, having considered the transaction fully and all the circumstances of it, it would itself take action under the Section if the transaction were completed.’ SP4/80

Industrial buildings allowance: Industrial workshops constructed for separate letting to small businesses

Under the industrial buildings allowance rules (Part 1 CAA 1990) a building only qualifies for relief if it is in use as an industrial building or structure as defined in Section 18. Where a number of small workshops which are to be industrial buildings are constructed for separate letting to small businesses, it is thus necessary for the owner of the relevant interest to establish in each case that the tenant is carrying on a qualifying trade. He must also establish, in each case, how much, if any, of the building is used for non-qualifying purposes, such as for offices. These requirements can be burdensome, particularly where tenants change frequently, and further

information on these points has to be obtained to establish that each workshop continues to be used in full as an industrial building. HM Revenue and Customs have decided that, in future, they will normally be prepared to deal with industrial buildings allowance claims for estates consisting of small industrial workshops on a global instead of individual basis. Where, therefore, individual workshops units of 2,500 square feet or less intended for separate letting as industrial buildings to small businesses are constructed as an estate, the Inspector will normally be satisfied with a general description of the uses to which the units will be put and, unless the circumstances suggest the need for further enquiry, will not ask for particulars of the trades carried on by individual tenants or details of the uses to which these premises are put. For the purpose of writing down allowances, the whole of any estate built at one time (or part of an estate where it is constructed in phases) will be regarded as having been brought into use when the first workshop begins to be used. A sale of the relevant interest in the estate would also be dealt with on a global basis so far as possible, but when only part of the estate is sold, separate computations would normally be necessary to establish the balancing adjustments and the successor's allowances. This practice is intended to simplify the administration of the industrial buildings allowance rules as they apply to most industrial workshop estates built for letting as separate units to small businesses. It will not apply where, exceptionally, several units in one estate are let to the same tenant or connected tenants; where the estate is to a significant extent used for trades which do not attract industrial buildings allowance; and in any other circumstances where the relief available would be significantly lower on a strict application of the industrial building allowances rules. SP5/80

Group relief: Section 410 ICTA 1988 - Superseded by SP3/93

SP6/80

Small workshops allowance

SP7/80

Deceased persons' estates: Income received during the administration period

SP8/80

Stock relief: Deferment of recovery charges: Definition of net indebtedness in Paragraph 1(5), Schedule 7, FA 1980

SP9/80

Investigation settlements: Retirement annuity relief -Superseded by SP9/91

SP10/80

Mortgage interest relief: Year of marriage

SP11/80

Liability under Chapter II of Part XIII, ICTA 1988, on gains arising on life and capital redemption policies and life annuities

1. On the occurrence of a chargeable event in connection with a policy of life assurance, a contract for life annuity, or a capital redemption policy, the appropriate person may be liable to pay tax in respect of any gain treated as arising on that event. 2. The Commissioners for Her Majesty’s Revenue and Customs have recently considered the liability on a chargeable event of persons not resident in the United Kingdom. Although the matter is not free from doubt, they have concluded that in future a charge to tax should not be made on non-resident persons if the proceeds of the policy or contract are not payable in the United Kingdom and: a.

the policy or contract was made outside the United Kingdom by an overseas branch of an insurance company resident in the United Kingdom; or

b.

the policy or contract was made outside the United Kingdom by an insurance company not resident in the United Kingdom.

SP12/80

Business property relief: ‘Buy and sell’ agreements

The Commissioners for Her Majesty’s Revenue and Customs understand that it is sometimes the practice for partners or shareholder directors of companies to enter into an agreement (known as a ‘Buy and Sell’ Agreement) whereby in the event of the death before retirement of one of them, the deceased’s personal representatives are obliged to sell and the survivors are obliged to purchase the deceased’s business interests or shares, funds for the purchase being frequently provided by means of appropriate life assurance policies. In the –Commissioners for Her Majesty’s Revenue and Customs view such an agreement, requiring as it does a sale and purchase and not merely conferring an option to sell or buy, is a binding contract for sale within Section 113 IHTA 1984. As a result the inheritance tax business property relief will not be due on the business interest or shares. (Section 113 IHTA 1984 provides that where any property would be relevant business property for the purpose of business property relief in relation to a transfer of value but a binding contract for its sale has been entered into at the time of the transfer, it is not relevant business property in relation to that transfer.) SP13/80

Demergers: Sections 213-8 ICTA 1988

Sections 213-8, ICTA 1988 contain certain tax reliefs where trading activities carried on by a single company or group are divided so as to be carried on by two or more companies not belonging to the same group or by two or more independent groups. This Statement of Practice explains how HM Revenue and Customs will apply certain of the provisions in practice and does not affect the right of appeal on points affecting liability to tax. The references are to ICTA 1988. ‘exempt distribution’ This expression, wherever it appears in Sections 213-8, refers only to what would otherwise have been a distribution for the purposes of the Corporation Tax Acts. It does not, for example, apply to a distribution in a winding up. 213(3)(b)(i) To satisfy S 213 (3)(b)(i), a trade (or trades) must be transferred. The Revenue will regard this as satisfied where what is received by the transferee company is a trade. What passes from one company to another will be a parcel of assets comprising what is needed for the carrying on of that trade. The same trade may previously have been carried on as such by the distributing company; but this is not essential. What is transferred may have been part only of a trade carried on by that company, for example, the retail end of a combined manufacturing/retailing trade. Or again the assets being transferred may be being brought together for the first time from one or more trades carried on by the distributing company or in the group of which it is a member; assets may even be included which were not previously used in a trade or held by a trading company, e.g. property may have been held in a property investment company. What matters is that there should be a division of trading activities and that assets transferred should be transferred to be used in a trade by the transferee company and should be so used. Relief will not be denied solely because some minor asset linked with a trading asset, for example a flat above a shop, is also transferred. S213 (6)(a), 8(b) and 8(d) ‘Ordinary shares’ Relief under S213 (2) is given to a distribution to ordinary shareholders only insofar as it is of shares forming part of ordinary share capital (as defined in Section 832) which are transferred or

issued. Relief on that distribution will not be denied solely because concurrently there is a transfer or issue, of a kind that does not qualify for relief, of other shares or securities to ordinary shareholders or of shares or securities of any description to preference shareholders (and whether or not that other transfer or issue involves a taxable distribution). Similarly, the words ‘substantially the whole’ will be regarded as satisfied even where the shareholders give some consideration. However, these other circumstances will be taken into account in judging whether all the conditions, in particular those of S213 (10) and (11) are satisfied. S213 (6)(a), 8(b), and (8)(d) ‘substantially the whole’ In the context of these particular provisions, ‘substantially the whole’ is taken to mean around 90 per cent or more. S213 (8)(a) ‘interest ... in that trade’ The legislation does not define this expression. In the Revenue's view, it must be given a wide meaning. A company would clearly retain an interest in a trade if it carried it on jointly or otherwise had a right to the profits or assets or to any of them. But other circumstances could exist in which it could be said to have an interest, for example, if it was or was entitled to be a main supplier or customer, or possibly as a consequence of the two companies having common management. In these kinds of case, the Revenue would not normally argue that the interest was other than a ‘minor interest’ unless the interest effectively gave control of the trade or of its assets, or a material influence on the profits or on their destination. More generally, it will not always be possible to quantify an interest in a trade; but where this can be done, ‘minor’ is the opposite of ‘substantially the whole’, i.e. around 10 per cent or less. S213 (6)(b), (8)(c) and (8)(e) ‘after’ In the Revenue's view, these provisions require that the company should be bona fide trading after the distribution; but in this context they do not regard ‘after’ as meaning ‘for ever after’. If there were any intention that the conditions would cease to be satisfied at some later time, the application of S213 (10) and (11) would need to be considered. S213 (11)(c) The concurrent sale of another company in the same group as a subsidiary being demerged is not necessarily a bar to relief. It would be so, for example, if that were a main purpose of a scheme or arrangement of which the distribution formed a part. S213 (11)(d) ‘after’ ‘after’ in this context clearly means ‘at any time after’. S215 Advice on the method of application under paragraph S215 (1) and on the information to be included in it is contained in the Annex to this Statement. Where, exceptionally, it is not possible to explain the purposes of a demerger adequately in writing, the Revenue will invite applicants to an interview. If they have to refuse clearance under these provisions, they will normally state the main reason for doing so. All general enquiries on the demerger legislation should be directed to Business Tax Division (Demergers), New Wing, Somerset House, London WC2R 1LB and not to local Inspectors of Taxes. Particular enquiries on the capital gains aspect should however be directed to Capital and Savings Division, Capital Gains Clearance Section at Sapphire House, 550 Streetsbrook Road, Solihull, West Midlands B91 1QU. S216 (1) This subsection requires a company making an exempt distribution to make a return giving particulars, inter alia, ‘of the circumstances by reason of which it is exempt’. In many cases a clearance notification will previously have been given by the Commissioners for Her Majesty’s

Revenue and Customs under S215 (1). Where the distribution is precisely that for which a clearance application was made, all relevant circumstances being as disclosed in that application, it will suffice to refer to the notification and to confirm that that is so. S768 ICTA 1988 Section 768 provides, broadly, that where within any three year period there is both a change in the ownership of a company and a major change in the nature or conduct of a trade carried on by it, then relief cannot be obtained against profits arising after the change of ownership for losses incurred before the change. The object of the demergers legislation is to make it easier for trading activities to be split (which may involve a change in ownership of a company within the meaning of the Section) so that some part of them at least may be managed more dynamically (which may involve a major change in the nature or conduct of the trade). In the meantime, if full details are given, the Revenue will consider sympathetically the application of the Section where the reason for Section 768 applying is that the ownership of a trade being demerged under these provisions is passing from a company to its shareholders, the underlying ownership of the trade being unchanged (e.g., the shareholders after the distribution own directly the interests in a company which previously they owned indirectly through the company which made the distribution). NB Extra-Statutory Concession C11 provides that a distributing company will not be regarded as failing to meet Section 213 (7) or (9) merely because it retains, after the distribution, sufficient funds to meet the cost of liquidation and to cover the amount of the share capital remaining, depending on the amount of that remaining share capital. The full text of ESC C11 may be found on the internet at www.inlandrevenue.gov.uk/leaflets/ir1.pdf ANNEX TO SP13/80 APPLICATIONS FOR CLEARANCE UNDER S215 (1) Procedure Application for clearance under Section 215 ICTA 1988 should be sent to: IF NOT MARKET SENSITIVE Mohini Sawhney 5th Floor 22 Kingsway LONDON WC2B 6NR IF MARKET SENSITIVE Ray McCann 5th Floor 22 Kingsway LONDON WC2B 6NR Applications under Section 215 ICTA and one or both of Sections 138/9 TCGA or 703 ICTA can be sent to the same address with a copy of the application and all supporting documents for each clearance sought. Applications will then be forwarded to the relevant offices. Alternatively the other applications may be made directly to: HMRC

Capital and Savings Capital Gains Clearance Section

Sapphire Solihull West B91

House 550, Streetsbrook Rd Midlands 1QU

and HMRC 5th 22 LOND WC2B

Special Investigations Section Floor Kingsway ON 6NR

respectively. Form of application To assist companies in preparing clearance applications under paragraph S215 (1) and to facilitate their consideration by the Commissioners for Her Majesty’s Revenue and Customs, an outline of the basic information needed is given below. It is not an exhaustive statement and each applicant in giving the particulars of the relevant transactions required by S215 (5) must fully and accurately disclose all facts and circumstances material for the decision of the Commissioners for Her Majesty’s Revenue and Customs (S215 (8)). This advice refers only to applications under S215 (1). Where a single application is made under that and other provisions, e.g. Section 138 TCGA 1992, it should open by stating clearly the provisions under which it is made and should be expanded to include any additional information needed for the application(s) under the other provision(s). It will be helpful if applications follow the order of items below, each item being expanded as necessary and further information being added at the end. 1. Companies The name of each ‘relevant company’ (S213 (3)) showing a.

whether it is a distributing’ ‘subsidiary’’ or ‘transferee’ company

b.

its tax district and reference

c.

whether it is resident in the UK

d.

status i.e. ’holding company’ or ‘trading company’ within the S218 (1) definition or some other type of company e.g. investment company or holding or trading company not within the definition.

2. Groups Where appropriate a statement or diagram showing the shareholding interest of each group company in other group companies. A group for this purpose is the largest 51 per cent group (as defined in S218 (1)) to which the distributing company belongs.

3. Purpose and benefits A statement of the reasons for the demerger, the trading activities to be divided, the trading benefits expected and any other benefits expected to accrue whether or not to the company concerned. If this can be stated more easily after giving a detailed description of the proposed transactions this item may be included in the application after item 4. 4. Transactions A detailed description of all the proposed transactions including a. Share capital Particulars (class, amount and voting rights) of all share capital of the companies in 1. above, issued (or to be issued) in the course of the demerger showing the shares to be transferred and/or issued (or exchanged) in the demerger and to which shareholders (or classes of shareholders) or companies. Particulars of any changes to be made in shareholders' rights or loan capital arrangements in connection with the demerger should also be given. b. Transfer of trade (as distinct from a trading subsidiary) Particulars of the transfer including all trading and other assets and liabilities to be transferred and retained. (Approximate statements of affairs for the distributing and transferee companies before and after the demerger would be helpful.) Particulars of any interest in the trade to be retained by the distributing company or its group should also be given. c. Prior transactions Particulars of any prior transactions or rearrangements within a group in preparation for the demerger. The description should make it clear why it is considered that all the relevant conditions of S213 (3)-(10) and (12) are satisfied. 5. S213 (11) conditions Confirmation, together with all relevant information, that the distribution is not part of a scheme etc within S213 (11). A statement should also be given of the circumstances, if any, in which it is envisaged that control of a ‘relevant company’ (listed in 1. above) might be acquired by someone other than members of the ‘distributing company’ or a trade carried on by one of those companies before or after the demerger might cease or be sold. (Such circumstances might of course exist but not as part of a scheme or arrangement or otherwise to cause any of the qualifying conditions to be failed.) 6. Balance sheet and Profit and Loss Account The latest available balance sheets and profit and loss accounts of the existing companies in 1. above and in the case of a group the consolidated balance sheet and profit and loss account with a note of any material relevant changes between the balance sheet date and the proposed demerger (the latest balance sheet etc available may of course be later than the last sent to the appropriate tax district). SP14/80

Relief for owner occupiers

FA 1980 introduced a new relief from capital gains tax for owner occupiers who let living accommodation in their homes. The legislation has been consolidated as -TCGA1992s223 (4). The purpose of this statement is to give to people who are, (or are thinking of) letting the whole or part of their homes an indication whether they are likely to be liable to any capital gains tax when they dispose of them. Anyone who would like further information about the application to

his own circumstances of the rules and practice described in this statement is advised to get in touch with -his Tax Office which will be pleased to give further help. 1. Full exemption Where the owner of a dwelling house has occupied the whole of it as his only or main residence throughout his period of ownership • Since 6 April 1965 if he acquired it before then and disposed of it before 6 April 1988, or • Since 31 March 1982 if he acquired it before then and disposed of it on or after 6 April 1988. Any gain on disposal is entirely exempt from capital gains tax. 2. Lodger living with the family Where a lodger lives as a member of the owner's family, sharing their living accommodation and taking meals with them, no part of the accommodation is treated as having ceased to be occupied as the owner's main residence, and the exemption is not restricted at all. 3. The relief for lettings The new relief will apply where the owner disposes after 5 April 1980 -of a dwelling house which has been –his only or main residence during his period of ownership but which he has wholly or partly let as residential accommodation. That part of the gain which would previously have been - taxable, ignoring the relief for lettings, will now be exempt from capital gains tax up to the lower of • £40,000 for disposals on or after 19 March 1991 and the amount of the exemption attributable to their own occupation. The amount of the gain on the let part depends on two things: i.

how much has been let; and

ii. the length of time during which it was let. For example, someone occupies the whole of his home (acquired after 6 April 1982) for six years out of a 10 year period of ownership. One-third of it is let throughout the other 4 years. The gain on the house as a whole is £30,000. Ignoring the relief for lettings, £26,000 would be exempt from capital gains tax and £4,000 (1/3 x 4/10 x £30,000) would be chargeable. Relief for lettings applies to the £4,000 (which is less than the two limits referred to above) so that the whole of the gain of £30,000 is now exempt. 4. When relief for lettings is available Whether the let accommodation is part of the owner's dwelling house or is itself a separate dwelling house depends on the facts of particular cases. The Commissioners for Her Majesty’s Revenue and Customs wish to make known, however, their view of the application of the relief to the common case where the owner of a house, which was previously occupied as his (or the family) home, lets part as a flat or set of rooms without structural alteration (or with only minor adaptations). For the purposes of relief for lettings the Commissioners for Her Majesty’s Revenue and Customs regard this as a letting of part of the owner's dwelling house, whether or not the tenants have separate washing and cooking facilities. But the relief does not extend to

property which, although it may be part of the same building, forms a dwelling house separate from that which is, or has been, the owner's (for example, a fully self-contained flat with its own access from the road). SP15/80

Maintenance payments: Payment of school fees

Where a Court Order requiring a former spouse to make maintenance payments direct to his/her child, who is living with the other spouse, includes an element to cover the cost of school fees of that child it is sometimes the practice for the payment of those fees to be made direct to the school under the Order which would normally be in the following form: ‘that that part of the Order which reflects the school fees shall be paid to the [headmaster] [bursar] [school secretary] as agent for the said child and the receipt of that payee shall be sufficient discharge’. Provided this Order reflects what is happening in practice tax relief will be given to the payer for these payments which will form part of the taxable income of the child. Changes to the taxation of maintenance payments introduced by the 1988 Finance Act mean that no relief is available to the payer unless the Order requiring payments to the child was made: i.

by 30 June 1988, on an application to the Courts made before 15 March 1988; or

ii.

to replace, vary or supplement such an Order which itself requires payments direct to the child.

Where relief is available, the payer's tax relief is limited to that available for 1988/89, even if the payments increase in later years. The child's liability to tax on the income is similarly limited to the amount which was taxable in 1988/89. The Revenue's views of the circumstances which will properly reflect the presuppositions of such an Order and of the responsibility for establishing that such circumstances exist are as follows: The onus will be on the parties themselves to produce evidence, where requested, that the person receiving the school fees has agreed to act as agent for the child and that the contract for the payment of the fees (which will most easily be proved if in writing) is between the child (not the spouse making the payments) and the school. Changes to the tax rules for maintenance payments mean that for payments direct to children will no longer be available from 6 April 2000. SP16/80

Lorry drivers: Relief for expenditure on meals

SP17/80

Flat rate expenses for manual and certain other employees

SP18/80

Securities dealt in on the Stock Exchange Unlisted Securities Market: Status and valuation for tax purposes – Rendered obsolete on the closure of the Unlisted Securities market

SP1/81

Non-statutory redundancy payments - Superseded by SP1/94

SP2/81

Contributions to retirement benefit schemes on termination of employment

SP3/81

Individuals coming to the UK: Ordinary residence – withdrawn with effect from 6 April 2009

SP4/81

Stock relief: Recovery charges when level of trading is negligible

SP5/81

Expenditure on farm drainage

Land which in the past was reasonably well drained but subsequently become wholly or partly waterlogged because the maintenance of efficient drainage was uneconomic is sometimes made available for cultivation by the restoration of drainage or by re-draining. In such case so much of the net expenditure incurred (after crediting any grants receivable) as would be necessary to restore the drainage will be admitted as revenue expenditure in farm accounts provided it excludes: a.

any substantial element of improvement - for example, the substitution of tile drainage, for mole drainage and

b.

the capital element in cases in which the present owner is known to have acquired the land at a depressed price because of its swampy condition.

SP6/81

Maintenance payments under court orders: Retrospective dating

SP7/81

Allowable expenditure: Expenses incurred by personal representatives – Superseded by SP8/94

SP8/81

Rollover relief for replacement of business assets: Trades carried on successively

1. Where a trader ceases carrying on his trade and commences carrying on another trade, there will often be an interval between these events. In such cases, the –Commissioners for Her Majesty’s Revenue and Customs are prepared to regard the trades as having been carried on ‘successively’ within the meaning of Section 152(8) TCGA 1992 (Section 115(7) CGTA 1979) provided that this interval does not exceed three years. 2. If the assets on which the gains accrue are disposed of during this interval, relief under Section 152 will nevertheless be available, adjusted as necessary under subsection (7). If the new assets are acquired during the interval, the Commissioners for Her Majesty’s Revenue and Customs are prepared to allow the gain to be rolled over into them provided that they are not used or leased for any purpose in the period before the new trade commences and are taken into use for the purposes of the trade on its commencement. 3. In relation to a group of companies, Section 175(1) TCGA 1992 (Section 276(1) ICTA 1970) treats all of the trades of the members of the group as a single trade for the purposes of the relief. Section 48 FA 1995 extends Section 175 TCGA 1992 to permit the relief to be claimed provided that the relevant conditions are satisfied, where one member of the group makes the disposal and another member makes the acquisition. Where the assets on which the gains accrue are disposed of after the first company has ceased to trade, or where the new assets are acquired before the second company has commenced to trade, the treatment in 2. above will apply. 4. Nothing in this Statement overrides the requirement in Section 152(3) for the acquisition to take place in the period beginning twelve months before and ending three years after the disposal (unless the Commissioners for Her Majesty’s Revenue and Customs by notice in writing extend these time limits).

5. This practice will be applied to all cases in which the amount of the relief has not been finally settled by the date of this Statement (18 September 1981). (But see Inland Revenue Press Release of 1 September 1992 on Rollover Relief and Groups of Companies.) SP9/81

Exercise of a power of appointment over settled property - Superseded by SP7/84

SP10/81

Payments on account of disability resulting in cessation of employment

1. Section 401 ITEPA 2003 provides for the taxation of those payments on retirement or removal from an office or employment which otherwise are not chargeable to tax. Section 406 (b) excludes from the ambit of Section 401 any payment ‘made on account of injury to or disability of the holder of an office or employment’. 2. The practice of HM Revenue and Customs prior to 1981 was governed by the view that ‘disability’ used in juxtaposition with the word ‘injury’ meant a loss of physical or mental health with which a person was afflicted suddenly at a particular time and which rendered him physically or mentally incapable of carrying out the duties which he had previously performed. A gradual decline in physical or mental disability caused by chronic illness culminating in incapacity to perform the duties of an office or employment was not regarded as ‘disability’. 3. As a result of a decision given by the Special Commissioners on 6 January 1981 the Revenue reconsidered its practice and now accepts that ‘disability’ covers not only a condition resulting from a sudden affliction but also continuing incapacity to perform the duties of an office or employment arising out of the culmination of a process of deterioration of physical or mental health caused by chronic illness. SP11/81

Additional redundancy payments

SP12/81

The construction industry tax deduction scheme: Carpet fitting

The Commissioners for Her Majesty’s Revenue and Customs, up until 20 November 1981, took the view that where carpet fitting was included in a specification for the construction, alteration or repair of a building, it was an operation included in the deduction scheme by virtue of Schedule 13, F (No 2) A 1975 (now S.67 (2), ICTA 1988). The Commissioners for Her Majesty’s Revenue and Customs however, received legal advice on this subject. Although the matter was not free from doubt, they concluded that carpet fitting, even if included in part of a building contract, is not an operation which forms 'an integral part of ....' or is 'for rendering complete such operations as are .... described ....' in the Act. Accordingly the Commissioners for Her Majesty’s Revenue and Customs now treat carpet fitting as an operation outside the scope of the scheme. SP1/82

The interaction of Income Tax and Inheritance Tax on assets put into settlements

1. For many years the tax code has contained legislation to prevent a person avoiding higher rate income tax by making a settlement, while still retaining some rights to enjoy the income or capital of the settlement. This legislation, which is embodied in Part XV of the Taxes Act 1988(from 6 April 2005,Chapter 5,Part 5 ITTOIA 2005), provides in general terms that the income of a settlement shall, for income tax purposes, be treated as that of the settlor in all circumstances where the settlor might benefit directly or indirectly from the settlement. 2. If the trustees have power to pay or do in fact pay inheritance tax due on assets which the settlor puts into the settlement HM Revenue and Customs have taken the view that the settlor has thereby an interest in the income or property of the settlement, and that the income of the settlement should be treated as his for income tax purposes under Part XV ICTA 1988 (from 6 April 2005, Chapter 5, Part 5 ITTOIA 2005).

3. The inheritance tax legislation (Section 199, IHTA) however provides that both the settlor and the trustees are liable for any inheritance tax payable when a settlor puts assets into a settlement. The Commissioners for Her Majesty’s Revenue and Customs have therefore decided that they will no longer, in these circumstances, treat the income of the settlement as that of the settlor for income tax purposes solely because the trustees have power to pay or do in fact pay inheritance tax on assets put into settlements. 4. SP2/82

This change of practice applies to settlement income from 1981-1982 et. seq. Company's purchase of own shares: ICTA 1988 (See also Inland Revenue Tax Bulletin, Issue 21, February 1996, page 280)

Where a company makes a purchase of own shares which involves a payment in excess of the capital originally subscribed for the shares, the excess constitutes a distribution. However, such a payment is treated as not giving rise to a distribution if, among other conditions, the purchase is made wholly or mainly to benefit a trade carried on by the company, or by one of its 75% subsidiaries. This Statement indicates how this test is applied by HM Revenue and Customs. The Annex to this Statement gives guidance on how companies should apply for a ruling on whether or not a purchase will be treated as a distribution. Section 219(1)(a) - The ‘Trade Benefit Test’ 1. The Company's sole or main purpose in making the payment must be to benefit a trade carried on by it or by its 75% subsidiary. The condition is not satisfied where, for example, the transaction is designed to serve the personal or wider commercial interests of the vending shareholder (although usually he will benefit from it) or where the intended benefit for the company is to some non-trading activity which it also carries on. 2. If there is a disagreement between the shareholders over the management of the company and that disagreement is having or is expected to have an adverse effect on the company's trade, then the purchase will be regarded as satisfying the trade benefit test provided the effect of the transaction is to remove the dissenting shareholder entirely. Similarly, if the purpose is to ensure that an unwilling shareholder who wishes to end his association with the company does not sell his shares to someone who might not be acceptable to the other shareholders, the purchase will normally be regarded as benefiting the company's trade. Examples of unwilling shareholders are: • an outside shareholder who has provided equity finance (whether or not with the expectation of redemption or sale to the company) and who now wishes to withdraw that finance; • a controlling shareholder who is retiring as a director and wishes to make way for new management; • personal representatives of a deceased shareholder, where they wish to realise the value of the shares; • a legatee of a deceased shareholder, where he does not wish to hold shares in the company. 3. If the company is not buying all the shares owned by the vendor, or if although the vendor is selling all his shares he is retaining some other connection with the company - for example, a directorship or an appointment as consultant - it would seem unlikely that the transaction could benefit the company's trade, so the trade benefit test will probably not be satisfied. However, there are exceptions; for example, where a company does not currently have the resources to buy out its retiring controlling shareholder completely but purchases as many of his shares as it can afford with the intention of buying the remainder where possible. In these

circumstances, it may still be possible for the company to show that the main purpose is to benefit its trade. Also, the Commissioners for Her Majesty’s Revenue and Customs do not raise any objection if for sentimental reasons it is desired that a retiring director of a company should retain a small shareholding in it, not exceeding 5% of the issued share capital. Annex to SP2/82 Applications for advance clearance under S.225 ICTA 1988 Procedure If clearance under S.225 is desired the application should be sent to: HMRC Mohini Sawhney 5th Floor 22 Kingsway London WC2B 6NR If clearance is also being sought under Section 707, ICTA 1988 a single application may be made under both provisions and should be directed to the address given above with an extra copy of the application and enclosures. Such an application should open by stating clearly the provisions under which it is made and should be expanded to include any additional information needed for the application under the other provision. Form of application - General Section 219-229 contain conditions which must be satisfied before the tax treatment afforded by S.219 can apply. A comprehensive application which has regard to each of these conditions will remove the need for lengthy fact finding enquiries and enable the –Commissioners for Her Majesty’s Revenue and Customs to come to a decision on the application with the minimum of delay. To assist companies in preparing clearance applications under Section 225 and to facilitate their consideration by the -Commissioners for Her Majesty’s Revenue and Customs, an outline of the basic information needed is given below. However, it is not an exhaustive list, and in giving the particulars of the relevant transactions required by Section 225(2) the applicant must fully and accurately disclose all facts and circumstances material for the decision of the Commissioners for Her Majesty’s Revenue and Customs (Section 225(5)). In what follows, references to purchase of shares include references to repayment or redemption of shares. It will be helpful if applications follow the order set out below, each item being expanded as necessary and any further information being added at the end. Application for clearance under Section 225(1)(a) It should be stated at the outset whether the purchase of shares is regarded as falling within Section 219(1) by virtue of (a) or (b). If the purchasing company has previously made any application under Section 225 it will be helpful if the Commissioners for Her Majesty’s Revenue and Custom’s reference(s) can be quoted. A.

Purchases within Section 219(1)(a)

1. a.

The Company. the name of the company making the purchase;

b.

its Tax District and reference;

c.

confirmation that it is an unquoted company as defined in Section 229(1);

d.

its status, that is, ‘trading company’ or ‘holding company of a trading group’ within the Section 229(1) definitions or some other type of company not within the definitions.

2.

Groups. Where the company is a member of a group (see below):

a.

the names of the group companies together with their Tax Districts and references:

b.

a statement or diagram showing the shareholding interests of each group company in other group companies.

A group for the purpose of this paragraph is the largest 51 per cent group to which the purchasing company belongs (Section 222(9)), but the meaning of ‘group’ is extended, where appropriate, by Section 222(10)) and (12). 3. a.

The Payment. Details of the shares to be purchased, the name of their present owner, the purchase price and the method of payment.

b.

Details of any other transactions between the company and the vendor at or about the same time.

c.

Confirmation that the company's Articles of Association allow it to purchase its own shares.

4. a.

Shareholders. A list of the current shareholders in the purchasing company, and where appropriate, in each company in a group as in 2 above, together with particulars (amount, class, dividend rights etc) of their current holdings;

b.

a statement of any relationships of the shareholders to each other;

c.

where the shareholder is the son or daughter of another shareholder, an indication that he or she is over 18 or else details of their age.

5. Prior transactions. Particulars of any prior transactions or rearrangements to be carried out in preparation for the purchase. 6. Purpose and benefits. A statement of the reasons for the purchase, the trading benefits expected and any other benefits expected to accrue, whether or not to the purchasing company. 7. Conditions in Section 219. Confirmation, together with all relevant information, that the purchase etc does not form part of a scheme or arrangement the main purpose or one of the main purposes of which is to enable the owner of the shares to participate in the profits of the company without receiving a dividend, or the avoidance of tax. Confirmation that the vendor will receive no other payment from the company, or details of any such payment to be made.

8. a.

Conditions in Sections 220-224. the present residence status of the vendor and any intended change (Section 220);

b.

the tax district, reference and National Insurance number of the vendor, or if not known his or her private address (Section 220);

c.

the period of beneficial ownership by the vendor of the shares to be purchased (Section 220(5));

d.

confirmation, if appropriate, that the vendor's interest will be ‘substantially reduced’ Section 221(1));

e.

confirmation, if appropriate, that the combined interests as shareholders of the vendor and his ‘associates’ (see Section 227) will be substantially reduced (Section 221(2));

f.

confirmation, if appropriate, that the vendor's interest as a shareholder in the group will be substantially reduced (Section 222(1));

g.

confirmation, if appropriate, that the combined interests as shareholders in the group of the vendor and his associates will be substantially reduced (Section 222(3));

h.

confirmation that the vendor will not, immediately after the purchase, be ‘connected with’ (see Section 228) the company making the purchase or with any company which is a member of the same group as that company (Section 223(1));

j.

confirmation that the purchase is not part of a scheme or arrangement within Section 223(2).

9.

Accounts and other financial information.

The application should be accompanied by a.

copies of the latest available financial statements for the purchasing company and for any group companies (see paragraph 2 above), and in the case of a group the financial statements for the group;

b.

a note of any material relevant changes since the balance sheet date or confirmation that there are none;

c.

details of any loan or current account which the vendor maintains with the company or with any group company.

B.

Purchase within Section 219(1)(b)

1. a.

Company. The name of the company making the purchase;

b.

its Tax District and reference;

c.

confirmation that it is unquoted as defined in Section 229(1);

d.

its status, i.e. ‘trading company’ or ‘the holding company of a trading group’ within the definitions in Sections 229(1), or some other type of company not within the definitions.

2. Groups. Where the company is a member of a group (see A.2 above): a.

The names of the group companies together with their Tax Districts and references;

b.

a statement or diagram showing the shareholding interests of each group company in other group companies.

3. a.

The Payment. Details of the shares to be purchased, the name of the present owner, the purchase price and method of payment.

b.

Details of any other transactions between the company and the vendor at or about the same time;

c.

confirmation that the company's Articles of Association allow it to purchase its own shares.

4. a.

Inheritance Tax. The name and date of death of the deceased;

b

the reference of the deceased at the Capital Taxes Office;

c.

the amount of the outstanding tax and whether or not liability has been finally agreed;

d.

the extent to which the purchase price is to be applied in satisfaction of the tax liability;

e.

a full explanation of the circumstances in which there would be ‘undue hardship’ if the tax liability were to be discharged otherwise than through the purchase of own shares from this or another such company;

f.

the Tax District and reference of the person to whom undue hardship would be caused or if not known the address of that person, and their National Insurance Number.

5.

Accounts and other financial information.

The application should be accompanied by a.

copies of the latest available financial statements for the purchasing company and for any group companies (see paragraph A.2 above), and in the case of a group the financial statements for the group;

b.

a note of any material relevant changes since the balance sheet date or confirmation that there are none.

Applications for clearance under Section 225(1)(b) 1. a.

Company. The name of the company making the purchase;

b.

its tax district and reference.

2. a.

The payment. Details of the shares to be purchased, the vendor, the purchase price and the method of payment.

b.

confirmation that the company's Articles of Association allow it to purchase its own shares.

3. a.

Account and other financial information. Copies of the latest available financial statements for the purchasing company;

b. A note of any material relevant changes since the balance sheet date or confirmation that there are none. 4. A statement of the reasons why it is believed that the proposed payment does not fall within the provisions of Section 219. SP1/83

Country-risk debts

SP2/83

Tax treatment of expenditure on films and certain similar assets

SP3/83

Relief for losses on loans to traders: Time limit for claims - Superseded by ESC D36

SP4/83

Approved savings - related share option schemes

SP5/83

Use of schedules in making personal tax returns

SP6/83

Company residence - Superseded by SP1/90

SP7/83

Business Expansion Scheme: Overseas activities – Superseded by SP7/86

SP1/84

Trade unions: Provident benefits: Legal and administrative expenses

1. Subject to certain conditions, a registered trade union is entitled, under Section 467 ICTA 1988, to exemption from tax in respect of its income and capital gains which, as provided for under the rules of the union, are used for the purpose of provident benefits. 2. The following expenses incurred by a registered trade union are regarded as payments made for the purpose of provident benefits: i.

Legal expenses in representing members at Industrial Tribunal hearings of cases alleging unfair dismissal.

ii.

Legal expenses in connection with a member's claim in respect of an accident or injury he has suffered.

iii.

General administrative expenses of providing provident benefits.

SP2/84

Payments to redundant steel workers

SP3/84

Stamp Duty: Convertible loan stock

Transfers of certain loan capital are exempted from stamp duty by Section 79, FA 1986. Subsection (2) provides that the exemption is not available where the loan capital carries an unexpired right of conversion into shares or other securities or to the acquisition of shares or other securities, including loan capital of the same description. The Commissioners for Her Majesty’s Revenue and Customs are advised that sub-section (2) does not exclude from the exemption loan

capital which carries an unexpired right of conversion into or acquisition of loan capital which itself comes within the terms of the exemption SP4/84

Development Land Tax: Double taxation conventions

SP5/84

Employees resident but not ordinarily resident in the UK: General earnings chargeable under Sections 25 and 26 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) – superseded by SP1/09

SP6/84

Non-resident lessors: Section 830 ICTA 1988

Where mobile drilling rigs, vessels or equipment leased by a non-resident lessor are used in connection with exploration or exploitation activities carried on in the United Kingdom or in a designated area, the question of whether the profits or gains arising from the lease constitute income from such activities depends on the facts and circumstances of each particular case. However, the practice of HM Revenue and Customs- HM Revenue and Customs is not to seek to charge such profits or gains to tax under S.830 ICTA 1988 if all of the following conditions are satisfied: 1

the contract is concluded outside the United Kingdom and the designated areas;

2

the lessor's obligations are limited to the provision of the asset, for example, a rig on ‘bare-boat’ terms, that is to say, if the lessor has not undertaken to provide any facilities, service or personnel;

3

the lessee takes delivery of the asset outside the designated areas, and is responsible for moving it to the place where it is used, and is not restricted to using it solely in the United Kingdom or a designated area;

4

the lessee and lessor are not connected persons, and no facilities, services or personnel related to the operation of the asset are provided by any person connected with the lessor.

SP7/84

Exercise of a power of appointment or advancement over settled property

The Commissioners for Her Majesty’s Revenue and Custom’s Statement of Practice SP9/81, which was issued on 23 September 1981 following discussions with the Law Society, set out the Revenue's views on the capital gains tax implications of the exercise of a Power of Appointment or Advancement when continuing trusts are declared, in the light of the decision of the House of Lords in Roome & Denne v Edwards. Those views have been modified to some extent by the decision of the Court of Appeal in Bond v Pickford. In Roome & Denne v Edwards the House of Lords held that where a separate settlement is created there is a deemed disposal of the relevant assets by the old trustees for the purposes of Section 71(1) TCGA 1992 -. But the judgements emphasised that, in deciding whether or not a new settlement has been created by the exercise of a Power of Appointment or Advancement, each case must be considered on its own facts, and by applying established legal doctrine to the facts in a practical and commonsense manner. In Bond v Pickford the judgements in the Court of Appeal explained that the consideration of the facts must include examination of the powers which the trustees purported to exercise, and determination of the intention of the parties, viewed objectively. It is now clear that a deemed disposal under Section 71(1) cannot arise unless the power exercised by the trustees, or the instrument conferring the power, expressly or by necessary implication, confers on the trustees authority to remove assets from the original settlement by subjecting them to the trusts of a different settlement. Such powers (which may be powers of advancement or

appointment) are referred to by the Court of Appeal as ‘powers in the wider form’. However, the Commissioners for Her Majesty’s Revenue and Customs considers that a deemed disposal will not arise when such a power is exercised and trusts are declared in circumstances such that: a.

the appointment is revocable, or

b.

the trusts declared of the advanced or appointed funds are not exhaustive so that there exists a possibility at the time when the advancement or appointment is made that the funds covered by it will on the occasion of some event cease to be held upon such trusts and once again come to be held upon the original trusts of the settlement.

Further, when such a power is exercised the Commissioners for Her Majesty’s Revenue and Customs considers it unlikely that a deemed disposal will arise when trusts are declared if duties in regard to the appointed assets still fall to the trustees of the original settlement in their capacity as trustees of that settlement, bearing in mind the provision in Section 69(1) TCGA 1992 - that the trustees of a settlement form a single and continuing body (distinct from the persons who may from time to time be the trustees). Finally, the Commissioners for Her Majesty’s Revenue and Customs accept that a Power of Appointment or Advancement can be exercised over only part of the settled property and that the above consequences would apply to that part. SP8/84

Section 124 ICTA 1988: Interest on quoted Eurobonds

SP9/84

Stamp duty: Treatment of securities dealt in on the Stock Exchange Unlisted Securities Market

SP10/84

Foreign bank accounts

1. At present, under Section 252(1) TCGA 1992 (Section 135(1) CGTA 1979), direct transfers from one foreign bank account to another are treated as a disposal and an acquisition of assets for capital gains tax purposes. 2. Except in relation to an account to which Section 275(1) TCGA 1992 (Section 69 FA 1984) applies (accounts held by non-domiciled individuals), a taxpayer may treat all bank accounts in his name containing a particular foreign currency as one account and disregard direct transfers among such accounts for capital gains tax purposes. This practice once adopted must be applied to all future direct transfers among bank accounts in that taxpayer's name containing that particular foreign currency until such time as all debt represented in the bank accounts has been repaid to the taxpayer. 3. This practice may be applied to all cases where the capital gains tax computations have not been settled. SP11/84

Estate Duty: Calculation of duty payable on a chargeable event affecting heritage objects previously granted conditional exemption

Under the estate duty provisions, an object which in the opinion of the Treasury was of national, scientific, historic or artistic interest could be exempt from duty if undertakings were given to preserve it and keep it in the United Kingdom. If an object which had been exempted from duty was subsequently sold (unless the purchaser was a national institution or similar body), or if the undertaking was broken, duty became chargeable, generally either on the sale proceeds or on the value of the object at the date of the charge. These ‘clawback’ charges may still apply now in relation to objects which have previously been exempted from estate duty.

Estate duty applied not only to property passing on death but also to property given away by the deceased within a certain period before his death. In these latter cases the duty chargeable could be reduced by a taper relief (Section 64 of the Finance Act 1960). The exemption described in the preceding paragraph could also apply to an object which came within the charge to duty because it was the subject of an inter vivos gift. The Commissioners for Her Majesty’s Revenue and Customs have been advised that in these circumstances taper relief under Section 64 is not available to reduce the amount liable to the clawback charge, and that the amount chargeable to duty is the full value or sale proceeds. SP1/85

Treatment of certain payments to relocated employees

SP2/85

Tax treatment of expenditure on films and certain similar assets

SP3/85

Exchange rate fluctuations

SP4/85

Relief for interest on loan used to buy land for partnership or company business purposes

SP5/85

Division of a company on a share for share basis

SP6/85

Incentive awards

1. Incentive scheme awards are often provided by way of vouchers. Section 87 Income Tax (Earnings and Pensions) ACT 2003(ITEPA) [formerly 141, ICTA 1988], treats as earnings a benefit an employee can obtain with a voucher provided for him by reason of his employment. The measure of the earnings is the ‘expense incurred by the person providing the voucher in or in connection with the provision of the voucher and the money, goods or services for which it is capable of being exchanged’ S 87 ITEPA [formerly Section 141 (1), ICTA 1988]. 2. It is not always easy to decide which incentive scheme expenses beyond the direct cost of buying the goods or services provided for the employee have been incurred ‘in connection with’ the voucher and the benefit it provides. In general, the expenses which should be included in the emoluments calculation are those which contribute more or less directly to the advantage enjoyed by the employee. Remoter expenses - for example, the cost of devising and planning an incentive scheme under which vouchers are to be distributed - need not be included. More details are given below. Award of goods or services provided via vouchers 3. (a) Expenses included in the computation of emoluments. i.

Cost of buying the goods or providing services.

ii.

Cost of selecting and testing those goods or services.

iii.

Cost of storing, distributing and installing the goods or, if appropriate, services.

iv.

Cost of servicing and other ‘after sales’ expenses.

v.

Where a third party is used to distribute the awards or to run an incentive campaign, his fees for handling functions within i-iv above.

(b)

Expenses excluded from the computation of emoluments.

i.

Cost of management time in considering whether or not to launch a scheme involving the provision of vouchers.

ii.

Cost of researching, devising and planning such a scheme.

iii.

Cost of preparing and printing promotional material relating to the provision of the voucher.

iv.

Cost of administration (including the costs of meeting the Revenue's requirements) except for the functions covered in (a) above.

v.

Where a third party is involved, as in (a) v above, his fees for handling functions within (b) i-iv above.

Retail vouchers 4. Awards sometimes consist of vouchers which are exchangeable for goods etc at retail shops or stores. Generally, the costs set out in 3(a) i-iv above will largely consist of the price paid to the shop etc for the vouchers. The cost of distributing the vouchers to award winners and the fees of any third party within 3(a) v will also need to be included. Other benefits 5. The computation of the benefit of incentive awards assessable under ITEPA s94 and s203 [formerly TA 1988, ss.142, 144,154] will follow broadly similar principles. Computations 6. When agreeing the assessable benefit of awards made under incentive schemes the total costs should be analysed between headings in paragraphs 3(a) and 3(b) above. Taxed Award Scheme On 2 November 1984 a Press Release announced voluntary arrangements for collecting tax at the basic rate on non-cash incentive prizes awarded to employees. On 18 January 1990 an Inland Revenue Press Release announced the arrangements had been extended to cover higher rate liabilities. These arrangements are known as ‘Taxed Award Schemes’. The approach described above will apply to awards dealt with under such arrangements as well as to all other incentive awards. The Incentive Award Unit will continue to deal with all applications for Taxed Award Schemes and will agree the amounts to be treated as emoluments. Awards under other schemes will be dealt with by the Tax Office which normally handles the PAYE Scheme of the provider of the award. Further details of Taxed Award Schemes may be obtained from - HM Revenue and Customs, Incentive Award Unit, Chapel Wharf Area, Floor4, Trinity Bridge House, 2 Dearman’s Place, Salford, M3 5BH. Tel 0161 261 3269; Fax: 0161 261 3354, e-mail: [email protected] SP7/85

Reliefs for non-residents: Treatment of wife's income

SP1/86

Capital allowances: Machinery and plant: Short-life assets

Sections 37 and 38, CAA 1990 1. Several representative bodies have raised with HM Revenue and Customs some practical questions arising out of the new rules for capital allowances on certain short-life machinery and plant which came into effect on 1 April 1986. The new rules enable allowances on machinery and plant for which an election is made to be dealt with outside the main capital allowance pool. 2. In discussions between these bodies and HM Revenue and Customs several areas were identified where businesses and their accountants might find guidance helpful. This note sets out, in broad terms, how they can be dealt with in ways which will be acceptable to local Inspectors of

Taxes. In general, Inspectors will want to be satisfied that the accounting and other records are adequate to support short-life asset elections and computations and that the new legislation is not being abused. 3. These guidelines are not, however, a substitute for the statutory rules. Their aim is to complement the legislation so that the new arrangements are introduced and continue to operate as efficiently as possible for businesses themselves, their professional advisers and HM Revenue and Customs. The intention is to review the guidelines when the arrangements have settled in and, if necessary, revise them in the light of experience. Election for short-life asset treatment 4. The rules for making elections are set out in Section 37(2). They enable all the machinery and plant acquired in a chargeable period (or its basis period) for which short-life asset treatment is wanted, to be included in one election signed by the taxpayer for that period. 5. In general, Inspectors will want to be sure that elections and any supporting material, such as a schedule attached to the election or cross references to schedules or analyses supplied with the accounts, provide sufficient information to minimise the possibility of any difference of view at a later date (for example, on a disposal) about what was and what was not covered by an election for any chargeable period etc and that the assets are not in one of the classes excluded by Section 38. 6. In particular, however, where separate identification of the short-life assets acquired in a chargeable period etc is either impossible or possible but impracticable (for example similar small or relatively inexpensive assets held in very large numbers perhaps in several locations) then the information on the election about the assets, required by Section 37(2)(b), may be provided by reference to batches of acquisitions. Where large numbers of similar short-life assets are acquired throughout a chargeable period etc it will be acceptable if the costs of those assets for the period are aggregated and shown on the election in one sum. Capital allowance computations 7. HM Revenue and Customs accept that it may not be practicable for individual capital allowance computations to be maintained for each and every short-life asset especially where the assets are held in very large numbers. 8. Where, therefore, the Inspector is satisfied that the actual life in the business of a distinct class of assets with broadly similar average lives before they are sold or scrapped is likely to be less than five years (that is, the year of acquisition plus the four following years) computations in the form set out in Example 1 below will be acceptable. On this basis a balancing allowance will normally become available for the last year of the agreed life of the assets. 9. Where disposal proceeds can be attributed to assets acquired in a particular year they should be brought into the appropriate column(s) of the computation relating to those assets for the year(s) in which the proceeds are received. If attribution in this way is not possible, disposal proceeds may be credited on a FIFO basis; that is all receipts from disposals in any chargeable period etc are to be regarded as related to the earliest period for which a short-life asset pool on the lines of these arrangements is in existence. 10. This form of computation is intended primarily for short-life assets costing similar amounts which cannot be identified individually. It is possible however that similar arrangements may be helpful where short-life assets which have a separate identity are acquired in large numbers such that the business does not in fact keep track of them individually and it would not be reasonable to expect it to do so. Where this is the case, computations based on the above principles and along the lines of Example 2 below will normally be acceptable to Inspectors.

11. Given the wide variety of potential short-life assets and the widely varying size and circumstances of individual businesses, other forms of computation may also be acceptable. Submission of election and computations to Inspectors 12. It is suggested that either on the first occasion when an election is made or when any abridged or simplified computations are submitted to Inspectors for the first time, an explanation of the way in which the computations will be or have been put together is provided together with a description of the underlying records on which they are based. Inspectors will want to be satisfied that, together, the elections and the computations provide the correct statutory result and that if, for any reason, questions are asked about individual items (for example, on a disposal several years after acquisition), sufficient information will be available to the business or to its accountants to enable complete and satisfactory answers to be given.

EXAMPLE 1 Assets held in large numbers with a very short life where individual identification is impossible (for example, returnable containers, linen, tools). The taxpayer satisfies the Inspector that the average actual life (NB not useful life) of tools used in his trade is 3 years; it is therefore reasonable to presume that those items acquired in year 1 are all disposed of in year 4. He elects for short-life asset treatment.

Year of acquisition

1986

1987

1988

Cost of tools 1986 WDA

£1000 £250

£1200

£800

Total 1989

£1000

each year

£250

£750 1987 WDA

1988 WDA 1989 Presumed scrapped Disposal value Balancing allowance WDA Qualifying expenditure carried forward

£188

£300

£562

£900

£140 £422

£225 £675

£488

£200 £600

£565

Nil £422 £169

£150

£250

£506

£450

£750

£991

Where scrap or sale proceeds are not in practice taxed as trading receipts and can be identified but not related to particular acquisitions, they should be regarded as disposal value of the earliest period for which a short life asset pool is in existence. For example, if proceeds from the sale of all tools scrapped in 1989 were £50, the balancing allowance in the example would be £372.

EXAMPLE 2 Assets held in large numbers where individual identification is possible but impracticable in the circumstances of the case The taxpayer uses in his trade large numbers of relatively small items such as scientific or technical instruments, calculators, or amusement machines and elects for short-life asset treatment. His accounting records enable him to identify for each kind the number and cost of acquisition, and both the number and sale proceeds of disposals and the number on hand at the end of the short-life asset period related to those acquisitions. Technical instruments

Number

Cost

Acquisition in 1986 Sold in 1988 Sold in 1989 On hand 1990

100 20 40 40

£10,000

Computation £10,000 £2,500 £7,500

1987 WDA

£2,500

£1,875 £5,625

£1,875

£4,500 ) £1,125 ) £3,375

£1,750

£1,125

WDA (80 instruments) 1989 disposals: 40 instruments Expenditure unallowed 40/(£3,375 x 80) = £1,688 Disposal value £400 Balancing allowance £1,288 WDA

£500 £400 Total allowed.

1986 expenditure on 100 instruments WDA

1988 disposal of 20 instruments Expenditure unallowed 20/(£5,625 x 100) = £1,125 Disposal value £500 Balancing allowance £625

Disposal value

(40 instruments) 1990 WDA Expenditure unallowed (40 instruments) 1991 Transfer to main pool

£1,688

£422 ) £1,265 £314 £951 £951

£1,710 £314

It is presumed in this example that all the items cost the same amount; where similar items cost different but broadly similar amounts, this method of computation may still be used.

SP2/86

Offshore funds

1. This statement sets out the Revenue's views on the interpretation of certain provisions of this legislation, on which queries have been raised. Material interests in offshore funds 2. The legislation applies to ‘material interests’ in offshore funds. For such an interest to exist, the investor, at the time of acquiring his investment, must have a reasonable expectation of being able to realise it within seven years for an amount reasonably approximate to that portion which the investment represents of the market value of the entity's underlying assets. Investments in commercial loans and bonds 3. Normal commercial loans or other debt instruments which entitle the lender to no more than a fixed return of principal on redemption, and which are not geared to the underlying asset value of the borrower's business, would not be regarded as a material interest within the legislation. Stock exchange listings of shares 4. Where shares in an overseas company are listed on a stock exchange, it is possible that the quoted price will on occasions correspond to underlying net asset value. This will however not of itself make the shares a material interest in an offshore fund. The shares would be considered a material interest only if, at the time they were acquired, the investor had a reasonable expectation of a future sale at or near net asset value. If historically the shares have been habitually traded at or near net asset value an investor is likely to have acquired a material interest. Conditions for distributor status 5. The legislation divides offshore funds into two groups: distributing funds, which must: a. meet specified investment restrictions, and b. distribute at least 85% of their income (as computed in their accounts) and 85% of what would be their taxable profits were they UK-resident companies (the ‘UK equivalent profits’); and other funds. Computation of what would be the UK equivalent profits (a) Is the fund trading? 6. Where a fund is regarded as trading, the resulting profits will be brought into the computation of UK equivalent profits. Whether the activities of an offshore fund amount to trading will turn on the facts of the particular case; and it is not possible to give any specific guidance on this aspect. Even a single transaction can on occasion constitute ‘an adventure or concern in the nature of trade’; but in general a fund would not normally be regarded as trading in respect of transactions which were relatively infrequent or, for example, where the intention was merely to hedge specific investments which were not associated with activities which themselves constituted trading. (b)

Interest paid by offshore funds to non-residents

7. In arriving at the computation of UK equivalent profits, a deduction is available for interest paid by a fund to a person resident outside the UK in the same way as it would be if the interest were paid to a UK resident.

(c)

Income taxed in the UK

8. Where an offshore fund receives income that has suffered tax at source in the UK, it is the net income (rather than the gross) that is included in the calculation of the UK equivalent profit. 9. A deduction will also be available for any tax suffered by direct assessment in the UK. The basis of the relief will be determined by reference to the individual case. SP3/86

Payments to a non-resident from UK discretionary trusts or UK estates during the administration period: Double taxation relief

Introduction 1. This Statement explains how relief from UK tax under double taxation agreements will be given in respect of payments made to a non-resident for a UK discretionary trust or a UK estate. Background Discretionary trusts 2. Generally speaking, a non-resident beneficiary receiving payments from a UK discretionary trust is not entitled to repayment of the tax paid by the trustees on the trust income. However, under extra-statutory concession B18 (which embodies a longstanding practice) HM Revenue and Customs ‘looks through’ the trust income to the underlying component parts of that income. The purpose of this ‘looking through’ is to allow the recipient of the income any relief that would have been available to him under the Taxes Acts had the income come to him direct instead of through the trustees. 3. Where the beneficiary is resident in a country with which the UK has a double taxation agreement, further relief under the ‘looking through’ principle may be due. Thus, for example, if the agreement provides for a withholding rate on interest of 15% and interest liable to UK tax formed part of the trust income which had suffered tax at -40% (i.e. the rate applicable to trusts) then, under the ‘looking through’ principle, the beneficiary would be repaid the amount of tax suffered in excess of the withholding rate, in this case 25%. 4. Some of the UK's double taxation agreements include an ‘other income’ article. The purpose of this article is to determine in which country income not expressly dealt with elsewhere in the agreement should be taxed. In the UK's agreement the article sometimes gives sole taxing rights in respect of such income to the recipient's country of residence. 5. It has been the practice of HM Revenue and Customs to apply the ‘looking through’ principle to all cases where relief in respect of the discretionary payment was sought and to refuse claims where full repayment of UK tax was claimed under the provision of ‘other income’ article in the agreement. Payments out of UK estates during administration period 6. The same principles set out in paragraphs 2-5 apply in the case of payments to nonresident residuary beneficiaries out of UK estates during the administration period. In these cases, the ‘looking through’ concession was explained in Statement of Practice 7/80 and is now contained in extra-statutory concession A14. Again it has been HM Revenue and Customs’ practice to make repayment to beneficiaries on the ‘looking through’ basis in all cases. Change of practice

7. Following a review of its practice in these two areas, HM Revenue and Customs has accepted that if a payment made by trustees out of a UK discretionary trust falls to be treated as a net amount in accordance with Section 687(2) ICTA 1988 the ‘looking through’ principle is not appropriate where the beneficiary is resident in a country with which the UK has a double taxation agreement and the ‘other income’ article gives sole taxing rights in respect of such income to that country. (This will usually be the case where income from trusts is not specifically excluded from the article.) This means that tax paid by the trustees in respect of the discretionary payment will be repayable to the beneficiary, provided that any conditions set out in the ‘other income’ article are met. For example, the recipient may be required to show that he is subject to tax on the income in his country of residence. 8. The practice set out in paragraph 7 will also be applied to payments from the residuary income of a UK estate during the administration period. Under Sections 652 or 654 Income Tax (Trading and Other income) Act 2005 such payments are deemed to be income of the beneficiary which has suffered UK tax at the basic rate. 9. Where the ‘other income’ article does not give sole taxing rights to the country of residence in respect of the trust or estate income or there is no double taxation agreement with the country concerned, the existing ‘looking through’ practice will continue to be applied where it is to the advantage of the beneficiary. Claims for relief under the new practice 10. The change in practice will be applied to all new and open claims. HM Revenue and Customs will also accept supplementary claims which are made within the time limits applicable to the original claim under the provisions of Section 42(8), TMA 1970. The normal time limit is 6 years from the end of the year to which the claim relates but this may be extended by Section 682(5) ITTOIA 2005 - in the case of estates. Procedure for dealing with claims for previous years 11. The change in practice may require a consequential adjustment to claims under Section 278, ICTA 1988. HM Revenue and Customs will automatically review a beneficiary's entitlement to this relief and make any adjustments necessary. 12. In relation to deceased estates, the provisions of Part XVI ICTA 1988 were rewritten as Part 5, Chapter 6 ITTOIA 2005 with effect from 6 April 2005, so for all payments made before this date, the relevant provisions of Part XVI ICTA 1988 apply, SP4/86

Payments made by employers to employees when in full-time attendance at universities and technical colleges

Scholarships, exhibitions, bursaries etc held by a person receiving full-time instruction at university, technical college or similar educational establishment are exempted from income tax by Section 776 ITTOIA 2005. This Statement of Practice sets out the circumstances when payments made by an employer to an employee for periods of attendance on a full-time course (including sandwich courses) can be exempted from income tax. The following conditions and exclusion apply. Conditions 1. The employer requires that the employee must be enrolled at the educational establishment for at least one academic year and must attend the course for at least twenty weeks in that academic year. Or if the course is longer the employee must attend for at least twenty weeks on average, in an academic year over the period of the course.

2. The educational establishments must be recognised universities, technical colleges or similar educational establishments, which are open to members of the public generally and offer more than one course of practical or academic instruction. For example an employer’s internal training school or one run by an employer’s trade organisation will not satisfy the educational establishment condition for the Statement of Practice. 3. For courses commencing on or after 1 September 2007, the payments, including lodging, subsistence and travelling allowances, but excluding any tuition fees payable by the employee to the university etc, do not exceed £15,480 for the academic year. Exclusion 4. This exemption does not apply to payments of earnings made for any periods spent working for the employer during vacations or otherwise. If the rate exceeds £15,480 HMRC may look at the arrangements in detail. This is because the level of payment exceeds what might reasonably be described as a scholarship or training allowance. However, an increase in the rate of payment over the qualifying limit, part way through a course, will not affect the exemption applying to any payments for the earlier part of the course. [The limit for the academic years ending on 31 August 2006 and 31 August 2007 applied from 1 September 2005 and was set at £15,000. For academic years ending on or before 31 August 2005 the limit was set at £7,000 or an amount which a public awarding body such as a Research Council, would have granted to a student with similar personal circumstances. Inland Revenue Press Release, 18 November 1992 gives the details. Information for the 2005/06 academic year commencing 1 September 2005 is in Inland Revenue Budget Note 32, 16 March 2005.] SP5/86

Relief for replacement of business assets: Employees and office holders

Relief which is available to a person carrying on a trade under Sections 152-156 TCGA 1992 (Sections 115 to 119, CGTA 1979) is extended by Section 158(1)(c), TCGA 1992 (Section 121(1)(c), CGTA 1979) to include employees and office-holders. If land or buildings are owned by an employee etc, but made available to the employer for general use in his trade, the employee etc may nonetheless satisfy the occupation test of Section 155 provided the employer does not make any payment (or give other consideration) for his use of the property nor otherwise occupy it under a lease or tenancy. The qualifying use of assets by an employee etc for the purposes of Section 152 and 153 will include any use or occupation of those assets by him, in the course of performing the duties of his employment or office, as directed by the employer. This practice may be applied to all cases where the capital gains tax computations have not been settled at 21 August 1986. SP6/86

Investigation settlements: Inclusion of interest clause in letters or offer Replaced by leaflet IR73, ‘Inland Revenue Investigations - How Settlements are Negotiated’.

SP7/86

Business Expansion Scheme: Overseas activities - Superseded by SP4/87

SP8/86

Treatment of income of discretionary trusts

This statement sets out the Board's practice concerning the Inheritance Tax/Capital Transfer Tax treatment of income of discretionary trusts. The Commissioners for Her Majesty’s Revenue and Customs take the view that: -

Undistributed and unaccumulated income should not be treated as a taxable trust asset; and

-

For the purposes of determining the rate of charge on accumulated income, the income should be treated as becoming a taxable asset of the trust on the date when the accumulation is made.

This practice applies from 10 November 1986 to all new cases and to existing cases where the tax liability has not been settled. SP9/86

Partnership mergers and demergers

1. This statement explains the basis on which the Revenue apply the provisions of S113, ICTA 1988 (change in ownership of trade, profession or vocation) to mergers and demergers of partnership businesses. In the following paragraphs, the word ‘business’ means trades, professions or vocations carried on in partnership. MERGERS 2. When two businesses which are carried on in partnership and which are different in nature merge, it may be that the result of the merger is a new business, different in nature from either of the previous business. Whether this is so is a question of fact to be determined according to the circumstances of each case. Where it is the case, the old businesses will have been permanently discontinued, and a new business commenced; S113, ICTA 1988 will therefore not apply and the normal commencement and cessation provisions will apply to each business respectively. 3. However, where two partnership businesses in different ownership carrying on the same sort of activities are merged and then carried on by the joint owners in partnership, the total activities of both businesses may continue, even though in a merged form, i.e. the new partnership may succeed to the businesses of the old partnership. In that event S113 (2), ICTA 1988 applies to both successions, so that both businesses are deemed to have continued. 4. It will of course be a question of fact whether succession has occurred and in this connection disparity in size between the old partnerships will not of itself be a significant matter. DEMERGERS 5. When a business carried on in partnership is divided up, and several separate partnerships are formed, it will again be a question of fact, to be determined according to the circumstances of each case, whether any of the separate partnerships carries on the same business as was carried on previously by the original partnership. It might be that one of the businesses carried on after the division was so large in relation to the rest as to be recognisably ‘the business’ as previously carried on; but that will frequently not be the case, and if it is not the case then the business will have ceased. 6. The Revenue would want to look carefully at any case where it was claimed that a demerger of a partnership had occurred but it appeared that the demerger was more apparent than real, and that the demerger seemed to have taken place for fiscal reasons. The Revenue might wish to argue that in such a case the same trade was being carried on after the demerger as before.

[Note: Despite the references to partnership businesses in the text, the Revenue regard the principles set out in SP9\86 as applying equally where • businesses previously carried on by sole traders are merged and are subsequently carried on by a partnership; and • a business carried on by a partnership is demerged and the businesses are subsequently carried on by sole traders.] SP10/86

Death benefits under superannuation arrangements

The Commissioners for Her Majesty’s Revenue and Customs confirm that their previous practice (see SPE3) of not charging capital transfer tax on death benefits that are payable from taxapproved occupational pension and retirement annuity schemes under discretionary trusts also applies to inheritance tax. The practice extends to tax under the ‘gifts-with-reservation’ rules as well as to tax under the ordinary inheritance rules. SP1/87

Exchange rate fluctuations- Now replaced by SP2/02

SP2/87

Close Company apportionment

SP3/87

Repayment of tax to charities on covenanted and other income

SP4/87

Business expansion scheme: Overseas activities

SP5/87

Tax returns: The use of substitute forms

Introduction HM Revenue and Customs have recognised their interpretation of Section 113(1) TMA 1970 in the light of improvements in office technology and its more widespread adoption, in order to help taxpayers and their professional advisers to benefit fully from such developments. This Statement explains the Revenue's current approach towards the acceptance of tax returns and other forms by way of facsimiles or photocopies, as substitutes for officially produced printed forms. The legislation Section 113(1) says that any Returns under the Taxes Act shall be in such form as Board prescribe. The Board are satisfied that where a photocopy of an official Return or an accurate facsimile are used these will satisfy the requirements of the Section. Further details about these two alternatives are given below. Accurate facsimiles For any substitute Tax Return to be acceptable, it must satisfactorily present to the taxpayer the information which -the commissioner’s for Her Majesty’s Revenue and Customs have determined shall be before him when he signs the declaration that the Return is correct and complete to the best of his knowledge. Put another way, the form, which need not be colour printed, must otherwise be an accurate facsimile of the official form in terms of the words which appear and the general layout. It should also be readily recognisable as a Return when it is received in HM Revenue and Customs Offices, and the entries of the taxpayer's details should be distinguishable from the background text. Recent advances in printing technology now mean that accurate facsimile Returns can be produced. The Commissioners for Her Majesty’s Revenue and Customs will accept such Returns if approval of their wording and design has been obtained before they

are sent in to Tax Districts. Any substitute which is produced with approval will need to bear an agreed unique imprint of some sort so that its source can be readily identified at all times. To facilitate the production of substitute Returns, the Revenue have arranged for advance copies of the major Income Tax Returns for 1987/88 to be made available to professional bodies and software houses. The Revenue intend that this will become an annual practice so that modifications to the Returns can be incorporated in the computer produced facsimiles in time for their submission. The Revenue hope that the 1988/89 returns will be available in January 1988. At that time a Press Release will be issued advising of the availability and detailing how advance copies may be obtained by others. All applications for approval will be considered as quickly as possible but there may be delays in the immediate run up to the Budget. Applications made before 15 February will be cleared before 6 April in that year. Applications for approval should be made to: HM Revenue and Customs Forms 1st Floor, New Wing Somerset House Strand LONDON -WC2R ILB 020 7438 7312 Photocopies A Return made on a photocopy of an official form is a valid Return provided that it is identical to the official form. It is sufficient that all of the pages are present and attached in the correct order if the facility to produce double sided photocopies is not available. The Revenue will also accept other types of forms (i.e. forms which are not strictly speaking returns) which are sent in as photocopies. The requirement for all pages to be present is important where one side of the form contain notes, as it does in wife's earnings elections and separate assessment cases. Any copy which does not also duplicate the notes on the original will not be acceptable. This is because such elections may not be valid in that absence of the notes being before the signatories. The photocopying of official forms is in strictness a breach of copyright. If this is done on an individual basis the Revenue will however take no action. On the other hand if forms are photocopied on a large scale for commercial gain the Revenue will advise HMSO who will collect copyright fees. In the large majority of cases there is no objection to the copying of another Revenue form where the original is lost. This is not to say that the Revenue actively welcomes photocopies as they have disadvantages, particularly if colour and size are important features in handling the completed forms. To avoid any misunderstanding, the Revenue cannot accept a photocopy of a completed return or form. In other words, the document sent in must bear the actual signature of the relevant person. References Where a facsimile or a photocopy is submitted instead of an official form it is important that is bears the correct reference which appeared on the original form. Additionally where an original form was not supplied it is equally important that the taxpayer's reference should be inserted.

SP6/87

Acceptance of property in lieu of Inheritance Tax, Capital Transfer Tax and Estate Duty

1. The Commissioners for Her Majesty’s Revenue and Customs, with the agreement of the Secretary of State for Culture, Media and Sport (and, where appropriate, other Ministers), accept heritage property in whole or part satisfaction of an inheritance tax, capital transfer tax or estate duty debt and any interest payable on the tax. 2. No capital tax is payable on property that is accepted in lieu of tax. The amount of tax satisfied is determined by agreeing a special price. This price is found by establishing an agreed value for the item and deducting a proportion of the tax given up on the item itself, using an arrangement known as the ‘douceur’. The terms on which property is accepted are a matter for negotiation. 3. Sections 60 FA 1987 and 97 F (No 2) A 1987 provide that, where the special price is based on the value of the item at a date earlier than the date on which it is accepted, interest on the tax which is being satisfied may cease to accrue from that earlier date. 4. The persons liable for the tax which is to be satisfied by an acceptance in lieu can choose between having the special price calculated from the value of the item when they offer it or when the Commissioners for Her Majesty’s Revenue and Customs accept it. Since most offers are made initially on the basis of the current value of the item, HM Revenue and Customs considers them on the basis of the value at the ‘offer date’, unless the offeror notifies them that he wishes to adopt the ‘acceptance date’ basis of valuation. The offeror’s option will normally remain open until the item is formally accepted. But this will be subject to review if more than 2 years elapse from the date of the offer without the terms being settled. The Commissioners for Her Majesty’s Revenue and Customs may then give 6 months notice that they will no longer be prepared to accept the item on the ‘offer date’ basis. 5. Where the ‘offer date’ option remains open and is chosen, interest on the tax to be satisfied by the item will cease to accrue from that date. SP7/87

Deduction for reasonable funeral expenses

The Commissioners for Her Majesty’s Revenue and Customs take the view that the term ‘funeral expenses’ in Section 172 IHTA 1984 allows a deduction from the value of a deceased's estate for the cost of a tombstone or gravestone. SP8/87

Close company apportionment: Member of a trading group

SP9/87

Capital allowances: Hotels

SP10/87

Stamp duty: Conveyances and leases of building plots - Superseded by SP8/93

SP1/88

Tax treatment of forward currency transactions by investment trusts Superseded by SP14/91

SP2/88

Civil tax penalties and criminal prosecution cases – Please see Codes of Practice 8 and 9

SP3/88

Delay in rendering tax returns: Interest on overdue tax

SP4/88

Tax treatment of transactions in financial futures and options - Superseded by SP14/91

SP5/88

Taxation of car telephones provided by employers

SP6/88

Double taxation relief: Chargeable gains

General 1. Section 277 TCGA 1992 applies to capital gains tax the double taxation provisions set out in Sections 788-806 ICTA 1988, with the necessary modifications. Section 797 of the Taxes Act applies the provisions to corporation tax on chargeable gains. 2. The standard credit articles in our double taxation agreements (which are made under Section 788) says, in effect, that subject to the provisions of the law of the United Kingdom, tax payable under the law of the treaty partner on capital gains from sources within that territory shall be allowed as credit against any United Kingdom tax computed by reference to the same gains by reference to which the overseas tax is computed. Section 790 allows unilateral relief for overseas tax and subsection (4) is in similar terms to the standard credit article. 3. The principal requirement for the granting of credit for overseas tax against liability to capital gains tax (or corporation tax on chargeable gains) is therefore that the overseas tax should be computed by reference to the same gain as the United Kingdom tax. There is no requirement that the respective tax liabilities should arise at the same time nor that they should be charged on the same person. Specific examples 4. The Revenue's view is that the following sets of circumstances fall within the terms of the standard credit article and Section 790 and may therefore give rise to a credit for overseas tax against United Kingdom capital gains tax or corporation tax on chargeable gains. i.

The overseas tax charges capital gains as income.

ii.

Overseas tax is payable on a disposal falling within Section 171 TCGA 1992 (transfers within a group of companies treated as taking place on a no gain/no loss basis) and a liability to United Kingdom tax arises on a subsequent disposal.

iii.

An overseas trade carried on through a branch or agency is domesticated (i.e. transferred to a local subsidiary) and relief is given under Section 140 TCGA 1992. There is a subsequent disposal of the securities (or the subsidiary disposes of the assets within 6 years) giving rise to a liability to United Kingdom tax and overseas tax is charged in whole or in part by reference to the gain accruing at the date of domestication.

iv.

Overseas tax is payable by reference to increases in the value of assets although there has been no disposal. There is a subsequent disposal of the assets on which a liability to United Kingdom tax arises.

5. It will be seen that relief is conditional upon the subject of the overseas tax being identified with the gains on which the United Kingdom tax liability arises. In contrast, where ‘roll-over’ relief is claimed, for example under Section 152 TCGA 1992, the gain on disposal of the old asset is not subjected to United Kingdom tax. The gain on realisation of the new asset remains a gain separate from that realised on sale of the old asset and overseas tax payable as a result of the sale of the old asset is not creditable against United Kingdom tax payable on the gain realised on sale of the new asset. However, in such circumstances, Section 278 TCGA 1992, allows the overseas tax to be claimed as a deduction in computing the gain for ‘roll-over’ relief purposes.

SP1/89

Partnerships: Further extension of Statement of Practice D12

Rebasing The Commissioners for Her Majesty’s Revenue and Customs have agreed that a disposal of a share of partnership assets to which paragraph 4 of the Statement of Practice D12 applies so that neither a chargeable gain nor an allowable loss accrues (before indexation, for disposals before 6 April 1988) may be treated for the purposes of Section 35 and Schedule 3 TCGA 1992 (Section 96 and Schedule 8 FA 1988) as if it were a no gain/no loss disposal within paragraph 1 of that Schedule. Deferred Charges A disposal of a share of partnership assets to which paragraph 4 of the Statement of Practice D12 applies so that neither a chargeable gain nor an allowable loss accrues (before indexation, for disposals before 6 April 1988) may be treated for the purposes of Section 36 and Schedule 4 TCGA 1992 (Section 97 and Schedule 9 FA 1988) as if it were a no gain/no loss disposal within paragraph 1 of Schedule 3 TCGA 1992 Indexation When, on or after 6 April 1988, a partner disposes of all or part of his share of partnership assets in circumstances to which paragraph 4 of the Statement of Practice of D12 applies so that neither a chargeable gain nor an allowable loss accrues, the amount of the consideration will be calculated on the assumption that an unindexed gain will accrue to the transferor equal to the indexation allowance, so that after taking account of the indexation allowance, neither a gain nor a loss accrues. Where a partner disposes on or after 6 April 1988 of all or part of his share of partnership assets, and he is treated by virtue of this Statement as having owned the share on 31 March 1982, the indexation allowance on the disposal may be computed as if he had acquired the share on 31 March 1982. A disposal of a share in a partnership asset on or after 31 March 1982 to which paragraph 4 of the Statement of Practice D12 applies so that neither a chargeable gain nor an allowable loss accrues may be treated for the purposes of Section 55(5) TCGA 1992 (Section 68(7) FA 1985) as if it were a no gain/no loss disposal within subsection 5 of that Section. A special rule will however apply where the share changed hands on or after 6 April 1985 (1 April in the case of an acquisition from a company) and before 6 April 1988: in these circumstances the indexation allowance will be computed by reference to the 31 March 1982 value but from the date of the last disposal of the share before 6 April 1988. SP2/89

Rebasing elections - Superseded by SP4/92

SP3/89

Unit trust and investment trust monthly savings schemes – Superseded by SP2/97

SP4/89

Company's purchase of own shares: Capital gains treatment of distribution received by corporate shareholder

If the purchase of its own shares by a company resident in the United Kingdom gives rise to a distribution, and a shareholder receiving such a distribution is itself a company, the distribution is included in the consideration for the disposal of the shares for the purposes of the charge to corporation tax on chargeable gains. In HM Revenue and Customs’ view the effect of Sections 208 ICTA 1988 and Section 8(4) TCGA 1992 (formerly 345(3) ICTA 1988) is that the distribution does not suffer a tax charge as income within the terms of Section 37(1) TCGA 1992 (formerly Section 31(1) Capital Gains Tax Act 1979.) The Revenue will apply this Statement of Practice where a company purchases its own shares after 19 April 1989.

SP5/89

Rebasing and indexation: Shares held at 31 March 1982

Under Section 35 and Schedule 3 TCGA 1992 (Section 96 and Schedule 8, Finance Act 1988), a person is treated as having held an asset at 31 March 1982 if he acquired it after that date by a transfer, or series of transfers, treated as giving rise to neither a gain nor a loss for capital gains purposes, from someone who did hold it at that date. Shares or securities of the same class in any company which are acquired in this way will be added to any shares or securities of the same class in the same company held by the transferee at 31 March 1982. Where, for rebasing and indexation purposes, it is necessary to determine the market value of the shares or securities at 31 March 1982 they will be valued as a single holding. If the shares or securities in the relevant disposal represent some but not all of those valued at 31 March 1982 then the allowable cost or indexation allowance as appropriate will be based on the proportion that the shares or securities disposed of bears to the total holding. The no gain/no loss transfers relevant in this context are those listed in Section 35(3)(d) TCGA 1992 (paragraph 1(3) of Schedule 8 Finance Act 1988). SP6/89

Delay in rendering tax returns: Interest on overdue tax (TMA 1970, Section 88)

1. Where an assessment has been made late or is inadequate because there has been a delay in making a tax return, interest is payable (under TMA 1970, s.88) on unpaid tax from the date on which the tax should have been paid. The Commissioners for Her Majesty’s Revenue and Customs, however, have specific discretion under s.88 to mitigate that interest charge. On 10 May 1977, the Board drew attention - by way of a press notice - to the department's practice of claiming such interest where the delay was ‘substantial’. 2. Enquiries have been received as to what degree of delay is regarded as ‘substantial’, particularly in relation to returns by individuals of their capital gains. 3. In respect of (i) new sources of income, (ii) continuing sources where inadequate estimated assessments are not appealed against or (iii) chargeable gains, the delay is regarded as ‘substantial’, and consideration will be given to charging interest under s.88, if the relevant tax return has not been made within 30 days of the date on which it was issued or, if later, by 31 October following the end of the tax year in which the income or chargeable gain arose. Where it is not possible to lodge the return, a s.88 charge will not be raised if the Inspector is provided, within these time limits, with sufficient information to enable an adequate estimated assessment to be made - e.g. in the case of the disposal of a chargeable asset, at least the sale price of that asset. 5. Section 88 has been repealed for 1996-97 and subsequent years of assessment (1997-98 and subsequent years for partnerships set up before 6 April 1994), and also for 1995-96 and earlier years where an assessment is made on or after 6 April 1998. This Statement of Practice only applies to assessments where Section 88 does apply. SP7/89

Surrender of Advance Corporation Tax

Advance corporation tax was abolished from 6 April 1999 onwards. Prior to 6 April 1999 Section 240 ICTA 1988 provides that a company may surrender to a 51 per cent subsidiary the benefit of advance corporation tax (ACT) on dividends. The time limit for claims to surrender is 6 years from the end of the accounting period in which the dividend was paid. A company can claim to surrender ACT whether or not it is surplus to the amount which under the rules in Section 239 ICTA 1988 can be set against the corporation tax (CT) charged on its own profits for that accounting period.

The Commissioners for Her Majesty’s Revenue and Customs had taken the view that if ACT had already been set against the tax payable on an assessment which had become final, that ACT could not subsequently be surrendered. Following a decision on an appeal to the Special Commissioners the Commissioners for Her Majesty’s Revenue and Customs has been advised that the determination of an assessment does not preclude the subsequent surrender of ACT set off in the assessment. This practice is applied to all claims for surrender made on or after 12 October 1989 and to existing claims which were not settled at 12 October 1989. SP8/89

Independent taxation: Mortgage interest relief: Time limit for married couples' allocation of interest elections

Under ICTA 1988 s.356B (2)(a), (4)(b), as inserted by FA 1988 Sch 3 para 14, an election by a married couple to allocate mortgage interest between them, or to revoke such an election, must be made not later than 12 months after the end of the relevant year of assessment or within such longer period as The Commissioners for Her Majesty’s Revenue and Customs may in any particular case allow. The Commissioners for Her Majesty’s Revenue and Customs will normally exercise its discretion to extend the time limit where it can be demonstrated that failure to comply with the time limit has been caused by sickness, absence abroad, or serious personal difficulties, or by the unavailability (within the time limit) through no fault of taxpayers or their advisers of information essential to the decision to make or revoke an election. SP1/90

Company residence

1. Residence has always been a material factor, for companies as well as individuals, in determining tax liability. But statute law has never laid down comprehensive rules for determining where a company is resident and until 1988 the question was left solely to the Courts to decide. Section 66 FA 1988 introduced the rule that a company incorporated in the UK is resident there for the purposes of the Taxes Acts. Case law still applies in determining the residence of companies excepted from the incorporation rule or which are not incorporated in the UK. A. The incorporation rule 2. The incorporation rule applies to companies incorporated in the UK subject to the exceptions in Schedule 7 FA 1988 for some companies incorporated before 15 March 1988. (This legislation is reproduced for convenience as an Appendix to this Statement). Paragraphs 3 to 8 below explain how the Revenue interpret various terms used in the legislation. Carrying on business 3. The exceptions from the incorporation test in Schedule 7 depend in part on the company carrying on business at a specified time or during a relevant period. The question whether a company carries on business is one of fact to be decided according to the particular circumstances of the company. Detailed guidance is not practicable but the Revenue take the view that 'business' has a wider meaning than 'trade'; it can include transactions, such as the purchase of stock, carried out for the purposes of a trade about to be commenced and the holding of investments including shares in a subsidiary company. Such a holding could consist of a single investment from which no income was derived. 4. A company such as a shelf company whose transactions have been limited to those formalities necessary to keep the company on the register of companies will not be regarded as carrying on business. 5. For the purpose of the case law test (see B below) the residence of a company is determined by the place where its real business is carried on. A company which can demonstrate

that in these terms it is or was resident outside the UK will have carried on business for the purposes of Schedule 7. "Taxable in a territory outside the UK" 6. A further condition for some companies for exception from the incorporation test is provided by Schedule 7 Para 1(1)(c) and Para 5(1). The company has to be taxable in a territory outside the UK. "Taxable" means that the company is liable to tax on income by reason of domicile, residence or place of management. This is similar to the approach adopted in the residence provisions of many double taxation agreements. Territories which impose tax on companies by reference to incorporation or registration or similar criteria are covered by the term 'domicile'. Territories which impose tax by reference to criteria such as "effective management", "central administration", "head office" or "principal place of business" are covered by the term 'place of management'. 7. A company has to be liable to tax on income so that a company which is, for example, liable only to a flat rate fee or lump sum duty does not fulfil the test. On the other hand a company is regarded as liable to tax in a particular territory if it is within the charge there even though it may pay no tax because, for example, it makes losses or claims double taxation relief. "Treasury consent" 8. Before 15 March 1988 it was unlawful for a company to cease to be resident in the UK without the consent of the Treasury. Companies which have ceased to be resident in pursuance of a Treasury consent, as defined in Schedule 7 Paragraph 5(1), are excepted from the incorporation rule subject to certain conditions. A few companies ceased to be resident without Treasury Consent but were informed subsequently by letter that the Treasury would take no action against them under the relevant legislation. Such letter is not a retrospective grant of consent and the companies concerned cannot benefit from the exceptions which depend on Treasury consent. B. The case law test 9. This test of company residence is that enunciated by Lord Loreburn in De Beers Consolidated Mines v Howe (5 TC 198) at the beginning of this century: "A company resides, for the purposes of Income Tax, where its real business is carried on ... I regard that as the true rule; and the real business is carried on where the central management and control actually abides". 10. The "central management and control" test, as set out in De Beers, has been endorsed by a series of subsequent decisions. In particular, it was described by Lord Radcliffe in the 1959 case of Bullock v Unit Construction Company (38 TC 712) at page 738 as being: "as precise and unequivocal as a positive statutory injunction ... I do not know of any other test which has either been substituted for that of central management and control, or has been defined with sufficient precision to be regarded as an acceptable alternative to it. To me ... it seems impossible to read Lord Loreburn's words without seeing that he regarded the formula he was propounding as constituting the test of residence". Nothing which has happened since has in any way altered this basic principle for a company the residence of which is not governed by the incorporation rule; under current UK case law such a company is regarded as resident for tax purposes where central management and control is to be found. Place of "central management and control" 11. In determining whether or not an individual company outside the scope of the incorporation test is resident in the UK, it thus becomes necessary to locate its place of "central management and control". The case law concept of central management and control is, in broad

terms, directed at the highest level of control of the business of a company. It is to be distinguished from the place where the main operations of a business are to be found, though those two places may often coincide. Moreover, the exercise of control does not necessarily demand any minimum standard of active involvement: it may, in appropriate circumstances, be exercised tacitly through passive oversight. 12. Successive decided cases have emphasised that the place of central management and control is wholly a question of fact. For example, Lord Radcliffe in Unit Construction said that "the question where control and management abide must be treated as one of fact or "actuality"" (p.741). It follows that factors which together are decisive in one instance may individually carry little weight in another. Nevertheless the decided cases do give some pointers. In particular a series of decisions has attached importance to the place where the company's board of directors meet. There are very many cases in which the board meets in the same country as that in which the business operations take place, and central management and control is clearly located in that one place. In other cases central management and control may be exercised by directors in one country though the actual business operations may, perhaps under the immediate management of local directors, take place elsewhere. 13. But the location of board meetings, although important in the normal case, is not necessarily conclusive. Lord Radcliffe in Unit Construction pointed out (p.738) that the site of the meetings of the directors' board had not been chosen as "the test" of company residence. In some cases, for example, central management and control is exercised by a single individual. This may happen when a chairman or managing director exercises powers formally conferred by the company's Articles and the other board members are little more than cyphers, or by reason of a dominant shareholding or for some other reason. In those cases the residence of the company is where the controlling individual exercises his powers. 14. In general the place of directors' meetings is significant only insofar as those meetings constitute the medium through which central management and control is exercised. If, for example, the directors of a company were engaged together actively in the UK in the complete running of a business which was wholly in the UK, the company would not be regarded as resident outside the UK merely because the directors held formal meetings outside the UK. While it is possible to identify extreme situations in which central management and control plainly is, or is not, exercised by directors in formal meetings, the conclusion in any case is wholly one of fact depending of the relative weight to be given to various factors. Any attempt to lay down rigid guidelines would only be misleading. 15. Generally, however, where doubts arise about a particular company's residence status, the Inland Revenue adopt the following approach: (i)

They first try to ascertain whether the directors of the company in fact exercise central management and control.

(ii)

If so, they seek to determine where the directors exercise this central management and control (which is not necessarily where they meet).

(iii)

In cases where the directors apparently do not exercise central management and control of the company, the Revenue then look to establish where and by whom it is exercised.

Parent/subsidiary relationship 16. It is particularly difficult to apply the "central management and control" test in the situation where a subsidiary company and its parent operate in different territories. In this situation, the parent will normally influence, to a greater or lesser extent, the actions of the subsidiary. Where that influence is exerted by the parent exercising the powers which a sole or majority shareholder has in general meetings of the subsidiary, for example to appoint and

dismiss members of board of the subsidiary and to initiate or approve alterations to its financial structure, the Revenue would not seek to argue that central management and control of the subsidiary is located where the parent company is resident. However, in cases where the parent usurps the functions of the board of the subsidiary (such as Unit Construction itself) or where that board merely rubber stamps the parent company's decisions without giving them any independent consideration of its own, the Revenue draw the conclusion that the subsidiary has the same residence for tax purposes as its parent. 17. The Revenue recognise that there may be many cases where a company is a member of a group having its ultimate holding company in another country which will not fall readily into either of the categories referred to above. In considering whether the board of such a subsidiary company exercises central management and control of the subsidiary's business, they have regard to the degree of autonomy which those directors have in conducting the company's business. Matters (among others) that may be taken into account are the extent to which the directors of the subsidiary take decisions on their own authority as to investment, production, marketing and procurement without reference to the parent. Conclusion 18. In outlining factors relevant to the application of the case law test, this statement assumes that they exist for genuine commercial reasons. Where, however, as may happen, it appears that a major objective underlying the existence of certain factors is the obtaining of tax benefits from residence or non-residence, the Revenue examine the facts particularly closely in order to see whether there has been an attempt to create the appearance of central management and control in a particular place without the reality. 19. The case law test examined in this Statement is not always easy to apply. The Courts have recognised that there may be difficulties where it is not possible to identify any one country as the seat of central management and control. The principles to apply in those circumstances have not been fully developed in case law. In addition, the last relevant case was decided almost 30 years ago, and there have been many developments in communications since then, which in particular may enable a company to be controlled from a place far distant from where the day-today management is carried on. As the Statement makes clear, while the general principle has been laid down by the Courts, its application must depend on the precise facts. C. Double taxation agreements 20. In general our double taxation agreements do not affect the UK residence of a company as established for UK tax purposes. But where the partner country adopts a different definition of residence, it may happen that a UK resident company is treated, under the partner country's domestic law, as also resident there. In these cases, the agreement normally specifies what the tax consequences of this "double" residence shall be. 21. Under the double taxation agreement with the United States, for example, the UK residence of a company for UK tax purposes is unaffected. But where that company is also a US corporation, it is excluded from some of the reliefs conferred by the agreement. On the other hand, under a double taxation agreement which follows the 1977 OECD Model Taxation Convention, a company classed as resident by both the UK and the partner country is, for the purposes of the agreement, treated as resident where its "place of effective management" is situated. 22. The Commentary in paragraph 3 of Article 4 of the OECD Model records the UK view that, in agreements (such as those with some Commonwealth countries) which treat a company as resident in a state in which "its business is managed and controlled", this expression means "the effective management of the enterprise". More detailed consideration of the question in the light of the approach of Continental legal systems and of Community law to the question of company residence has led the Revenue to revise this view. It is now considered that effective

management may, in some cases, be found at a place different from the place of central management and control. This could happen, for example, where a company is run by executives based abroad, but the final directing power rests with non-executive directors who meet in the UK. In such circumstances the company's place of effective management might well be abroad but, depending on the precise powers of the non-executive directors, it might be centrally managed and controlled (and therefore resident) in the UK. 23. The incorporation rule in Section 66(1) FA 1988 determines a residence which supersedes a different place "given by any rule of law". This incorporation rule determines residence under UK domestic law and is subject to the provisions of any applicable double taxation agreement. It does not override the provisions of a double taxation agreement which may make a UK incorporated company a resident of an overseas territory for the purposes of the agreement (see 20 and 21 above). Appendix to SP1/90 Finance Act 1988 1. Subject to the provisions of Schedule 7 to this Act, a company which is incorporated in the United Kingdom shall be regarded for the purposes of the Taxes Acts as resident there; and accordingly, if a different place of residence is given by any rule of law, that place shall no longer be taken into account for those purposes. 2.

For the purposes of the Taxes Acts, a company which -

(a)

is no longer carrying on any business; or

(b)

is being wound up outside the United Kingdom,

shall be regarded as continuing to be resident in the United Kingdom if it was so regarded for those purposes immediately before it ceased to carry on business or, as the case may be, before any of its activities came under the control of a person exercising functions which, in the United Kingdom, would be exercisable by a liquidator. 3. 1970.

In this section "the Taxes Acts" has the same meaning as in the Taxes Management Act

4. This section and Schedule 7 to this Act shall be deemed to have come into force on 15 March 1988. Schedule 7 - Exceptions to rule in Section 66(1) Cases where rule does not apply 1. (1) Subject to sub-paragraphs (2) and (3) below, Section 66(1) of this Act shall not apply in relation to a company which, immediately before the commencement date (a)

was carrying on business;

(b)

was not resident in the United Kingdom, having ceased to be so resident in pursuance of a Treasury consent; and

(c)

where that consent was a general consent, was taxable in a territory outside the United Kingdom.

(2) If at any time on or after the commencement date a company falling within subparagraph (1) above (a)

ceases to carry on business, or

(b)

where the Treasury consent there referred to was a general consent, ceases to be taxable in a territory outside the United Kingdom,

Section 66(1) of this Act shall apply in relation to the company after that time or after the end of the transitional period, whichever is the later. (3) If at any time on or after the commencement date a company falling within subparagraph (1) above becomes resident in the United Kingdom, Section 66(1) of this Act shall apply in relation to the company after that time. 2.

(1) Subject to sub-paragraphs (2) and (3) below, Section 66(1) of this Act shall not apply in relation to a company which (a)

carried on business at any time before the commencement date;

(b)

ceases to be resident in the United Kingdom at any time on or after that date in pursuance of a Treasury consent; and

(c)

is carrying on business immediately after that time.

(2) If at any time after it ceases to be resident in the United Kingdom a company falling within sub-paragraph (1) above ceases to carry on business, Section 66(1) of this Act shall apply in relation to the company after that time or after the end of the transitional period, whichever is the later. (3) If at any time after it ceases to be resident in the United Kingdom a company falling within sub-paragraph (1) above becomes resident in the United Kingdom, Section 66(1) of this Act shall apply in relation to the company after that time. Cases where rule does not apply until end of transitional period. 3. (1) Subject to sub-paragraph (2) below, in relation to a company which (a)

carried on business at any time before the commencement date;

(b)

was not resident in the United Kingdom immediately before that date; and

(c)

is not a company falling within paragraph 1(1) above,

Section 66(1) of this Act shall not apply until after the end of the transitional period. (2) If at any time on or after the commencement date a company falling within subparagraph (1) above becomes resident in the United Kingdom, Section 66(1) of this Act shall apply in relation to the company after that time. 4.

(1)

Subject to sub-paragraph (2) below, in relation to a company which (a)

carried on business at any time before the commencement date;

(b)

ceases to be resident in the United Kingdom at any time on or after that date in pursuance of a Treasury consent; and

(c)

is not a company falling within paragraph 2(1) above,

Section 66(1) of this Act shall not apply until after the end of the transitional period. (2) If at any time after it ceases to be resident in the United Kingdom a company falling within sub-paragraph (1) above becomes resident in the United Kingdom, Section 66(1) of this Act shall apply in relation to the company after that time. Supplemental 5. (1) In this Schedule "the commencement date" means the date of the coming into force of this Schedule; "general consent" means a consent under any section to which sub-paragraph (2) below applies given generally within the meaning of subsection (4) of that section; "taxable" means liable to tax on income by reason of domicile, residence or place of management; "the transitional period" means the period of five years beginning with the commencement date; "Treasury consent" means a consent under any section to which sub-paragraph (2) below applies given for the purposes of subsection 1(a) of that section. (2) This sub-paragraph applies to the following sections (restrictions on the migration etc of companies), namely Section 765 of the Taxes Act 1988; Section 482 of the Taxes Act 1970; Section 468 of the Income Tax Act 1952; and Section 36 of the Finance Act 1951. (3) Any question which arises under any of the provisions of this Schedule shall be determined without regard to the provision made by Section 66(1) of this Act. SP2/90

Guidance notes for migrating companies: Notice and arrangements for payment of tax

1. Section 130 FA 1988 requires a company to notify the Commissioners for Her Majesty’s Revenue and Customs of its intention to cease to be resident in the United Kingdom and to obtain the Commissioners for Her Majesty’s Revenue and Custom’s approval of arrangements for payment of the company's tax liabilities. These notes explain the procedure to be followed, the information required in support of a request for approval and the arrangements which will normally be acceptable to the Commissioners for Her Majesty’s Revenue and Customs. 2. 2.1

Notice A notice under Section 130(2) (a) should be sent to: HMRC

CT & VAT: International (Company Migrations) Floor 3c 100 Parliament Street London SW1A 2BQ The notice should give the intended date of migration (see paragraph 5 below). The information required by Section 130 (2) (b) and (c) should normally be sent with the notice (i.e. the statement of tax liabilities and proposals for securing payment - see 3(d) and (e) below). 2.2

As the Board will have to check the statement of tax payable with the company's tax district, it would be useful if a copy of the notice and of the tax computation could be sent to the company's tax district at the same time.

3. a.

Information to be supplied The name of the company, its address in the UK and its place of incorporation.

b.

Its tax district and reference number.

c.

A copy of the latest available accounts.

d.

A detailed statement of all tax liabilities which are or will be due for periods commencing before the date of migration. The statement should cover Corporation Tax and Advance Corporation Tax and, if relevant, all taxes mentioned in subsection (7) of Section 130 and any accrued interest on tax (subsection (8)). It should include any charges which arise as a consequence of the migration itself e.g., under Section 337(1) ICTA 1988 and Section 185 TCGA 1992. (If an unlimited guarantee is to be offered - see paragraph 4.3 - the statement can be restricted to a brief summary of the tax position.)

e.

The company's proposals for securing the payment of tax liabilities. These should include the name and address of the proposed attorney and of the proposed guarantor (see paragraphs 4.1 and 4.2).

f.

If a corporate guarantor other than a bank is proposed (see paragraph 4.2), a copy of its memorandum and articles of association.

4. Arrangements for securing payment of tax 4.1 a. It will normally be necessary to appoint an attorney to act for the company in tax matters, e.g. to receive notices of assessment. The attorney must be a person resident in the United Kingdom and will usually be an individual who is professionally qualified e.g., as a solicitor or accountant. The Board will need to be satisfied that the migrating company has power to appoint an attorney. Further information and drafts of the power of attorney in a form approved by the Board are available from the above address. 4.1 b. The capacity of a migrating company to appoint an attorney may be demonstrated by the opinion of a lawyer qualified in the appropriate local law upon the following matters: i.

That the company has power by its constitution and/or by appropriate local law to appoint an attorney in the terms of the draft Power of Attorney (see para 4.1.a. above).

ii.

To know what formalities, if any, are required for a valid exercise of the Power to Appoint an Attorney.

iii.

How the Deed in the form of the Draft Power of Attorney should be executed and whether execution should be Notarily Attested.

4.2 The precise form of the arrangements will vary from case to case. Normally they will take the form of a guarantee from a company which must be either resident in the United Kingdom or a UK branch of a foreign bank. A guarantor company must of course have power to act as guarantor and a copy of its current memorandum and articles is required to satisfy the Board of this. The memorandum and articles should be certified by a solicitor or an officer of the company to be the version currently in force and as filed with the Registrar of Companies. 4.3 The guarantee may be unlimited or limited to a specified sum. An unlimited guarantee is given for the total tax liabilities without specifying the amount. Where the migrating company has an associated United Kingdom resident company of sufficient substance the Board will normally look for an unlimited guarantee from that company. Where the guarantee is given by a company not associated with the migrating company, usually by a bank, the Board understand that the guarantor will require the guarantee to be limited to a specified sum. Under Section 130(4) any dispute as to the amount can be referred to the Special Commissioners. 4.4 Where it is not possible for a guarantee in one of the forms indicated above to be provided, other arrangements may be acceptable. Further information is available from the above address. 5. Date of migration 5.1 The Board will act as speedily as possible to approve the arrangements but the time required will depend on several factors. If possible the intended date of migration should not be less than two months from the date of the notice. If it is necessary to agree values of assets in order to estimate tax liabilities, the time required may be longer and companies should take this into account. However, where an unlimited guarantee is proposed, it will not usually be necessary to estimate the tax liabilities in detail and it may then be possible to approve the arrangements well within two months of the notice. 5.2 A company may decide to change the intended date of migration either for its own reasons or because, for example, the arrangements will clearly not be approved in time to meet the original date. It should then give notice under Section 130 FA 1988 of the amended date and provide details of any consequential changes in either the amount of tax and interest to be included in the arrangements or the nature of the arrangements themselves. 6. Non-compliance Where a company migrates without the requirements of Section 130 being met, the persons responsible, including individual directors, may be liable for substantial penalties under Section 131. Where tax liabilities of a migrating company remain unpaid, those liabilities may also be recovered from related companies, or from certain directors, under Section 132. 7. Telephone enquiries An initial enquiry may be made to the HM Revenue and Customs, Somerset House Public Enquiry Room (020 7438 6420/5) - callers should ask for HMRC, CT&VAT International (Company Migrations). SP3/90

Stocks and long-term contracts

SP4/90

Charitable covenants

SP5/90

Accountants' working papers

1. Section 20 TMA 1970 gives the Revenue powers to call for information relating to a person's tax affairs. Section 20B TMA, which contains restrictions on the use of Section 20 powers, was amended by Finance Act 1989 to bring accountants working papers, which were previously excluded, within the range of documents which the Revenue may require a third-party

to deliver or make available for inspection under these powers. This Statement explains how the new rules work in relation to accountants working papers and how the Revenue will use these powers in practice. 2. Three classes of documents are still excluded from the papers which may be called for from a third-party. First, there is no change in the protection given to documents brought into existence specifically to support the conduct of a pending appeal. Second, audit papers are protected from disclosure by an auditor. Third, communications relating to giving or obtaining tax advice are protected from disclosure by a tax adviser. The protection given to audit papers and tax advice is limited however where the papers contain essential information about the origin of figures in accounts, returns and other information submitted to the Revenue or the relationship of those figures with the books and records of the taxpayer. 3. In addition, papers for which legal professional privilege could be claimed are protected from disclosure by a lawyer in relation to a client's tax affairs and there are general protections for medical records and other records kept by doctors, counsellors etc relating to an individual's personal welfare and the working papers of a journalist. Audit papers 4. An auditor appointed under any statutory provision, e.g. Companies Act, Building Societies Act, etc is not obliged to disclose audit papers to the Revenue under a third party notice, i.e. Section 20(3) or 20(8A) TMA. Audit papers are papers which are the property of the person appointed as an auditor under that enactment and which have been prepared by, or for, that person in order to carry out the statutory duties of an auditor under that enactment. 5. In practice the Revenue will allow equivalent protection where an accountant is appointed to carry out a non-statutory, independent audit to standards similar to those required for a Companies Act audit or to standards laid down by the client's professional body, provided the work on the audit is kept separate from any work on the preparation of the accounts. Tax advice 6. A tax adviser is not obliged to disclose communications relating to the giving or obtaining of tax advice to the Revenue under a third party notice. A tax adviser is any person appointed by a client, either directly by the client or indirectly via another tax adviser, to give advice on the client's tax affairs. The communications which are protected are ones between the tax adviser and the client or another adviser, made for the purposes of giving or obtaining advice about the client's tax affairs, and can include notes of meetings and telephone calls, internal memoranda, copy letters and faxes as well as ordinary correspondence. Restrictions on protection for audit papers and tax advice 7. The protection given to audit papers and tax advice is restricted where the auditor or tax adviser has assisted the taxpayer in the preparation of accounts, returns or other information to be used for tax and the papers contain workings or other analytical information showing how an entry in the accounts, returns or other information submitted to the Revenue was arrived at, which has not previously been made available to the Revenue. In that event, the Revenue is entitled to have access to the information showing how the entry was arrived at, although information showing why the entry was arrived at in that way remains protected. 8. Where an auditor or tax adviser wishes to claim protection for part of a paper, a copy, which must be photographic or otherwise by way of facsimile, of the part which is not protected may be supplied to the Revenue. But the original must also be made available for inspection by the Revenue on request, when the protected parts may be kept covered up if the auditor or tax adviser wishes.

9. The protection given to audit papers and tax advice is restricted similarly where the notice is made under Section 20(8A) TMA for information in respect of an unnamed taxpayer or taxpayers and the papers contain details giving the identity or address of any of the unnamed taxpayers or of any person who has acted on their behalf. Use of Section 20 powers in respect of accountants working papers 10. Accountants working papers will not be called for on a routine basis. The Revenue will normally do so in connection with enquiries into a client's tax affairs only where they have been unable to satisfy themselves otherwise that the client's accounts or returns are complete and correct. Although the new provisions give the Revenue formal powers to require access to accountants working papers, this has been given in the past on a voluntary basis where appropriate. The Revenue will continue their general policy of seeking access on a voluntary basis and will use their formal powers only where they consider it absolutely necessary. 11. Requests will be limited as far as possible to information explaining specific entries. But there may be occasions when the Revenue will wish to examine the whole or a particular part of the working papers. The Revenue will usually be willing to visit the accountant's office or the client's premises to examine the papers and to take copies or extracts. Accountants convicted of a tax offence 12. The restrictions on the use of the Revenue's powers to obtain access to an accountant's working papers described above do not apply to the Revenue's powers under Section 20A TMA to require access to the working papers of an accountant who has been convicted of a tax offence or had a penalty awarded against him under Section 99 TMA. Destruction of papers 13. It is a criminal offence intentionally to falsify, conceal, destroy or otherwise dispose of documents which the Revenue has called for under Section 20 or 20A TMA before the Revenue has seen them. (Section 20BB TMA). This applies both where an informal request has been made under Section 20B(1) TMA, which would be made in writing and clearly identified as such when it was made, and where a formal notice has been given under Section 20 or 20A TMA. SP6/90

Stamp Duty: Conveyances and transfers of property subject to a debt Section 57 Stamp Act 1891

Introduction 1. Since the abolition of the duty on voluntary dispositions in 1985, many enquiries have been received about the stamp duty chargeable on conveyances etc subject to a debt where no chargeable consideration (e.g. money or stock) unrelated to the debt is given by the transferee. The Statement of Practice sets out the Commissioners for Her Majesty’s Revenue and Custom’s view of the correct stamp duty treatment of such conveyances. 2. For the sake of completeness it should be noted that where chargeable consideration unrelated to debt is given by the transferee, Section 57 renders the conveyance liable to ad valorem duty on the aggregate of that consideration and the debt whether the transferee assumes liability for the debt or not (IRC v City of Glasgow Bank 1881 8 R389, 18 SLR 242). Section 57, Stamp Act 1891 3. The most commonly misunderstood applications of Section 57 arise where -

a mortgaged property held in the name of one spouse is transferred into the joint names of both spouses;

-

a mortgaged property held in the name of one spouse or in their joint names is transferred into the sole name of the other;

-

a mortgaged business property, frequently farmland, is conveyed from a sole proprietor to a family partnership or from a family partnership to a fresh partnership bringing in other members of the family.

4. The critical question is whether the transaction to which the conveyance gives effect is or is not a sale. If it is, Section 57 will apply and the conveyance will be chargeable to ad valorem duty on the amount of the debt assumed. If it is not, then Section 57 will not apply and ad valorem duty will not be payable. Express covenants 5. Where property is transferred subject to a debt, the transferee may covenant, either in the instrument or by means of a separate written undertaking, to pay the debt or indemnify the transferor against his personal liability to the lender. Such a covenant or undertaking constitutes valuable consideration and, in view of Section 57, establishes the transaction as a sale for stamp duty purposes. 6. Where the transferor covenants to pay the debt and the transferee does not assume any liability for it, no chargeable consideration has been given and there is no sale. The transfer would then be a voluntary disposition - i.e. an unencumbered gift capable of being certified as Category L under the Stamp Duty (Exempt Instruments) Regulations 1987 (SI 1987 No 516) and so exempt from the 50p charge that would otherwise arise. Implied covenants 7. Where no express covenant or undertaking is given by the transferee, the Commissioners for Her Majesty’s Revenue and Customs are advised that, except in Scotland, a covenant by the transferee may be implied. That makes the transaction a sale, as in paragraph 4 above. 8. Such an implied covenant may be negated if there is evidence that it was the intention of the parties at the time of the transfer that the transferor should continue to be liable for the whole of the mortgage debt. Where evidence of such a contrary intention exists, the transfer would again be treated for stamp duty purposes as a voluntary disposition. 9. Where property in joint names subject to a debt is transferred to one of the joint holders (though with no cash passing), a covenant by the transferee to indemnify the transferor may be implied even where both were jointly liable on the mortgage. Amount chargeable 10. Where a conveyance of property subject to a debt is chargeable to ad valorem duty and the express or implied covenant by the transferee relates only to part of the debt, only the amount of that part is treated as chargeable consideration within Section 57. A certificate of value under Section 34(4) FA 1958 may, where appropriate, be included in the conveyance where the relevant amount of the debt does not exceed the amount certified. Other provisions 11. The foregoing does not affect any statutory exemption from duty that may apply, e.g. that for transfers to a charity (Section 129 FA 1982) and that available for certain transfers of property from one party to a marriage to the other in connection with their divorce or separation (Section 83(1) FA 1985 and Category H of the Stamp Duty (Exempt Instruments) Regulations 1987). Procedure 12. Where the applicant is satisfied that the conveyance or transfer is made on sale, it may be sent or taken for stamping with a remittance for the duty payable. If the transfer contains an appropriate certificate of value - see paragraph 10 above - it may be sent direct to the Land

Registry in the usual way if appropriate. In either case, if the amount of the debt outstanding is not given in the conveyance or transfer the amount should be stated in a covering letter. 13. Where the conveyance or transfer contains a covenant by the transferor to pay the debt (see paragraph 6) and is certified as within Category L of the Stamp Duty (Exempt Instruments) Regulations 1987, it should also be sent direct to the Land Registry if appropriate. 14. In any other case where the applicant believes that the conveyance or transfer effects a voluntary disposition - see paragraph 8 above - it should be presented for adjudication accompanied by a statement of the facts and any supporting evidence. SP7/90

Compulsory acquisition of freehold reversion by tenant - Superseded by SP13/93

SP8/90

Losses on irrecoverable loans in the form of qualifying corporate bonds: Loss on early redemption

If a qualifying corporate bond becomes of negligible value before its redemption date, relief may be claimed under Section 254(3) TCGA 1992 (Section 136A(3) CGTA 1979) for the loss arising on the underlying loan. In the case of a qualifying corporate bond which ceased to have any value because it was redeemed early, HM Revenue and Customs accepts that relief under Section 254 may be claimed on the basis that the condition in Section 254(3)(a) is satisfied. SP1/91

Small companies' rate of Corporation Tax and Corporation tax starting rate

1. Section 13 ICTA 1988 contains the rules for the small companies' rate of corporation tax and marginal relief. If a company's profits for an accounting period do not exceed the lower relevant maximum amount, the company may claim to be taxed at the small companies' rate. If the profits exceed the lower relevant maximum amount but do not exceed the upper relevant maximum amount, the company may make a claim for the marginal relief to apply. 2. Section 13AA ICTA 1988 contains the rules for and Corporation tax starting rate and marginal relief. If a company’s profits for an accounting period do not exceed the first relevant amount, the company may claim to be taxed at the Corporation tax starting rate. If the profits exceed the first relevant amount but do not exceed the second relevant amount, the company may make a claim for the marginal relief to apply. 3. The lower and upper relevant maximum amounts (for Section 13) and the first and second relevant amounts (for Section 13AA) are restricted where the company has one or more associated companies. Two companies are associated if one controls the other or both are under the control of the same person or persons. 4. If a company wishes to take advantage of Section 13 or Section 13AA, it is necessary for it to make a claim. HM Revenue and Custom’s practice is to accept as a valid claim under Section 13 or Section 13AA a clear indication in a company's return (or corporation tax computation or accompanying correspondence) for the relevant accounting period that the profits should be charged at the small companies' rate, the Corporation tax starting rate or that the marginal relief should be applied. Except in the case of an unincorporated association or other members' club or society, the claim should include a statement of the number of associated companies which the company had in the relevant accounting period. Where the company had no associated companies in the accounting period, the claim should state this. SP2/91

Residence in the UK: Visits extended because of exceptional circumstances – withdrawn with effect from 6 April 2009

SP3/91

Finance lease rental payments

1. This statement sets out the view of the Commissioners for Her Majesty’s Revenue and Customs of the correct treatment, for tax purposes, of rentals payable by a lessee under a finance lease. That view reflects advice the Commissioners for Her Majesty’s Revenue and Customs have received on the application of the correct principles of commercial accounting and relevant case law. The statement sets out what will be HM Revenue and Customs’ practice in applying tax law to rentals payable under a finance lease, in cases where Statement of Standard Accounting Practice (SSAP) 21 has not been applied and in cases where SSAP 21 has been applied. A. Cases where SSAP 21 is not applied Accounting treatment 2. The Commissioners for Her Majesty’s Revenue and Customs are advised that finance lease rentals are revenue payments for the use of the asset over time and, in accordance with the correct principles of commercial accounting, should be allocated to the periods of account for which the asset is leased under the ‘accruals’ concept. 3. Where a lease provides not only a primary period (i.e. the period over which the lessee initially contracts to lease the asset), but also secondary periods (i.e. periods for which the lessee has the option to continue to lease the asset), then in determining what are the periods of account to which the rentals are to be allocated regard should be had not only to the primary period but also to the economic life of the asset and its likely period of use by the lessee. Tax treatment 4. The Commissioners for Her Majesty’s Revenue and Customs are advised that for tax purposes, the rentals are deductible in computing profits on the same basis as they are correctly allocated to the periods of account under the accruals concept. 5. There is no entitlement to deduct the rentals for tax purposes, merely by reference to the due dates of payment. Revenue practice 6. Inspectors of Taxes will normally be prepared to accept, for tax purposes, the lessee's accounting treatment of rental payments where that treatment is consistent with the accounting principles described at paragraphs 2 and 3 above. 7. Where the lessee's treatment of rental payments in the accounts does not accord with the basis indicated above, Inspectors will seek to negotiate the computational adjustments necessary to secure for tax purposes, an appropriate spreading of the rental payments, in accordance with the accruals concept. B. Cases where SSAP 21 is applied Accounting treatment 8. SSAP 21 recognises the transfer of effective ownership of the asset to the lessee who is required to record the lease in the balance sheet, as the acquisition of the asset subject to a loan. The asset is to be depreciated over its expected useful life in the hands of the lessee. Rentals are treated as comprising a finance charge element and a capital repayment element. Tax treatment 9. Notwithstanding that SSAP 21 requires a proportion of the rentals payable to be treated as capital repayment, the rentals remain in law revenue payments for the use of the asset, and for tax purposes the whole of the rentals should be allocated to the periods of account for which the asset is leased in accordance with the accruals concept.

Revenue practice 10. Where the lessee has accounted for a lease in accordance with SSAP 21 Inspectors of Taxes will normally accept for tax purposes, that the finance charge element of the rentals allocated to a period of account is deductible in computing the profits of that period. 11. In determining what proportion of the capital repayment element should be allowed for tax purposes in a period of account, Inspectors will normally be prepared to accept that the properly computed commercial depreciation of the asset which is charged to the profit and loss account in that period represents the appropriate amount. 12. Where, however, the depreciation charge is not calculated on normal commercial accounting principles then it will not represent the appropriate proportion of the capital repayment element of the rental. In such cases, the Inspector will allow such part of the rentals for the period as represents the properly calculated proportion of the capital repayment element which should be allocated to that period in accordance with the accruals concept. Timing of introduction 13. The practice described in paragraphs 6-7 and 10-12 above will be applied to leases entered into after the date of this statement, 11 April 1991. See also Inland Revenue Tax Bulletin, Issue 15, February 1995, pages 189 - 193. SP4/91

Tax returns

SP5/91

Investment trusts investing in authorised unit trusts - Superseded by SP7/94

SP6/91

Stamp Duty and VAT: Interaction - Superseded by SP11/91

SP7/91

Double taxation relief: Business profits: Unilateral relief

1. Section 790 ICTA 1988 sets out the basis under which relief (‘unilateral relief’) may be given for foreign tax in the absence of a Double Taxation Agreement. The Section sets out the conditions precedent to the granting of relief. So far as business profits are concerned the foreign tax is admissible for relief only if it is a tax which is payable under the law of the foreign territory; a tax which is computed by reference to income arising in the foreign territory; a tax which is charged upon income; and a tax which corresponds to income tax or corporation tax. 2. Hitherto HM Revenue and Customs have interpreted the conditions so as to exclude from relief a number of foreign taxes having characteristics similar to turnover taxes, that is to say taxes computed by reference to a prescribed proportion of a gross amount of fee or contractual sum from which expenses fall to be deducted in arriving both at the commercial profit and at the amount which, in the UK, would be assessable under Case I or II of Schedule D. The taxes excluded from relief were those where the proportion of the gross amount charged to tax prompted the view that the tax could not reasonably be regarded as corresponding to UK income tax or corporation tax charged upon net profits. 3. Following consideration of the point in the High Court*, HM Revenue and Customs have decided to change their interpretation. In future the question of whether or not a foreign tax is admissible for unilateral relief under Section 790 ICTA 1988 will be determined by examining the tax within its legislative context in the foreign territory and deciding whether it serves the same function as income and corporation tax serve in the UK in relation to the profits of the business. Turnover taxes, as such, are not therefore affected by the revised interpretation and will continue to be inadmissible for relief. The revised interpretation will take effect from Wednesday 13 February 1991 when judgement was given in the High Court, and will apply to claims made

on or after that date and to earlier claims unsettled at that date. Taxpayers who would like HM Revenue and Customs to review a previous decision in respect of a specific foreign tax are invited to address their enquiry to HM Revenue and Customs, CT & VAT, 100, Parliament Street, London SW1A 2BQ. 4. It should be noted however that the admissibility of the foreign tax is only one aspect of unilateral relief which can give rise to disputes between HM Revenue and Customs and the taxpayer. Relief is only available in respect of the foreign tax on income arising in the foreign territory, and according to the facts of the particular case there may be room for argument as to where the income arose and to the amount of the income, having regard to the different principles of law in the foreign territory and in the UK. In the light of the High Court decision HM Revenue and Customs practice will continue to be to determine questions of this sort by reference to principles of UK tax law. It follows that the charging of foreign tax upon an amount of income will not of itself be sufficient to establish that income of that amount arose in the foreign territory, and it is necessary to apply principles of UK tax law in order to ascertain the amount of the foreign income. As credit for foreign tax is restricted to the income tax or corporation tax attributable to the foreign income, this last point is one of some importance. *

SP8/91

Yates v GCA International Ltd (formerly Gaffney Cline and Associates Ltd) (64 TC 37) Discovery assessments

General 1. This Statement of Practice explains, in relation to income tax, corporation tax and capital gains tax, the circumstances in which - HM Revenue and Customs seeks to recover tax when a person has not been assessed or has been inadequately assessed. The Statement does not cover cases where there may have been fraud or negligence by or on behalf of the taxpayer. 2. The Statement draws attention to the relevant statute and case law, in particular to the cases of Cenlon Finance Co Ltd v Ellwood (1) and Scorer v Olin Energy Systems Ltd (2) (See references at end of this Statement). 3. The following paragraphs should be read as subject to the general proviso that it is fundamental to the operation of the tax system that it is for the taxpayer, who is in possession of the facts, to supply them to the Revenue so that his tax liability may be determined. Case law confirms that, if the relevant facts have not been accurately, fully and clearly disclosed by the taxpayer at the time, the Revenue should not regard agreements reached, or action taken or omitted by its officials as binding it to accept less than the full amount of tax legally due. 4.

This statement of practice applies to the following for the years specified: •

Individuals - for returns for years to and including 1995/96.

•

Partnerships whose trade, profession of business were set up and commenced before 6 April 1994 - for returns for the years to and including 1996/97.

•

For bodies within the charge to Corporation Tax - for accounting periods ending before 1 July 1999.

•

For periods after those referred to above TMA 1970 s.29 as amended by FA 1994 ss191 applies, except for companies. In the case of companies paragraphs 41-45, Schedule 18 FA 98 apply.

Inspectors' discovery powers 5. Section 29(3) TMA 1970 provides that where, after an assessment has been made or a decision has been taken that an assessment is not required, an Inspector of Taxes discovers that any taxable profits have not been assessed, he may make an assessment in the amount he considers ought to be charged. Similarly, a further assessment may be made if an Inspector discovers that an assessment is insufficient or that a relief should be withdrawn. These powers may also be exercised by the Commissioners for Her Majesty’s Revenue and Customs. There are also other discovery provisions in the Taxes Acts which empower an Inspector to make assessments to recover excessive reliefs, tax unpaid and over-repayments of tax, for example Section 30 TMA and Sections 252 and 412(3) ICTA 1988. Normally any assessment or further assessment must be made not later than six years after the end of the chargeable period to which it relates (Section 34(1) of the TMA). 6. The Courts have established that, subject to the decisions in the Cenlon and Olin cases, a change of opinion can amount to ‘discovery’; that discovery can be made by an Inspector other than the one who made the first assessment; and that discovery can extend to a finding that the law has been incorrectly applied as well as the coming to light of additional facts. The word has been held to include any situation in which for any reason it newly appears to an Inspector that a taxpayer has been undercharged. The main principles 7. Two main principles are relevant in considering whether a discovery assessment may be made in any particular circumstances. First, HM Revenue and Customs does not go back on a specific agreement made by an Inspector on a particular point and raise a discovery assessment in respect of that point, whether or not the Inspector correctly took account of current law and practice in entering into that agreement; Second, in circumstances where it cannot be said that the particular point was the subject of a specific agreement, the Revenue regards itself as bound by the Inspector's acceptance of a computation if the view of the point implicit in the computation was a tenable one. But the Revenue does not regard itself as bound by any agreement made, or considered to be made, or any decision taken by an Inspector, if any of the information supplied on which that agreement or decision was founded was misleading. The position in more detail i) Specific agreement: appeal cases Cenlon 8. First, there is the case where there has been a specific agreement made by an Inspector on a particular point, i.e. where an issue has been raised expressly by the Inspector, the taxpayer or his agent (whether orally or in writing) and agreement has been reached on the treatment of that issue for tax purposes. The decision in the Cenlon case established that, if an assessment has been determined on appeal in accordance with Section 54 TMA 1970, a discovery assessment should not be made in respect of any particular point which had been specifically dealt with in the course of the determination of that appeal. Olin

9. The decision in the Olin case gives guidance on deciding whether (in the absence of express words making the position clear) a particular point has been agreed, or could be said to have been agreed, in the course of reaching an overall agreement on a person's tax liability for a particular period. The Olin case makes it clear that a particular point agreed may not only be an issue raised expressly by the Inspector, the taxpayer, or his agent, (whether orally or in writing), but also any point which was fundamental to the whole basis of the computation of the taxpayer's liability, and so clearly and fully described in the accounts or computations that its significance for the computation of the taxpayer's liability was clearly and immediately apparent. In these circumstances the Inspector could not reasonably be regarded as having agreed the computation without having appreciated and accepted the point. In other words the Inspector must have been clearly put on notice of the point. 10. The question whether a particular point is fundamental to the whole basis of the computation of the liability is one which must depend for its answer on the facts and circumstances of the particular case. At one extreme, there will be cases like Olin itself where the claim to set off the losses of the defunct trade against the profits of the continuing trade was fundamental in that it had a major impact on the computation of the liability and, moreover, was so clearly and fully described in the computations that the Inspector must have appreciated what was being claimed. In the House of Lords, Lord Keith concluded that the Inspector's agreement to the computations would have led a reasonable man to believe that the Inspector had decided to admit the claim. In circumstances like these, the Revenue would accept that the particular point was covered by the agreement reached and could not subsequently be the subject of a discovery assessment. 11. At the other extreme, there will be cases in which a point is not fundamental to the basis of the computation, in that it does not have a major impact on the liability, or it is not so clearly and fully described in the accounts or computations that its significance is clearly and immediately apparent from the information supplied. For example, in cases where the taxpayer or his agent are claiming a particular deduction in arriving at profits, and among a multiplicity of items contained in the accounts and supporting material is a piece of information which, if the Inspector had studied it in detail and thought through the implications, could have alerted him to the fact that the claim was not valid, the Revenue would not accept that a discovery assessment could not be raised in respect of the particular (incorrect) deduction. Moreover, if further information were needed before the Inspector could reasonably be expected to appreciate the significance of the point for the taxpayer's liability, the Revenue would not accept that the Inspector should be regarded as having considered and agreed that point. 12. The treatment of cases in between these two extremes must be a matter of judgement, depending on the particular facts. It will be necessary to decide, taking a reasonable and commonsense view of the matter, whether a taxpayer or his adviser would consider that a competent Inspector, in examining the accounts and computations, must be considered to have addressed his mind to the point at issue before signifying his agreement to the computation of the liability. This will be so only if the point was both fundamental to the whole basis of the computation, and was so clearly and fully described that its significance for the computation of the taxpayer's liability was clearly and immediately apparent. In these circumstances the Inspector could not reasonably be regarded as having agreed the computation without having appreciated and accepted the point. ii)

Specific agreement: non-appeal cases

13. The principles established in the Cenlon and Olin cases strictly apply only where there was an appeal against an assessment or an appeal against a decision on a claim given in accordance with Section 42, TMA 1970 which was subsequently determined either by the Commissioners or under Section 54 of that Act. But, even if there was no determination of an appeal, a discovery assessment will not be made if the particular point on which the Inspector

takes a revised view was, or (as in the Olin case, see paragraph 8 above) could be said to have been, the subject of the specific agreement of the final figures for assessment purposes. These circumstances may arise because the figures were agreed before an assessment was made, because the Inspector decided not to make an assessment, or because the Inspector's decision on the claim was accepted. iii) No specific agreement: appeal and non-appeal cases 14. There will also be circumstances in which the Cenlon and Olin principles are not applicable. Thus, the particular point on which the Inspector subsequently takes a revised view and considers making a discovery assessment may not have been the subject of a specific agreement or, because the point was not fundamental, cannot be said to have been the subject of a specific agreement (see paragraph 8 above). In these circumstances, a discovery assessment will not be made, provided that the Inspector's original decision, whether on a claim or on the proper amount of an assessment, was based on a full and accurate disclosure of all the relevant facts and was a tenable view, so that the taxpayer could reasonably have believed that the Inspector's decision was correct. And it follows that if the Inspector's original decision was consistent with a view of the law and practice generally received or adopted at the time, a discovery assessment would not be made where, for example, there is a subsequent change in that practice - e.g. following a Court decision. Some particular circumstances where discovery assessments will be made 15. The application in any individual case of the general principles described in the preceding paragraphs will, of course, depend on the particular facts and circumstances. But there are certain specific circumstances in which there will clearly be no grounds for an Inspector not to make a discovery assessment, i.e. where -

profits or income have not earlier been charged to tax because of any form of fraudulent or negligent conduct;

-

the Inspector has been misled or misinformed in any way about the particular matter at issue;

-

there is an arithmetical error in a computation which had not been spotted at the time agreement was reached, and which can be corrected by the making of an in date discovery assessment;

-

an error is made in accounts and computations which it cannot be reasonably be alleged was correct or intended, e.g. the double deduction from taxable profits of a particular item (say group relief).

(1)

[1962] AC 782; [1962] 2 WLR 871; [1962] 1 A11 ER 854; 40 TC 176

(2)

[1985] AC 645; [1985] 2 WLR 668; [1985] 2 A11 ER 375; [1985] STC 218; 58 TC 592.

SP9/91

Investigation settlements: Retirement annuities and personal pension relief

1. When an assessment to tax becomes final and conclusive more than six years after the end of the year to which it relates, Sections 625(3) and 642(4) ICTA 1988 provide special rules for taking account of any unused personal pension or retirement annuity relief arising from the assessment. In particular the taxpayer may pay contributions to utilise that relief and elect that the relief shall be allowed for the year of assessment in which the contributions are paid. These must be in addition to the normal maximum for that year under either Section 619(2) (for retirement annuities) or Section 640 (for personal pensions). Both the payment of the

contributions and the making of the election must take place within 6 months of the assessment becoming final. 2. Where incorrect returns and accounts are found to have been submitted, offers in settlement of liability to tax, interest and penalties are often accepted by the Commissioners for Her Majesty’s Revenue and Customs without assessment of all the tax. In such an investigation settlement the absence of assessments means that the conditions for obtaining unused relief under either Section 625(3) or Section 642(4) are not satisfied. 3.

Nevertheless, where a settlement is reached in circumstances where:

-

assessments which would have given rise to unused relief are not made; or

-

assessments have been made and appealed against but not formally determined, and the tax for the years of assessment concerned is included in the settlement;

claims under Section 625(3) or Section 642(4) will be accepted if: a.

the settlement includes tax on relevant earnings for a year of assessment which ended more than six years before the date of the letter accepting the offer and which, if assessed, would give rise to unused relief; and

b.

within six months of the date of the letter accepting the offer the taxpayer both i.

pays a qualifying contribution or premium to cover all or part of the unused relief, and

ii.

makes a formal election under either Section 625(3)(b) or Section 642(4)(b).

4. It should be noted that unused relief carried forward can only be utilised by the payment of contributions or premiums in excess of the maximum applying under whichever is applicable of Section 619 or Section 640. It is only this excess that must be paid within the 6 months period referred to in paragraph 3(b). Contributions or premiums up to the normal limits for the year of assessment may be paid within the normal time span for Sections 619, 639 and 641. SP10/91

Corporation Tax: Major change in the nature or conduct of a trade or business

1. This statement explains the basis on which HM Revenue and Customs interpret the term `a major change in the nature or conduct of a trade' (or, as appropriate, `business') for various corporation tax purposes. 2.

The term is relevant in the following provisions:

Section 245 ICTA 1988, which prevents advance corporation tax paid in respect of distributions made, or deemed to be made, in an accounting period before a change of ownership from being carried forward to set against a corporation tax liability in an accounting period after a change of ownership, or carried back from an accounting period after the change of ownership to be set against a corporation tax liability of an accounting period before the change of ownership, when in any period of three years there is a change in the ownership of a company and a major change in the nature or conduct of a trade or business carried on by the company. Section 245A ICTA 1988, which prevents advance corporation tax surrendered to a subsidiary company under Section 240 from being carried forward from an accounting period before the change of ownership to set against the corporation tax liability in an accounting period after the change of ownership when in a period of six years beginning three years before the change in the

ownership there is a change in the ownership of the subsidiary company and a major change in the nature or conduct of a trade or business carried on by the surrendering company. Section 767A ICTA 1988, which prevents the use of company purchase schemes to avoid payment of corporation tax, by enabling HM Revenue and Customs to collect any unpaid tax from the persons who previously controlled the company, or from companies under the control of such persons. It applies in certain circumstances where there is a change of ownership of a company and there is a major change in the nature or conduct of a trade or business of the company during the period of six years beginning three years before the change in ownership. Section 768 ICTA 1988, which prevents a trading loss incurred in an accounting period before the change of ownership from being carried forward to set against trading income of an accounting period after the change of ownership when in any period of three years there is a change in the ownership of a company and a major change in the nature or conduct of a trade carried on by the company. Section 768A ICTA 1988, which prevents a trading loss incurred in an accounting period after the change of ownership from being carried back to set against profits of an accounting period before the change of ownership when in any period of three years there is a change in the ownership of a company and a major change in the nature or conduct of a trade carried on by the company. Section 768B ICTA 1988, which prevents excess management expenses or certain interest whether otherwise allowable as a charge or as a Case III debit from a period before the change of ownership from being deducted in computing the corporation tax profits of a period after the change of ownership, when in a period of six years beginning three years before the change in the ownership there is a major change in the nature or conduct of the business of the company. Schedule 7A TCGA 1992, which restricts the set-off of pre-entry capital losses brought by a company into a group. Paragraph 7 Schedule 7A specifies the gains from which pre-entry losses are deductible and includes special rules for trades. Paragraph 8 Schedule 7A disregards the existence of a trade in relation to the period before a company joins a group if, within 3 years before or after that event, there is a major change in the nature or conduct of the trade. The rules for ascertaining whether there has been a change in the ownership of a company for the purposes of Sections 245, 245A, 767A, 768, 768A and 768B are in Section 769. The rules for determining whether a company is a member of a group are in Section 170 TCGA 1992. These rules apply for the purposes of Schedule 7A subject to certain modifications contained within Schedule 7A itself. 3.

Section 768 (4) sets out some of the circumstances which may amount to a major change in the nature or conduct of a trade for the purposes of Sections 768 and 768A. Section 245 (4) sets out some of the circumstances which may amount to a major change in the nature or conduct of a trade or business for the purposes of Sections 245, 245A and 767A. Section 768B (3) sets out one of the circumstances which may amount to a major change in the nature or conduct of a business for the purposes of Section 768B. Paragraph 8 (2) Schedule 7A TCGA 1992 sets out some of the circumstances which may amount to a major change in the nature or conduct of a trade for the purposes of Schedule 7A.

HM Revenue and Customs will have regard to any of the circumstances specified in the relevant subsection, such as a major change in services or facilities provided in the trade, or a major

change in customers of the trade or a change in the nature of the investments held. HM Revenue and Customs will also have regard, if appropriate, to changes in other factors, such as the location of the company's business premises, the identity of the company's suppliers, management, or staff, the company's methods of manufacture, or the company's pricing or purchasing policies to the extent that these factors indicate that a major change has occurred. 4. In considering whether there has been a major change in the nature or conduct of a trade or business, HM Revenue and Customs will have regard to a comparison of the conditions applying at any two points in the three years which includes the date of the change of ownership of the company or, for the purpose of Section 245A, Section 767A and Section 768B, at any two points in the period of six years beginning three years before the change of ownership. It will not matter whether the change occurs at a particular point in time or is the result of a gradual process. The gradual process may itself have begun before the beginning of the appropriate three (or six) year period. 5. All of the relevant factors will be evaluated as a whole although, on occasion, a change in one factor may be decisive. 6. In the light of the judgement in the Court of Appeal (Northern Ireland) in the case of Willis v Peeters Picture Frames Ltd (56TC436) and the comments on that case in the High Court judgement in Purchase v Tesco Stores Ltd (58TC46), HM Revenue and Customs will have regard to both qualitative issues (such as whether something is or is not a change) and to quantitative issues (such as whether or not a change is a major change). To be a major change, the change must be more than significant (Gibson LJ in Willis v Peeters Picture Frames Ltd) though it does not necessarily have to be fundamental (Warner J in Purchase v Tesco Stores Ltd). 7. HM Revenue and Customs will not regard a major change in the nature or conduct of a trade as having occurred when all that happens is that a company makes changes to increase its efficiency, or makes changes which are needed to keep pace with the developing technology in the industry concerned or with developing management techniques. 8. Similarly, HM Revenue and Customs will not regard a major change in the nature or conduct of a trade as having occurred when all that happens is that a company rationalises its product range by withdrawing unprofitable items and, possibly, replacing them with new items of a kind related to those already being produced. 9. For some tax purposes, where part of a trade is transferred by one company to another in the same ownership, the different parts are treated as separate trades. This occurs in the rules for certain company reconstructions in Section 343 (8). For the purposes of Sections 768 and 768A only, where a transfer of part of a trade falls within Section 343 the transfer will not, by itself, be regarded as a major change in the nature or conduct of either the part-trade transferred or the parttrade retained by the transferring company, where it is relevant to consider either part separately. Instead, the trade of each company after the transfer (or, if appropriate, the relevant part of a combined trade) will be compared with the equivalent part of the combined trade before the transfer. This will apply whether the transfer occurs before or after the relevant change in the ownership. Where the transfer occurs after the change in the ownership, however, it may be necessary to consider whether it involves a major change in the nature or conduct of the undivided trade, as it subsisted at the date of the change in the ownership. In such cases it may be appropriate to regard the transfer as constituting a major change, depending on the surrounding circumstances. In practice, however, HM Revenue and Customs would not contend that the transfer constituted a major change if there was no other major change in either the original trade, or the parts into which it became divided, within the relevant three year period. The transfer of the whole or part of a trade or business may, however, constitute a major change for the purposes of Sections 245, 245A, 767A and 768B ICTA and Schedule 7A TCGA 1992.

10. Though the courts have made it clear that each case should be looked at in the light of all its facts, the following may assist in showing where HM Revenue and Customs regard the borderline falling in particular circumstances: EXAMPLES WHERE A CHANGE WOULD NOT OF ITSELF BE REGARDED AS A MAJOR CHANGE a)

A company manufacturing kitchen fitments in three obsolescent factories moves production to one new factory (increasing efficiency).

b)

A company manufacturing kitchen utensils replaces enamel by plastic, or a company manufacturing time pieces replaces mechanical by electronic components (keeping pace with developing technology). A company operating a dealership in one make of car switches to operating a dealership in another make of car satisfying the same market (not a major change in the type of property dealt in).

c)

d)

A company manufacturing both filament and fluorescent lamps (of which filament lamps form the greater part of the output) concentrates solely on filament lamps (a rationalisation of product range without a major change in the type of property dealt in).

e)

A company whose business consists of making and holding investments in UK quoted shares and securities makes changes to its portfolio of quoted shares and securities (not a change in the nature of investments held).

EXAMPLES WHERE A MAJOR CHANGE WOULD BE REGARDED AS OCCURRING f)

A company operating a dealership in saloon cars switches to operating a dealership in tractors (a major change in the type of property dealt in).

g)

A company owning a public house switches to operating a discotheque in the same, but converted, premises (a major change in the services or facilities provided).

h)

A company fattening pigs for their owners switches to buying pigs for fattening and resale (a major change in the nature of the trade, being a change from providing a service to being a primary producer).

i)

A company switches from investing in quoted shares to investing in real property for rent (a change in the nature of investments held).

SP11/91

Stamp Duty and VAT: Interaction

1. This Statement is a revised version of the Statement about stamp duty and VAT issued on 22 July 1991, SP6/91, and replaces it. Introduction 2. To comply with a judgement of the European Court of Justice in June 1988, standard rate UK VAT has been applied to non-residential construction with effect from 1 April 1989 (Section 18 Finance Act 1989). VAT is compulsory on sales of buildings treated as new for this purpose, which are mainly buildings under three years old that have been completed after March 1989. And owners of non-residential property were given the option from 1 August 1989 of charging VAT on sales of old buildings and on leases.

3. These new charges have prompted a number of enquiries about the relationship between stamp duty and VAT where both taxes arise on a sale or lease of commercial property or, occasionally, other assets. Sales of new non-domestic buildings 4. The Commissioners for Her Majesty’s Revenue and Customs are advised that for stamp duty purposes the amount or value of the consideration for a sale is the gross amount inclusive of VAT. Therefore where VAT is payable on the sale of new non-residential property, stamp duty is calculated on the VAT-inclusive consideration. Other non-domestic transactions 5. Transactions in non-residential property other than sales of new buildings are exempt from VAT. These include: -

sales of old buildings;

-

the assignment of existing leases, or the creation of new leases, in old or new property.

However, the vendor or lessor can elect to waive the exemption. 6. that:

The Commissioners for Her Majesty’s Revenue and Customs have received legal advice

-

where the election has already been exercised at the time of the transaction, stamp duty is chargeable on the purchase price, premium or rent including VAT;

-

where the election has not been exercised at that time, VAT should similarly be included in any payments to which an election could still apply (which will depend on the facts of each case).

7. The Commissioners for Her Majesty’s Revenue and Customs propose to follow this advice, which will result in a change of practice: in the past, the Stamp Office did not seek to include the VAT element in the stamp duty charge in cases where an election to waive the exemption from VAT had not yet been exercised. The new practice applies to documents executed on or after 1 August 1991. 8. Neither a formal notice of election made to HM Customs and Excise, nor any notification to the purchaser or lessee that such an election has been made, will attract stamp duty. Rent 9. Where VAT is charged on the rent under a lease, and is itself treated as rent under the lease, stamp duty at the appropriate rate according to the length of the term will be charged on the VAT-inclusive figure. If the lease provides for payment of VAT on the rent otherwise than as rent, duty will be charged on the VAT element as consideration payable periodically (Section 56 Stamp Act 1891). In either case the rate of VAT in force at the date of execution of the lease will be used in the calculation. 10. In the case of a formal Deed of Variation or similar document varying the terms of the original lease so as to provide for payment of VAT by way of additional rent, further stamp duty may be payable (Section 77(5) Stamp Act 1891). Agreements for leases 11. Paragraphs 5 to 10 above also apply to an agreement for lease if that is the instrument to be stamped (Section 75 Stamp Act 1891).

Procedure 12. Applicants for stamping are requested to make clear, either in the conveyance or lease document itself, or in a covering letter to the Stamp Office, whether the property is commercial or residential. 13. Deeds of Variation etc (paragraph 10 above) should be presented for adjudication together with a copy of the original lease. No VAT on Stamp Duty 14. It is sometimes suggested that stamp duty might itself attract a charge to VAT. This is not the case. The value for VAT depends on the amount (consideration) obtained by the supplier from the purchaser, less the included VAT itself. Stamp duty is paid by the purchaser/lessee of property direct to HM Revenue and Customs and not to the supplier; it does not therefore form part of the consideration for VAT purposes. SP12/91

Income Tax: ‘In the ordinary course’ of banking business

SP13/91

Ex-gratia awards made on termination of an office or employment by retirement or death

1. An ex-gratia payment made on or in connection with an employee's death or retirement from an office or employment is a ‘relevant benefit’ as defined in Section 612 ICTA 1988. (But this term does not include payments made solely because of death or disablement by accident or severance payments on redundancy or loss of office). 2. An ex-gratia payment is made under a retirement benefits scheme if the decision to make the payment involves an arrangement. Self evidently, there will be an ‘arrangement’ if the payment flows from any prior formal or informal understanding with the employee. But the term ‘arrangement’ in this context goes wider and includes any system, plan, pattern or policy connected with the payment of a gratuity. Some examples are: a.

a decision at a meeting to make an ex-gratia payment on an employee's retirement; or

b.

where, say, a personnel manager makes an ex-gratia payment under a delegated authority or on the basis of some outline structure or policy; or

c.

where it is common practice for an employer to make an ex-gratia payment to a particular class of employee.

3. There may be some exceptional situations where a gratuity is not paid under an ‘arrangement’. The position in individual cases can be determined only on their facts. If an employer is unsure whether a gratuity is paid under an arrangement advice may be sought from the IR Savings Pensions Shares Schemes Office at Yorke House, PO Box 62, Castle Meadow Road, Nottingham, NG2 1BG. Any such request should give full details of the circumstances in which the gratuity is to be paid. 4. The following paragraphs explain the tax treatment of these ex-gratia arrangements. All statutory references are to the ICTA 1988 unless otherwise stated. Pensions 5. An ex-gratia pension to an employee or the employee's spouse or dependent will be chargeable to income tax as taxable pension income under Part 9 of the Income Tax (Earnings & Pensions) Act 2003 whether or not paid under a tax approved scheme. Lump sums

6. Lump sum relevant benefits are not taxable when paid under an approved scheme. In the past, approval has been given only to contractual schemes. But approval may now be given to certain ex-gratia lump sum payments in the circumstances described in paragraph 7; or payments may be treated as from an approved scheme where paragraph 8 applies. 7. An employer may apply for tax approval of an arrangement to pay an ex-gratia lump sum relevant benefit. In order to qualify for approval, the payment must: a.

be the only lump sum relevant benefit potentially payable in respect of the employment; in other words the employee should not be a member of either of the following i.

a retirement benefits scheme that is either approved or is being considered for approval, or

ii.

a Relevant Statutory Scheme (as defined in Section 611A),

unless the payment is made on retirement and the scheme provides benefits only on death in service; and b.

satisfy the normal requirements for tax approval of a retirement benefits scheme (which are described in the booklet Practice Notes on Approval of Occupational Pension Schemes (IR 12)). These include a limit on the amount of lump sum payable. On retirement, for example, the limit is 3/80ths of final salary for each year of service with an employer (up to 40 years), while on death it is normally two times salary, though it can be as high as four times salary.

Details on how to apply for approval may be obtained from IR Savings Pensions Shares Schemes in Nottingham (address at paragraph 3 above). Where a payment is made before confirmation of approval is received the employer should deduct tax in accordance with the PAYE system. If and when approval is granted the employee will be able to claim repayment of the tax deducted. 8. In addition, HM Revenue and Customs will accept that an arrangement to pay a single ex-gratia lump sum relevant benefit to a particular employee need not be submitted for approval where: a.

the condition at paragraph 7a above is satisfied; and

b.

the total of all lump sum payments from all associated employers (as defined in Section 590A(3)) made in connection with the retirement or death does not exceed onetwelfth of the earnings cap prescribed under Section 590C for the year of assessment in which the payments are made. For the year ended 5 April 2005, the limit is £8500.

In these cases the payments will be treated as from an approved retirement benefits scheme. They will therefore not be chargeable to income tax and so need not be reported by an employer to its tax office. 9. An ex-gratia lump sum relevant benefit not falling within paragraphs 7 or 8 above, will constitute a non-approved retirement benefits scheme. It will be charged to tax as employment income under Section 394 of the Income Tax (Earnings and Pension) Act 2003 on the recipient for the year of assessment in which the benefit is received. When making such payments an employer should deduct tax in accordance with the PAYE system. Payments for redundancy or termination of employment caused by accident 10. An ex-gratia payment made to an employee on severance of an employment due to redundancy or loss of office, or because of death or disability due to an accident, is not affected

by this Statement of Practice where the arrangements for making the payment are designed solely to meet such a situation. Nor will the tax treatment of any such payment be affected by the payment of early retirement benefits under other arrangements (such as the employer's approved pension scheme). The taxation of such lump sum payments is not therefore affected by this Statement of Practice. In particular, genuine redundancy payments within the terms of Statement of Practice 1/94 will be taxed under Section 403 Income Tax (Earnings and Pensions) Act 2003 (subject to the exemption in section 403(1)). SP14/91

Tax treatment of transactions in financial futures and options Superseded by SP3/02

SP15/91 SP1/01

Treatment of investment managers and their overseas clients replaced by

SP16/91

Accountancy expenses arising out of accounts investigations

It is the practice to allow, in computing profits assessable under Case I and II of Schedule D, the normal accountancy expenses incurred in preparing accounts and agreeing taxation liabilities. Additional accountancy expenses arising out of an investigation of a particular year's accounts will not be allowed where the investigation reveals discrepancies and additional liabilities for earlier years, or a settlement involving only one year includes interest or interest and penalties. Where, however, the investigation results in no addition to profits, or an adjustment to profits for the year of review only without a charge to interest or interest and penalties, the additional accountancy expenses will normally be allowed. SP17/91

Residence in the UK: When ordinary residence is regarded as commencing where the period to be spent here is less than three years – withdrawn with effect from 6 April 2009

SP18/91

Foreign earnings deduction

SP1/92

Directors' and employees' emoluments: Extension of time limits for relief on transition to receipts basis of assessment

SP2/92

Transactions within Section 765A ICTA 1988: Movements of capital between residents of EC member states

Background 1. Article 67 of the Treaty establishing the European Economic Community provides, inter alia, that Member States shall progressively abolish between themselves all restrictions on the movement of capital belonging to persons resident in Member States. This provision is implemented by the Directive of the Council of the European Communities No 88/361/EEC of 24 June 1988. Article 1 of the Directive requires Member States to abolish restrictions on movements of capital taking place between persons resident in Member States. 2. As a consequence, the provision of Section 765 ICTA 1988, which make certain transactions unlawful if they are carried out without Treasury consent, have been disapplied by Section 765A(1) ICTA 1988 so that as from 1 July 1990, the date from which the Directive took effect, a UK resident body corporate no longer requires Treasury consent before carrying out a transaction which is a movement of capital to which Article 1 of the Directive applies. However, Section 765A(2) requires the body corporate to provide HM Revenue and Customs with information on certain of the transactions within six months of carrying them out. Purpose of this Statement

3. Paragraphs 5-23 of this statement seek to explain the views of the Treasury and HM Revenue and Customs where there may be doubt as to whether a transaction is a movement of capital to which Article 1 of the Directive applies. Their purpose is to assist UK resident bodies corporate in deciding whether they should seek Treasury consent for a transaction or report it to HM Revenue and Customs. However, it is the responsibility of the UK resident body corporate which considers that a transaction which it has carried out (or proposes to carry out) is one liberalised by the Directive to justify that view. 4. Paragraphs 24-26 give guidance on procedure to bodies corporate making a report under Section 765A(2) in accordance with the Regulations made under the Section. The Channel Islands, Isle of Man and Gibraltar 5. The provisions of the Directive do not apply to movements of capital between residents of Member States and residents of the Channel Islands and the Isle of Man. But by virtue of Article 227(4) of the Treaty establishing the EEC, that Treaty applies to Gibraltar, subject to the exceptions mentioned in Article 28 of the Act of Accession of Denmark, Ireland and the United Kingdom. It follows that the Directive is as fully applicable to Gibraltar as to any other Community Territory. However, Gibraltar is not itself a Member State being regarded for the purposes of Community Law as part of the territory of the United Kingdom. It follows that, while transactions which are movements of capital between residents of Gibraltar and residents of other Member States are within Section 765A rather than Section 765, movements of capital between residents of Gibraltar and residents of the United Kingdom are wholly internal to the United Kingdom and are still governed by Section 765. Difference between general and special consent transactions 6. Section 765 has ceased to apply to all transactions which are movements of capital within Article 1 of the Directive. But a body corporate has to report to HM Revenue and Customs only those transactions for which it would need to apply to the Treasury for special consent if they were not movements of capital within the Directive. A transaction which would be covered by a general consent if it were not a movement of capital within the Directive would be lawful when carried out even if the Directive did not apply to it and so should not be reported under Section 765A(2). Movements of capital 7. The Nomenclature in Annex 1 to the Directive lists a wide range of operations which are within the Directive. These include ‘all the operations necessary for the purpose of capital movements: conclusion and performance of the transaction and related transfers’ but the list is not exhaustive: the Directive makes clear that it is looking to the principle of full liberalisation of capital movements. The Treasury and HM Revenue and Customs have been advised that all issues and transfers of shares and debentures within subsection (1) of Section 765 which take place between residents of Member States may be considered movements of capital within the Directive subject to the reservation in paragraphs 8-9. 8. Section 1 of the Nomenclature is concerned with direct investment. The explanatory notes define direct investment generally as ‘investments of all kinds by natural persons or commercial, industrial or financial undertakings, and which serve to establish or to maintain lasting and direct links between the person providing the capital and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity’. The expression ‘with a view to establishing or maintaining lasting economic links’ is also used in the description of certain operations listed in Part 1. In the view of the Treasury and Inland Revenue, it can be inferred that a transaction otherwise falling within the description of direct investment which is not carried out with a view to establishing or maintaining such links is not a movement of capital to which the Directive applies.

9. The Treasury and Inland Revenue recognise that transactions of a direct investment type with companies resident in Member States will normally be carried out with a view to establishing or maintaining lasting economic links with those companies. But that may not always be so and the treatment of particular cases will depend on their facts. Where, for example, a company is used as nothing more than a conduit the transaction is unlikely to be carried out with a view to establishing or maintaining such links with that company. This may be the case where a subsidiary resident in another Member State issues a debenture to its United Kingdom resident parent for a sum which is immediately loaned back to the parent or another member of the United Kingdom group. Issues and transfers of shares and debentures between residents of member states 10. A transaction is excluded from Section 765 by Section 765A only if it is a movement of capital between residents of Member States. Thus, for example, a parent company which is a resident of the UK may hold directly all the shares in a company which is a resident of the Netherlands and all the shares in a US company which is not a resident of a Member State. If the parent company transfers its shares in the Netherlands company to the US company that transaction will require Treasury consent because the transfer is not between residents of Member States. But if the parent company transfers its shares in the US company to the Netherlands company that transfer is between residents of Member States and is within Section 765A and so excluded from Section 765. 11. Similarly, a subsidiary company which is a non-resident body corporate within Section 765(1)(c) and a resident of a Member State may issue shares at the same time to persons who are not so resident. The former issue is a movement of capital between residents of Member States and excluded from Section 765. But the latter issue is still within Section 765 and Treasury consent will be required. 12. Article 67 and consequently Council Directive 88/361/EEC relate to restrictions which apply as between Member States. They have no application to movements of capital and restrictions which are wholly internal to a single Member State. For example, a company which is a resident of the UK holds all the shares in a US company which is not a resident of Member State. If the UK company transfers the shares to another company which is a resident of the UK that is not a capital movement which is within the terms of the Directive. The transaction will require Treasury consent. (Such transfers will often be within the terms of the General Consents). 13. A transaction for which a UK resident company requires consent under Section 765 unless Section 765A applies may be a movement of capital between persons resident in the same Member State other than the United Kingdom. The Treasury and HM Revenue and Customs regard that transaction as not being wholly internal to a single Member State and therefore within Section 765A because the body corporate requiring consent is resident in the United Kingdom which is a different Member State. (Such transactions if consent under Section 765 were required would often be within the terms of the General Consents). Residents of member states within the meaning of the Directive 14. The explanatory notes to the Directive give to ‘Residents or non-residents’ the meaning of ‘Natural and legal persons according to the definitions laid down in the exchange control regulations in force in each Member State’. ‘Natural or legal persons’ are ‘as defined by the national rules’. In most cases, the territory where a company or natural person is resident will be self-evident. 15. Some Member States still have exchange control regulations in force although that may not always be so. Others, including the United Kingdom, have no such regulations. In the view of the Treasury and HM Revenue and Customs this cannot mean that Section 765A and, still less, the Directive will be ineffective. But it does introduce an element of uncertainty into the application of the Directive to transactions within Section 765. Paragraphs 16-23 explain the

approach of the Treasury and HM Revenue and Customs to the question of residence for the purposes of determining whether a movement of capital is between residents of different Member States so that Section 765A applies or whether the movement of capital is wholly within the United Kingdom or across the external frontier of the Community so that it is still within Section 765. The UK resident body corporate in Section 765 16. Since the main effect of the Directive in the United Kingdom is to render unlawful the restrictions which are placed by Section 765 on bodies corporate which are resident in the United Kingdom entering into transactions which are capital movements between Member States, it is logical to regard bodies corporate which are resident in the UK for the purposes of that Section as being residents of the United Kingdom within the meaning of the Directive. Consequently a body corporate will be considered to be a resident for the purposes of the Directive if it is resident in the United Kingdom for tax purposes. However, the persons from which those restrictions are lifted by the Directive are not the only persons whose residence has to be ascertained in order to discover the scope of the Directive. Other persons resident in member states 17. Exchange control regulations So long as there are exchange control regulations in force in a Member State, they will determine residence or non-residence in that State for the purposes of the Directive. As the position of Member States on exchange control at the time this Statement was prepared was in the process of change, it is not possible to indicate in this Statement which States retain regulations. 18. The Relevance of Tax Residence If there are no exchange control regulations, the Treasury and Inland Revenue will usually regard a person as a resident in a Member State (including the United Kingdom) if that person is resident in that State for its tax purposes. But there may be circumstances in which tax residence is too restrictive a criterion to determine whether a transaction is a movement of capital to which the Directive applies. 19. Economic Activities A person who is not a tax resident in a Member State may have a presence in a Member State for the purpose of a continuing economic activity there. A company may have a branch in a Member State (see paragraph 20). Or an individual may have moved to a Member State with the intention of remaining there to carry on business but may not yet be resident for tax purposes. If a movement of capital is part of that economic activity it would be regarded as made to or by a person resident in that State for the purpose of determining whether a transaction is within Section 765A. 20. Branches in member states As paragraph 19 suggests, a transaction carried out by a branch in a Member State may be regarded as a transaction by a person resident in that State. For example, a UK company holds all the shares in a US company which is not a resident of a Member State and all the shares in a French company which is a resident of a Member State. The US company has a branch in the UK and lends money to the French company which issues a debenture. The loan is made by the UK branch of the US company. Normally a transaction between the US company and the French company would not be within the Directive. But the UK branch can be treated as a resident of the UK for the purposes of the Directive and the transaction is therefore within Section 765A and Treasury consent is not required. Whether or not a transaction is carried out by a branch will be a question of fact. 21.

Branches not in member states

There may be a movement of capital to or from a branch not in a Member State of a company which is resident in a Member State. The Treasury and Inland Revenue will regard that as a movement of capital by or to a person resident in the Member State unless Exchange Control Regulations in the State in which the company is resident treat branches outside the State as nonresident. 22. Resident of Gibraltar Although Gibraltar is not a Member State (See 5 above) it will be necessary under some circumstances to decide if a person is a resident of Gibraltar. In relation to transactions with a Member State other than the UK a company will be considered to be resident in Gibraltar if it is liable to tax on income by reason of residence, domicile, place of management or other criterion of a similar nature or the transaction is carried out by the Gibraltar branch of a company which is not otherwise resident in Gibraltar. Whether the transaction is carried out by the Gibraltar branch will be a question of fact. An individual will be resident in Gibraltar for these limited purposes if he or she is resident in Gibraltar for the purposes of Gibraltar tax. 23. Information on residence The Movements of Capital (Required Information) Regulations 1990 (SI 1671) require the resident body corporate to state, where relevant, the grounds on which a person is claimed to be resident in a Member State for the purposes of the Directive. A company which owes its status as a body corporate to the laws of a Member State and has its main place of business there will usually be a resident of that State for both exchange control (if any) and tax purposes, as will individuals who have their usual place of residence there. The Treasury and Inland Revenue will normally accept a presumption that such a company or individual is a resident of that State for the purposes of the Directive. Procedure for providing information under Section 765A(2) ICTA 1988 24. The nature and extent of the information to be reported under Section 765A(2) are laid down in the Movements of Capital (Required Information) Regulations 1990 (SI 1671). Copies of the regulations are available from Her Majesty's Stationery Office. The information should be given in a letter addressed to CT&

HM Revenue and Customs VAT 100, Parliament Street London SW1A 2BQ

It would be helpful if an additional copy of the letter could be supplied. 25. Provided all the information required by the Regulations is covered, the letter need not be in any particular form. But it will usually be helpful if it follows broadly the order in which the information is requested in the Regulations. 26. Section 765A requires a transaction to be reported after it has taken place. It may be part of a series of transactions for one or more of which the company making the report has obtained Treasury consent under Section 765. If in that case part or all of the information required by the Regulations has been given to the Treasury or to the Revenue in connection with the application for consent, it is necessary only to identify in the report under Section 765A(2)(a) the relevant letters in which the information was given.

SP3/92

Double taxation relief: Status of UK/USSR convention for the avoidance of double taxation – Superseded by SP4/01

SP4/92

Capital Gains Tax: Rebasing elections

1. Section 35(6) TCGA 1992 (Section 96(6) FA 1988) provides that an election under Section 35(5) (Section 96(5)) should be made within two years of the end of the year of assessment or accounting period in which ‘the first relevant disposal’ is made, or such longer period as the Commissioners for Her Majesty’s Revenue and Customs may allow. 2. The Board will always exercise their discretion to extend the time limit to at least the date on which the statutory time limit would expire if disposals of a certain kind did not count as a first relevant disposal of either (i)

an asset held at 31 March 1982; and

(ii)

an asset treated by paragraph 1 Schedule 3, TCGA 1992 (paragraph 1 Schedule 8 Finance Act 1988) as having been held at that date.

3. There are three kinds of disposals in relation to which the Commissioners for Her Majesty’s Revenue and Customs will exercise their discretion in this way. 4. First, those on which the gain would not be a chargeable gain by virtue of a particular statutory provision. Such disposals can be left out of account in deciding when to make an election. 5. The main examples of these provisions are in the annex attached to this Statement of Practice. 6. Second, those disposals which in practice do not give rise to a chargeable gain or allowable loss. The main examples of such disposals are: Building Society accounts Withdrawals from Building Society accounts on which no chargeable gain or allowable loss arises. Private residences The disposal by an individual of his or her dwelling house where the whole of any gain would qualify for relief under Section 223(1) TCGA 1992 (Section 102(1) CGTA 1979.) No gain/no loss transfers Transfers which give rise to neither a chargeable gain nor an allowable loss by virtue of the operation of statutory ‘no gain/no loss’ provisions listed at Section 35(3)(d) TCGA 1992 (paragraph 1(3), Schedule 8, Finance Act 1988). These included gifts to charities and transfers between spouses. 7. Third, those disposals in respect of which a Section 35(5) (Section 96(5)) election cannot be made. These are specified in paragraph 7, Schedule 3 TCGA 1992 (formerly paragraph 12 Schedule 8 FA 88) and are, in general terms, disposals of: (i)

Plant and machinery

or (ii)

Assets used in connection with a trade of working mineral deposits

but in either case only if capital allowances were or could have been given. or (iii) Oil

licences

or (iv)

Shares deriving their value from oil exploration or exploitation

In each case, a rebasing election cannot apply to such disposals, but they will nevertheless count strictly as first relevant disposals. Consequently, in all cases the Commissioners for Her Majesty’s Revenue and Customs will exercise their discretion to extend the time limit to at least the date on which the statutory time limit would expire if such disposals did not count as a first relevant disposal. Persons becoming resident in the UK after 6 April 1988 8. A person who is non UK resident on 6 April 1988 may make a disposal which will count as a first relevant disposal between then and the date on which they first become UK resident. The Commissioners for Her Majesty’s Revenue and Customs will generally give sympathetic consideration to extending the time limit to the end of the second year of assessment or, in the case of companies, accounting period after the year in which the first disposal is made after taking up UK residence. The extension will not normally be available where the taxpayer has disposed of an asset, held on 31 March 1982, within Section 10 TCGA 1992 (Section 12 CGTA 1979 and Section 11 ICTA 1988) in the period between 6 April 1988 and the date of becoming UK resident. Other situations in which the statutory time limit may be extended 9. There are a variety of other circumstances in which the Commissioners for Her Majesty’s Revenue and Customs may exercise their discretion to extend the statutory time limit. In all cases an extension will depend on the particular facts and circumstances of each individual case. What may be regarded as a first relevant disposal? 10. There are also some circumstances where it may help to clarify what is regarded as a first relevant disposal: (i)

Capacity in which person makes an election under Section 35(5) Where a person makes an election under Section 35(5) in relation to assets held in one capacity the election does not apply to assets held in another capacity. This is because of the provisions of Section 35(7). For this purpose a person may hold assets in several capacities as, for example, an individual, trustee, partner or member of a European Economic Interest Grouping. It follows that there will be a first relevant disposal and a separate time limit for making an election for each holding of assets which a person holds in different capacities. Individuals who hold assets in different capacities should indicate at the time they make an election in what capacity it should be regarded as applying.

(ii)

Disposals of non UK assets by an individual resident but not domiciled in the UK In the case of individuals who are resident but not domiciled in the UK a disposal of an asset situated outside the UK may be a first relevant disposal. For Section 35(5) purposes

the date on which the proceeds are remitted to the UK is taken to be the date on which the disposal occurs and not the date when the asset was disposed of. This means that the date of the first relevant disposal will therefore be the date on which remittances are received from an overseas gain after 5 April 1988 or the date of the first disposal of a UK asset, whichever occurs first. (iii)

Disposals by a UK resident during a period of non-residence An individual who is UK resident on 6 April 1988 may then have a period of nonresidence before resuming UK residence. In these circumstances the first relevant disposal will be treated as the first disposal after 5 April 1988 on which the individual is chargeable to UK capital gains tax. So if, for example, a disposal was made between 6 April 1988 and the date the individual became non-resident that will be treated as the first relevant disposal. If there was no disposal in this period the first relevant disposal will be the first disposal after residence is resumed. Where an individual is not entitled to be treated as resuming residence part-way through a tax year by virtue of Extra-Statutory Concession ESC D2, the first disposal will be the first made in the year in which residence is resumed.

11. This Statement of Practice provides an indication of the main circumstances where, and the extent to which, The Commissioners for Her Majesty’s Revenue and Customs will or may exercise their discretion under Section 35(6)(b) TCGA 1992. It is not intended to be an exhaustive list of disposals where, having regard to the individual facts and circumstances, such discretion may be exercised. Annex to SP4/92 Disposals on which any gain would not be a chargeable gain by virtue of specific statutory provision are: (i) Private cars (Section 263 TCGA 1992) [formerly Section 130 CGTA 1979] (ii)

Chattels, including household goods, and personal belongings, but excepting commodity futures and foreign currency, worth less than the chattel exemption at the date of disposal (Section 262(1) TCGA 1992) [formerly Section 128(1) CGTA 1979]

(iii)

All chattels that are wasting assets, except plant and machinery used in business (but see also (ii) above and paragraph 7(i) of the Statement of Practice) and commodity futures (Section 45(1) TCGA 1992) [formerly Section 127(1) CGTA 1979]

(iv)

Government non-marketable securities, including savings certificates, premium and British Savings bonds (Section 121 TCGA 1992) [formerly Section 71 CGTA 1979]

(v)

Gilt-edged securities and qualifying corporate bonds, except those received in exchange for shares or other securities (Section 115 TCGA 1992) [formerly Section 67 CGTA 1979]

(vi)

Life assurance policies and deferred annuity contracts unless purchased from a third party (Section 210(2) TCGA 1992) [formerly Section 143(2) CGTA 1979]

(vii)

Foreign currency acquired to meet personal or family expenditure abroad (Section 269 TCGA 1992) [formerly Section 133 CGTA 1979]

(viii)

Rights to compensation or damages for any wrong or injury suffered by an individual in his person, profession or vocation (Section 51(2) TCGA 1992) [formerly Section 19(5) CGTA 1979]

(ix)

Debts, other than debts on a security, held by the original creditor, his personal representative or legatee (Section 251(1) TCGA 1992) [formerly Section 134(1) CGTA 1979]

(x)

Business expansion scheme shares in respect of which relief has been given and not withdrawn (Section 150(2) TCGA 1992) [formerly Section 149C(2) CGTA 1979]

(xi)

Shares held as part of a personal equity plan investment (Regulation 1 SI 1989 No 469, as amended)

(xii)

Gifts of eligible property, including works of art, for the benefit of the public (Section 258(1) and (2) TCGA 1992) [formerly Section 147(1) and (2) CGTA 1979]

(xiii)

Decorations for valour or gallantry (Section 268 TCGA 1992) [formerly Section 131 CGTA 1979]

(xiv)

Rights to or any part of an allowance, annuity or capital sum from a superannuation fund or any other annuity (except under a deferred annual policy) or annual payments receivable under a covenant which is not secured on property (Section 237 TCGA 1992) [formerly Section 144 CGTA 1979]

The disposal of sterling, which is not an asset for capital gains tax purposes (Section 21(1) TCGA 1992) [formerly Section 19(1) CGTA] does not count as a first relevant disposal. SP5/92

Non-resident trusts (See also Inland Revenue Tax Bulletin, Issues 8 and 16, August 1993 and April 1995)

I. Introduction 1. Sections 83-92 and Schedules 16-18 FA 1991 introduced new rules for capital gains of certain offshore trusts. These are now at Sections 80-98 and Schedule 5 TCGA 1992. This Statement explains the practice HM Revenue and Customs will follow in applying the new rules in the circumstances set out below. Statutory references are to TCGA 1992 unless indicated otherwise. II. Charge on migration: Residence 2. Under Section 69, a body of trustees is regarded as capable of changing its residence status part-way through a year of assessment. It must be borne in mind, however, that Section 2(1) provides that the trustees are liable to tax on all chargeable gains of a tax year during any part of which they are resident or during which they are ordinarily resident in the UK. 3. Trustees who became not resident and not ordinarily resident in the UK between 6 April 1990 and 18 March 1991 (inclusive), and remain so until after 5 April 1991 are not liable to a charge under Section 80, nor are they regarded as having met the condition in paragraph 9(4) of Schedule 5 for 1990/91. III. Charge on migration: Past trustees' liabilities 4. Sections 80-85 impose a capital gains tax charge on the unrealised gains of a UK trust which ceases to be within the UK tax charge. The charge applies to a trust which migrates on or after 19 March 1991. Where the tax which is due under this charge is not paid by the current trustees, Section 82 enables HM Revenue and Customs to look to certain former trustees to meet the liability. No liability can be sought from the personal representatives of a former trustee who dies before a notice of liability has been served on him. Those who can show that there was no

proposal, at the time of their resignation, that the trustees might become not resident and not ordinarily resident in the UK are not liable under this Section. 5. Payment can only be sought from former trustees where the Revenue is unable to obtain payment from current trustees. In the first instance, payment will generally be sought from those persons who resigned as trustees immediately before the trust migrated and then from earlier trustees. Each case will, however, need to be considered in the light of the relevant facts. 6. An amount recovered from present trustees by a former trustee in respect of capital gains tax under Section 82 is not regarded as a capital payment under Section 97. Further, such amounts do not fall within the provisions of Part XV, Section 739 or Section 740, ICTA 1988 nor are there any inheritance tax implications. IV. Charge on the settlor: Settlor's right to repayment from the trustees 7. Section 86 and Schedule 5 charge settlors to capital gains tax where chargeable gains accrue within certain offshore trusts from which the settlor, members of the settlor's immediate family, or companies which they control, can or do benefit. This goes wider than the provisions of Part XV, Income and Corporation Taxes Act 1988, e.g. the settlor could be chargeable on gains realised within a trust from which his adult children could benefit even though there was no possible benefit to the settlor, his spouse or minor children. 8. The settlor's right, under paragraph 6 of Schedule 5, to reimbursement (or any payment in reimbursement) of tax paid under that Schedule is not regarded as creating an interest in a trust for the settlor under the provisions of Part XV, ICTA 1988 where the settlor, the settlor's spouse, and any companies in which they are participators cannot otherwise benefit from the trust e.g. where the only beneficiaries are the settlor's children. Similarly, this statutory right to, or payment in, reimbursement is not regarded as bringing the settlor within the provisions of Sections 677, 739 and 740 ICTA 1988, nor as a capital payment for the purposes of Section 97. 9. Further, this statutory right is not regarded as a reservation of benefit for inheritance tax purposes; nor is a provision in the trust deed either requiring the trustees to recognise the settlor's right to reimbursement under paragraph 6 of Schedule 5 or to reimburse the settlor. But where a settlor does not pursue the statutory right to reimbursement, the failure to exercise this right may give rise to an inheritance tax claim under Section 3(3) Inheritance Tax Act 1984, in which case the usual rules for lifetime transfers would apply. 10. A provision written into a settlement deed requiring the trustees to recognise the settlor's right to reimbursement under paragraph 6 of Schedule 5, or to reimburse the settlor, is not, of itself, regarded as giving the settlor an interest in the settlement for the purposes of Schedule 5, nor as bringing into play the provisions of Part XV, Sections 739 or 740 ICTA 1988. V. Charge on the settlor: certain trusts created before 17 March 1998 11. All trusts are within the scope of Schedule 5, except for those falling within the definition of ‘a protected settlement’ in paragraph 9(10A) at 6 April 1999. A protected settlement has to have been created before 19 March 1991. But a protected settlement will also be within the scope of Schedule 5 where, on or after 19 March 1991, at least one of the conditions listed below is met. Moreover, a settlor is not treated as having an ‘interest’ in a trust created before 17 March 1998 under the terms of which the only ‘defined persons’ (listed in paragraph 2(3)) who can benefit are confined to the grandchildren of the settlor or of the settlor’s spouse etc, unless at least one of the conditions listed below is met on or after that date. The conditions referred to above are:

-

subject to certain exclusions, property or income is directly or indirectly provided for the purposes of the trust (paragraphs 2A(2) and 9(3));

-

the trustees become non-resident in the UK or fall to be treated as such for the purposes of a double taxation agreement (paragraphs 2A(4) and 9(4));

-

the terms of the settlement are varied to admit certain new beneficiaries (paragraphs 2A(5) and 9(5));

-

a benefit is enjoyed by a defined person who is not a beneficiary under the terms of the trust (paragraphs 2A(6) and 9(6)).

[Paragraphs 12–37 below only refer to paragraph 9, but the same principles will be followed in deciding whether any of the conditions in paragraphs 2A(2)-(6) are met] a. Paragraph 9(3): Transactions entered into at arm's length 12. The condition in paragraph 9(3) is not met where the property or income is provided to the trust under a transaction entered into at arm's length - see paragraph 9(3)(a). This applies irrespective of whether the parties to the transaction are connected persons under Section 286. Each case depends on its own facts and circumstances but, a transaction is, in general, regarded as being at arm's length where all the facts and circumstances of the transaction are such as might have been expected if the parties to the transaction had been independent persons dealing at arm's length i.e. dealing with each other in a normal commercial manner unaffected by any special relationship between them. 13. Solely for the purposes of paragraph 9(3)(a), a provision in the document governing the transaction for an appropriate adjustment to the consideration where the value agreed by the Revenue differs from the original consideration arrived at by an independent valuer and specified in the sale document is, in general, regarded as falling within the terms of the above definition of an arm's length transaction. The arm's length value of the transaction is to be determined in accordance with the principles set out in paragraph 12 above. This will usually correspond to the value for capital gains tax purposes except, for example, where Section 19 would apply. 14. It would also be necessary for the terms of the contract to provide for compensating interest at a commercial rate to be paid in either direction once the arm's length value is determined. For this purpose, the official rate of interest for Section 160 ICTA 1988 purposes will usually be regarded as equivalent to a commercial rate of interest, although a different rate may be accepted as so equivalent if the circumstances of a particular case warrant this treatment. 15. This practice is, however, subject to the consideration passing on sale being realistically based, i.e. on a third party valuation by a qualified valuer, all the other terms of the transaction being at arm's length and the compensating interest being timeously paid. The position in a particular case depends on all the facts and circumstances. b. Paragraph 9(3): Close companies 16. The condition in paragraph 9(3) may be satisfied where property or income is provided to a company in which the trustees are participators. Where, however, the transaction is carried out with the sole object of leaving funds within the company for the company's purposes and it can be shown that any indirect benefit to the trust is merely incidental to that object, the transaction is disregarded for the purposes of paragraph 9(3). 17.

Examples of transactions which may be so disregarded are

-

where another shareholder waives an entitlement to all or part of a dividend; or

-

a director restricts withdrawals of remuneration voted,

in order to assist the company's cash flow, and no payments are made, directly or indirectly, to the trustees as a result of this. All relevant factors will be considered in determining whether it is appropriate to apply this practice in a particular case. c. Paragraph 9(3): Transactions with wholly-owned companies 18. In general, transactions between trustees and companies which they, directly or indirectly, wholly own, or between such companies, are outside the scope of paragraph 9(3) of Schedule 5 and are not treated as capital payments within Section 97. For this purpose, a company is treated as directly wholly owned by the trustees where the whole of its issued share capital is directly owned by the trustees of the settlement for the benefit of the beneficiaries of the settlement. A company is treated as indirectly wholly owned by the trustees where the whole of its issued share capital is directly and beneficially owned by a company which is directly wholly owned by the trustees or it is the 100% subsidiary of such a company, or a chain of companies, which is indirectly wholly owned by the trustees. This approach may not, however, be taken where, on the facts of a particular case, it appears that the transaction has been entered into solely or mainly for the purposes of obtaining a UK tax advantage. d. Paragraph 9(3): Loans made to settlements i. Loans made before 19 March 1991 19. A fixed-period loan made, directly or indirectly, to a relevant settlement prior to 19 March 1991 on non-commercial terms, e.g. at a low or nil rate of interest is, generally, regarded as a provision of property in pursuance of a liability incurred before 19 March 1991, provided the loan remains outstanding on the same terms. As such, it falls within the terms of paragraph 9(3)(b) and the first condition set out in paragraph 9(3) is not met. 20. There would, however, be a direct or indirect provision of property for the purposes of the settlement where a fixed-period loan falls to be repaid after 18 March 1991 but repayment is not made and so becomes a repayable on demand loan. 21. An extra statutory concession, ESC D.41, which is being published at the same time as this statement, sets out the position in the case of non-commercial, repayable on demand, loans for the purposes of applying paragraph 9(3). ii. Loans made after 19 March 1991 22. A loan made, directly or indirectly to a relevant settlement after 19 March 1991 on noncommercial terms, e.g. at a low or nil rate of interest is regarded as a provision of funds for the purposes of paragraph 9(3). This is the case whether the loan is for a fixed period or repayable on demand. e. Paragraph 9(3): Loans made by trustees 23. The repayment of any loan made, directly or indirectly, to any person by the trustees is not generally regarded as the provision of funds for the purposes of the settlement under paragraph 9(3). This does not, however, apply where more is repaid than is due under the original terms of the loan or, in the case of loans made after 19 March 1991, where the interest charged under the terms of the loan exceeds a commercial rate. f. Paragraph 9(3): Failure to exercise rights to reimbursement 24. Failure, by or on behalf of any relevant person, to exercise statutory rights to reimbursement, e.g. under Part XV ICTA 1988 may be regarded as the provision of funds for the purposes of the settlement under paragraph 9(3). The settlement could remain outside the terms of paragraph 9(3) where the exercise of the right to reimbursement is unsuccessful, provided it could be shown that there had been a genuine attempt to enforce rights to reimbursement.

g. Paragraph 9(3): Administrative expenses 25. As provided by paragraph 9(3), a trust may remain outside the scope of Schedule 5 where funds are provided to pay certain expenses which exceed the income of the trust. These expenses are defined as ‘expenses relating to administration and taxation’; and could be chargeable either to the income or to the capital of the trust. Only sums provided to meet genuine expenses of administration fall within the terms of the proviso: any payments which exceed such expenses are regarded as meeting the condition in paragraph 9(3) and so bringing the trust within the scope of Schedule 5. 26. The following items are not regarded as ‘expenses relating to administration’ within the terms of the proviso to paragraph 9(3): -

loan interest (other than interest on a loan taken out to meet expenses of administration within the terms of the proviso);

-

the costs of acquiring, enhancing or disposing of an asset;

-

expenses incurred in connection with a particular trust asset to the extent that such expenditure can be set against income arising from that asset. For the purpose of the proviso to paragraph 9(3), the measure of the gross income from such a source is net of expenses.

27. The term ‘expenses relating to ... taxation’ in subparagraph 9(3) is regarded as encompassing UK or foreign taxes to which the trustees are liable, along with any interest and penalties due on that tax. It could also include certain costs incurred by the trustees under the terms of the trust in obtaining information regarding the beneficiaries' tax liabilities. One example might be where the trustees, in order to ensure they were acting in a beneficiary's best interests, had to ascertain the tax implications for the beneficiary in adopting a particular course of action. 28. It is only the settlement's expenses relating to administration or taxation which are within the terms of the proviso to paragraph 9(3). Expenses of, for example, a company wholly owned by the trustees fall outside its scope. 29. An expense on capital account paid out of trust income is not treated as a provision of income by a beneficiary for the purposes of paragraph 9(3) provided that either: -

the trust deed permits payment of capital expenses from income and the beneficiary is entitled only to net income after such payments; or

-

the trustees borrow money from the income account which is subsequently restored, along with interest over the period of the loan. The appropriate rate of interest is considered to be that which a Court of Equity would order on the replacement of trust income.

30. Normally the specific date on which the liability to an expense relating to administration or taxation was incurred determines the year into which it falls for the purpose of applying the proviso to paragraph 9(3). Where, however, the expense is incurred for a period rather than on a specific date, the basis of allocating expenses adopted by the trustees in preparing trust accounts or returns is, generally, regarded as acceptable provided that this basis is consistently adopted and is in accordance with conventional trust accounting practice. 31. Additions to meet the difference between expenses relating to administration and taxation and any income arising to the trust do not have to be made by 5 April in the relevant year of assessment. There must, however, be a clear connection between the amount added and the

computed shortfall. Additions should, therefore, be made as soon as the relevant figures are available. 32. Income, for the purposes of the proviso to paragraph 9(3), is the total income which arises to the trustees in the relevant year, rather than the income which is (or would be if the trust were resident in the United Kingdom) subject to UK tax. Usually, items of income will need to be allocated to the year in which they arise for the purposes of the proviso, but, in practice, income arising from a trade carried on by the trustees may be apportioned on a time basis, provided that this basis is consistently followed. h. Paragraph 9(3): Life tenants 33. A life tenant is not regarded as having provided income or property for the purposes of the settlement merely because there is an administrative delay in paying out the income that has vested in that beneficiary. If, however, the beneficiary directs the trustees to retain this income on the terms of the settlement, this is regarded as a provision of funds within paragraph 9(3). i. Paragraph 9(3): Indemnities and guarantees 34. An indemnity given by the new trustees to retiring trustees is not considered as the provision of funds for the purposes of the settlement under paragraph 9(3). Other types of indemnity are considered in light of the facts of a particular case. 35. The giving of a guarantee is regarded as an indirect provision of funds under the terms of paragraph 9(3). Payment of an obligation under a guarantee given before 19 March 1991 is, in general, regarded as a payment in pursuance of a liability incurred before 19 March 1991 and within paragraph 9(3)(b). This may not, however, apply where -

the contingent liability under the guarantee cannot be quantified with a sufficient degree of accuracy, e.g. where the guarantee is open-ended or the contingency is remote; or

-

the guarantor does not take reasonable steps to pursue his rights against the debtor.

j. Paragraph 9(5): Variations 36. This provision is concerned with situations where the terms of the settlement are varied by the beneficiaries or a court to admit new beneficiaries within the class of persons defined at paragraph 9(7) of the Schedule, without thereby bringing the settlement to an end and creating a new one. For example, where the terms of the trust include a power to appoint anyone within a specified range to be a beneficiary, exercise of that power after 19 March 1991 will not be regarded as a variation of the settlement. The term ‘spouse’ in paragraph 9(7) is not considered to include a widow or a widower. k. Paragraph 9(6): ‘Ultra vires’ payments 37. For the purposes of clarification, this condition deals with ‘ultra vires’ payments, i.e. cases where one of the persons defined at paragraph 9(7) receives a benefit from the trust for the first time and that person is not a beneficiary under the terms of the trust deed. It may also apply where such a person benefits from a transaction with the settlement carried out, for example, under the trustees' investment powers. VI. Charge on beneficiaries: Intragroup transfers 38. Sections 87-89 charge UK resident beneficiaries to capital gains tax on certain capital payments received from non-resident settlements. Section 96 is concerned with the application of these provisions to capital payments made by companies which are controlled by the trustees and capital payments received by certain non-resident companies. 39. Section 96 provides that, where the trustees (or a company which they control) make a payment to a closely-controlled non-resident company, the payment is, broadly, treated as made

to those who control the company. This may, for example, mean that a payment made by a wholly-owned subsidiary to its holding company (in which the shares are, say, held 50% by the settlor and 50% by the trustees of a non-resident trust) can be treated as being made by the trustees to the settlor. 40. The payment must, however, be a capital payment within Section 97(1) - i.e. it must not be chargeable to income tax on the recipient nor be made under a transaction entered into at arm's length. Intragroup payments which are not capital payments, for example a capital distribution on winding up which represents merely a repayment of capital on shares, or a distribution chargeable to corporation tax, do not fall within the ambit of Section 96. SP6/92

Accident insurance policies: Chargeable events and gains on policies of life Insurance

1. HM Revenue and Customs take the view that certain accident insurance policies which provide protection only, and no investment element, do not give rise to chargeable ‘gains’. Relevant legislation 2. Liability to tax may arise on the occurrence of a chargeable event in connection with a policy of life insurance. The rules are at Chapter II, Part XIII, ICTA 1988. ‘Chargeable event’ and the ‘gain’ to be taxed are defined at Sections 540 and 541 ICTA 1988 respectively. The meaning of ‘policy of life insurance’ is determined from general law and decisions of the courts. Present practice 3. Until now, HM Revenue and Customs have taken the view that the term ‘policy of life insurance’ included an accident insurance policy providing cover against dying as a result of an accident. On that view, a taxable ‘gain’ may arise in connection with an accident insurance policy. New practice 4. HM Revenue and Customs now take the view that an accident insurance policy which provides protection only should not be regarded as a policy of life insurance when applying the rules at Chapter II, Part XIII, ICTA 1988. Taxable ‘gains’ will not therefore be treated as arising in connection with an accident insurance policy which: (a)

affords protection against the risk of dying only if death is as a result of an accident; and

(b)

has no investment content; and

(c)

does not acquire a surrender value (other than one equal to a proportion of the premium paid which is refundable if the policy is terminated early or in other circumstances).

5.

The accident insurance policies to which this practice will apply are those written as:

(a)

‘Contracts of general insurance’ of an Insurance company or a friendly society or members of Lloyd’s within paragraph 1 Schedule 1 Part 1 of the Financial Services Markers Act 2000 (Regulated Activities) Order 2001 (SI 2001/1544); or

(b)

similar protection only policies written by non-resident insurers.

Commencement 6. This Statement of Practice will be applied in settling any tax liability which is not final at the date of issue of this Statement. The statutory references applicable for the past are those from which the current provisions are derived.

Background 7. Some group life policies will be taken outside of the scope of the chargeable event rules if they fail within any of the exclusions in section 539(2) ICTA 1988. These are policies which are issued in connection with approved retirement benefit scheme or retirement annuity contracts, policies which meet the conditions in section 539A to be excepted group life policy and certain loan protection policies taken out by credit unions. But if a group life policy which is not within these exclusions gives rise to more than one death benefit then some mortality benefits come into the computation of the gain. This is a result of the rule dealing with partial surrenders of the rights conferred by a policy. Benefits, including death benefits, paid at any time prior to the ‘chargeable event’ in question are included when computing ‘gain’. 8. The rules make no special provision for group life insurance policies (although some, issued in connection with approved retirement benefit schemes or retirement annuity contracts, are completely outside the scope of the charge under the general exclusion for certain policies of insurance at Section 539(2) ICTA 1988). If a group life insurance policy gives rise to more than one death benefit some mortality benefits come into the computation of gain. This is a result of the rule dealing with partial surrenders of the rights conferred by a policy. Benefits, including death benefits, paid at any time prior to the ‘chargeable event’ in question are included when computing a ‘gain’. Other points 9. An accident insurance policy which provides cover against disablement only (not death) as a result of an accident has never been considered to be a policy of life insurance. The tax treatment of disability benefits from such a policy is not affected therefore by the new practice. 10. Policy benefits may be otherwise chargeable to tax; for example, as receipts of a trade or profession. Any such charge is unaffected by this Statement of Practice which is concerned only with the application of the chargeable events legislation at Chapter II, Part XIII, ICTA 1988. SP7/92

Profit-related pay: Use of pool determination formulae

SP8/92

Valuation of assets in respect of which Capital Gains Tax gifts holdover relief is claimed (See also Inland Revenue Tax Bulletin, Issue 28, April 1997, Page 417)

Introduction 1. This Statement sets out HM Revenue and Custom’s practice for dealing with the valuation of assets in respect of which a claim to capital gains tax (CGT) gifts holdover relief has been made. It applies to both new claims to holdover relief and existing claims in relation to which valuation negotiations with HM Revenue and Customs may already have started. Circumstances in which CGT gifts holdover relief is available 2. Subject to an appropriate claim, gifts holdover relief is available where: • an individual makes a disposal not at arms length of: • an asset used for the purposes of a trade, profession or vocation carried on by the transferor, his personal company or a member of a trading group of which the holding company is the transferor's ‘personal’ company - Section 165(2)(a) TCGA 1992 or • shares in a trading company or holding company of a trading group which are either unlisted or are in the transferor's ‘personal’ company - Section 165(2)(b) TCGA 1992 or

• agricultural property as defined by IHTA 1984 - paragraph 1 Schedule 7 TCGA 1992 • the trustees of a settlement make a disposal of certain settled property - paragraph 2 and 3, Schedule 7 TCGA 1992 • an individual or the trustees of a settlement make a disposal of an asset not at arm's length which is either a chargeable transfer under the Inheritance Tax Act 1984, or is one of a specified range of exempt transfers - Section 260(2) TCGA 1992. What is the heldover gain? 3. In the absence of a claim to holdover relief, Section 17 TCGA 1992 would treat both the acquisition and disposal of the assets transferred to be for a consideration equal to their market value. Where a valid claim is made the effect is that the transferor's chargeable gain is reduced to nil and the transferee's acquisition cost is reduced by the amount of the heldover gain. 4. The heldover gain is the amount of the chargeable gain which would have accrued to the transferor, but for the claim to holdover relief. To compute the chargeable gain, and hence the heldover gain, it is necessary to establish the market value of the asset at the date of the transfer. 5. Where no other reliefs are involved, holdover relief will be available where the market value of the asset transferred exceeds the transferor's allowable expenditure and the amount of indexation allowance due up to the date of disposal. If holdover relief is claimed and no consideration is paid then the transferee's acquisition cost will be equal to the sum of the transferor's allowable expenditure plus indexation to the date of transfer. In holdover relief cases, assuming none of the restrictions described in paragraphs 6 and 13 below apply, agreement of the market value of the asset at the date of transfer has no bearing on the immediate CGT liability of the transferor. Position where consideration is paid by the transferee 6. Additional rules apply which affect the amount of the heldover gain where actual consideration is given to the transferor. Full holdover relief is only available if the actual consideration received does not exceed the transferor's allowable expenditure (Section 38 TCGA 1992). If the actual consideration received exceeds the transferor's allowable expenditure on the asset, the holdover relief is restricted by that excess (Sections 165(7) and 260(5) TCGA 1992). 7. Where consideration is given, the transferee's acquisition cost will be equivalent to the sum of the transferor's allowable expenditure, the indexation allowance due to the date of disposal by the transferor and the gain immediately chargeable on the transferor. Circumstances where in future market value at disposal need not be agreed with HM Revenue and Customs 8. Subject to the following conditions, HM Revenue and Customs will admit a claim for holdover relief without requiring a computation of the heldover gain in any case where the transferor and transferee complete the second page of the claim form attached to the Help Sheet IR295. In particular this requires • a joint application by the transferor and the transferee • provision of details concerning the asset and its history or alternatively a calculation incorporating informally estimated valuations if necessary and • a statement that both parties have satisfied themselves that the value of the asset at the date of transfer was in excess of the allowable expenditure plus indexation to that date

The further conditions are that • once a claim made on this basis has been accepted by HM Revenue and Customs it may not be subsequently withdrawn • if after acceptance by HM Revenue and Customs it emerges that any information provided or statement made by either the transferor or transferee was incorrect or incomplete, in each case their capital gains tax position in relation to the asset will be computed in accordance with the relevant statutory provisions and assessments made as appropriate. It should be noted that for years 1996/97 onwards all claims to holdover relief are to be made on the claim form attached to Help Sheet IR295 or a copy of it. 9. Where, under the terms of this Statement of Practice, a claim is admitted without the heldover gain being computed, this does not mean that HM Revenue and Customs accepts as factually correct or will subsequently be bound by any information or statements given by any person, whether expressly or by implication, in connection with the claim. Neither HM Revenue and Customs nor the claimants are bound in any way by any estimated values shown on the claim form or in any calculations. Assets held on 31 March 1982 10. Unless actual consideration is given by the transferee, this practice will also apply to assets held by the transferor on 31 March 1982. It will only be necessary to agree a value at 31 March 1982 when the transferee disposes of the asset. 11. If the transferor has made an election under Section 35(5) TCGA 1992, the transferee's acquisition cost of the asset will be equal to the 31 March 1982 value plus indexation up to the date of the transfer. If there is no election under Section 35(5), the transferee's acquisition cost of the asset will be equal to the transferor's original cost plus indexation up to the date of the transfer or the 31 March 1982 value plus indexation up to the date of transfer - whichever is greater. 12. If the transferee has given some consideration for the asset it will be necessary to agree the 31 March 1982 value immediately. This is so that the excess over the allowable expenditure which is chargeable to CGT immediately - can be determined. However, HM Revenue and Customs will still be prepared to accept a holdover relief claim without undertaking a valuation as at the date of transfer. Circumstances in which a valuation may be required 13. There are certain cases where paragraphs 5, 6 or 7 of Schedule 7 TCGA restrict the amount of the heldover gain. These are cases where an asset has at some time during the transferor’s ownership been used for non-business purposes, or has only been used in part for business purposes, and cases involving shares etc., in a company which has non-business assets. This Statement of Practice cannot apply in any of these cases, because it is necessary to compute the chargeable gain before holdover relief. Otherwise, HM Revenue and Custom’s expectation is, subject to the circumstances described in paragraphs 8 and 10 to 12, that it will rarely be necessary to determine the market value at the date of the gift. However, a valuation may become necessary as a result of the interaction of the heldover gain with other CGT reliefs. It is not expected that even in these cases will it be necessary to establish the market value immediately. Instead, it is more likely that a valuation will not be required before, for instance, a later disposal of the asset by the transferee. The following paragraphs cover the more common circumstances. Retirement relief 14. Holdover relief is not available in the case of a disposal of an asset to the extent that any gain benefits from retirement relief (Section 165(3)(a) and (b); Section 260(5) and Schedule 6

TCGA 1992). This means that holdover relief may be claimed if the market value at the date of transfer is at least equal to the sum of the transferor's allowable expenditure, indexation allowance to the date of disposal and the retirement relief due. 15. Unless requested by the claimants, the agreement of the market value of the asset will be deferred until either • it is necessary to determine the quantum of the retirement relief due. (Normally this will be when the transferor makes another disposal which attracts retirement relief), or • it is necessary to determine the transferee's cost of the asset. Relief in respect of deferred charges on gains before 31 March 1982 (Schedule 4 TCGA 1992) 16. In the case of an asset acquired before 31 March 1982 and transferred before 6 April 1988 it is necessary to compute any heldover gain in order to give the benefit of the 50% reduction available under Schedule 4. To the extent that the market value of the asset at the date of transfer has not already been determined HM Revenue and Customs is prepared to defer the need for a valuation until disposal by the transferee. Time apportionment in the case of assets held on 6 April 1965 17. In the case of an asset held at 6 April 1965 chargeable gains and allowable losses arising on disposal are ‘time apportioned’ so that only those accruing since 6 April 1965 are recognised for CGT purposes. If holdover relief is claimed in relation to the gift of such an asset it is always necessary to agree a valuation at the date of transfer in order to apply time apportionment to the deferred gain. HM Revenue and Customs are content to defer this valuation until the asset is disposed of by the transferee. Application of Statement of Practice to existing holdover relief claims 18. In relation to existing holdover relief claims, valuation negotiations with HM Revenue and Customs may have commenced, but not yet been completed. Taxpayers who want to take advantage of the practice in relation to such claims should write to the Inspector of Taxes to whom they were submitted. SP9/92

Partnerships: Circumstances in which late elections will be accepted

In cases where no statutory discretion is given to The Commissioners for Her Majesty’s Revenue and Customs to extend a time limit for a claim or election, it must be assumed that Parliament's intention is that the limit should be applied strictly. The number of cases in which it would be appropriate to exercise discretion under the Commissioners for Her Majesty’s Revenue and Custom’s powers of care and management (provided in the Taxes Management Act 1970) is correspondingly limited. Every such case has to be considered on its own merits, and in the light of the factors relevant to the circumstances in which the claim was made late. However, there would be a presumption in favour of admitting an election under Section 113(2) ICTA 1988 which is made as soon as is reasonably possible in all the circumstances, but after the statutory time limit has expired, if the reason for the late election being late was one of the following: -

some relevant and uncorrected error on the part of HM Revenue and Customs has had the effect of misleading the partners or their agent about whether the requirements of the legislation had been met; or

-

at a crucial time, one of the required signatories was not available for unforeseeable reasons (e.g. because of serious illness); or the agent of a signatory was similarly not

available and there was no one else who could reasonably be expected to stand in the agent's shoes: or -

there was some other difficulty about obtaining all the required signatures to the election within the time limit, and HM Revenue and Customs had, before the time limit expired, both been clearly notified that each of the signatories had individually decided to make an election, and been given the reasons why the election could not be made within the time limit.

The Commissioners for Her Majesty’s Revenue and Customs will not admit elections if they were made after the expiry of the time limit because of oversight or negligence on the part of a partner or his or her agent; or because one of the parties to the election temporarily refused to sign it; or because there was a deliberate decision to delay the making of the election because its effect on the taxation liabilities of the relevant parties was not clear by the time the time limit expired. NB This Statement ceases to be relevant for tax years 1997-98 onwards but continues to apply, where appropriate, for 1996-97 and earlier years. SP1/93

Tax treatment of expenditure on films and certain similar assets – Replaced by SP1/98

SP2/93

Inheritance Tax: The use of substitute forms

Introduction 1. This Statement explains the Commissioners for Her Majesty’s Revenue and Custom’s approach towards the acceptance of facsimiles of inheritance tax forms as substitutes for officially produced printed forms. Legislative context 2. Section 257(1) IHTA 1984 says that all accounts and other documents required for the purposes of the Act shall be in such form and shall contain such particulars as the Board may prescribe. The Commissioners for Her Majesty’s Revenue and Customs are satisfied that an accurate facsimile of an official Account or other required document will satisfy the requirements of the Section. What will be considered an accurate facsimile? 3. For any substitute inheritance tax form to be acceptable, it must show clearly to the taxpayer the information which the Commissioners for Her Majesty’s Revenue and Customs have determined shall be before him or her when he or she signs the declaration that the form is correct and complete to the best of his or her knowledge. In other words, the facsimile must accurately reproduce the words and layout of the official form. It need not, however, be colour printed. 4. The facsimile must also be readily recognisable as an inheritance tax form when it is received by Her Majesty’s Revenue and Customs Capital Taxes, and the entries must be distinguishable from the background text. Where a facsimile is submitted instead of a previously supplied official form it is important that it bears the same reference as appeared on the official form. It is equally important that if no official form was supplied the taxpayer's reference should be inserted on the facsimile. 5. Advances in printing technology now mean that accurate facsimile forms can be produced. The Commissioners for Her Majesty’s Revenue and Customs will accept such forms if approval by the Capital Taxes Offices of their wording and design has been obtained before they are used. Any substitute which is produced with approval will need to bear an agreed unique imprint so that its source can be readily identified at all times.

Applications for approval 6. Applications for approval should be made to: In England, Wales and Northern Ireland The Customer Service Manager HM Revenue and Customs Capital Taxes Office Ferrers House PO Box 38 Castle Meadow Road N OTTINGHAM NG2 1BB or DX 701201 Nottingham 4 or in Scotland The Customer Service Manager HM Revenue and Customs Mulberry House 16 Picardy Place EDINBURGH EH1 3NB or DX ED305 Edin 1. All applications will be considered as quickly as possible. Further information available 7. A set of guidelines giving further details on the production of substitute forms is available on application to the appropriate office at the above address. SP3/93

Groups of companies: Arrangements

Introduction 1. This statement supersedes Statement of Practice SP5/80. Some features of the earlier statement have been omitted or revised but this does not indicate a more restrictive approach on the part of HM Revenue and Customs. 2. This statement gives general guidance on how HM Revenue and Customs interpret ‘arrangements’ in the following provisions of ICTA 1988: •

Section 240(11)(a) - surrender of Advance Corporation Tax to a subsidiary company;

•

Section 247(1A)(b) - group income elections in certain consortium cases;

•

Section 410(1) and (2) - group and consortium reliefs; and ‘option arrangements’ in

•

Paragraph 5B(1) of Schedule 18 - group and consortium reliefs.

Extra-Statutory Concession C10 3. Certain types of ‘arrangements’ or ‘option arrangements’ relating to groups and consortia which fall within the above legislation are in practice excluded from its scope by ESC C10, as revised January 1993. General 4. This Statement of Practice gives general guidance in conjunction with ESC C10. Comprehensive guidance cannot be given about what constitutes ‘arrangements’ or ‘option arrangements’, nor about precisely when they come into existence. Particular cases depend on the particular relevant facts. 5. As regards ‘option arrangements’ the Commissioners for Her Majesty’s Revenue and Customs’ view is that if an agreement provides for the creation of specified option rights exercisable at some future time ‘option arrangements’ come into existence when the agreement was entered into. Disposal of shares or securities in a company 6. Where a holder of shares or securities in a company is preparing to dispose of them, straightforward negotiations for the disposal will not give rise to the existence of ‘arrangements’ before the point at which an offer is accepted subject to contract or on a similar conditional basis. Equally, unless there are exceptional features, an offer made to the public at large of shares or a business will not at that stage bring ‘arrangements’ into existence. 7. If a disposal requires the approval of shareholders, operations leading towards disposal will not give rise to the existence of ‘arrangements’ before that approval is given or until the directors become aware that it will be given. 8. If following negotiations with potential purchasers a holder of shares or securities concentrates on a particular potential purchaser this will not of itself be regarded as bringing ‘arrangements’ into existence. But ‘arrangements’ might exist if there were an understanding between the parties in the character of an option. For example, an offer, whether formally made or not, might be allowed to remain open for an appreciable period so that the potential purchaser was allowed to choose the moment to create a bargain. Company reconstructions 9. The approval of shareholders for a company reconstruction may be required under company law or to comply with the rules of a stock exchange. ‘Arrangements’ will not come into existence before approval is given or until the directors become aware that it will be given. Enforceability 10. ‘Arrangements’, though not ‘option arrangements’, may exist between parties even though they are not enforceable. SP4/93

Deceased persons' estates: Discretionary interests in residue

Section 650(3), (4), (6), 655(1), 662 Income Tax (Trading and Other Income) Act 2005 provide for discretionary payments out of the income of the residue of an estate of a deceased person, whether made directly by the personal representatives, or indirectly through a trustee or other person, to be treated as the income of the recipient for the year in which they are paid. HMRC will apply Section 650(3), (4), (6), 655(1), 662 ITTOIA 2005 whenever such discretionary payments are made, whether they are payments out of income of the residue as it arises or out of income arising to the personal representatives in earlier years, which has been retained pending the exercise of their discretion.

Where payments are made out of income of the residue of United Kingdom estates (as defined in sections 651(1), (2), (3) ITTOIA2005 they are treated for 1993/94 and later years as received after deduction of tax at the applicable rate (as defined in sections 663,679(2), (3) ITTOIA 2005). Recipients who are not liable to income tax on the payments, including charities, are entitled to claim repayment of this tax except where the basic amount is paid from sums within section 680 ITTOIA 2005. Where payments are made indirectly through trustees, the trustees may be liable to tax at the rate applicable to trusts on the payments under Section 686, ICTA 1988. Beneficiaries may be treated as receiving the payments after deduction of tax at the rate applicable to trusts. This tax may be repaid or further tax charged, depending on the beneficiary's marginal rate. The trustees are not chargeable to income tax at the rate applicable to trusts, where a trust is established for charitable purposes only. With effect from 16 March 1993 HMRC will apply sections 650 (3), (4), (6), 655(1), 662 Income Tax (Trading and Other Income) Act 2005 in this way to all open cases whether this results in repayment of tax or an assessment to income tax at the higher rate. Claims for repayment of tax may also be made for years from 1986/87 onwards, including supplementary claims where an earlier claim was refused under previous practice. For all payments made before 6 April 2005, the relevant provisions of Part XVI ICTA1988 apply, and after 6 April 2005, where a company is the beneficiary of a deceased estate, the provisions of Part XVI continue to apply for discretionary payments to the company out of the income of the residue. SP5/93 1.

United Kingdom/Czechoslovakia Double Taxation Convention The Convention, the full title of which is as follows:

‘Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Czech and Slovak Federal Republic for the avoidance of double taxation with respect to taxes on income and capital gains’; was signed in London on 5 November 1990 and entered into force on 20 December 1991. It took effect: (a)

(b)

in the United Kingdom; (i)

in respect of income tax and capital gains tax for the year of assessment beginning on 6 April 1992 and subsequent years of assessment; and

(ii)

in respect of corporation tax for the financial year beginning on 1 April 1992 and for subsequent financial years; and

in Czechoslovakia, from 1 January 1992.

2. Following the dissolution of the Czech and Slovak Federal Republic and the recognition of the Czech Republic and the Slovak Republic by the United Kingdom as sovereign, independent states, the Commissioners for Her Majesty’s Revenue and Customs have been advised that the Czech Republic and the Slovak Republic have committed themselves to continue to honour all the international obligations of the former Federal Republic and that the provisions of the United Kingdom/Czechoslovakia Double Taxation Convention will be treated as remaining in force between the United Kingdom and, respectively, the Czech Republic and the Slovak Republic.

SP6/93

United Kingdom/Yugoslavia Double Taxation Convention – Superseded by SP3/04

SP7/93

Insurance companies: Transfers of long term business

SP8/93

Stamp Duty: New buildings

This Statement sets out the practice the Commissioners for Her Majesty’s Revenue and Customs will apply in relation to the stamp duty chargeable in certain circumstances on the conveyance or lease of a new or partly constructed building. It affects transactions where, at the date of the contract for sale or lease of a building plot, building work has not commenced or has been only partially completed on that site but where that work has started or has been completed at the time the conveyance or lease is executed. This Statement reflects the advice the Commissioners for Her Majesty’s Revenue and Customs have received on this subject in the light of the decision in the case of Prudential Assurance Company Limited v IRC [1993] 1 WLR 211). This Statement does not apply to the common situation where the parties have entered into a contract for the sale of a new house and that contract is implemented by a conveyance of the whole property. This Statement replaces the Statements of Practice issued in 1957 and 1987 (SP10/87) on this subject which are now withdrawn. The Commissioners for Her Majesty’s Revenue and Customs are advised that, whilst each case will clearly depend on its own facts, the law is as follows: 1. Two transactions/two contracts Where the purchaser or lessee is entitled under the terms of a contract to a conveyance or lease of land alone in consideration of the purchase price or rent of the site and a second genuine contract for building works is entered into as a separate transaction, the ad valorem duty on the conveyance or lease will be determined by the amount of the purchase price or rent which the purchaser or lessee is obliged to pay under the terms of the first contract. In these circumstances it does not matter whether any building work has commenced at the date of the conveyance or lease. The consideration chargeable to ad valorem duty will still be only that passing for the land. 2. One transactions/two contracts Where there is one transaction between the parties but this is implemented by two contracts, one for the sale or lease of the building plot and one for the building works themselves, the amount of ad valorem duty charged on the instrument will depend on the amount of the consideration, which in turn will depend on whether those contracts can be shown to be genuinely independent of each other. i.

If the two contracts are so interlocked that they cannot be said to be genuinely capable of independent completion (and in particular where if default occurs on either contract, the other is then not enforceable) ad valorem duty will be charged on the total consideration for the land and buildings, whether completed or not, as if the parties had entered into only one contract.

ii.

If the two contracts are shown to be genuinely independent of each other, ad valorem duty will be charged by reference to the consideration paid or payable for the land and any building works on that land at the date of execution of the instrument. It follows that, where the instrument is executed after the building works are completed, ad valorem duty will be charged on the consideration for the land and the completed building(s).

3.

Sham or artificial transactions

This Statement does not apply to cases where the transaction concerned, or any part of it, involves a sham or artificial transaction. Contracts already entered into Where unconditional contracts have been entered into before or within 28 days of the date of this Statement and the duty payable on the resulting conveyance or lease would have been less under the earlier Statements of Practice, the Stamp Office will accept duty in the lesser amount. In such cases the instrument should be submitted together with all the evidence to support the claim that unconditional contracts were entered into within this transitional period. Procedure for submitting documents Where a person accepts that a conveyance or lease of a building plot is chargeable on the total price paid or payable for the land and the completed building, it should be submitted for stamping in the usual way together with a covering letter giving the aggregate price and a payment for the duty appropriate to that price. Where the total price does not exceed the amount up to which the instrument is liable to nil duty (currently £60,000) and a certificate of value is included in the instrument, a conveyance may be sent direct to the Land Registry in England and Wales or, in Scotland, to the Keeper of the Registers of Scotland. A lease will need to be stamped in respect of the rent. Where the total price exceeds the threshold at which duty becomes payable but the taxpayer takes the view that duty is payable on some smaller sum, the instrument should be submitted to the Stamp Office. This applies even where the taxpayer believes that the amount potentially chargeable to ad valorem duty is below the threshold and a certificate of value is included in the instrument. The instrument should be accompanied by a copy of the agreement(s) for sale etc and a letter stating the amount which the taxpayer regards as chargeable consideration, identifying separately any amount attributable to building work. Details of any contractual arrangements not covered by the agreement(s) should also be given in the covering letter. SP9/93

Corporation Tax Pay and File: Corporation Tax returns

SP10/93

Corporation Tax Pay and File: Special arrangement for groups of companies

SP11/93

Corporation Tax Pay and File: Claims to capital allowances and group relief made outside the normal time limit

SP12/93

Double taxation: Dividend income: Tax credit relief

1. Section 790 ICTA 1988 sets out the basis under which relief (‘unilateral relief’) may be given for foreign tax paid in the absence of a double taxation convention. Section 790(5)(c) provides that tax credit relief shall not be available for overseas tax on a dividend paid by a company resident in a territory outside the United Kingdom unless: i.

the overseas tax is directly charged on the dividend, whether by charge to tax, deduction of tax at source or otherwise, and the whole of it represents tax which neither the company nor the recipient would have borne if the dividend had not been paid; or

ii.

the dividend is paid to a company within Section 790(6); or

iii.

Section 802 ICTA 1988 applies (UK insurance companies trading overseas).

2. Section 790(6) ICTA 1988 provides, among other things, that where a dividend is paid by a company resident in a territory outside the United Kingdom to a company resident in the United Kingdom which either directly or indirectly controls, or is a subsidiary of a company which

directly or indirectly controls, not less than 10% of the voting power in the company paying the dividend, any tax in respect of its profits paid under the law of the territory outside the United Kingdom by the company paying the dividend shall be taken into account in considering whether any, and if so what, credit is to be allowed in respect of the dividend. 3. There are similar provisions in a number of double taxation conventions, in which case tax credit relief against United Kingdom tax on the dividends concerned is available under those conventions and not under Section 790. Typically these conventions provide that where a company which is a resident of the other country pays a dividend to a company resident in the United Kingdom which controls directly or indirectly at least 10% of the voting power in the company paying the dividend, the credit for foreign tax shall take into account the tax of the other country payable by the company paying the dividend in respect of the profits out of which the dividend is paid. 4. A number of countries outside the United Kingdom operate a ‘company tax deducted’ system whereby, when a dividend is paid, tax is accounted for at the standard rate of tax on company profits. In the case of Guernsey, for example, where a company pays a dividend out of profits that will be or have been charged to tax in Guernsey, the company is entitled to deduct tax which it must remit to the tax authorities. That tax is a payment on account of the tax charged or chargeable on the profits and gains of the company; and where the amount of tax charged or chargeable on the company's profits and gains is less than the amount of tax deducted from the dividend and remitted to the tax authority, the appropriate repayment is made to the company. The tax deducted and accounted for by the company on making the dividend payments is not tax that is additional to the tax on the company's profits and gains. 5. It has been the practice of HM Revenue and Customs, when calculating the tax credit relief due under Section 790 ICTA 1988 to a United Kingdom company against United Kingdom tax on a dividend from a company resident in Guernsey, to allow credit at the rate of ‘company tax deducted’ or at the rate of tax paid by the Guernsey company on its profits (the actual underlying rate), whichever is the greater. A similar practice has operated in respect of dividends received from companies resident in Jersey and, in cases where there is a double taxation convention with a provision along the lines of paragraph 3 above, in respect of dividends received from companies resident in Belize, the Gambia, Malaysia, Malta and Singapore. 6. The matter has been under review and, following further consideration, HM Revenue and Customs have decided that, as regards dividends declared on or after today, the correct way to give effect to the relief allowable as described in paragraphs 2 and 3 above is, subject to the usual rules governing tax credit relief, to allow relief for the amount of the tax actually paid by the overseas company on the particular profits out of which the dividend is paid. Where those profits are not taxed in the other country, no tax credit relief will be available. The amount of overseas tax available for credit relief will be determined not by reference to what is shown on the dividend voucher but by reference to the tax paid in the other country in respect of its profits by the company paying the dividend. This will be ascertained in the usual way by examination of the overseas company's accounts and tax assessments. SP13/93

Compulsory acquisition of freehold or extension of lease by tenant

1. Section 247, TCGA 1992 allows roll-over relief in certain circumstances where a landlord disposes of land to an ‘authority exercising or having compulsory powers’ and acquires replacement land. ‘Authority’ is defined in Section 243(5) TCGA 1992 to mean a person or body of persons with compulsory purchase powers. 2. In HM Revenue and Custom’s view, relief under Section 247 may be claimed by a landlord - subject to the general conditions of the Section - where a tenant exercises the following rights to acquire an interest in the tenanted property from the landlord:

•

the right to acquire the freehold reversion or an extension of the lease under the Leasehold Reform Act 1967 or the Leasehold Reform, Housing & Urban Development Act 1993, or

•

the right to buy or to acquire the freehold or an extension of the lease under the Housing Acts 1985 to 1996, or the right to purchase tenanted property under the Housing (Scotland) Act 1987.

SP14/93

Valuation of oil disposed of otherwise than at arm's length: Paragraph 2, Schedule 3, Oil Taxation Act 1975

SP15/93

Business tax computations rounded to nearest £1,000

1. HM Revenue and Customs are prepared to accept computations of business profits for tax purposes in figures rounded to the nearest £1,000 from single businesses or companies with an annual turnover of not less than £5 million, where rounding at least to that extent has been used in preparing their accounts. (The turnover of members of a group will not be aggregated for applying this £5 million threshold.) Where turnover fluctuates either side of the threshold, rounding can be used for a period of account if the turnover for either that year or the immediately previous year is above the limit. (Turnover comprises gross receipts including investment and estate income, as well as trading receipts.) 2. HM Revenue and Customs will only accept rounding in any particular case if the basis adopted is satisfactory. Rounded computations from such businesses must be accompanied by a certificate made by the person preparing the computations which: -

states the basis on which the rounding has been done;

-

confirms that this basis is unbiased, that it has been applied consistently and that it has been used in a manner which, in all the circumstances, produces a fair result for tax purposes; and

-

if the rounding was done by computer, states the program or software used.

In subsequent years if there have been no changes in the basis or in the software, the certificate need only confirm that the rounding has been done on the same basis as before. 3. HM Revenue and Customs are prepared to accept rounded figures only in relation to the computation of the profits of the business, including in the case of companies, non-Case I items. They cannot accept rounded figures in relation to the computation of tax payable or of any other figure of tax. 4. Nor can they accept rounded figures, in relation to any other aspect of the tax computations, where rounding would impede the proper application of the relevant legislation or where it would normally be necessary to go back to the underlying records to do the computation, and thus there would be no reduction in the compliance burden in allowing the use of round sums. Rounding is not therefore acceptable in: -

computations of chargeable gains (since precise dates on which expenditure is incurred are needed for indexation allowance purposes); rounding can however be accepted in relation to the incidental costs of acquisition and disposal;

-

computations of tax credit relief: while individual items of foreign income (including profits of overseas branches and, for the purpose of calculating underlying tax rates, dividends paid by overseas companies and the profits of those companies) may be rounded, computations of credit relief must continue to distinguish the individual items of

income and to show the exact amounts of foreign tax for which credit is claimed so that the rules for limiting the credit can be properly applied; -

computations required for purposes of the Accrued Income Scheme (Section 710-728, ICTA 1988);

-

aspects of capital allowances computations where precise figures are required, for example by the statute or where rounding might work unfairly because more than one taxpayer is involved and different bases could be used by each. One case where the statute requires the use of precise figures is the expensive car provisions in Sections 3436 CAA 1990. However in any capital allowances apportionment case it would be open to the taxpayer to demonstrate to the Inspector that, taking all the circumstances into account, including those of any other party, the use of rounded figures did not lead to a result that was materially different from the statutory position. For example, in the case of the industrial builders one-quarter rule (section 18(7) CAA 1990), the Inspector would want to be satisfied that the use of rounding alone did not reduce the non-qualifying expenditure to one-quarter or less of the total expenditure (and thereby enable the whole of the expenditure to attract allowances);

-

the application of the statutory amount in Section 748(i)(d) ICTA 1988 in relation to a controlled foreign company.

5. Exceptionally other circumstances may arise where rounding would not satisfy the tests in paragraph 4. In those circumstances the Inspector may insist that roundings are not used. 6. These arrangements will continue into Pay and File. Subject to the exceptions provided in the two previous paragraphs, rounded figures from the accounts may be used in the computation of trading profits and losses, each category of income, management expenses and charges. Where appropriate, these figures will of course require adjustment to the ‘received’ or ‘paid’ basis. Group relief or relief for losses from other periods should be on the actual sums surrendered or brought forward (or carried back). No rounding should take place in the return form itself (for example, in the allocation of profits to financial years) or in any arithmetic that precedes such entries (for example, a computation of marginal small companies relief). 7. Where arrangements on the use of rounding have already been agreed locally with Inspectors these may continue to operate in the short term, but must come to an end for all periods ending after 31 May 1995. SP1/94

Non-statutory lump sum redundancy payments

1. Section 309 (1) & (3) ITEPA 2003 provide that statutory redundancy payments shall be exempt from income tax as employment income, with the exception of any liability under Section 401 of that Act. 2. Lump sum payments made under a non-statutory scheme, in addition to, or instead of statutory redundancy pay, will also be liable to income tax only under Section 401 ITEPA 2003, provided they are genuinely made solely on account of redundancy as defined in the Employment Rights Act 1996. This will be so whether the scheme is a standing one which forms part of the terms on which the employees give their services or whether it is an ad hoc scheme devised to meet a specific situation such as the imminent closure of a particular factory. 3. However, payments made under a non-statutory scheme which are not genuinely made to compensate for loss of employment through redundancy may be liable to tax in full. In particular, payments which are, in reality, a form of terminal bonus will be chargeable to income tax as earnings under Section 62 ITEPA 2003. Payments made for meeting production targets or doing

extra work in the period leading up to redundancy are examples of such terminal bonuses. Payments conditional on continued service in the employment for a time will also represent terminal bonuses if calculated by reference to any additional period served following issue of the redundancy notice. 4. HM Revenue and Customs is concerned to distinguish between payments under nonstatutory schemes which are genuinely made to compensate for loss of employment through redundancy and payments which are made as a reward for services in the employment or more generally for having acted as or having been an employee. As arrangements for redundancy can often be complex and provide for a variety of payments, it follows that each scheme must be considered on its own facts. HM Revenue and Customs’ practice, in these circumstances, is to allow employers to submit proposed schemes to their Inspectors of Taxes for advance clearance. 5. An employer or any other person operating a redundancy scheme, who wishes to be satisfied that lump sum payments under a scheme will be accepted as liable to tax only under Section 401 ITEPA 2003 should submit the full facts to the Inspector for consideration. Applications for clearance should be made in writing and should be accompanied by the scheme document together with the text of any intended letter to employees which explains its terms. SP2/94

Enterprise Investment Scheme and Venture Capital Trust Scheme: Location of activity – Superseded by SP7/98

SP3/94

Business Expansion Scheme, Enterprise Investment Scheme, Capital Gains Tax Reinvestment Relief and Venture Capital Trust Scheme: Loans to Investors – Superseded by SP6/98

SP4/94

Enhanced stock dividends received by trustees of interest in possession trusts

1. This Statement of Practice sets out HM Revenue and Customs’ views on the tax treatment of enhanced stock dividends received by trustees of trusts in which there is an interest in possession - that is, trusts where one or more beneficiaries have a right to the whole of the income of the trust as it arises. Paragraphs 19-20 deal with the position of Scottish trusts. 2. A company may offer its shareholders the option of taking additional shares rather than a cash dividend. Such issues of shares are described in the statute as stock dividends, although they are also commonly known as scrip dividends. Where the number of shares issued is deliberately set so that their market value exceeds the cash alternative, the issue is known as an enhanced stock dividend (or enhanced scrip dividend). 3. On the principles derived from CIR v Blott (8 TC 101), an issue of non-redeemable shares is not a distribution for the purposes of Section 209, ICTA 1988. This means that the shares are received without any sort of tax credit. However, Section 409 ITTOIA 2005 treats certain recipients of stock dividends within Section 410 ITTOIA 2005 as having received on the due date of issue an amount of income equal to the equivalent of the share capital grossed up by reference to the dividend ordinary rate. The cash equivalent of share capital is defined as the amount of the cash dividend alternative unless the difference between the share capital’s market value equals or exceeds 15% of that market value. Where market value applies this is determined-

in the case of listed share capital, on the date of first dealing in the case of other share capital, on the earliest date on which the company is required to issue it.

4. Section 409 ITTOIA 2005 can apply to an enhanced stock dividend received by trustees of an interest in possession trust (‘the trustees’) only where the beneficiary with an interest in possession (‘the beneficiary’) is beneficially entitled to it so that Section 249(4) applies (see paragraph 8 below). 5. Where the trustees take an enhanced stock dividend they must consider whether, as a matter of trust law, it should be regarded as income or capital, taking account of -

all the relevant facts;

-

any specific provision in the trust deed.

6. HM Revenue and Customs can offer no guidance about the application of trust law in any particular case. However, HM Revenue and Customs will accept whichever of the three approaches described in this Statement of Practice the trustees conclude that they should adopt, provided that their conclusion is supportable on the facts of their particular case. 7. The tax treatment of enhanced stock dividends received by the trustees follows from the trust law position. This Statement of Practice sets out the tax consequences if an enhanced stock dividend -

is regarded as income; or

-

is regarded as capital; or

-

is regarded as capital but the trustees make a payment to the beneficiary in accordance with Re Malam, Malam v Hitchens (1894) 3 CH 578.

I Enhanced stock dividend regarded as income 8. If the enhanced stock dividend is regarded as income the beneficiary is beneficially entitled to the shares comprised in the dividend and Section -410(2) ITTOIA 2005 applies. The beneficiary is treated as having received income of an amount which, when reduced by an amount equal to income tax at the Schedule F ordinary rate, is equal to the ‘appropriate amount in cash’. No repayment of this tax can be made. (Section 414(2) ITTOIA 2005). The beneficiary has no further income tax to pay if he is a basic rate taxpayer. A higher rate taxpayer has an extra liability equal to the difference between the Schedule F ordinary rate and the Schedule F upper rate on the income that he is treated as having received. 9. For capital gains tax (CGT) purposes, Section 142, TCGA 1992 applies. The issue is not a reorganisation. The beneficiary is treated as having acquired the shares for the ‘appropriate amount in cash’. Under Section 60, TCGA 1992 any formal transfer by the trustees to the beneficiary is disregarded. If they sell the stock dividend on his behalf, it is treated as a sale by the beneficiary. II Enhanced stock dividend regarded as capital 10. If the enhanced stock dividend is regarded as capital there is no income tax liability as Section 410(2) ITTOIA 2005 does not apply. 11. For CGT purposes, the issue is a reorganisation within Section 126, TCGA 1992. The consequences are as follows: -

the newly issued shares are pooled with the shares in respect of which they were issued (‘the original shares’) to form the new holding;

-

the new holding and the original shares are treated as the same asset acquired when the original shares were acquired (Section 127 TCGA).

12. The trustees are not regarded as having made any payment for the shares. Because the reorganisation rules apply, the date of acquisition is the date on which the original shares were acquired. III 13.

Enhanced stock dividend regarded as capital but with an adjusting payment to the beneficiary with an interest in possession The trustees may decide- that where

-

they have elected to take an enhanced stock dividend in preference to a cash dividend that would have belonged to the beneficiary; and

-

the enhanced stock dividend is regarded as capital under trust law

the beneficiary is entitled to some compensation from the trustees for the cash dividend forgone. 14. In these circumstances the tax position of the trustees is as set out in section II above. The payment they make to the beneficiary is an annual payment and tax must be deducted from it at the basic rate in accordance with Section 349(1), ICTA 1988. No income tax is treated as having been paid in respect of the enhanced stock dividend, whether by virtue of a tax credit or otherwise, so the trustees have to account to HM Revenue and Customs for the whole of the basic rate tax deducted from the payment. 15. The beneficiary is treated as receiving income taxable under Chapter 7 Part 5 of ITTOIA 2005 on which income tax at the basic rate has been paid. 16.

This treatment applies whether the payment is made

-

out of the proceeds of the disposal of shares comprised in the enhanced stock dividend;

-

out of other capital of the trust;

-

in the form of a proportion of shares comprised in the enhanced stock dividend. (Section 410 (2) ITTOIA 2005 does not apply in these circumstances because the beneficiary is not beneficially entitled to the stock dividend).

17. Whatever form the payment takes, the trustees are treated as having made an annual payment and the beneficiary as having received a net sum after deduction of income tax at the basic rate. 18. For CGT purposes, the treatment described in paragraphs 11-12 above applies. Where the trustees make the payment to the beneficiary in the form of shares, the transfer constitutes a part-disposal of the new holding. Scottish interest in possession trusts 19. The same income tax treatment applies to Scottish trusts in which a beneficiary has a right to income. Although under Scots law the rights of the income beneficiary are different from those of a beneficiary with an interest in possession in an English trust, for income tax purposes the beneficiary of a Scottish trust is treated as having the same rights by virtue of Section 118, FA 1993. 20. (This paragraph reflects the changes in FA 1998). For CGT purposes, where the enhanced stock dividend is dealt with as described in Section 1 above (enhanced stock dividend

regarded as income), the position of a Scottish trust is different from that of an English trust. Under Scots law the beneficiary is not absolutely entitled to the enhanced stock dividend. However, since Section 410(2) ITTOIA 2005 applies to the stock dividend (by virtue of Section 118, FA 1993), the trustees are treated as having given ‘the appropriate amount in cash’ (see paragraph 8 above) as consideration for the new holding by virtue of Section 141, TCGA 1992. This is not a reorganisation. If the enhanced stock dividend is transferred to the beneficiary the trustees make a disposal to the beneficiary, which by reason of the share identification rules in Section 106A, TCGA 1992, would normally be a disposal of the shares acquired as a stock dividend. Associated companies for small companies' relief and Corporation Tax starting rate: Holding companies

SP5/94

Under section 13(4), ICTA 1988, a company which does not carry on any trade or business in an accounting period is disregarded in calculating the profits limits for the small companies' relief of any other company with which it is associated. A holding company which does not carry on a trade, but which holds the shares in one or more companies which are its 51 per cent subsidiaries, may or may not be carrying on a business in respect of that holding. HM Revenue and Custom’s view is that a company is not carrying on such a business in an accounting period if, throughout that period, all of the following apply: •

it has no assets other than shares in companies which are its 51 per cent subsidiaries; and

•

it is not entitled to a deduction, as charges or management expenses, in respect of any outgoings; and

•

it has no income or gains other than dividends which it has distributed in full to its shareholders and which are, or could be, franked investment income received by that company (section 832(1) and (4A)); and

•

the 51 per cent subsidiaries are 51% subsidiaries under section 247(8), (8A) and (9A).

SP6/94

Capital allowances: Notification of expenditure on machinery and plant made outside the normal time limit (See also Inland Revenue Tax Bulletin, Issue 35, June 1998, Page 551)

1. Section 118(3) and (4) Finance Act 1994 introduced time limits for notifying qualifying expenditure on machinery and plant. The Commissioners for Her Majesty’s Revenue and Customs have power under Section 118(5) to extend these limits in exceptional circumstances. This Statement explains the general criteria which the Commissioners for Her Majesty’s Revenue and Customs will apply in considering applications for extended time limits. The notification rules 2. For corporation tax cases, and also for income tax cases for years of assessment until 1995/96, the relevant conditions for notifying qualifying expenditure are fulfilled where: • for chargeable periods ending on or after 30 November 1993, notice of expenditure is given to the Inspector, in such form as the Commissioners for Her Majesty’s Revenue and Customs may require, not later than two years after the end of that period; • for chargeable periods ending before 30 November 1993: (a)

the expenditure was included in a computation which -

(i)

was required to be made for any tax purpose;

(ii)

was given before that date to the Inspector, and

(iii)

was not contained in a document prepared primarily for a purpose which was not a tax purpose; or

(b)

notice of the expenditure is given to the Inspector, in such form as the Commissioners for Her Majesty’s Revenue and Customs may require, not later than three years after the end of that period or;

(c)

if the chargeable period ends on or after 1 December 1990, notice of the expenditure is given before 3 May 1994.

3. For income tax cases for 1996-97 and any earlier years dealt with under self assessment the time limit is 31 January following the first anniversary of the end of the year of assessment in which the period of account ends. 4. In the event that the above time limits have not been met, the capital allowances due on the past expenditure will not usually be lost. These will normally be claimable in the first period for which the time limit has not expired. No relief will be available for assets which have been sold prior to notification. Form of notification required by the Commissioners for Her Majesty’s Revenue and Customs 5. In view of the great variety of circumstances, the Commissioners for Her Majesty’s Revenue and Customs do not propose to specify in detail the form notifications should take. Generally, the requirement to notify the Inspector will be satisfied where the expenditure is included in a computation prepared for any tax purpose (provided the time limits set out earlier are met). However, it will be advisable to give enough information in the computations to identify the asset for which notification is given, as well as the amount of the expenditure. This does not mean that it will be necessary to list each and every item where large numbers of similar assets are purchased. 6. Where the expenditure is included within the calculation of taxable trading profit (i.e. as revenue expenditure) but is subsequently recategorised as being expenditure on machinery and plant, the original tax computation will be regarded as notice for the purposes of the new rules. 7. Inclusion of expenditure in a document prepared primarily other than for tax purposes (e.g. annual accounts of a business, valuation reports, quantity surveyors' reports etc) will not satisfy the requirement. The Commissioners for Her Majesty’s Revenue and Customs’ policy on extending time limits 8. The time limits allowed for giving written notification of qualifying expenditure on machinery and plant described above should generally be adequate and the Commissioners for Her Majesty’s Revenue and Customs will not make routine use of its powers to extend the notification period outside of these limits. But there may be exceptional circumstances in which notification cannot be made within the time specified. Applications to allow further time in accordance with the power referred to at paragraph 1 above will be considered under the following criteria. 9. In general terms the Commissioners for Her Majesty’s Revenue and Customs’ policy will be to extend the notification time limit only where there is good reason, arising out of

circumstances beyond the taxpayer's and his agent's control, why notification could not be given within the statutory time limits. 10. Sometimes a large construction project involving expenditure on a variety of assets, including machinery and plant, extends over several years and it is impossible to complete the final allocation of expenditure between different classes of asset when the normal time limit expires. In such cases, the Commissioners for Her Majesty’s Revenue and Customs will accept a refinement of the allocation of the overall expenditure between machinery and plant and other assets after the time limit has passed provided: •

reasonable estimates have been made of the expenditure attributable to machinery and plant within the time limit; and

•

there is no undue delay in finalising the details.

11. The application for extension and notification of the expenditure involved must be made within a reasonable period (normally not more than three months) after the expiry of the circumstances giving rise to the late notification. 12. What constitute acceptable reasons for late notification will depend upon the particular circumstances of each individual case. Such circumstances do not include the following: •

oversight or negligence on the part of the taxpayer or his agent;

•

delay, whether due to pressure of work, the complexity of the facts or to other causes except where the circumstances come within paragraph 9 above;

•

the taxpayer was absent or ill, unless: -

the absence or illness arose at a critical time and prevented the giving of notification within the normal time limit, and

-

there was good reason why notification was not given before the time of the absence or illness, and

-

in the case of absence, there was a good reason why the taxpayer was unavailable, and

-

there was no other person who could have given notification on the taxpayer's behalf within the normal time limit.

Procedure 13. The application to extend the notification period outside the statutory time limits should be sent to the Inspector dealing with the taxpayer and must include an explanation as to why notification could not have been given within the statutory time limit. Section 43A, TMA 1970 14. There is a general provision in Section 43A, TMA 1970 which may extend the time limit for giving a notice where a tax liability arises under an assessment which is made late. The Section 43A time limit is one year from the end of the chargeable period in which the assessment is made. 15.

It should be noted that:

•

Section 43A does not apply where the assessment is made to recover tax lost to the Crown because of fraudulent or negligent conduct;

•

a notice given within the Section 43A time limit cannot reduce the tax due beyond the amount due under the late assessment.

SP7/94

Investment trusts investing in authorised unit trusts – Superseded by SP3/97

SP8/94

Allowable expenditure: Expenses incurred by personal representatives and Corporate trustees Superseded by SP2/04

SP9/94

Application of foreign exchange and financial instruments legislation to partnerships which include companies

SP1/95

Interest payable in the UK

SP2/95

Payment of tax credits to non-resident companies

SP3/95

Definition of Financial Trader for the purposes of S177 (1), FA 1994 Superseded by SP4/02

SP4/95

Long term insurance business: Computations of profit for tax purposes

1. This statement sets out the approach that HM Revenue and Customs adopts to the computation of the trading profit of companies and friendly societies carrying on long term insurance business when those insurers draw up their accounts in accordance with company law implementing 1 the European Community’s Insurance Accounts Directive [the IAD]. It applies to any computation made in accordance with the statutory provisions applicable to Case I of Schedule D. It is not concerned with the measurement of income, capital gains or expenses in the so-called ‘I minus E’ computation. 2. The normal starting point for a computation of trading profits for tax purposes is the balance of profit or loss disclosed by a set of accounts drawn up in accordance with the ordinary principles of commercial accounting. For periods of account beginning after 6th April 1999, there is an additional requirement that the profits must be computed on an accounting basis which gives a true and fair view, subject to any adjustment required or authorised by law – section 42 FA 1998. Section 42 is amended by section 103 FA 2002 to clarify that the true and fair view must be one that is shown by the use of UK generally accepted accounting practice. Before the adoption of the IAD, the absence of a figure of profit or loss in the accounts of companies carrying on long term insurance business made a different approach necessary, and the convention of using the actuarial surplus as a substitute for the commercial profit has been firmly established for many years. 3. We have received legal advice to the effect that, in relation to life assurance and life annuity business, this convention is implicit in the special statutory rules relating to life assurance business, and in particular in Section 83 FA 1989. Accordingly, when it is necessary for any purpose to compute •

the profits from life assurance business in accordance with Case I rules, or

•

the Case VI profits of pension business, ISA business, overseas life assurance business, or life reinsurance business in accordance with Case I principles,

1

The IAD was implemented in UK law by the Companies Act 1985 (Insurance Companies Accounts) Regulations 1993 (SI 1993/3246), the Insurance Accounts Directive (Miscellaneous Insurance Undertakings) Regulations 1993 (SI 1993/3245) and the Friendly Societies (Accounts & Related Provisions) Regulations 1994 (SI 1994/1983)

we shall continue to base the computation on that part of the total actuarial surplus for the period that relates to the business in question, although we recognise that in many cases this surplus will not be apparent from the face of the regulatory return and will have to be constructed from the various elements that make it up. In general the treatment of particular items in the published accounts in the IAD format will have no direct bearing on their treatment for tax purposes. 4. Different considerations apply, however, to the other classes of long term business. Here, our legal advice is that once a figure of profit is available from a set of accounts drawn up in accordance with an accepted accounting method that follows the ordinary principles of commercial accounting then, subject to any adjustment required or authorised by law, that figure must be used as the starting point for the Case I computation. This will be so whether or not a separate profit and loss account is prepared for this part of the business. 5. This paragraph explains our view of the way in which the tax computations for long term business other than life assurance should be derived from the accounting profit described in paragraph 4 above. It is based on the proposition (which HM Revenue and Customs believes to be correct) that accounts drawn up in accordance with Schedule 9A to the Companies Act 1985 and the ‘Statement of Recommended Practice. Accounting for Insurance Business’ issued by the Association of British Insurers in November 2003 fulfil the requirements of section 42 Finance Act 1998. •

Normally an insurance company carries on a single trade, so strictly there should be a single computation for the whole of the company’s business other than life assurance business. There will be no objection in practice to companies preparing separate computations for, say, pre-1938 capital redemption business, permanent health insurance, pension fund management, and any general insurance business which the company may conduct; but the results of these separate computations must then be combined, if necessary with the result of any general insurance business, to determine the overall figure of profit or loss from insurance business other than life assurance business.

•

Where it is necessary to make a division of the profit of the whole long term business the division should, so far as possible, be made on a factual basis so that, for example, premiums referable to permanent health insurance are allocated to that business. Where this is not possible, a reasonable method of apportionment should be adopted. But the total amount of the investment return from the assets of the long term business fund to be attributed to business other than life assurance business should be determined in accordance with the statutory rules in Section 432A ICTA 1988.

•

Gains and losses from loan relationships, financial instruments (for periods beginning before 1 October 2002) and derivative contracts (for periods beginning on or after that date) should be included in accordance with the relevant accounting method. Until July 2001 HM Revenue and Customs took the view that, in relation to other investments, any profit on the sale of which would fall to be included in the company’s trading receipts, only realised gains should be brought into account. On 1 August 2001 HM Revenue and Customs’ Press Release ‘Tax and Accounting Change of Basis’, together with draft clauses published on 9 August 2001, made it clear that where such investments are accounted for using a mark to market basis in which the unrealised profits and losses are taken into account in the company’s technical or non-technical account, no adjustment is authorised by law to remove those unrealised gains and losses from the Case I profit figure. The legislation contained in those draft clauses was enacted as sections 65 and 66 FA 2002.

•

Section 65 FA 2002 provides that the previous basis would continue to be sanctioned for all periods of account up to the one in which 1 August 2001 falls. But companies may use mark to market for tax purposes if they wish. Whichever basis is used, the appropriate part of the investment gains from all assets backing the long-term business

should be included, regardless of whether these are credited in the ‘technical’ or ‘nontechnical’ part of the profit and loss account. Section 66 FA 2002 permits an insurance company to elect to retain the old basis for assets held on 1 January 2002. Where a company carries on both PHI business and general insurance business, the election may be made only in respect of general business assets. Where this is the case, PHI assets will be accounted for tax purposes on a mark to market basis, whenever they were acquired. • The deferral of acquisition costs that is required by the Directive (as implemented in the United Kingdom) should be followed in the profit computation. • Where, unusually, permanent health insurance is written on a with-profits basis no deduction is available for bonuses, following the case of Last v London Assurance (2 TC 100). Nor is any deduction available for provisions for future bonuses. • Movements in reserves held within the long term funds that are properly regarded as reserves rather than provisions should be excluded from the tax computation, whether or not the movements are dealt with through the ‘fund for future appropriations’ in the balance sheet. In the Revenue view contingency, closed fund, resilience and similar reserves which may be included in the statutory liabilities for solvency purposes should normally be regarded as reserves rather than provisions. It will be a question of fact in each case as to what extent such reserves relate to long term business other than life assurance. 6. Where companies write the type of business known as ‘deposit administration’ it will be necessary to determine whether this falls to be treated as life assurance business or as the type of pension fund management that is deemed to be (long term) insurance business by inclusion of relevant contracts in the definition of contracts of -insurance in paragraph 11.1 of the FSA’s Interim Prudential sourcebook: Insurers. Following the Privy Council decision in Colonial Life Insurance Co (Trinidad) Ltd v Board of Inland Revenue ([1991] Simons Tax Cases 503) it seems likely that many deposit administration contracts will properly be classified as contracts for life annuities, so that they should be included in life assurance business. (Contracts of this type will also fall to be included in pension business where they are made with the trustees or administrators of approved pension schemes, provided that the other statutory conditions are met.) But where it is agreed that a deposit administration contract, or any other contract, merely provides for the management of the funds of a pension scheme any method which a company has agreed with its Inspector for identifying the profit derived from the business need not be disturbed, so long as it continues to give a reasonable result. 7. The practice set out in this statement will be subject to review in the light of accounting developments. It should not be read as carrying any implications for the way in which the profits of a life office might be measured if the Government decides to introduce legislation designed to move away from the present ‘I minus E’ basis of life assurance taxation. SP5/95

Taxation of receipts of insurance and personal pension scheme commissions (See also Inland Revenue Tax Bulletin, Issue 16, April 1995) – Superseded by SP4/97

SP6/95

Legal entitlement and administrative practices

Where an assessment has been made and this shows a repayment due to the taxpayer, repayment is invariably made of the full amount. In Self Assessment where any amount is repayable it will be repaid in full on request. Where the end of year check applied to Schedule E taxpayers who

have not had a tax return for the year in question shows an overpayment of £10 or less, the repayment is not made automatically. As regards payment of tax assessed, where a payment to the Accounts Offices exceeds the amount due, and the discrepancy is not noted before the payment has been processed, the excess is not repaid routinely by the computer system unless it exceeds £0.99, or where clerical intervention is required, unless it exceeds £9.99. For Inheritance Tax (and Capital Transfer Tax), assessments that lead to repayments of sums overpaid are not initiated automatically by the Capital Taxes Offices if the amount involved is £25 or less. The aim of these tolerances is to minimise work which is highly cost-effective; they cannot operate to deny repayment to a taxpayer who claims it. SP7/95

Venture Capital Trusts: Value of ‘gross assets’ – Superseded by SP5/98

SP8/95

Venture Capital Trusts: Default terms in loan agreements

1. Section 842AA(12)(a), ICTA 1988 provides that a loan made by a venture capital trust to a company will qualify as a security for the purposes of section 842AA (and in the provisions of section 842 as they apply for the purposes of section 842AA) if certain conditions are met. In particular, the terms of the loan (whether secured or not) must not allow any person to require it to be repaid, or any stock or security relating to that loan to be re-purchased or redeemed, within the period of five years from the making of the loan or, as the case may be, the issue of the stock or security. 2. Provided that the loan is made on normal commercial terms, HM Revenue and Customs will not regard a standard event of default clause in the loan agreement as a provision, which would disqualify that loan from being a security within the meaning of section 842AA(12)(a). The purpose of such a clause is to afford protection to the lender by enabling redemption to be enforced in circumstances where the borrower defaults. Such a provision would not be regarded as being standard, however, if it entitled the lender, or a third party, to exercise any action, which would cause the borrower to default. SP1/96

Notification of chargeability to income tax and capital gains tax for tax years 1995-96 onwards – See Enquiry Manual EM 4551

SP2/96

Pooled cars: Incidental private use

Introduction 1. This Statement explains The Commissioners for Her Majesty’s Revenue and Customs’ approach to the question whether any private use by an employee of a car made available by his or her employer is ‘merely incidental to’ his or her business use of the car. The same approach is taken to vans. Legislation 2. No tax charge arises on a car made available by reason of an employment (a ‘company car’) if it is a ‘pooled car’. Section167 (3) ITEPA 2003- sets out the conditions which must all be satisfied for a car to qualify as a pooled car. Section 169 ITEPA2003 applies the same conditions for pooled vans. 3. The fourth of the five conditions is that any private use of the car or van by any employee to whom it is available is merely incidental to his or her other (i.e. business) use of the car or van in the tax year in question (Section 167 (3) (d) ITEPA and 168(3)(d).

Board's interpretation 4. The Commissioners for Her Majesty’s Revenue and Customs have been advised that the expression ‘merely incidental to’ requires consideration of whether: a. the private use of the car is independent of the employee's business use of the car (in which case it is not ‘merely incidental’ to it) or b. the private use follows from the business use (in which case it is). 5. This is a qualitative test which means it is necessary to look at the nature of private use, over the year, by each employee who uses the car. Journeys starting from home 6. A simple example of the test is where an employee takes a car home in order to make an early start on a business journey the following morning. Where that business journey could not reasonably be undertaken the next day starting from the normal place of work then the journey from work to home, although private, is merely incidental to the business use of the car. Use while away from home on business 7. Another example is an employee who is staying away from home overnight on a business trip. She uses the car to go to a nearby restaurant in the evening. This use, while it may not be necessary, can be regarded as merely incidental to the necessary business journey and overnight stay. Amount of private use 8. In practice HM Revenue and Customs find that private use of a car which they accept is a pooled car is usually small in comparison with its business use. But this does not mean a proportion of purely private use can always be allowed. For example, use of a car for an annual holiday would not be merely incidental to the business use of the car, even if that use was only small in comparison with the employees’ business travel in the car in the year in question. Cars with drivers 9. Particular questions arise where a car and driver are available to employees. 10. First, the car and driver may be used to take employees between home and work in order for the employee to work in the car on confidential papers. Travel between home and work is usually private. Working in the car during the journey does not change that. But HM Revenue and Customs’ practice has hitherto been to accept that all such journeys, while private, could be merely incidental to the business use of the car without regard to the frequency or length of such journeys or the employees’ other use of the car. 11. HM Revenue and Customs now take the view that the fact an employee is carrying confidential papers on which he or she may be working is only one of the factors to be considered, along with others, when deciding whether a journey is private or business; and, if private, whether or not that private use is merely incidental to its business use. It may be relevant where, for example, papers have to be delivered to a client or are needed for a meeting at the employee's home. It may also be relevant where the private use is otherwise close to the limits of what would be accepted as merely incidental use. But carrying such papers and working in the car neither changes a private journey into a business journey nor guarantees its use is merely incidental to the employee's other, business use of the car. 12. Second, a person employed as a chauffeur to drive a pooled car may be obliged to take the car to his home for retention overnight. The chauffeur's use of the car for this purpose does not of itself disqualify the car from treatment as a pooled car. This has been HM Revenue and

Customs’ practice since 1976 and will continue to be the practice. This is on the basis that such use is necessary in the performance of the duties of a chauffeur who is required to take a car home in order to collect or deliver passengers from or to various locations. Commencement 13. This Statement of Practice will be applies in this form for 2002/03 and subsequent years of assessment. It originally applied from 1996-97, when it referred to the previous legislation. SP3/96

Sections 225-226 ITEPA 2003: Termination payments made in settlement of employment claims

1. Section 225-226 ITEPA 2003 imposes a charge as earnings from employment on payments made to individuals for undertakings, given in connection with an employment, which restrict their conduct or activities. 2. A financial settlement relating to the termination of an employment may contain terms whereby the employee agrees to accept the termination package in full and final settlement of his or her claims relating to the employment, and/or may expressly provide that the employee should not commence or, if already commenced, should discontinue legal proceedings in respect of those claims. These may relate to claims at common law arising from the contract of employment or to claims arising under employment protection or other legislation. The settlement, therefore, seeks to avoid legal dispute or proceedings, for example before a court or an industrial tribunal, in connection with those rights. The termination settlement may also reaffirm undertakings about the individual's conduct or activity after termination which formed part of the terms on which the employment was taken up. 3. HM Revenue and Customs will accept that no chargeable value will be attributed under Section 225(1) (b) ITEPA 2003 to such undertakings by an employee or former employee. 4. But this does not affect the application of Section 225-226 to sums that are attributable to other restrictive undertakings which individuals give in relation to an employment, whether these undertakings are contained in a job termination settlement or otherwise. SP4/96

Income tax: Interest paid in the ordinary course of a bank's business

Introduction 1. The Taxes Acts generally require that when yearly interest is paid by a company income tax must be deducted on payment. However, this is modified by Section 349(3)(b) ICTA when yearly interest is paid by a bank in the ordinary course of business. This Statement of Practice sets out how HM Revenue and Customs applies the test of ‘in the ordinary course of business’ for the purposes of that section. 2. Section 349(3)(b) was amended by Paragraph 3(b) Schedule 37 FA 1996 and now applies to interest paid by a bank ‘in the ordinary course of its business’. Meaning of ‘bank’ 3. ‘Bank’ for the purposes of Section 349(3)(b) has the meaning given by Section 840A ICTA. Interpretation of ‘in the ordinary course of its business’ 3. HM Revenue and Customs will accept that yearly interest is paid in the ordinary course of a bank's business unless that interest falls within one or both of the two circumstances set out immediately below.

(i) Yearly interest will not be regarded as paid in the ordinary course of business where the borrowing relates to the capital structure of the bank. A borrowing will be regarded as relating to the capital structure of the bank if it conforms to any of the definitions of tier 1, 2 or 3 capital adopted by the Bank of England, whether or not the borrowing actually counts towards tier 1, 2 or 3 capital for regulatory purposes. Where, however, a borrowing within the tier 3 definition arose at a time prior to 1 January 1996 (the date when tier 3 capital was introduced for regulatory purposes) and was in the ordinary course of business at the time it arose, yearly interest on that borrowing will continue to be regarded as within Section 349(3)(b). (ii) Yearly interest will not be regarded as paid in the ordinary course of business where the characteristics of the transaction giving rise to the interest are primarily attributable to an intention to avoid UK tax. Application 5. This Statement supersedes SP12/91 in relation to yearly interest paid on or after 29 April 1996. 6. Whether or not interest is within the scope of this Statement of Practice depends both on the date of the transaction giving rise to the interest and on whether the bank was also a bank under the pre FA 1996 rules, that is, whether it was recognised by HM Revenue and Customs prior to 29 April 1996 as a bank for the purposes of Section 349(3)(b). 6.1 Transactions entered into on or after 29 April 1996. This Statement of Practice applies to all yearly interest paid by the bank on or after 29 April 1996. 6.2 Transactions entered into before 29 April 1996. Where the paying bank was recognised by HM Revenue and Customs prior to 29 April 1996 as a bank for the purposes of Section 349(3)(b), this Statement of Practice applies to all yearly interest paid by the bank on or after 29 April 1996. This means that such banks (the majority) will not need to consider whether interest arises on an advance, or whether the bank remains a ‘bank carrying on a bona fide banking business in the United Kingdom’ under the pre-FA 1996 rules at the time of payment of the interest. Where the paying bank was not recognised by HM Revenue and Customs prior to 29 April 1996 as a bank for the purposes of Section 349(3)(b), the bank must continue to deduct income tax from yearly interest paid on or after 29 April 1996 on advances, as it did from payments made before that date. All other interest paid by the bank, however, on or after 29 April 1996 will be governed by this Statement of Practice. SP5/96

PAYE Settlement Agreements

Introduction 1. PAYE Settlement Agreements (PSAs) - formerly known as Annual Voluntary Settlements (AVSs) - are arrangements under which employers can settle in a single payment the income tax liability on largely, minor benefits in kind and expenses payments given to their employees. 2. PSAs are potentially available to all employers. They are intended to provide flexibility for those employers who use them because items covered by a PSA do not have to be included on Forms P9D or P11 D at the end of the year. Nor do employees have to include them on their tax return, if they receive one. But they are not intended to provide a general alternative to the obligation on an employer to operate PAYE under ITEPA 2003/S 684 or to make a return after

the end of the year in relation to benefits in kind and expenses payments. This means that PSAs will not apply to: -

cash payments of wages, salaries or bonuses including those paid to casual employees

-

major benefits provided regularly for the sole use of individual employees - for example, a company car, car fuel, provided accommodation, beneficial loans

-

round sum allowances.

3. However, the key intention of PSAs is flexibility. It is intended that Inspectors will regard PSAs as a useful way of reducing burdens for employers and Revenue alike. 4. ITEPA 2003 /PART II Chapter 5 and The Income Tax (Pay As You Earn) Regulations SI 2003/2682 Part 6 contains rules governing PSAs. PAYE Settlement Agreements Scope of items which may be covered by an PSA 5. Regulation 106 describes the -earnings which can be covered by a PSA. This provides for the inclusion of expenses payments and benefits which are ‘minor'; or, if not minor, are either payable on an ‘irregular’ basis or in circumstances where it is ‘impracticable’ to apply PAYE or apportion the value of particular benefits which have been shared by a number of employees. 6. These terms have deliberately not been defined. The regulations require the employer and the Inspector to agree where payments are of an amount, or are paid in circumstances, which satisfy one or other of the terms. In discussion with the employer, the Inspector will be expected to make a reasonable judgement - based on the natural meaning of the words and taking account of the overall objective of the arrangements - about what may be included in a PSA. 7. Some examples are given below of items which may be suitable for inclusion in a PSA. It is not an exhaustive list. And it will not always be appropriate for an item listed below to be included in a particular PSA. In addition, some items might satisfy more than one term. The following paragraphs indicate some of the factors which an Inspector may take into account. Interpretation of ‘minor’ 8. An expenses payment or benefit in kind can be included in a PSA if it is ‘minor’ as regards the sums paid or the type of benefit provided - Regulation 106(3)(a). In agreeing with employers what may be included in a particular PSA, Inspectors will take account of the natural meaning of the term ‘minor’. The key question is whether on any objective judgement the item in question is minor in value. The nature of the item and the circumstances in which it is paid will normally also need to be taken into account. For example, a gift paid as part of a scheme to reward long service which does not satisfy ITEPA 2003/S 323. In deciding what constitutes minor, Inspectors will not be influenced by, for example, the comparable earnings of the particular employees concerned or the size of the employer. 9.

Some examples of what may constitute a 'minor’ item may help: Long service awards outside ITEPA 2003/S 323 Incentive awards Reimbursement of late night taxi fares home outside ESC A66 Personal incidental expenses in excess of the statutory daily limit Present for an employee in hospital Staff entertainment - for example, a ticket for Wimbledon Use of a company van Use of a pool car where the conditions for tax exemption are not satisfied

Subscriptions to gyms, sports clubs etc Telephone bills Gift vouchers and small gifts 10. If it is not possible to accept that an item is ‘minor’, it may still be appropriate for inclusion in a PSA because the Inspector will then consider whether it is either paid on an irregular basis; or whether it is impracticable to apply PAYE to it or identify the amount to be included on form P11D. The following paragraphs indicate some of the factors Inspectors will take into account when deciding if the circumstances satisfy either test. Interpretation of ‘irregular’ 11. Regulation 106 (3)(b) provides that an item may be included in a PSA if it is paid irregularly to an employee. Whether an item is paid on an ‘irregular’ basis will depend on the facts of each case. The Inspector will take into account, for example, the nature of the item, the normal frequency of its payment and how often it was paid or given to the individual employee in question. The exclusion of an item given to some employees because it was received regularly by them, would not necessarily mean that the same items received, irregularly by other employees would be excluded from a PSA. In considering if an item is received irregularly, Inspectors will primarily consider the frequency at which an item is provided during the year for which the PSA applies. But in appropriate cases, for example the use of the employers holiday accommodation, the period taken into account may be longer. Items provided to the same employee every year are unlikely to satisfy the irregular test. 12. Relocation expenses where the amounts concerned exceed the £ 8000 tax exempt threshold (ITEPA 2003/S 271) are an important example of a range of benefits in kind or expenses which may fail the minor test, but will normally qualify for inclusion in a PSA on grounds of irregularity. 13.

Other examples may include: Occasional attendance at an overseas conference where not all the expenses qualify for relief under ITEPA 2003 Part 5 Expenses of a spouse occasionally accompanying an employee abroad Occasional use of a company holiday flat One-off gifts which are not minor

Interpretation of 'impracticable’ 14. The key question is whether it is ‘impracticable’ for the employer to operate PAYE on a payment; or to identify precisely how much of a shared benefit should be attributable to each individual employee and included on the Form P9D or P11D. The employer will be expected to demonstrate that it would not be possible to do so without a disproportionate amount of effort or record keeping taking account of the value of the item concerned, the number of employees involved and the nature of the items involved. 15.

Examples of what might be impracticable may include: Free chiropody care Hairdressing services Shared use of the firm's bus to work Christmas Parties and similar entertainment provided by the employer which do not already qualify for relief The cost of shared taxi fares home which do not satisfy ESC A66 Shared cars

16.

The flow chart at Annex A summarises the tests of eligibility for inclusion in a PSA.

Overlap with Taxed Award Schemes 17. Currently, employers operating formal incentive award schemes can pay the tax on behalf of their employees by entering into a Taxed Award Scheme (TAS) with HM Revenue and Customs. A general information pack on Taxed Award Schemes is available from The Incentive Award Unit, Chapel Wharf Area, Trinity Bridge House, 2 Dearmans Place, Salford M3 5BH. Tel: 0161 261 3269 Most awards under these schemes will be suitable for inclusion in a PSA if employers wish to use a PSA instead of TAS. A third party who provides awards to the employees of another and who wishes to pay the employees' tax bill cannot use a PSA. A TAS should be used instead. Calculation of tax payable 18. Regulation 108 provides the basis on which the tax payable by the employer may be computed. In practice, this provides for the tax to be grossed up in a similar way to that already adopted by Inspectors for agreeing amounts due under the previous, informal arrangements for AVSs. In calculating the tax payable, the Inspector and the employer will take into account: -

the amount of any expenses payments and the value of any benefits in kind provided which are to be included

-

the number of employees concerned receiving the payments or benefits

-

the rates of tax which should be used in ‘grossing up’ the tax due.

19. The tax due should be grossed up taking into account the effective marginal rates of tax of the individual employees covered by the agreement. So, for example, where an agreement relates to a group of employees some of whom are basic rate taxpayers and some are higher rate taxpayers, the tax due will need to be grossed up separately for the two groups of employees and the results aggregated to give the total tax due. In appropriate cases, the Inspector and the employer may agree that the amount of tax payable under a PSA in relation to a large number of employees can be calculated by reference to a sample of the employees concerned. An example of how to calculate the tax payable under a PSA is attached at Annex B. Record keeping 20. Once a PSA is agreed the employer no longer has to: -

operate PAYE on agreed items or include the items on the P35 or P14

-

include the expenses and benefits concerned on Forms P9D or P11 D.

21. The employer will still need to retain suitable records of what had been provided or paid. In general, it will be sufficient to retain records for three years. Where items are easily attributable to individual employees, the same records otherwise required for the purposes of completing Forms P9D and P11 D should be retained. Details of cash payments to individual employees should also be retained. But where it is impracticable to allocate a benefit or payment between employees, a record of the individuals concerned will not be needed. Instead the employer should keep sufficient information about: -

the overall cost of providing the benefits concerned (for example the total cost of providing a party which a number of employees attended)

-

the number of employees concerned, and

-

an indication of their marginal tax rates.

What employers should consider telling their employees 22. Employees should not include items covered by a PSA in their tax return, if they receive one. 23. Employees who receive tax returns may ask the employer to clarify the position in relation to benefits in kind or expenses payments they have received which are not included on the P11 D information given to them by their employer. So employers may find it best to tell employees about them at the same time as they issue the P11 D information to their employees. And if the PSA is a regular arrangement, employers might find it best to tell employees when they first take up their employment or when employees first receive an item included in the PSA. This may reduce the number of possible queries from employees who are completing their own tax returns. 24. However, there is no statutory requirement for employers to tell their employees about a PSA and HM Revenue and Customs will not be liable to disclose details of agreements they have made with employers to their employees. Nor will it be possible for HM Revenue and Customs to check that an employee who has completed a tax return may have included such items in error. Adjustments to the scope of a PSA 25. The Inspector will not normally need to adjust a PSA during the year. But employers may ask the Inspector to widen the scope of a PSA which applies for a particular year by: -

during the year, adding items on which PAYE would otherwise be due - but only ceasing to apply PAYE once the Inspector has agreed the extension to the PSA

-

during the year, adding items which would otherwise be included on Form P9D or P11D

-

after the end of the year, but before 6 July following the end of the year, finalising the PSA by adding items which would otherwise need to be included on Form P9D or P11D.

26. Many employers will want to carry forward their PSA to the following year. Inspectors will invite employers before the beginning of the year to renew their PSA. The PSA will only need to be altered if the employer wishes to make an adjustment to what had previously been agreed or it was justified because there had been a change in the circumstances on which the original PSA had been based. Payment of tax 27. Regulation 109 provides for the payment of tax under a PSA. The employer - not the employee - will always be accountable for tax payable in respect of items included in a PSA ITEPA 2003/PART II Chapter 5 and Regulation 105). 28. The precise amount of tax does not need to be agreed by 6 July when the scope of the PSA has to be finalised. Normally, the tax due will be agreed between the employer and the Inspector after 6 July, but in time to ensure that payment is made by the due and payable date of 19 October following the end of the tax year to which the PSA applies. There is nothing to preclude the employer from paying the tax in full before the due date (where it can be established in advance) or making instalment payments during the year. Those who wish to do so should contact the Inspector accordingly. Withdrawal of PSA by the Inspector 29. Where the Inspector establishes that an employer has operated outside the agreed terms of a PSA he may cancel or adjust the agreement. Employers will then be expected to operate PAYE as appropriate on payments made after the date of cancellation or termination. Similarly, all benefits and expenses provided after that date will need to be returned on Form P9D or P11D

at the end of the year. 30. Inspectors may cancel a PSA where there has been a serious or persistent failure to account for the tax under the agreement; or more generally where there has been a failure under PAYE or in relation to the completion of Forms P9D or P11 D. An Inspector would not normally cancel an agreement because, for example, the employer had made a minor error as to the calculation of the tax payable under a PSA, or in relation to the sums on which tax should be computed. 31. Following a withdrawal, the agreement of a PSA for future years will be at the discretion of the Inspector. Each case will be looked at on its own merits. But there would be nothing in principle to prevent an Inspector agreeing a PSA for the tax year following a cancellation where he was satisfied that the failure would not re-occur. Rights of appeal 32. There is no statutory right of appeal against the refusal of the Inspector to agree a PSA or the cancellation of a PSA. But if the employer believed that the Inspector had acted unreasonably, after review under HM Revenue and Customs’ internal complaints procedures, the matter could be considered by the Adjudicator for HM Revenue and Customs. Details of the complaints procedures for taxpayers are available in HM Revenue and Customs leaflet COP1 ‘Putting things right. How to complain’. 33. There is a statutory right of appeal against a determination under Regulation 110 of the amount of tax payable under a PSA. Under Schedule 3 Taxes Management Act 1970 (as amended by paragraph 10, Schedule 22, Finance Act 1996) the employer can elect to have the appeal heard where the place of business is located. In practice, this could be where the company head office is located or where the trade is carried on. Treatment of NICs under a PSA From 6.4.99 class 1B NICs is due when a PSA is entered into. - Information about Class 1B

NICs can be found on the HMRC Internet site.

ANNEX A to SP5/96 FLOW CHART FOR DECIDING WHICH ITEMS CAN BE INCLUDED IN A PSA

1. Are the items wages, salaries or bonuses?

YES

NO

2. Are the items major, regular expenses or benefits1?

YES

NO

3. Are the items minor expenses or benefits2? If the answer to a ll of questions 3 to 5 is ‘NO’ then 4. Are the items ‘irregular’2?

5. Is it ‘impracticable to operate PAYE’, or apportion items betwe en employees 2?

If the answer to any of questions 3 to 5 is ‘YES’ then

The items can be covered in a PSA

The items cannot be covere d in a PSA

Notes Major benefits such as sole-use co mpany cars, car fuel and beneficial loans are excluded from the scope of PSAs. 2. The ter ms ‘ minor’, ‘irregular’ and ‘Impracticable to operate PAYE or apportion items between employees’ are explained in the text of this Statement of Practice 1.

ANNEX B to SP5/96 CALCULATING THE TAX PAYABLE UNDER A PSA EXAMPLE Smith and Jones Ltd has a work-force of 1,000 em ployees, all of whom ar e provided with benefits in k ind d uring the tax year 1996- 97 valued at £ 50 per head. So me 800 of t heir employees pay tax at the basic rate, the remaining 200 at the higher rate. The tax payable under a PAYE settl ement agree ment (for 1996/97, and covering t he whole work-force) would b e calculated as follows: Value of benefits provided to basic rate employees (800 x £50)

£40,000

Tax due @ 24% on £40,000

£ 9,600

Grossed up tax

£9,600 x 100 = 100-24

Value of benefits provided to higher rate employees (200 x £50) Tax due @ 40% on £10,000 Grossed up tax

+ £19,

£12,631.58 £10,000 £4,000

£4,000 x= 100 100-40

Total tax payable by Smith and Jones Ltd under the PSA

£6,666.67 £12,631.58 £6,666.67 298.25

Alternatively, the value of the benefits could be grossed up, and ta x calculated on that figure in the normal way, with identical results: Value of benefits provided to basic rate employees (800 x £ 50) 100-2

Grossed up value of benefits

x 100 £40,000=

4

£40,000 £52,63 1.58

Tax due @ 24% on £52,631.58

£12,631.58

Value of benefits provided to higher rate employees (200 x £ 50)

£10,000

Grossed up value of benefits

£16,666.67

£10,000 x 100 = 100-40

Tax due @ 40% on £16,666.67

£6,666.67

Total tax payable by Smith and Jones Ltd under the PSA

£12,631.58 +£6,666.67 £19,298.25

SP1/97

The Electronic Lodgement Service

INTRODUCTION 1. Schedule 3A Taxes Management Act 1970 (TMA) provides the legislative ground for the new Electronic Lodgement Service (ELS). It enables taxpayers to fulfil their obligation to deliver certain tax returns by arranging for an approved 'filer' to transmit the relevant information to HM Revenue and Customs electronically. 2. Using an approved software package the filer enters the information which is transmitted in a secure manner over public networks through the Secure Messaging Gateway (SMG) to HM Revenue and Customs Gateway. This validates the information and, if accepted, logs its receipt and updates the Self Assessment system. An acknowledgement message accepting or rejecting the return is then sent back to the filer. The whole cycle should not take any longer than 24 hours. 3. This Statement of Practice describes how the Revenue will operate ELS and the more detailed requirements of the service. LEGISLATION 4. The main elements of Schedule 3A are - the returns and documents which may be sent via ELS - approval of electronic filers - the method and content of transmission - the hard copy of the information transmitted - HM Revenue and Custom’s powers and the taxpayer's rights in relation to the information transmitted electronically - the use of the information in proceedings THE RETURNS AND DOCUMENTS WHICH MAY BE SENT VIA ELS 5. ELS will be available initially only for returns by individuals under Section 8 TMA, partnerships under Section 12AA, and trustees under Section 8A, due under self assessment from 6 April 1997. Other returns and amendments to self assessment returns will not, at this stage, be accepted by ELS. HM Revenue and Customs will be considering the extension of the service to other returns and forms in the future. 6. The ELS legislation acknowledges, implicitly, that supporting documents may be sent separately (for example by post), subject to meeting the relevant time limit (paragraph 3(3) of Schedule 3A of TMA). Although advised that in strictness statutory time-limits for filing a return apply equally to any documents intended to accompany it, HM Revenue and Customs will accept that any documents submitted within one month of the return ‘accompany’ it for the purpose of making a disclosure within section 29 TMA if the return indicates that such documents have been, or are to be, submitted. Where documents have been sent outside that time limit, HM Revenue and Customs will consider sympathetically any request for them to be treated as supporting the return in question for that purpose. 7. ELS will accommodate all the information which may be given on the SA tax return, including any further details in the white space areas provided on the return for additional information. The service will be able to cope with substantial amounts of additional data should that be considered appropriate by the taxpayer or his adviser. However, in the majority of cases, the information from the core return and supplementary pages, together with limited details in the `white space', should facilitate adequate disclosure of the taxpayer's affairs. APPROVAL OF ELECTRONIC FILERS 8. Any person who is authorised to send information to HM Revenue and Customs via ELS is described here as a `filer'. Those who wish to transmit information in this way, whether on their

own or another's behalf, must be approved in writing by HM Revenue and Customs. Application forms for approval are available from HM Revenue and Customs ELS Business Support Team at Accounts Office Shipley, West Yorkshire, BD98 8AA (telephone: 01274 539301/539325). 9. Applications for approval will be refused only where there is clear evidence that the applicant has been involved in the evasion of tax. The application will automatically be refused in any case where a conviction in relation to a tax offence or a penalty under Section 99 TMA has been imposed within three years of the application. Where in other cases, refusal is considered, HM Revenue and Customs will have regard to all relevant facts. Particularly crucial will be any facts suggesting the likely misuse of the ELS system in any way by the applicant. 10. Notices of refusal or withdrawal of approval will be given in writing and will include the grounds underlying HM Revenue and Customs’ decision. Any person refused approval, or who has had their approval withdrawn, has a right of appeal against this decision to the Special Commissioners. 11. The statute requires approval to be considered in relation to any person wishing to make transmissions by ELS. However, subject to their right to request applications by those persons in a business wishing to use ELS, HM Revenue and Customs are prepared to approve an application by an individual on behalf of the particular business concerned, whether it be a large sole practice, a partnership or a company. An application on this basis must include details of all those within the business who have a responsibility for the ELS link, i.e. those persons who have a clear role in determining the office procedures under which ELS will be operated. This ultimately is something for each particular organisation to decide, but HM Revenue and Customs will give advice where necessary. 12. Any changes in those who have been or should be named in an application must be notified at yearly intervals. HM Revenue and Customs will issue a request once each year for confirmation of such changes. Provided applications are updated in this way it will not be necessary for any concern to seek a fresh approval following each change. 13. Where an application on behalf of a business cannot be approved because of concerns relating to certain persons named in the application, HM Revenue and Customs may nevertheless grant approval provided an undertaking is given by the applicant that those persons who would not gain approval in their own right, are not permitted to make, or authorise, electronic transmissions via ELS link. Similarly, where a person newly joining the organisation would not gain approval in his or her own right, HM Revenue and Customs may seek confirmation that he or she will not be permitted to make, or authorise, electronic transmissions via ELS link. 14. HM Revenue and Customs anticipate receiving applications for approval not only from advisers who wish to file their own clients' returns, but also from persons who intend simply to offer the facility of electronic filing. Such applications will be examined to ensure there is a sufficient degree of contact between the taxpayer and the filer. This contact is important where a return is rejected and HM Revenue and Customs must be satisfied that the filer's processes ensure that the taxpayer is notified promptly of any messages from the Revenue, including any rejection of the information sent. 15. Any approval of a person will apply to the business or practice which that person represents, regardless of the number of locations from which it is operated. THE METHOD AND CONTENT OF TRANSMISSION 16. Those persons transmitting information electronically must use approved software. HM Revenue and Customs will arrange with the software suppliers to ensure that the systems are compatible. Part of this process will allow the software products to carry an indication (a ‘kitemark’) that they are approved for ELS use by HM Revenue and Customs.

17. Approval will be granted following successful testing between HM Revenue and Customs and the software house. In addition to assuring all parties that the software performs to specification HM Revenue and Customs will require proof that the software package produces acceptable hard copy transcripts containing the taxpayer declaration and authority. 18.

The technical specifications for the software are - Return check sum this will be an algorithmic value calculated from the numeric values on the return. The requirement is that the sending tax return application calculates the value, using an Inland Revenue published standard. HM Revenue and Customs will recalculate the value on receipt and compare the result with that received from the filer. The return check sum field will be mandatory within the EDIFACT message. (EDIFACT is the international messaging standard for defining the data format and structure of electronic data interchange.) - Unique Electronic Tax Return Identification Number - this will be a number created by the tax return software, by reference to a Revenue published standard. The standard will include date, time and form and taxpayer reference fields as a minimum. The number will be mandatory within the EDIFACT message and will be incorporated, as a further check, in the Revenue acknowledgement message. - The software applications must result in an electronic return being sent to a defined EDIFACT standard. The return and acknowledgement/rejection messages will be to a defined message type including structure, content and (EDIFACT) code. - This information will be incorporated in an ELS EDIFACT Guide which will provide an overview, sample messages, addressing and batching strategy, data communications overview, forms definition, change control, list of ELS forms and security requirements and measures. - The above EDIFACT Guide will, as stated, include a section confirming and providing details that the required communications protocol must be X.400 (1984 or 1988) conformant. - The sending applications must be capable of receiving and processing return acceptance or rejection messages.

19. Having prepared a taxpayer's return using an approved software package, the filer must print out a standard hard copy of the information, containing the authentication which the taxpayer must sign before the information is transmitted. This authentication, which replaces the taxpayer's signature on a paper return, effectively represents his authority for the filer to transmit the information. The authentication must be an integral part of the hard copy transcript of the return data to be transmitted. 20. A mandatory part of the electronic return is the filer's confirmation that the hard copy was made and authenticated before the information was transmitted. It will also be necessary for the date on which the taxpayer signed the authority to transmit to be included in the transmission. Where this date is not supplied the return will not be accepted and an appropriate rejection message will be sent to the filer. 21. HM Revenue and Customs approved software ensures that the hard copy which the taxpayer endorses as complete and correct contains the information that is transmitted to HM Revenue and Customs. This will, in part, be achieved by each transmission of a new or corrected return bearing the unique identification number, which is a requirement of HM Revenue and Custom’s approval of the software. This code will be part of the transmission to HM Revenue and

Customs and part of the acknowledgement message. THE HARD COPY OF THE INFORMATION TRANSMITTED 22. Paragraph 8(1) of Schedule 3A TMA provides that a hard copy of the information transmitted is made within the terms of the statute if it is made ‘under arrangements designed to ensure that the information contained in the hard copy is the information in fact transmitted’. These arrangements refer to the working practices adopted in relation to electronic filing by filers. 23. As a minimum HM Revenue and Customs expect that safeguards are put in place to ensure or enable the following - the authorisation of the manner in which all electronic transmissions via ELS are made only by those who have been specifically approved, or included in a list of partners in an approved partnership; - the physical security of the computer system; - the prevention of earlier or later versions of the return to that authorised by the taxpayer being sent in error; - only authorised staff have access to computer systems and taxpayer files; - access to any integrated or separate communications applications for ELS; - security of back up or archiving data. HM REVENUE AND CUSTOMS' POWERS AND THE TAXPAYER'S RIGHTS IN RELATION TO THE INFORMATION TRANSMITTED ELECTRONICALLY 24. The legislation provides that HM Revenue and Customs shall be able to exercise their powers in respect of the information received electronically, and the taxpayer shall be able to make claims to 'error or mistake' relief or to amend a return on the basis of the information transmitted. Furthermore, anyone who has their return filed electronically will not be prevented from exercising any right to which they would have been entitled had the return been submitted in paper form. THE USE OF THE INFORMATION IN PROCEEDINGS 25. When a tax return is sent to HM Revenue and Customs in paper form there can be no dispute over what the taxpayer actually approved to be submitted. With the transmission of information in electronic form, bearing no signature, this may not be the case. The signed hard copy of the information is the taxpayer's evidence of the details he authorised to be sent. It is an important document, which the taxpayer is strongly advised to keep, or to have his accountant keep, for the same period that any underlying records need to be retained. 26. In the event of any proceedings in relation to a tax return which was delivered via ELS, the taxpayer will have an opportunity to show that he authenticated a valid hard copy which will then stand as evidence of the information transmitted. Otherwise it will be open to HM Revenue and Customs to produce their own hard copy of the information which was received. It is expected that these two versions will be identical, but it is clearly in the taxpayer's best interests that his own authenticated hard copy is retained, should there be a need to produce it in proceedings. MISCELLANEOUS Availability of network 27. It is expected that the ELS network will be available to filers generally for 24 hours per day. Any unavailability of the system (e.g. to allow for maintenance), whether or not scheduled, will be notified by the SMG provider to filers. The availability of the network will be subject to a Service Agreement between HM Revenue and Customs and the SMG provider.

Acknowledgements 28. Any return received at the SMG should result in an acceptance or rejection message being available for collection by the agent within the next working day. The exact details will depend on the Service Agreement between HM Revenue and Customs and SMG provider as well as the computer technologies used. 29. A filer will get a ‘non delivery’ report as part of the process where, in exceptional circumstances, the file has not been successfully transmitted to the SMG (for HM Revenue and Customs). The absence of this message indicates that the package has been received, but not opened, at the SMG. Filers will also be able to optionally request a delivery report confirming that the file containing the return or returns has been received but not yet processed. Date of Receipt 30. The legislation provides that the obligation to deliver a return is not fulfilled until four conditions are met. The first three are the approval of the filer, the approval of the transmission process and the authentication of a hard copy. The fourth condition is that the information transmitted to HM Revenue and Customs is accepted. That is notified to the filer when HM Revenue and Customs issue an acceptance signal in respect of the information. 31. It follows that until HM Revenue and Customs have issued this acceptance of the information, the filing obligation is not fulfilled. For this reason, taxpayers and filers are strongly advised to ensure that the transmission is made at least 24 hours before the end of the day on which the time limit for submitting the return expires. 32. However, it is a feature of the system that the date on which the electronic return is lodged with the SMG is recorded. Provided this date is no later than the end of the period by which the return may be delivered, and that the information is not rejected for any reason, a penalty for late submission will not normally be sought, even though the acceptance signal may be transmitted after the due date. As this inevitably involves a certain degree of risk, taxpayers and filers should not rely on this practice to file returns via ELS on the due date. 33. Where a return is rejected the same rules will apply to the date of its resubmission and final acceptance. Rejections 34. Where returns are rejected by the ELS system a suitable message will be sent back to the filer. This will detail why the processing of the return has not been possible. The filer can then correct the return and resubmit the information electronically. Where the information changes in any way the resubmission will require a fresh authorisation by the taxpayer. 35. It should be noted that this resubmission does not include the transmission of an amended return (i.e. one altered other than in response to a rejection message) following a previously accepted one. Amended returns must be submitted on paper. SP2/97

Authorised unit trusts, approved investment trusts, and open-ended investment companies: Monthly savings schemes (superseded by SP2/99)

SP3/97

Investment trusts investing in authorised unit trusts or open-ended investment companies

Introduction 1. This Statement of Practice sets out HM Revenue and Customs’ views on the tax implications of investment by investment trusts in authorised unit trusts (AUTs) or open-ended investment companies (OEICs) incorporated in the United Kingdom.

2. For the purposes of the Tax Acts, each sub-fund of an AUT which is an umbrella scheme is regarded as an AUT in its own right, and the umbrella scheme itself is not regarded as an AUT. Similarly, each sub-fund of an OEIC which is an umbrella company is regarded as an OEIC in its own right, and the umbrella company itself is not regarded as an OEIC. 3. Where a sub-fund of an umbrella scheme is treated as an AUT for tax purposes, references in this Statement to the units of that AUT are to be regarded as references to the rights or interests (however described) of those persons who for the time being have rights in the subfund in question. Similarly, where a sub-fund of an umbrella company is treated as an OEIC for tax purposes, references in this Statement to the shares of that OEIC are to be regarded as references to the shares in issue of the umbrella company which for the time being confer rights in the sub-fund in question. Approval of investment trusts 4. A company has to satisfy the various tests set out in section 842 of the Income and Corporation Taxes Act 1988 for a particular accounting period if it is to be approved by HM Revenue and Customs as an investment trust for that accounting period. HM Revenue and Customs accept that units in AUTs and shares in OEICs are to be treated as shares in companies for the purposes of those tests. 5. In the majority of cases, no further point arises, since companies seeking approval as investment trusts do not generally have substantial investments in AUTs or OEICs. However, where there is substantial investment of this sort, the test in section 842(1)(b) may be relevant. This is because this test restricts the size of an investment trust's holding in any one company, except in the case of a company that: • is itself an approved investment trust; or • would qualify as an investment trust but for the public listing test in section 842(1)(c). 6. HM Revenue and Customs consider that for the purposes of section 842(1)(b), an AUT or OEIC can, provided it meets one condition, be regarded as a company which would qualify as an investment trust but for the listing test. As a result there is no restriction on the size of the company's investment in that AUT or OEIC. 7. The condition to be met reflects the test in section 842(1)(a). It is that, for the period of time in the investing company's accounting period during which it held investments in an AUT or OEIC, the income of the AUT or OEIC concerned consisted wholly or mainly of ‘eligible investment income’. 8. For these purposes, ‘eligible investment income’ is income deriving from shares or securities, or ‘eligible rental income’ within the meaning of section 508A of the Income and Corporation Taxes Act 1988. 9. HM Revenue and Customs consider that this condition will always be satisfied where the AUT concerned is: • a ‘securities fund’ for the purposes of the Regulations for AUTs which have been made by the Financial Services Authority (FSA) under the Financial Services Act 1986; or • a sub-fund of an authorised umbrella scheme which, according to the terms of the scheme, would be a securities fund if it were itself the subject of an authorisation order. 10. Similarly, HM Revenue and Customs consider that the condition will always be satisfied where the OEIC concerned is:

• a ‘securities company’ for the purposes of the corresponding FSA Regulations for OEICs incorporated in the United Kingdom; or • a sub-fund of an umbrella company which, according to the company's instrument of incorporation, would be a securities company if it were itself the subject of an authorisation order. 11. Where the AUT or OEIC concerned does not fall within the categories described in paragraph 9 or 10 above, the question as to whether the relevant income consisted wholly or mainly of eligible investment income (and so whether that AUT or OEIC could count as the equivalent of an investment trust for the purposes of Section 842(1)(b)) will be tested by reference to the facts. 12. HM Revenue and Customs consider that this test has to be applied for each accounting period in which the company investing in an AUT or OEIC continues to be so invested. And, for the purpose of this test, income is regarded as consisting wholly or mainly of eligible investment income if at least 70 per cent of it is eligible investment income. SP4/97

Taxation of commission, cashbacks and discounts

Introduction 1. This Statement sets out the views of the Commissioners for Her Majesty’s Revenue and Customs of the correct treatment for tax purposes of commission, cashbacks and discounts. The passing on to customers by intermediaries or agents of the whole or part of commission and the payment of cashbacks or the granting of discounts by the providers of goods or services has become increasingly common. These arrangements have given rise to considerable uncertainty about the tax consequences for both customers and intermediaries which previous Statements of Practice were unable to resolve. This Statement sets out HM Revenue and Customs’ practice in applying the law to these arrangements and in particular it confirms that most customers are not liable to tax on commission, cashbacks and discounts. 2. Sections A and B (paragraphs 3-10) set out both the different types of receipt and arrangements covered by the Statement and when these receipts are not liable to tax. Section C is concerned with the liability to tax under the different cases of Schedule D. It sets out the circumstances in which commission, cashbacks and similar inducements will be taken into account as receipts • in computing taxable profits from a trade or profession under Case I or II of Schedule D (paragraphs 11-15); • in computing other taxable annual profits under Case VI (paragraph 19). It also provides guidance on the deductibility of commission etc. passed on to the customer • in computing profits under Case I or II (paragraph 17); and • in computing profits under Case VI (paragraph 21). The rest of the Statement is concerned with the tax treatment of persons receiving or becoming entitled to commission or a cashback under

• the Income Tax (Employments and Pensions) Act 2003 (ITEPA), covered in section D (paragraphs 23-32). (The deductibility of commission passed on to the customer and the operation of PAYE are dealt with in paragraphs 33 and 34 respectively); • Capital Gains Tax, covered in section E (paragraph 35); and • Life insurance and personal pensions, covered in section F (paragraphs 36-41). A. Scope 3. This Statement covers • Commission (meaning a sum paid by the providers of goods, investments or services to agents or intermediaries as reward for the introduction of business). Sometimes, commission is passed on to the customer or to some other person by the agent or intermediary, or the customer may receive commission direct from the provider of the goods or services if that provider would normally pay commission to an agent or intermediary. • Cashbacks (meaning lump sums received by a customer as an inducement for entering into a transaction for the purchase of goods, investments or services and received as a direct consequence of having entered into that transaction (for example a mortgage)). The payer may be either the provider of the goods, investments or services or another party with an interest in ensuring that the transaction takes place. • Discounts (meaning that the purchaser's obligation is to pay less than the full purchase price of goods, services or investments, other than as a result of any entitlement to commission or a cashback). 4. It deals with liabilities to income or corporation tax under the rules of Schedule D ITEPA, capital gains tax or the chargeable events legislation (that is, the rules for taxing gains on certain insurances) and with tax relief in respect of contributions to personal pension schemes. 5. It is not practicable to cover in this Statement every situation that may arise. There will be individual cases which do not fall squarely within its terms where the taxation consequences may be different. For example, where inducements or rewards offered to customers take the form of a series of payments (and are not simply capital sums calculated in advance but paid in instalments) they may be taxable as income in the recipients' hands. It is beyond the scope of the Statement to give a view on all such cases. They will have to be dealt with on an individual basis and the taxation consequences in each case will depend on the precise nature of the arrangements entered into. B.

General 6. The Statement covers the main circumstances in which commission or a cashback is likely to be passed between the parties to a transaction. It deals with arrangements where • commission or a cash-back is - received - netted-off (meaning that the purchaser's entitlement to commission or a cash-back is set off against the obligation to pay the full purchase price for goods or services so that only the net amount is paid), or

- invested or applied in some way for the benefit of the purchaser or where • a discounted purchase price is paid, or • extra value is added to the goods, investments or services obtained for the purchase price where there is no entitlement to commission or a cash-back. An example is the allocation of bonus units in an investment or of a different class of unit where the purchase price remains unchanged. However, where the added value represents a return on the investment, the tax treatment may differ from that dealt with in this statement. 7. In general, ordinary retail customers purchasing goods, investments or services at arm's length will not be liable to income or capital gains tax in respect of any commission, discounts or cashbacks received by them. For example, an ordinary retail customer who, when purchasing a car, negotiates to receive part of the commission earned on the sale by the salesperson will not be liable to income or capital gains tax in respect of that commission. 8. The Statement outlines some circumstances in which receipts are treated as tax-free, or in which payments qualify for tax relief. However, the legal analysis, and consequent tax treatment, will not necessarily follow that outlined in the Statement where the receipts or payments in question form part of a scheme of tax avoidance. Similarly, the treatment outlined in the Statement may not apply where the recipient of a commission, cashback or other benefit is party to an arrangement under which the purchase price for goods, investments or services has been increased. 9. The tax treatment of the person receiving or becoming entitled to the commission or cashback will be considered separately from the treatment of the person paying the commission or cashback. 10. Unless otherwise indicated, all statutory references are to the Income and Corporation Taxes Act 1988. C. Schedule D Cases I and II - receipts 11. Where the provision of the services remunerated by commission etc. is on a sufficiently commercial, regular and organised basis to amount to a trade or profession, commission and similar sums to which the trader or professional person becomes entitled will be receipts from that source. A self-employed insurance or travel agent would normally be in that position. 12. The fact that some or all of the commission etc. received by a trader or professional person in the circumstances described in paragraph 11 is passed on to customers does not cause it to cease to be a receipt of that business. See paragraph 17 below regarding the corresponding deduction. 13. Furthermore, commission etc., which would have been taxable if it had actually been received by a trader or professional person, does not necessarily cease to be taxable merely because it goes directly to the customer without first being received by the trader. For example, commission may be passed on by way of a reduction in regular insurance or pension policy premiums or by the allocation of extra value (e.g. units) to the policy by the insurance company. In those circumstances, the commission remains a taxable business receipt so long as the trader or professional person had an enforceable legal right to receive that commission which he subsequently forgoes in favour of the customer (but as indicated at paragraph 17 below a deduction may be available in respect of the amount forgone).

14. Where the trader or professional person neither receives the commission etc. nor has any such entitlement to it, there will be no taxable receipt in respect of that commission. Thus commission or a cashback payable to a trader or professional person within the first bullet of paragraph 6 is a taxable business receipt but a discount or added value within the last two bullets of paragraph 6 above will not be a taxable receipt. 15. Commission etc. receivable as an incident in the carrying on of any other business taxable under Cases I and II of Schedule D should be taken into account in computing the profits of the business. For example, the following items should be taken into account in computing the profits of the business: • insurance commission to which an accountant becomes entitled in the course of the profession; • commission received in respect of business insurance contracts taken out by, say, a grocer (for example, if the premium paid has been reduced by the commission, by deducting only the net sum); • a cashback received on a car purchased for business purposes (normally by reducing the cost of the car for the purposes of capital allowances). 16. In strict law commission earned for business introduced in the course of a trade or profession remains a taxable business receipt even where it is derived from a private transaction funded by the trader or professional person. For example, a travel agent may obtain commission for booking a package holiday for himself and his family with a tour operator whose holidays he sells to the public. But, by concession, there may be excluded from taxable profits so much of any such commission as does not exceed the maximum amount the trader or professional person could reasonably have been expected to pass on to an arm's length customer buying the same services or product. Case I and II - deductions 17. Commission etc. passed on to a customer, or otherwise forgone in the circumstances described in paragraph 13 above, as an inducement to enter into a transaction is deductible if it is laid out wholly and exclusively for the purpose of the trade or profession. The statutory test is very likely to be satisfied if the customer required the commission to be passed on as a condition of entering into the transaction or if the transaction was one between independent parties acting at arm's length. Presentation of information in tax return and/or accounts 18. This paragraph applies to commission etc. which is passed on other than by a separate payment and is to be regarded as a taxable receipt as described in paragraph 13 above. In these circumstances, the calculation of the gross commission received and the amount passed on may not be a straightforward matter. Subject to the conditions described below, the commission applied in this way may be excluded from both commission income and commission expenses in the intermediary's tax return. Those conditions are that either the customer required the commission to be passed on as a condition of entering into the transaction or the transaction was one between independent parties acting at arm's length (see paragraph 17 above). Case VI - receipts 19. Commission etc. may sometimes be received by a person as consideration for introducing a customer to a supplier of goods or services, other than in circumstances where the commission would be taxable as income under Case I or II of Schedule D (see paragraph 11 above) or as employment income (see paragraph 25 below). Subject to paragraph 20 below, if the commission arises under an enforceable contract, it should be brought into account as a taxable receipt in

calculating the profit from the transaction under Case VI of Schedule D. 20. A sum, however described, which is received by an ordinary retail customer as consideration for the purchase by the customer of goods or services should not be regarded as a taxable receipt in computing profits under Case VI. This is the case whether the payer is the provider of the goods or services or another party with an economic interest in ensuring the transaction takes place. Case VI - deductions 21. Where, in the circumstances described in paragraph 19 above, some or all of the commission etc. in question is passed on to the customer, a deduction is due where the customer requires the commission to be passed on as a condition of entering into the transaction or where for some other reason the payment is necessary to earn the commission. Building society distributions 22. Cashbacks received from building societies are not regarded as distributions in respect of investments for the purposes of the Income Tax (Building Societies) (Dividends and Interest) Regulations 1990 SI 1990 No 2231. Building societies are not therefore required to deduct tax from mortgage cashbacks by virtue of those Regulations. D. Employment Income 23. The word ‘employee’ means office holder or an employee. The word earnings defined in section 62 ITEPA includes such things as salaries, fees, wages and profits. 24. It is a question of fact whether a sum within the scope of this Statement is received in the capacity of employee/office holder or in some other capacity such as the purchaser of a policy, goods or services. This part of the Statement covers only liability arising on earnings from employment and liability under the benefits code 63 ITEPA. In some circumstances liability to tax as employment income may arise under other provisions, such as the legislation dealing with termination and change payments. Those provisions should be considered even where there is no liability under the provisions considered here. Commission arising from, and discounts in connection with, goods, investments or services sold to third parties 25. Employees who receive, or are entitled to receive, commission (as earnings) from their employment in respect of goods, investments or services sold to third parties are assessable under section 62 ITEPA on the full amount of that commission. This is so whether or not the commission is passed on by them to the customer and whether the commission is paid by the employer or anyone else. 26. Where an employee consents or directs that commission which is due from his or her employment should be either paid to the customer or anyone else, or invested for his or her own benefit or the benefit of the customer or anyone else, that employee is assessable under section 62 ITEPA on that commission (but see paragraph 33 for circumstances where a deduction will be admissible).

27. Where the purchaser pays a discounted price, there is no tax liability on the employee if • the purchaser is not a member of the employee's family or household and • neither the employee nor any member of his or her family or household receives anything (money or benefits) in consequence. If the purchaser is a member of the employee's family or household, the provision of goods or

services at a discount may constitute a taxable benefit for the employee. However, where the discounted price paid covers the cost of those goods or services to the provider, there will be no taxable benefit. In all cases the cost of providing goods or services is a question of fact. But where the sale is of an insurance policy there will be no taxable benefit if the discount is no greater than the sum of • the commission that would otherwise have been paid by the insurer on selling the policy to the third party, and • the anticipated profit on the policy. Commission and discounts in respect of an employee's purchase of goods, investments or services from the employer 28. Paragraphs 29 and 30 below are concerned with cases of commission arising from employment. Where a commission is available to an employee on the same basis as it is available to members of the general public, it will not arise from the employment. Paragraph 31 is concerned with tax charges under the benefits legislation. Where the commission or the net or discounted amount referred to within that paragraph is available on the same basis to members of the general public, no benefit will result. 29. Employees who receive commission (from employment) in respect of their own purchase of goods, investments or services from the employer are liable to tax under section 62 ITEPA on the full amount of that commission. Where such a commission is placed at the employee's disposal but the employee requests, permits or is required to accept that the commission is applied in some way for his or her benefit, the commission remains liable to tax. 30. Where an employee does not receive and is not entitled to receive, or to have applied for his or her benefit, a cash commission, but does receive from employment a right which has a monetary value, a liability will arise on that value because that right counts as earnings within section 62 ITEPA. An example is the case where an additional amount is invested in an employee's investment and that investment can be disposed of or otherwise turned to account. 31. Where an employee who is not in lower paid employment (see section 217 ITEPA) receives a commission from, or pays a net or discounted amount to, the employer in respect of his or her purchase of goods, investments or services, the employee will be liable to tax on the benefit that has been provided. The charge to tax upon a net or discounted amount is calculated following the principles described in paragraph 27 above. The charge upon a commission, not otherwise chargeable to tax, is calculated by reference to the cost of its provision and will typically be the amount paid. Services etc. provided by persons other than the employer in return for commission, or for a net or discounted purchase price, may give rise to a charge calculated in the same way if the benefit is provided by reason of the employment. Cashbacks 32. Where an employee receives a cashback from his or her employer or a third party on the same basis as is available to members of the general public, no amount is chargeable to tax as employment income if the cashback is received under a contract with the employer or third party disassociated from the contract of employment, and the employee gives fair value for the cashback under that contract or by entering into some other contract with the employer or third party. The cashback will then be neither earnings from employment (within section 62 ITEPA) nor a benefit (within section 201 ITEPA). However, if in such circumstances the cashback is provided gratuitously and is received from the

employee's employer, liability under the benefits code must be considered. Deductions 33. Where commission etc. within the scope of this Statement is taxable employment income, a claim for deduction in respect of commission shared with, passed on to, or invested for the benefit of, some other party will be admissible if the employee is obliged to expend the sum wholly, exclusively and necessarily in performing the duties of the office or employment. Such an obligation is likely to exist when the transaction falls within the normal framework of the employer's business and is a transaction between independent parties acting at arm's length. PAYE 34. PAYE applies where commission etc. is paid to an employee or on his or her behalf if it is taxable as employment income. This includes amounts relating to commission invested on behalf of the employee if the amount of the commission is taxable. Where commission or other taxable income is provided in the form of readily convertible - assets rather than cash, PAYE applies under section 696 ITEPA. E. Capital Gains Tax 35. A cashback does not derive from a chargeable asset for capital gains tax purposes. No chargeable gain therefore arises on receipt of the payment. (A cashback does not include a cash payment by a building society to members etc. on take-over by, or conversion to, a bank; or by other mutual organisations such as insurance companies or friendly societies on demutualisation.) F. Life Insurance and Personal Pensions Qualifying life insurance policies 36. Where commission etc. in respect of a policy holder's own qualifying life insurance policy is received, netted off or invested, that policy will not be disqualified as a result of entitlement to that commission if the contract under which commission arises is separate from the contract of insurance. In practice, the Revenue will not seek to read two contracts as one in a way that would lead to the loss of qualifying policy status. 37. Where a policyholder pays a discounted premium in respect of his or her own policy, the premium payable under the policy will be the discounted premium. It is this amount that must be used for the purposes of establishing whether the relevant qualifying rules are met. Calculation of chargeable event gains in respect of life insurance policies, capital redemption policies and life annuity contracts 38. Chargeable event gains are computed by reference to the premiums or lump sum consideration paid. The amount paid will be interpreted as follows: • where a policy holder pays a gross premium and receives commission etc. in respect of that policy, the chargeable event gain is calculated using the gross amount paid without taking the commission received into account; • where an amount of commission etc. is received or due under an enforceable legal right and subsequently invested in the policy, that amount is included as a premium paid when calculating the chargeable event gain; • where a policy holder nets off commission from an insurer in respect of his or her own policy from the gross amount of premium payable and the commission is not taxable as income on the policy holder, the chargeable event gain is calculated using the net amount paid to the insurer; • where a policy holder pays a discounted premium, the chargeable event gain is calculated

using the discounted amount of premium paid; • where extra value is added to the policy by the insurer (for example by allocation of bonus units), the premium for the purpose of calculating the chargeable event gain is the amount paid by the policy holder without taking the extra value into account. Tax relief in respect of personal pension contributions 39. Tax relief for contributions to personal pension schemes is due in respect of ‘a contribution paid by an individual’. The amount of the contribution will be interpreted as follows where the contract under which the commission arises is separate from the personal pension scheme contract: • where a contributor pays a gross contribution and receives commission in respect of that contribution, tax relief is given on the gross amount paid without taking the commission received into account; • where an amount of commission is received by, or is due under an enforceable legal right to, the contributor and subsequently invested in the personal pension that gave rise to the commission, tax relief is given on that amount; • where a contributor deducts commission in respect of his or her own pension contribution from the gross amount payable, relief is due on the net amount paid; • where a contributor pays discounted contributions, tax relief is due on the discounted amount paid; • where extra value is added to the policy by the insurer (for example by allocation of bonus units), relief is due on the amount paid by the contributor without taking the extra value into account. 40. If commission were to be rebated to the contributor under the same contract as the personal pension contract, this would be an unapprovable benefit (since it would involve leakage of the pension fund to the member) which would jeopardise the tax-approved status of the arrangement. 41. The consequences of paying commission on transfers between tax-approved pension schemes may be different from those outlined if such payment is effectively a benefit not authorised by the rules of the pension scheme. Alternatively, the misrepresentation as an annual premium of any premium applied to new pensions business so that a higher rate of rebated commission is generated will call into question the bona fides of the pension arrangement and jeopardise its approval from inception. SP1/98

Tax treatment of expenditure on films

SP2/98

Business by telephone

SP3/98

Stamp Duty: Group relief

1. Section 42 Finance Act 1930 gives relief from stamp duty for transfers of property between members of the same group of companies. Section 151 Finance Act 1995 similarly gives relief from duty on the grant of a lease between members of the same group.

2. Section 27(3) Finance Act 1967 and Section 151(3) Finance Act 1995 are designed to prevent the use of group relief to avoid stamp duty when property, or an economic interest in it, passes out of the group. 3. This statement sets out the Stamp Office’s current general practice in order to assist practitioners in determining whether claims to relief might qualify. The treatment of a particular case will of course depend on the precise facts. This statement is for general guidance only; and the facts of a particular transaction may, exceptionally, place it outside the guidelines. It applies also to the equivalent Northern Ireland legislation. General 4. Broadly, Section 27(3) and the corresponding provisions in Section 151, provide that relief is not to be given if the transfer was made in pursuance of, or in connection with, an arrangement under which a.

all or part of the consideration for the transfer was to be provided or received, directly or indirectly, by a person outside the group; or

b.

the interest being transferred was previously transferred by a person outside the group; or

c.

the transferor and transferee were no longer to be part of the same group.

5. The person claiming the relief when the relevant instrument is adjudicated has the onus of satisfying the Stamp Office that the intra-group transaction is not carried out in pursuance of, or in connection with, an arrangement of a kind which disqualifies the transaction from relief: Escoigne Properties Ltd v IRC [1958] AC 549, 564. ‘Arrangement’ 6. In this context, arrangement means the plan or scheme in pursuance of which the things identified in the subparagraphs of Ss27 (3) and 151(3) have been or are to be done: Shop and Store Developments Ltd v IRC [1967] 1 AC 472, 493-494. The arrangement need not be based in contract. It is sufficient if the intra-group transaction is made in connection with that plan or scheme. The intra-group transaction may be the first bi-lateral step by which legal rights and obligations are created in pursuance of the arrangement. If there is an expectation that a disqualifying event will happen in accordance with the arrangement and no likelihood in practice that it will not, relief will be refused. 7. The words in connection with are very broad. In Escoigne, there was a gap of four years between the two steps in issue. Provision or receipt of consideration by a person outside the group: section 27(3)(a); section 151(3)(a) and (4) 8. Section 27(3)(a) denies relief where the instrument was executed in pursuance of or in connection with an arrangement under which any of the consideration is to be provided or received, directly or indirectly, by a person outside the group. It also denies relief if the arrangement is one under which the transferor or transferee (or a member of the same group as either of them) is to be enabled to provide any of the consideration, or is to part with it, in consequence of a transaction involving a payment or other disposition by a person outside the group. Section 151 lays down similar rules for leases. 9. In some cases, the question arises whether loan finance for the purchase or lease will disqualify an intra-group transaction from relief. It is necessary to look at all the facts of the individual case, but the Stamp Office will interpret the provisions in the light of their general purpose of denying relief where the intra-group transaction is a means of saving stamp duty when

the property, or an interest in it, moves out of the group. Accordingly, the Stamp Office are likely to be satisfied that relief is due if the intra-group transaction is not to be followed by a sale of the property transferred, or an underlease, to a person outside the group. If the intra-group transaction is to be followed by a sale or underlease to a person outside the group, but the claimant can demonstrate that stamp duty will be paid in respect of that transaction in approximately the same amount as would have been payable if the intra-group transferor or lessor had itself sold the property or granted the underlease, the Stamp Office are likely to be satisfied that the intra-group transaction and the transfer or lease out are independent for stamp duty purposes and grant the relief sought. 10. A transaction is not disqualified merely because the transferee within the group obtains a specific loan for the purchase of the asset; or the loan is secured on the asset; or arrangements are made to replace or novate an existing charge on the property transferred. It will be necessary to consider the facts as a whole, especially if the loan finance is not straightforward finance on ordinary commercial terms. 11. Intra-group transactions will be very carefully scrutinised, and relief may be refused, where, for example, the intra-group transaction involves or is to be followed by:

12.

•

the creation or transfer of loan stock or equity capital;

•

a capital reorganisation of the transferee;

•

a guarantee by a third party not associated with the group;

•

the creation of a new charge or financial arrangement whereby title to the property is, or may be, vested in the lender otherwise than in satisfaction of all or part of the debt; or

•

the assignment of the freehold reversion or the intra-group lease to a person outside the group.

Similarly transactions will be very carefully scrutinised where •

all or part of the consideration for the transaction is to remain outstanding or is represented by intra-group debt, (as the aim and effect may be to reduce the value of the transferee company on a possible future sale outside the group); or

•

the existing shareholders of the transferee include shareholders outside the group and the transaction is to be followed by the declaration of a dividend in specie, or by the liquidation of the transferee.

13. Further assurances by way of statutory declaration - the document in which the claim is made to the Stamp Office - will be required in any case in which the property transferred or vested intra-group is the only, or only substantial, asset of the transferee. Information to that effect should be provided in the statutory declaration submitted with the documents. 14. Where group member A has granted a lease to a person outside the group, and subsequently grants an underlease to its fellow group member B, so that the rent already payable by the lessee becomes payable to B rather than A, relief is likely to be given for the intra-group underlease, provided there are no other factors which suggest that relief should be denied. Property previously conveyed by a person outside the group: section 27(3)(b)

15. Section 27(3)(b) was intended to prevent the avoidance of duty on the transfer of property into a group by means of a sub-sale, so as to take advantage of section 58(4) of the Stamp Act 1891. For example, suppose the property is sold to a group member by a vendor outside the group, but the sale rests in contract without a transfer of the legal title. The group member then sells the property to another member of its own group, and directs the vendor to transfer the legal title to that other member. In accordance with section 58(4) the transfer completing the sale and the sub-sale is chargeable to duty only in relation to the sub-sale (thus relieving the effect of section 4 of the Stamp Act). However, section 27(3)(b) would deny group relief for that transfer. 16. The Stamp Office will continue to apply section 27(3)(b) to schemes of this type and to any other scheme where an attempt has been made to avoid the duty payable on the acquisition by the group. However, where an outside vendor sells a property to a member of the group, the sale is completed by a transfer and stamp duty is paid on that transfer, the Stamp Office will normally regard any subsequent intra-group transfer as independent, and grant relief for the transfer within the purchaser’s group. Dissociation or demerger of transferee: section 27(3)(c): section 151(3)(b) 17. Before the introduction of section 27(3), almost all the avoidance devices encountered in this area involved the transfer of property to a subsidiary, often created solely as a vehicle for that property, followed by the transfer of the shares in the subsidiary out of the group. Compared with a transfer of the property out of the group, a substantial amount of duty could be avoided even where the subsidiary paid for the property from its own resources. If the consideration for the intra-group transaction remained outstanding or was represented by debt, duty could be reduced further by reducing the value of the shares - hence section 27(3)(a). 18. Section 27(3)(c) was introduced to counter this avoidance in relation to conveyances and transfers on sale. Section 151(3)(b) deals with leases on similar lines. 19. In cases of this kind, the Stamp Office will need to be satisfied that the intra-group transfer or lease is not a step in pursuance of an arrangement to demerge the transferee. The existence of such an arrangement may be apparent from company documents, correspondence and other dealings between members of the group and professional advisers, or from discussions or negotiations with the potential purchasers, underwriters or minority shareholders. 20. In practice, the Stamp Office will apply these provisions so as to preclude group relief if there is evidence of a plan or scheme to dispose of the subsidiary and there is no practical likelihood that the scheme will not be carried through. It will not be regarded as sufficient for the claimant to contend that such an arrangement which is less than contractual may possibly be frustrated by unforeseen events or unlikely occurrences. Even a contract may be frustrated. 21. As the liability of the relevant instrument must, as a matter of general principle, be determined as at the date of the instrument, the question whether an arrangement of the relevant kind exists must also be determined at that time, although the Stamp Office may have regard to what is said and done thereafter to establish the true position (Wm Cory and Son Ltd v. IRC [1965] AC1088). For the purposes of stamp duty, it is therefore the existence of the scheme or plan to which these provisions direct attention, not the ultimate outcome of steps which may be taken to implement that scheme. Accordingly, statements of practice in relation to other taxes have no application in this context. SP4/98

Application of loan relationships, foreign exchange and financial instruments legislation to partnerships which include companies

Withdrawn for company accounting periods beginning on or after 1 October 2002 General

1. This Statement of Practice supersedes an earlier statement (SP9/94). That statement dealt with the application of the foreign exchange and financial instruments legislation to partnerships of which at least one partner was a company within the charge to corporation tax. It did not deal with the effect of the loan relationship legislation introduced by Finance Act 1996. That legislation made a major reform to the corporation tax treatment of government and corporate debt. SP9/94 will continue to be relevant for accounting periods ending on or before 31 March 1996. This SP should be applied to later accounting periods beginning on or before 30 September 2002. For a company accounting period beginning on or after 1 October 2002, this Statement is superseded by specific legislation. See Schedule 9 paragraphs 19 &20, sections 87 and 87A Finance Act 1996 (loan relationships and foreign exchange) and Schedule 26 paragraphs 49 and 50 Finance Act 2002 (derivative contracts). 2. This revised Statement of Practice describes HM Revenue and Customs’ view of how the rules for partnerships apply where profits, losses and other amounts arise to the partnership from loan relationships (corporate and government debt), exchange differences and financial instruments and to transactions between a partnership and its members in these areas. Statutory framework 3. Section 8(2) Income and Corporation Taxes Act 1988 (‘ICTA’) provides that a company is chargeable on profits arising to it under any partnership. 4. Section 114 ICTA 1988 gives the rules for computing profits and losses of a trade or business where one or more of the partnership members is a company. The profits and losses of the partnership are computed, for the purposes of corporation tax, as if the partnership were a company, separate from any company which is a partner. The trade or business carried on is also treated as separate from any trade etc. which the company member carries on its own account. 5.

These basic rules therefore apply to the computation of profits and losses under • the loan relationships legislation in Chapter II of Part IV Finance Act 1996 • the foreign exchange gains and losses (Forex) legislation in Chapter II of Part II Finance Act 1993 and • the financial instruments (FI) legislation in Chapter II of Part II Finance Act 1994.

Some modifications and consequential adaptations, described in this Statement of Practice, are needed to address particular situations. 6.

The effect of section 114 ICTA 1988 is to treat the partnership for tax purposes as itself • a party to loan relationships for the purposes of Chapter II of Part IV Finance Act 1996 • as entitled to assets and subject to liabilities for the purposes of the Forex legislation and • entitled to rights, or subject to duties, under interest rate, currency or debt contracts or options for the purposes of the FI legislation

whatever the position under the general law relating to the partnership. 7. Section 172 FA 1994 provides a special rule for partnerships, one or more of whose members is a ‘qualifying company’ for the purposes of the legislation in that Act on financial

instruments. A qualifying company for that purpose is any company but it does not include the trustees of an authorised unit trust (even though they are treated as if they were a company for other purposes), nor does it include an open-ended investment company (‘OEIC’). It does include an approved investment trust company in relation to interest rate and debt contracts but not in relation to currency contracts. Where a partnership includes both at least one qualifying company and at least one company which is not a qualifying company, section 172(4) operates to require two separate corporation tax computations for the purposes of section 114(1). Otherwise it does no more than reinforce the requirements of section 114. 8. Although there is a similar definition in section 153 FA 1993 (exchange differences) of ‘qualifying company’ (although for the Forex legislation an investment trust company is never a qualifying company), there is no specific rule equivalent to section 172 FA 1994. The practice of HM Revenue and Customs in the rare cases where a non-qualifying company is a member of a partnership will be to follow section 172 FA 1994 as if it applied to exchange differences. 9. There is no concept of qualifying company in Chapter II of Part IV Finance Act 1996 (loan relationships). However the trustees of an authorised unit trust and an OEIC, although treated as companies for many purposes of the Tax Acts, are treated for the purposes of the loan relationships legislation as if they were subject to income tax rules (paragraph 2(2) Schedule 10 FA 1996 and Part II Open-ended Investment Companies (Tax) Regulations 1997). It follows that where the trustees of an authorised unit trust are, or an OEIC is, a member of a partnership, they will not be treated as companies to whom credits and debits under the loan relationships legislation can be attributed under section 114. Computation of partnership profits and losses 10. In any case where one or more companies is a member of a partnership, and they are not all excluded from the application of the relevant legislation by paragraphs 7 to 9 above, partnerships should prepare computations of profits and losses from any trade or business under section 114 ICTA 1988 on the basis that the foreign exchange gains and losses, financial instruments and loan relationships legislation apply to the partnership as if it were a company. This computation will be used to determine the shares of profits and losses appropriate to members subject to corporation tax and who are neither investment trusts (except in relation to interest rate and debt contracts), OEICs nor the trustees of authorised unit trusts 11. Where any member of the partnership is an investment trust, an OEIC or the trustees of an authorised unit trust, another computation should be prepared on the basis that corporation tax rules ignoring the Forex and FI legislation apply (except where an investment trust is a party to interest rate or debt contracts), and in the case of an authorised unit trust or OEIC, that the rules in Schedule 13 FA 1996 rather than the rest of Chapter II of Part IV Finance Act 1996, apply. This computation will be used to determine the shares of profits and losses appropriate to those members. 12. Where there are members of the partnership who are neither companies, nor the trustees of an authorised unit trust, a computation of profits and losses for the purposes of income tax, made under section 111 ICTA 1988 will also be required. 13. Profits and losses (including interest) on loan relationships are treated by Chapter II Part IV FA 1996 as credits and debits. The debits and credits for the partnership should be computed following the rules in that Chapter. In particular• The authorised accounting method used should be that used in the partnership accounts, with an authorised accruals method being used if the partnership accounts do not conform with either authorised method - section 86 FA 1996

• A claim under section 91 FA 1996 to set off income tax in the period of receipt rather than accrual may be made • The special rules for convertible, asset linked and index-linked gilt-edged securities may apply - sections 92 to 94 FA 1996 • Exchange differences are left out of account - paragraph 4 Schedule 9 FA 1996 • The bad debt rules in paragraph 5 Schedule 9 FA 1996 apply • The anti-avoidance rules on imported losses (paragraph 10 Schedule 9 FA 1996), transactions not at arm’s length (paragraph 11) and loan relationships for unallowable purposes (paragraph 13) will apply. but • The rules in paragraph 12 Schedule 9 FA 1996 about continuity of treatment where loan relationships are transferred between members of a group of companies will not apply where a loan relationship is transferred to or by a partnership. • A change in partnership profit sharing ratios, including a case where a company joins or leaves a partnership does not of itself give rise to a related transaction in a loan relationship to which the partnership is a party. 14. Trading profits and losses deriving from exchange differences -section 128 FA 1993 and non-trading profits or losses treated by section 129 and 130 FA 1993 as non-trading debits or credits under the loan relationships legislation should also be computed as set out in paragraph 10 above. In particular• Valuations of assets and liabilities should be made in accordance with the accounting methods used by the partnership - section 159 FA 1993. • The main benefit and arms length rules in sections 135 to 138 FA 1993 will apply by reference to the circumstances of the partnership. • Section 140 to 143 FA 1993 (deferral of certain gains) may apply. In computing the amount which may be deferred, the whole of the profits and of various types of exchange gains and losses of the partnership, as computed for the purposes of corporation tax, will be taken into account. 15. Trading profits and losses on financial instruments -section 159 FA 1994 - and nontrading profits or losses treated by section 160 FA 1994 as non-trading debits or credits under the loan relationships legislation should also be computed as set out in paragraph 10 above. In particular• Valuations of assets and liabilities should be made in accordance with the accounting methods used by the partnership - sections 156 and 157 FA 1994. • The transfer of value, arm’s length and transactions with non-resident rules in sections 165 to 168 FA 1994 will apply. Share of partnership profits and losses for corporation tax purposes 16. The resulting partnership trading profit or loss, excess of non-trading credits over debits assessable under Case III or non-trading deficit, should then be apportioned to the partners

according to the partnership agreement. The partners receive a share of the overall result, they do not receive an allocation of individual debits and credits. The partnership itself is not assessable to corporation tax and cannot, for example, carry forward non-trading deficits. 17. Each corporate member of the partnership will be assessed and charged to Corporation Tax on its share of any trading profit or loss (which will include all loan relationship, foreign exchange and financial instruments trading profits and losses) as if its share derived from a trade it carried on alone, and which is separate from any trade it carries on its own account. 18. The corporate members of the partnership should incorporate their allocation of any Case III profit or non-trading deficit into their own Case III or non-trading deficit computation. It will not form a separate ‘pot’. The company will be able to claim under section 83 FA 1996 if the result of combining the two amounts is a net non-trading deficit. It should not claim separately for its allocation of a partnership non-trading deficit. 19. For example a company has a non-trading deficit on its own activities of £10,000. It has a share in a partnership Case III profit of £5,000. The company is treated as having an overall deficit of £5,000. It cannot surrender as group relief the amount of £10,000 under section 83(2) FA 1996 and submit to a charge to tax on the £5,000. Similarly if the £5,000 Case III income arose on its own account, and its share of a partnership deficit was £10,000 it could not surrender the deficit of £10,000. Differing accounting periods 20. A partnership may draw up its accounts to a different date from that adopted by the corporate members of the partnership. The profits or losses deriving from the corporation tax computations under section 114(1) ICTA 1988 should be allocated as necessary (normally on a time basis) between the relevant accounting periods of the company members themselves. Interaction with capital gains tax 21. For companies which are within the charge to Corporation Tax and, for the purposes of the foreign exchange or financial instruments legislation, are qualifying companies, certain assets (e.g. foreign currency, certain debts and some interest rate and currency contracts and options) no longer give rise to chargeable gains following Finance Acts 1993, 1994 and 1996. However, these assets may still give rise to chargeable gains in the hands of persons (including individuals) who are not subject to Corporation Tax. These assets may also, in certain circumstances, give rise to chargeable gains in the hands of some insurance companies. Section 59 TCGA 1992 (treatment of partnership assets) and Statement of Practice D12 will continue to apply to the disposal of shares in partnership assets to which members of the partnership who are not companies subject to corporation tax are entitled. In certain circumstances qualifying companies will also be treated as having chargeable gains and losses on liabilities where corresponding matched assets are disposed of - see paragraph 31 onwards below. Connected persons and section 87 FA 1996 22. Section 832 ICTA defines a company as excluding a partnership. Section 114 ICTA 1988 however provides that where at least one of the partners is a company, the profits of any trade, profession or business carried on by the partnership shall be computed for the purposes of Corporation Tax as if the partnership were a company. HM Revenue and Customs takes the view that this statutory fiction does not extend to making a partnership a ‘company’ for the purposes of section 87(3) FA 1996 (accounting method for connected parties). It also takes the view that a partnership is neither a participator nor an associate of a participator within the meaning of section 417 ICTA 1988. A partnership is not therefore connected for the purposes of section 87 Finance Act 1996 with any of its members which provide loans to the partnership. Companies making loans to connected parties are usually denied bad debt relief by paragraph 6 Schedule 9 FA 1996. But when a loan is made from a corporate member of a partnership to the partnership (or vice versa) it follows from HM Revenue and Customs’ view on section 87 Finance Act 1996

that bad debt relief may be available depending on the circumstances of the debtor. It also follows that where a partnership releases a company member from repaying a debt, or vice versa, the relevant party must recognise a credit equal to the amount released. 23. Exam ple: Two independent and unconnected companies, A, and B, go into partnership to develop a new product. The partnership, X, is initially funded by loan capital of £50,000, interest free, from each of the two companies. The profit/loss share is 50:50, between the two partners. Company A then injects a further £500,000 into the partnership to fund the production process. This is a five year loan which carries interest of 5% per annum. The business does not do quite as well as expected and eventually the production facility and business is sold to another party for £200,000. This entire amount is paid to Company A in full satisfaction of its debt of £500,000. What are the debits and credits? 24. HM Revenue and Customs would treat the partnership as a separate person to compute profits and losses. The partnership will accrue interest of £25,000 per year which is an allowable debit in its Case I computation. The overall Case I profit or loss for each accounting period is allocated 50:50 to the partners. On the sale of the business the partnership would have a £300,000 credit for the Case I computation when it satisfied its debt of £500,000 with a payment of £200,000. A and B release the remaining debt of £50,000 each, resulting in a further £100,000 credit for the partnership. 25. Company A would accrue interest of £25,000 per year which is a credit in its Case III computation. In the period the business was sold Company A would bring in 50% of the trading profit of the partnership (including the credits of £300,000 and £100,000). Company A would be entitled to bad debt relief for £300,000 on the loan of £500,000 and of £50,000 on the other loan. This would be given as a debit in its Case III computation. 26. In the period the business was sold Company B would bring in 50% of the trading profit of the partnership (including the credits of £300,000 and £100,000). Company B would be entitled to relief of £50,000 as a debit in its Case III computation. Interest paid or received under deduction of income tax 27. Yearly interest paid by or on behalf of a partnership in which a company is a member should, subject to section 349(3), be paid under deduction of tax - section 349(2)(b) ICTA 1988. 28. Where a partnership of which a company is member receives interest under deduction of tax, HM Revenue and Customs’ practice will be to accept that the income tax suffered should be apportioned amongst the company partners in the same proportion as the interest under the loan relationship is apportioned. Local currency elections 29. Section 92 FA 1993 lays down a general rule that the profits of a trade are to be expressed in sterling. This codified the existing law that still applies to all other computations of income and profits. However, sections 93 to 95 FA 1993 allow companies to elect (via regulations) for trading profits of certain companies to be computed by translating a figure of profit calculated in a currency other than sterling, without requiring a translation of qualifying assets and liabilities denominated in that currency. In Statement of Practice 9/94 HM Revenue and Customs took the view that unless a partnership consisted wholly of qualifying companies it could not make this local currency election. The revised Inland Revenue view is that because section 114 Taxes Act 1988 (partnerships involving companies) provides for computations to be prepared as if a partnership were a company, then where at least one of the partners is a qualifying company it is open to that partnership to make a local currency election. Any election must satisfy the conditions in the Local Currency Elections Regulations (SI 1994 No 3230) applied to the partnership as if it were a company. All partners who are, at the time of the election, subject to United Kingdom corporation tax should sign any election. Without all the

signatures, HM Revenue and Customs will treat the election as not effective. In cases where an effective election is made that election will be regarded as irrevocable and will not cease to be valid on subsequent partnership changes. Deferral 30. Under section 139 to 143 FA 1993 qualifying companies may claim to defer a proportion of unrealised exchange gains. This facility will also be available to qualifying partnerships and the practice of HM Revenue and Customs will be to consider claims to deferral made by the partnership (rather than individual company members) based on the computation prepared under section 114(1) ICTA 1988. In any accounting period the amount of any exchange gain to be deferred will be the proportion of that gain which is appropriate to qualifying corporate members of the partnership. In other words each of the corporate partners which is a qualifying company will be able to exclude from its share of exchange gains and losses the appropriate part of the deferred gain. The same approach will be taken to amounts treated as accruing by virtue of section 140(4) FA 1993 in the period to which the gains have been deferred. 31. It follows that a company member of a partnership cannot make a deferral claim in respect of a gain attributed to it under section 114 if the partnership has not itself made a claim. But it can make a claim in respect of its own gains arising otherwise than through the partnership, whether or not a partnership claim has been made for the partnership gains, and no account will be taken of partnership gains or losses in establishing the amount of the company’s own gains that may be deferred 32. The complex rules for companies which are members of groups set out in paragraph 4 of the Exchange Gains & Losses (Deferral of Gains and Losses) Regulations (SI 1994/3228) will not however apply to partnerships. The treatment of the partnership as a company by section 114 of the Taxes Act does not extend to deeming the partnership as such to be a member of a group. Matching 33. Under regulations 4-11 of The Exchange Gains and Losses (Alternative Method of Calculation of Gain or Loss) Regulations 1994 qualifying companies can elect to reduce to nil exchange differences on liabilities which match certain assets (shares in associated or subsidiary companies, net investments in branches outside the UK and ships or aircraft). HM Revenue and Customs has revised the view expressed in Statement of Practice 9/94 which limited the range of assets for which a partnership may make a matching election. It will now accept that partnerships which have eligible liabilities as described in regulation 5(4) or (5) can make a matching election for the full range of eligible assets described in regulation 5(6) SI 1994 No 3227. Where an election is made, HM Revenue and Customs will not treat it as effective unless it is signed by all partners subject to United Kingdom corporation tax. 34. It follows that since a partnership is treated as if it were a company for the purposes of computing exchange gains and losses, and in particular for computing what gains and losses in liabilities may be deferred under the matching rules, a company cannot make a claim to match its own liability (one which is not its share of a partnership liability) with an asset held by the partnership, whether or not the partnership has made an election to match the asset. 35. Under regulation 7 of the Alternative Method regulations, disposal of a matched asset triggers the calculation of the aggregate exchange gains and losses on the corresponding liability which have not been taken into account for tax purposes because they have been reduced to nil by regulation 5(2). 36. The net exchange gain or loss thus found is treated as a chargeable gain or allowable loss accruing at the same time as the asset was disposed of. If the matched asset was however a ship or aircraft, the net gain or loss is treated as an exchange gain or loss.

37. In cases where there has been no change in the partnership, or in any partner’s asset share ratio, between the date the matching election for the asset has effect and the date the asset is disposed of, any chargeable gain or allowable loss produced by regulation 7 will accrue to the partners in accordance with section 59 TCGA 1992 and Statement of Practice D12 in the same way as the chargeable gain or allowable loss on the matched asset will accrue. 38. If the regulation 7 gain or loss is an exchange gain or loss then it will be allocated to the partners in the manner described in paragraph 15 onwards. 39. There may be cases however where a corporate partner in a partnership which has made a matching election leaves the partnership or reduces its asset share ratio before the matched asset is disposed of by the partnership. Where this happens, the partner is treated as disposing of the whole or part of his share in the matched asset - Statement of Practice D12 Paragraph 4 and the appropriate calculation of excluded exchange gain or loss should be made under regulation 7. A proportionate part of the gain or loss will then be allocated to the partner leaving or reducing its asset share. On a subsequent actual disposal of the asset by the partnership an appropriate adjustment should be made to the regulation 7 calculation. 40. It is a condition of HM Revenue and Customs accepting a matching election at partnership level that each partner which is a qualifying company for the purposes of the Forex legislation at the time the matching election has effect should also undertake to return any regulation 7 gain accruing to it in accordance with this statement if it has left the partnership or reduced its asset share ratio. Anti-avoidance rules 41. As mentioned in paragraphs 13 to 15 above, the practice of HM Revenue and Customs will be to apply the rules in sections 165 to 168 FA 1994, sections 135 to 138 FA 1993 and Chapter II Part IV FA 1996 to the partnership as though it were a qualifying company. But it will also apply these rules where appropriate to individual partnership members. SP5/98

Venture Capital Trusts and the Enterprise Investment Scheme: Value of ‘gross assets’ – Supersedes SP7/95

SP6/98

Enterprise Investment Scheme, Venture Capital Trusts, Capital Gains Tax Reinvestment Relief and Business Expansion Scheme: Loans to Investors Supersedes SP3/94

Introduction 1. The rules for the Enterprise Investment Scheme, Venture Capital Trusts, the Business Expansion Scheme, and capital gains tax reinvestment relief each make provision for the tax relief in question to be withdrawn (or to be unavailable) in certain circumstances where a loan is made to the investor or to an associate of the investor. 2. The circumstances in which these rules apply are where the loan would not have been made, or would not have been made on the same terms, if the investor had not made the investment in the shares for which the relief was to be claimed, or had not been proposing to make that investment. This Statement explains HM Revenue and Custom’s understanding of the way in which the provisions operate, and gives examples of instances where the rules have effect to deny or withdraw relief and of instances where they do not. Application 3. The way in which these rules are applied in any particular case will depend on the precise facts and circumstances. However, in looking to see whether a given loan falls within the scope of the legislation, HM Revenue and Custom’s primary concern will be with the reason why the lender made the loan rather than why the borrower applied for it. The rules do not necessarily

have effect to deny or withdraw relief just because a loan is used to finance the acquisition. Moreover, if the lender learns that the purpose, or one of the purposes, of the loan application is the financing of the acquisition, that does not necessarily mean that the rules have effect to deny or withdraw relief. The test is whether the lender makes the loan on terms which are influenced by the fact that the borrower, or an associate of the borrower, has acquired, or is proposing to acquire, the shares.

4. The rules would not have effect to deny or withdraw relief where a person proposing to

acquire shares receives a loan from a bank, if the bank would have made a loan on the same terms to a similar borrower who was intending to use it for a different purpose. But if, for example, a loan is made on a specified security which consists of, or includes, the shares in question, it would be one which would not otherwise have been made on the same terms. In such a case, the loan would be linked with the shares, and the investor would not qualify for relief in respect of them. This would apply only where the shares, or any rights associated with them, are specified as all or part of the security. It would not apply, for example, in any case where the lender had recourse against the borrower’s assets generally.

5. In considering the terms of any particular loan, HM Revenue and Customs will have regard to such features as the qualifying conditions which must be satisfied by the borrower, the existence of incentives or benefits offered to the borrower, the time allowed for repayment, the amount of repayment and interest charged, the timing of interest payments, and the nature of the security pledged. Note 6. The Business Expansion Scheme came to an end for new investment at the end of 1993, and CGT reinvestment relief is not available for shares acquired after 5 April 1998. SP7/98

Enterprise Investment Scheme, Venture Capital Trusts and Capital Gains Tax Reinvestment Relief: Location of activity – Supersedes SP2/94

SP8/98

Business by telephone

SP1/99

Self assessment enquiries and capital gains tax valuations

Self assessment enquiries: section 9A and section 12AC Taxes Management Act 1970: enquiries remaining open after expiry of the period within which a notice of enquiry may be issued solely because of an unagreed valuation for Capital Gains Tax purposes. The following Statement of Practice applies where, in the case of an enquiry into a return made under section 8, 8A or 12AA Taxes Management Act 1970, • • •

an officer of the Commissioners for Her Majesty’s Revenue and Customs has given notice under section 9A(1) or 12AC(1) Taxes Management Act 1970 of his intention to enquire into that return, and the enquiry remains open after the expiry of the period within which that notice had to be issued (‘enquiry period’), and the enquiry remains open solely because of an unagreed valuation for CGT purposes.

In such circumstances HM Revenue and Customs will not, as a matter of practice, raise further enquiries into matters unrelated to the valuation or the Capital Gains Tax computation unless the circumstances are such that, had the enquiry already been completed, an officer of the Commissioners for Her Majesty’s Revenue and Customs could have made a discovery within the meaning of Section 29 TMA 1970. This practice applies only to valuations for Capital Gains Tax purposes in respect of individuals, partnerships and trusts.

This practice does not alter or fetter HM Revenue and Custom’s right to ask further questions or make additional enquiries on matters in connection with, or consequential to, the obtaining of the valuation which were not raised when the valuation was first referred to Shares Valuation Division or the Valuation Office Agency. SP2/99

Monthly savings in investment funds – Supersedes SP2/97

Introduction 1. This Statement of Practice explains where HM Revenue and Customs will accept simplified capital gains tax computations from individuals who have disposed of shares or units in investment funds which they acquired through monthly savings schemes before 6 April 1999. The investment funds concerned are authorised unit trusts (AUTs), approved investment trusts (AITs), and open-ended investment companies (OEICs) incorporated in the United Kingdom. For capital gains tax purposes, each sub-fund of an AUT which is an umbrella scheme is regarded as an AUT in its own right, and the umbrella scheme itself is not regarded as an AUT. Similarly, each sub-fund of an OEIC which is an umbrella company is regarded as an OEIC in its own right, and the umbrella company itself is not regarded as an OEIC. 2. Where taxpayers ask for the practice to apply, the number of calculations needed to determine their capital gains tax liabilities for the units or shares they acquired through their savings scheme which qualify for indexation allowance will be substantially reduced. This Statement does not affect the rights of taxpayers who wish to submit computations made on the normal statutory basis. 3. Although the Statement covers a wide variety of circumstances, its basic approach is simple. It applies where an investor saves a fixed sum each month and makes no withdrawals, or only relatively small withdrawals. In these cases, the total of an investor’s monthly investments in the fund during its accounting year will be added to the total of any distributions or other allocations of income which are reinvested in the fund on his or her behalf in the accounting year. Any small withdrawals made in that accounting year will be deducted. The resulting figure will be treated for capital gains tax purposes as if it had formed a single investment made on the date on which the seventh monthly investment is made. Suppose, for example, an investor in an AUT saves £50 on the seventh of each month, that no distributions or other income allocations are reinvested in the fund on his or her behalf, and that the AUT has an accounting year ending on 31 December. Capital gains tax computations will be made as if the taxpayer had made a single investment of £600 on 7 July. As a result, only one computation will be needed for the investments in the fund in that year, instead of twelve. Who can ask for this practice to apply? 4. Individuals who entered before 6 April 1998 into a monthly savings scheme to invest regular monthly sums in an AUT, AIT or OEIC, and dispose of investments on or after 6 April 1988. The practice can be applied in respect of monthly sums invested during those accounting years of the fund concerned which ended before 6 April 1999. The practice cannot be applied in respect of monthly sums invested during accounting years which end on or after 6 April 1999, and the capital gains tax computations for investments made in those periods must be calculated on the normal statutory basis. 5. The appendix at the end of this Statement provides an example of a capital gains tax computation where the disposal in question is made by an investor some years after 6 April 1999 of income units in an AUT which were acquired through a savings scheme that began before 6 April 1998. The example illustrates how the practice is used for the period for which it is applicable, and how the computations are made for the period for which the practice does not apply.

How should the taxpayer make the request? 6. Taxpayers must write to their Tax Offices not later than twelve months after 31 January following the end of the first tax year in which they dispose of units or shares acquired via monthly savings schemes, and •

the resulting gains, together with any other gains made in the year, exceed the capital gains annual exempt amount for that year, or

•

the disposal proceeds together with the proceeds of their other disposals exceed twice the annual exempt amount, or

•

their other disposals in the year give rise to net losses.

7. Where a taxpayer has monthly savings schemes in more than one AUT, AIT or OEIC, applications for this practice to apply should be made separately for each trust or company. Where a taxpayer has more than one monthly savings scheme in the same AUT, AIT or OEIC, the application will cover all those schemes, and this practice will apply as if they formed a single scheme. 8. Some savings schemes allow an investor to make a single monthly payment which is split between different trusts or companies. If so, the Statement will apply as if there were separate savings schemes for each trust or company concerned. Thus, an investor who saves £200 a month, with £100 allocated to XYZ Growth Unit Trust and £100 to XYZ Income Unit Trust, will be treated as having two separate schemes for £100 a month each. 9. Some savings schemes allow investors to vary the fund in which their monthly contributions are invested. An investor who changes the fund in which his or her contributions are invested will be regarded for these purposes as having ceased contributing under one savings scheme and having started a new scheme. This treatment also applies in cases where investors switch their contributions between different sub-funds of an umbrella AUT or OEIC. What will the simplified computation apply to? 10. The rules described below will apply in calculating the gain on the disposal of units or shares in the year of assessment to which the application relates. Where the disposal is a partdisposal, the rules will also apply in determining gains on later disposals of units or shares acquired via the savings scheme, subject to the taxpayer's right to revert to the statutory basis. A taxpayer who has exercised his or her right to revert to the statutory basis for a particular savings scheme may not benefit for a second time from the simplified rules for that scheme. 11. Some taxpayers may have units or shares in a monthly savings scheme for a particular AUT, AIT or OEIC and other units or shares in the same AUT, AIT or OEIC which are acquired by, for example, separate lump sum investment. The practice described in this Statement will apply only to the units or shares held in the monthly savings scheme. Any gain on units or shares acquired in other ways will be computed according to normal capital gains rules as if those units or shares formed a holding separate from those acquired through the monthly savings scheme. The approach of the simplified computations 12. The general approach treats all investments and withdrawals made in a year during the lifetime of the savings plan as though they were made in a single month of that year. 13. The year will correspond to the accounting year of the fund. This may not always be exactly twelve months, because for some funds the date to which accounts are drawn up varies slightly from year to year. For example, the accounting date may be set as the second Thursday in November (irrespective of the day of the month on which it falls). Apart from such small

variations, special rules will apply when the accounting date is changed. These are described later. 14. In the straightforward case where an investor makes regular monthly contributions throughout the accounting year, investments and withdrawals will be treated as made on the day on which the seventh monthly investment in the accounting year is due. The calendar month in which that day falls is referred to in this Statement as ‘the seventh month’. 15. Where distributions are automatically reinvested to acquire further shares or units, or where the investor uses the savings scheme to acquire accumulation units in an AUT or accumulation shares in an OEIC, the distribution or allocation of income will be treated as invested on the day on which it is credited to the trust or company on the investor’s behalf. No adjustment will be made for equalisation. The day on which the investment is treated as made for the final distribution in the accounting year of the trust or company will be determined as follows: •

in cases where distributions are automatically reinvested in the trust or company to acquire further units or shares on the investor’s behalf, the final distribution for an accounting year will be credited after the end of that accounting year. This means that final distributions for an accounting year will be regarded for these purposes as reinvested in the following accounting year.

•

in the case of accumulation units or shares, on the other hand, the final allocation of income in respect of an accounting period becomes part of the capital property of the AUT or OEIC concerned with effect from the end of the accounting year in question.

Example 1 a) An accounting year starts on 1 January 1996. b) The taxpayer subscribes £100 a month throughout the accounting year in income units in an AUT, on the sixth of each month. c) The final distribution for the accounting year ending on 31 December 1995 is £25, the interim distribution for the new accounting year is £27, and the final distribution for the new accounting year is £30. The distributions are automatically reinvested in the AUT to acquire further units on the taxpayer’s behalf. In calculating the indexation allowance, the taxpayer will be treated as having made a single investment of £1,252 on 6 July 1996. Example 2 a) An accounting year starts on 1 January 1996. b) The taxpayer subscribes £100 a month in accumulation shares in an OEIC throughout the accounting year, on the sixth of each month. c) The final distribution for the accounting year ending on 31 December 1995 is £25, the interim distribution for the new accounting year is £27, and the final distribution for the new accounting year is £30. In calculating the indexation allowance, the taxpayer will be treated as having made a single investment of £1,257 on 6 July 1996.

Example 3 a) An accounting year starts on 20 January 1995 and ends on 19 January 1996. b) The taxpayer subscribes £100 a month throughout the accounting year in shares in an AIT, on the sixth of each month. c) The final distribution for the accounting year ending on 19 January 1995 and the interim distribution for the new accounting year are £50 in aggregate and are automatically reinvested in the AIT to acquire further shares on the taxpayer’s behalf. The first monthly contribution in the new accounting year is made on 6 February 1995, and the seventh on 6 August 1995. In calculating the indexation allowance, the taxpayer will be treated as having made a single investment of £1,250 on 6 August 1995. Pre-1982 holdings 16. When calculating capital gains tax and indexation on the statutory basis, pre-1982 holdings (acquisitions made on or before 31 March 1982) are treated as a separate pool from the post-1982 pool (acquisitions between 1 April 1982 and 5 April 1998). This will also apply for the purposes of the special treatment provided by the practice described in this Statement. Indexation will be calculated for two separate pools and any withdrawals will be treated as disposals of units or shares from the post-1982 pool first, and when that is exhausted, from the pre-1982 pool. This is in accordance with the existing LIFO (last-in, first-out) rules. The practice will not apply to the pre-1982 holding. Where an accounting year straddles 31 March 1982, the practice will apply as if regular saving began in April 1982, in accordance with paragraph 17 below. It will not apply to investments and withdrawals up to 31 March 1982. First year of investment 17. Where an investor begins regular saving part-way through an accounting year, his or her investments and any withdrawals in that period will be treated as made on the date of the last monthly contribution in the accounting year. Final year of monthly saving 18. In the accounting period in which regular monthly saving stops, investments will be treated as made on the date of the last regular contribution or, if earlier, in the seventh month. One-off extra savings 19. An investor may sometimes make extra payments into his or her savings scheme in addition to the regular monthly commitment. If, in any month, the extra payment is not more than twice the regular monthly commitment, it will be treated in the same way as the regular monthly savings (and so, in the normal case, as if it were made in the seventh month). If the extra payment exceeds twice the monthly commitment, it will be treated as made in the calendar month in which it is actually made. 20. In some AITs, arrangements for one-off savings are kept separate from the monthly savings schemes. Where that happens, the practice will not apply to shares acquired by one-off savings. Increases in monthly savings level 21. Some investors may increase their monthly savings commitments. If the increase occurs after the seventh month in an accounting year, the extra savings will be deemed to be made at the beginning of the next accounting year, and indexation, where available, runs from the seventh month for that following year.

Example 4 a) The accounting year coincides with the calendar year, so that the seventh month is July. b) From January to August 1990, the taxpayer saves £50 a month. c) From September 1990, the taxpayer saves £100 a month. d) The final distribution for 1989, which is automatically reinvested, is £50. There is no interim distribution. The taxpayer will be deemed to have made a single investment of £650 in July 1990. The extra £200 invested between September and December 1990 will be deemed to be invested in January 1991, and added to the investments made in 1991. Indexation will be given on this amount from July 1991 until April 1998. Withdrawals and part-disposals 22. Savings schemes often allow taxpayers to make withdrawals. Where the withdrawals in any accounting year do not exceed one quarter of the total amount of regular savings made in that accounting year, the withdrawal or withdrawals will not be treated as involving a disposal, but the amount invested in the accounting year will be reduced by the amount withdrawn. 23. Where withdrawals in any accounting year exceed one quarter of the total amount of regular savings made in the accounting year, the practice does not apply to savings made in that year. However, provided the necessary conditions are satisfied, the practice applies to earlier and later accounting years. 24. Under some AIT savings schemes, an investor wishing to realise part of a holding has to make his or her own arrangements to sell the shares because the scheme does not offer a facility to dispose of shares. In such cases, the practice will apply to part-disposals of shares acquired via the scheme in the same way as to withdrawals. If at the time of a disposal prior to 6 April 1998 the investor also has shares acquired outside the scheme, the disposal will be treated, so far as possible, as being of those other shares. For disposals after 5 April 1998, the normal capital gains tax rules apply to identify the shares which are disposed of. Part disposals before 6 April 1988 25. Where there was a part disposal before 6 April 1988 and the gain either was assessed or would have been calculated on the statutory basis under paragraphs 23 or 27 of this Statement had the practice applied at the time, the simplified rules will apply to investments and withdrawals made from the start of the accounting year following the accounting year in which the last such part disposal took place. Short-term investors 26. This practice does not apply where fewer than seven months' regular savings are made. Missed months 27. Some savings schemes allow taxpayers to miss a month of regular saving. This practice will apply in the normal way to any accounting year in which the taxpayer misses only one regular payment. If more than one payment is missed in an accounting year the practice will not operate for investments and withdrawals in that accounting year. However, if the necessary conditions are satisfied, it will apply for earlier and later accounting years.

Non-standard periods of account 28. Sometimes an AUT, AIT or OEIC may draw up accounts for a period which is less than, or greater than, a year. This will often apply for the first accounting period, and a non-standard period of account will also arise if the accounting date is changed. In these circumstances, special rules apply: a) if the period of account is less than seven months, investments and withdrawals will be treated as made on the date of the last regular contribution in the period. b) if the period is at least seven months but does not exceed twelve months, investments and withdrawals will be treated as made in the seventh month (as defined in paragraph 14 above). c) if the period exceeds twelve months, it will be subdivided. The first twelve months will be treated as if they formed an accounting year, and investments and withdrawals in them will be treated as made in the seventh month. Investments and withdrawals in the remainder of the period will be treated as made on the date of the last regular contribution in the period. These special rules will not apply where there is a change of accounting date in accordance with a routine formula which merely reflects a variation of the kind referred to in paragraph 13. Loss of approved investment trust status 29. Investment trusts have to be approved each year by HM Revenue and Customs. This practice will not apply for an accounting period for which approval is not obtained. But, provided the necessary conditions are satisfied, it will apply for earlier or later periods for which approval is given. Interaction with years of assessment 30. An accounting year is unlikely to coincide with a year of assessment. When a taxpayer completes his or her return it may not yet be certain that all the conditions for the operation of this practice will be satisfied for the accounting year straddling the end of the year of assessment concerned. In such circumstances, the return should be completed on the assumptions that: a) monthly savings will continue at the level applying at the end of the year of assessment; and b) there will be no withdrawals or one-off extra savings in that part of the straddling accounting year which falls after the year of assessment. 31. The treatment described in paragraph 22 above can be applied only if withdrawals in that part of the straddling accounting year which falls within the year of assessment concerned do not exceed total savings in that part of the straddling accounting year. If it turns out that the conditions for the practice to apply are not, in fact, satisfied in the second part of the straddling accounting year, the treatment of any investments and withdrawals made in the earlier part of the straddling accounting year will not be disturbed. Transfers or mergers of funds 32. An investor may enter into a monthly savings scheme with an AUT, AIT or OEIC whose business is later transferred to, or merged with, another trust or company. On the transfer or merger the investor’s old units or shares will generally be cancelled, and replaced with units or shares in the new trust or company. Where section 136 TCGA 1992 applies in such cases the investor is treated for capital gains tax purposes as not disposing of his or her original units or shares, or acquiring replacement units or shares in the new trust or company. Instead, the new

units or shares are treated as having been acquired at the same times, and for the same amounts, as the original units or shares. 33. If, where section 136 TCGA 1992 applies to the investor’s holding on the transfer or merger, the investor continues to make the same regular monthly payments to the new fund, this practice applies as though no transfer or merger had taken place. The new trust or company may, however, have a different accounting date from the old trust or company. If so, the period from the last accounting date of the old fund, to the next accounting date of the new fund, may - so far as the investor is concerned - be treated simply as a non-standard period of account to which paragraph 27 above applies in relation to the continuing contributions. If, on the other hand, section 136 TCGA does not apply on the transfer or merger, the investor is treated as disposing of his or her units or shares for capital gains tax purposes, and starting a new scheme with the new trust or company at that time. In such cases paragraphs 18 and 17 of the Statement will apply instead.

APPENDIX Example Mary enters into a monthly savings scheme in September 1995 in which she invests £100 a month on the first of each month in income units in an AUT. No distributions or other income allocations are reinvested in the fund on her behalf. The accounting year of the unit trust begins on 1 July each year and ends on 30 June in the following year. She makes her last payment in April 2002, and disposes of all her units on 25 May 2004, having made no withdrawals and no additional investments in the fund in the meantime. The tables below show the prices she paid for the units she purchased under the scheme, and the number of units purchased. Month

Price (p)

Units

Month

Price (p)

Units

Sep 1995 Oct Nov Dec Jan 1996 Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan 1997 Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan 1998 Feb Mar Apr May June July Aug Sep Oct Nov Dec

38.22 38.71 39.30 39.98 38.26 37.01 37.95 39.43 40.62 40.87 41.79 42.65 43.08 42.81 42.92 44.05 46.43 47.11 47.34 48.93 49.62 47.33 46.87 46.69 48.31 50.15 51.41 52.60 52.88 53.17 53.10 54.63 53.96 53.85 54.29 55.62 55.81 56.78 57.18 57.73

261.64 258.33 254.45 250.13 261.37 270.20 263.50 253.61 246.18 244.68 239.29 234.47 232.13 233.59 232.99 227.01 215.38 212.27 211.24 204.37 201.53 211.28 213.36 214.18 207.00 199.40 194.51 190.11 189.11 188.08 188.32 183.05 185.32 185.70 184.20 179.79 179.18 176.12 174.89 173.22

Jan 1999 Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan 2000 Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan 2001 Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan 2002 Feb Mar Apr

58.61 60.14 59.59 60.62 61.57 62.44 62.87 63.54 62.10 60.56 59.62 59.27 60.28 61.37 62.84 64.15 65.06 68.32 70.14 71.28 73.81 74.00 74.81 74.97 75.33 76.41 77.99 78.45 78.42 79.61 80.15 82.22 83.58 83.10 83.85 84.07 85.21 86.32 87.19 88.04

170.62 166.28 167.81 164.96 162.42 160.15 159.06 157.38 161.03 165.13 167.73 168.72 165.89 162.95 159.13 155.88 153.70 146.37 142.57 140.29 135.48 135.14 133.67 133.39 132.75 130.87 128.22 127.47 127.52 125.61 124.77 121.62 119.65 120.34 119.26 118.95 117.36 115.85 114.69 113.58

The total number of units Mary has acquired through the scheme was 14,319.44 at a total cost of £8,000, and when she sold them the price she obtained for each unit was 101 pence. The consideration she received was, therefore, £14,462.63. We want to calculate the amount of the gain of £6,462.63 which is chargeable. Calculation This is done in a number of steps. The first step is to split the units acquired after 30 June 1998 - which is the last day of the final accounting year for which the practice can be applied - into batches according to the number of years’ taper relief for which they qualify. The gain, and the amount of it which is chargeable, is then calculated in each case. (a) The 1311.68 units acquired from 1 June 2001 to 1 April 2002 inclusive do not qualify for taper relief, as they were not business assets and Mary had held them for less than three complete years when she disposed of them. The consideration received for these units was 1311.68 × £1.01 = The cost of these units was The chargeable gain is

£1,324.80 £1,100.00 £224.80

(b) The 1613.74 units acquired from 1 June 2000 to 1 May 2001 inclusive were held by Mary for three complete years before she disposed of them. They therefore qualify for three years’ taper relief as non-business assets. This means that 95 per cent of the gain is chargeable. The consideration received for these units was 1613.74 × £1.01 = The cost of these units was The gain is The tapered gain is

£1,629.88 £1,200.00 £429.88 £408.39

(c) The 1936.75 units acquired from 1 June 1999 to 1 May 2000 inclusive were held by Mary for four complete years before she disposed of them. They therefore qualify for four years’ taper relief as non-business assets. This means that 90 per cent of the gain is chargeable. The consideration received for these units was 1936.75 × £1.01 = The cost of these units was The gain is The tapered gain is

£1,956.12 £1,200.00 £756.12 £680.51

(d) The 1899.49 units acquired from 1 July 1998 to 1 May 1999 inclusive were held by Mary for five complete years before she disposed of them. They therefore qualify for five years’ taper relief as non-business assets. This means that 85 per cent of the gain is chargeable. The consideration received for these units was 1899.49 × £1.01 = The cost of these units was The gain is The tapered gain is

£1,918.48 £1,100.00 £818.48 £695.71

The second step is to apply the practice for those accounting years of the fund for which it can be used. These are the periods ending on 30 June 1996, 30 June 1997, and 30 June 1998. The rule given in paragraph 17 of the Statement provides that the units Mary acquired in the accounting year of the fund which ended on 30 June 1996 are treated as though she acquired them on the date she made her last contribution in that period, namely 1 June 1996. The seventh month rule applies for the accounting years ending on 30 June 1997 and 30 June 1998. So Mary is treated as acquiring: 2564.09 units on 1 June 1996 for £1,000, 2655.55 units on 1 January 1997 for £1,200, and 2338.14 units on 1 January 1998 for £1,200. The third step is to calculate the gain on these 7557.78 units and how much of it is chargeable. As these units were all acquired (or are treated as acquired) before 6 April 1998, they are pooled together for capital gains tax purposes. They qualify for indexation allowance to April 1998, and also for a year’s head start for taper relief purposes, as Mary is treated as holding all of them on 17 March 1998. The consideration received for these units was 7557.78 × £1.01 = The cost of these units was The unindexed gain is

£7,633.36 £3,400.00 £4,233.36

The indexation allowance in respect of these units is

£149.40 £4,083.96

The indexed gain is

The number of complete years after 5 April 1998 for which these units are held is six years. The effect of the one-year head start is that they qualify for seven years’ taper relief. The units are not business assets for taper relief purposes. This means that 75 per cent of the gain is chargeable. The tapered gain is

£3,062.97

(HM Revenue and Customs Help Sheet IR 284: Shares and Capital Gains Tax gives details of how to calculate the indexation allowance on a disposal of shares or units in a pool. You can obtain a copy from HM Revenue and Customs Orderline by telephoning 0645 000404, writing to PO Box 37, St Austell, Cornwall PL25 5YN, e-mailing [email protected], or faxing 0645 000604.) The final step is to sum: £408 £680 £695 £3,0 £5,0

£224.80 .39 .51 .71 62.97 72.38

So the amount of the gain which is chargeable is £5,072.38. The amount of capital gains tax that Mary will actually have to pay for the year of assessment 2004-05, if any, will depend on a number of factors, including the value of the annual exempt amount at that time, the aggregate amount of chargeable gains which accrue to her in that year, the amount of any allowable losses that she has available to set against untapered gains, and the amount of her taxable income. HM Revenue and Customs booklet CGT1: Capital Gains Tax: an introduction, which is available from any Tax Enquiry Centre or Tax Office, provides further details about the basic capital gains tax rules for individuals.

SP3/99

Advance Pricing Agreements (APAs) – Superseded by SP2/10

SP1/00

Corporate Venturing Scheme; applications for advance clearance under Part X, Schedule 15, FA 2000

The Corporate Venturing Scheme provides relief against corporation tax (‘investment relief’) in certain circumstances to companies investing in new shares of other companies. Where a company hopes to use the scheme to attract investment, paragraph 89, Schedule 15, Finance Act 2000 enables it to apply to The Commissioners for Her Majesty’s Revenue and Customs for an advance clearance notice. Such a notice provides confirmation that the Commissioners for Her Majesty’s Revenue and Customs consider that the conditions for relief under the scheme, other than those applying to the investor, will be met in relation to the proposed issue of shares at the time the issue is made. In the case of those conditions which have to be met throughout a qualification period, however, there can of course be no certainty until after the end of that period that they will be met. This Statement of Practice gives guidance to companies wishing to obtain advance clearance. All references to paragraphs in this Statement are to paragraphs of Schedule 15, FA 2000. PROCEDURE Applications should be sent to: The Small Company Enterprise Centre Centre for Revenue Intelligence (CRI) Ty Glas Llanishen Cardiff CF14 5ZG Under paragraph 91 the Commissioners for Her Majesty’s Revenue and Customs must respond to an application within 30 days after receiving the application. The Commissioners for Her Majesty’s Revenue and Customs may request further particulars, and if they do their response must be given within 30 days after the last such request was complied with. CONTENT OF APPLICATION - GENERAL In order to consider applications the Commissioners for Her Majesty’s Revenue and Customs need certain basic information and assurances. To assist companies in preparing their applications, an outline of what is needed is given below. However, this is not necessarily an exhaustive list in all cases, and each applicant must fully and accurately disclose all facts and circumstances material for the decision of the Commissioners for Her Majesty’s Revenue and Customs (paragraph 89). The application will be considered solely by reference to the material provided by the company in its application or in response to a request for further particulars. It will be helpful if applications follow the order set out below, each item being expanded as necessary and any further information being added at the end. This will enable the Commissioners for Her Majesty’s Revenue and Customs to come to a decision on the application as soon as possible. For the purposes of the scheme, an ‘issue of shares’ consists of all the shares of the same class which are issued by a company on the same day. An advance clearance notice can be given only in respect of a single issue of shares. If it is expected that there will be more than one issue

within a short period of time, please say so. Any clearance will apply only to the issue or issues in respect of which information has been given, so if an advance clearance notice is sought in respect of more than one issue, relevant information must be provided in respect of each of them. INFORMATION AND DOCUMENTS NEEDED 1. General The name of the tax office dealing with the company making the application, and the tax reference. If the company is newly formed and the tax office is not yet known, state the address of the registered office. If the company has previously made any application for an advance clearance notice it will be helpful if the Commissioners for Her Majesty’s Revenue and Customs’ reference(s) can be quoted. 2. Accounts and other documents a. Copies of the latest available financial statements for the company, or in the case of a group the financial statements for the group and for each group company. b. A copy of any prospectus or memorandum or other document to be made available to prospective investors or their advisers (or a draft of any such document). c. A draft copy of any subscription agreement which is to be made with any investor. 3. Transactions subsequent to accounts Particulars of any material changes or events which have occurred since the date of the latest balance sheet, or which are expected to occur before the issue takes place. 4. The company The following particulars are needed in relation to the company which is to issue the shares: a. confirmation that the ‘unquoted status’ requirement set out in paragraph 16 will be satisfied; b. confirmation that the ‘independence’ requirement set out in paragraph 17 will be satisfied when the shares are issued; c. details of the expected ownership of its ordinary share capital following the issue of the shares, with sufficient information to show that the ‘individual owners’ requirement set out at paragraph 18 will be satisfied at that time; d. confirmation that the ‘partnerships and joint ventures’ requirement set out in paragraph 19 will be satisfied when the shares are issued; e. if, at the time the shares are issued, it will have any subsidiary or control any other company: •

the name of each such company, together with the name of its tax office and its tax reference or, if there is no tax office, the address of its registered office, and

•

f.

a statement or diagram showing the shareholding interests of each group company in other group companies, sufficient to show that all subsidiaries will be ‘qualifying subsidiaries’ as defined at paragraph 21;

sufficient information to establish whether the ‘gross assets’ requirement set out in paragraph 22 will be satisfied (see Statement of Practice SP2/00);

g. a description of each activity comprised in any trade carried on, or to be carried on, by the company and, in the case of each subsidiary or controlled company mentioned at e. above, each activity comprised in any trade carried on, or to be carried on, by that subsidiary. 5. The share issue and the money raised a.

Details of the total number of shares expected to be issued to investors seeking investment relief (where known), the nominal value of such shares, the rights which they will carry, and the price at which they are expected to be issued.

b.

Details of the activity or activities for which it is intended that the money raised by the issue will be used.

c.

In the case of a company which will have subsidiaries at the time when the shares are issued, the identity of the company or companies which will use that money.

d.

Confirmation that each trade or other activity for which the money will be used will be carried on wholly or mainly in the United Kingdom (see Statement of Practice SP3/00).

UNDERTAKINGS NEEDED a.

That the company intends that the money raised by the share issue will be used within the time set out at paragraph 36.

b.

That the shares to be issued to corporate investors wishing to obtain investment relief will not be issued unless they have been subscribed for wholly in cash and that cash has actually been paid.

c.

That those shares will be issued for commercial purposes and not as part of a scheme or arrangement which has as a main purpose the avoidance of tax.

d. That the issuing arrangements in respect of the shares will not include any arrangements of the kind set out at paragraph 37. INFORMAL EIS CLEARANCES Where subscribers to the same issue of shares are expected to include individuals who may wish to claim relief under the Enterprise Investment Scheme, any request for an informal clearance under the EIS should be sent with the CVS application.

SP2/00

Venture Capital Trusts, the Enterprise Investment Scheme, the Corporate Venturing Scheme and Enterprise Management Incentives (supersedes SP5/98) Value of ‘Gross assets’ (superseded by SP2/06)

SP3/00

Enterprise Investment Scheme, Venture Capital Trusts, Corporate Venturing Scheme, Enterprise Management Incentives and Capital Gains Tax Reinvestment Relief

1.

Location of activity

The provisions for— • • • • •

the Enterprise Investment Scheme; Venture Capital Trusts; the Corporate Venturing Scheme; Enterprise Management Incentives; and Capital Gains Tax Reinvestment Relief (which is not available for investments made after 5 April 1998)

each include the requirement that a company's trade should, at a certain time or for a certain period, be ‘carried on wholly or mainly in the United Kingdom’. This Statement explains the way in which HM Revenue and Customs applies this condition in those contexts. 2. The way in which the requirement is applied in any particular case will depend on the relevant facts and circumstances. A company may at any given time carry on some of the activities of the trade outside the United Kingdom and yet satisfy the requirement if the major part of the trade, that is over half of the trading activity, taken as a whole, is at that time carried on within the United Kingdom. 3. In considering whether the requirement is satisfied, HM Revenue and Customs will take into account the totality of the activities of the trade. For example, they will consider where the capital assets of the trade are held, where any purchasing, processing, manufacturing and selling is done, and where the company’s employees and other agents are engaged in its trading operations. For trades involving the provision of services, the location of the activities giving rise to the services and the location where they are delivered will both be relevant. 4. No one factor is in itself likely to be decisive in any particular case. In particular, HM Revenue and Customs will not regard a company's activities as not being carried on in the United Kingdom solely because— • • •

the goods or services which it manufactures or provides are exported or supplied to overseas customers; its raw materials are purchased from abroad; or its raw materials or products are stored abroad.

5. In the case of a trade consisting of ship chartering, the trade will be considered to satisfy the requirement if all the charters are entered into in the United Kingdom and the provision of the crews and the management of the ships while under charter take place mainly in the United Kingdom. If these conditions are not met the test may still be satisfied, but this will depend on all the facts and circumstances of the case. 6. The corresponding requirements in certain of the schemes mentioned in relation to research and development and to oil exploration are applied in a similar way.

SP4/00

Tonnage Tax

CONTENTS Introduction

Paragraph

1

Allocation of Cases

2

Contacting HM Revenue and Customs

5

Clearance

8

Foreign company/group

15

Group Arrangements

17

The Tonnage Tax Election (Part II)

22

Qualifying Companies and Qualifying Ships (Part III) Ships Strategic and commercial management Examples of strategic and commercial management Temporary cessation 45 Seagoing Excluded vessels 50 The 75% Limit (Part V)

32 32 33 42

Anti-avoidance (Part V)

55

Relevant Shipping Profits (Part VI)

61 63

86 92 96

106

Transfer Pricing Finance costs Capital Allowances (Part IX)

52

57

Core qualifying activities 57 Tugs Vessels providing transport for services at sea Merchant adventurers 66 Pooling on liner services 69 Secondary activities 72 Passengers 84 Gambling Sale of luxury goods 89 Slot charters Incidental activities 93 Distributions of overseas shipping companies Exclusion of interest income etc 104 The Ring Fence (Part VII)

49

106 107 109

Transfer of ships within a tonnage tax group Industrial buildings 111

109

Finance Leasing (Part X)

112

Offshore Activities (Part XI)

121

Groups, Mergers & Related Matters (Part XII) Corporate Partnerships (Part XIII) Exit Charges (Part XIV) Finance Costs ANNE XE

126

128 131

Introduction 1. This statement covers th e general operati on of th e tonnage tax regim e for shippin g companies. Unless specif ically stated otherwise, any reference t o a paragrap h or part num ber relates to Schedule 22, Finance Act 2000. Allocation of Cases 2. HM Revenue and Custo ms will b e allocating existing network cases to a nu mber of tax offices specialising in tonnage tax. They are: • • •

Liverpool Queensway (for the Northwest, London and Northern Ireland) Hull 2 (for the rest of England and Wales) Aberdeen St Nicholas (for Scotland)

3.

Cases dealt with by the Large Business Office will generally remain in situ, but one LBO will specialise in tonnage tax groups:

•

4.

Liverpool LBO Oil Taxation Office will continue to work oil industry cases that elect into tonnage tax.

Contacting HM Revenue and Customs Existing shipping companies and their agents should initially contact their current tax office. Transfers of companies/groups will be arranged in accordance with the previous paragraphs.

5.

6.

Newly set up businesses, including overseas concerns, considering entering tonnage tax should contact Liverpool Large Business Office. The Tonnage Tax Unit at Liverpool LBO will also act as the technical head office for tonnage tax. It may be contacted at: Liverpool Large Business Office, Regian House, James Street, Liverpool L75 1AE Telephone: 0151 242 8025; Fax: 0151 242 8046; e-mail: John [email protected]

7. A ‘training commitment’ forms a necessary condition of entering the tonnage tax regime. However, HM Revenue and Customs does not administer the training commitment. Enquiries on training should be addressed to the Department for Transport at: Shipping Policy 2A, 2/26 Great Minster House, 76 Marsham Street, London SW1P 4DR Telephone: 020 7944 5438/5421/5121/5280; Fax: 020 7944 2182; e-mail:[email protected] or [email protected] or [email protected] or [email protected] Clearance 8. A non-statutory and non-mandatory clearance procedure is available to enable any company or group interested in tonnage tax to discuss its own circumstances with HM Revenue and Customs in advance of making the initial election or before making its first corporation tax return under the tonnage tax regime. Examples of companies that might find this procedure useful include a company considering an initial tonnage tax election, or a company considering starting up a new shipping business in the United Kingdom.

9. The clearance procedure will generally only be available in advance of a company or group’s first election into tonnage tax. However, in exceptional circumstances, HM Revenue and Customs may allow a further clearance application prior to a renewal election being made. For instance, such further clearance may be sought after a major change in the structure of a group, or a major change (temporary or permanent) in its activities, which might create a potential

exclusion from tonnage tax. Companies considering clearance are encouraged to contact HM Revenue and Customs sooner rather than later.

10.

This particular clearance procedure is limited to tonnage tax issues only and does not extend to the mechanics of any reorganisation that may be required to put the group or company into the optimum position to make an election. Examples of issues that could be addressed are: i) ii) iii) iv) v) vi) vii) viii) ix) x)

whether a particular ship is a qualifying ship; whether the strategic and commercial management test is met; whether an activity is a core or secondary qualifying activity; how to deal with potentially non-qualifying secondary activities; how a service at sea is to be split out from the associated transport; whether dividends from an overseas subsidiary qualify as relevant shipping income; how the calculation of excess finance costs is to be made; how to apply the 75% limit on time charters-in within a tonnage tax group; how to record ‘offshore’ activities and their treatment in the computation; whether incidental income qualifies as relevant shipping income.

The clearance application must include all pertinent information to enable a decision to 11. be made. This should include full details of the tonnage tax group structure (see paragraph 23(iii) below) unless already provided as part of a tonnage tax election.

12.

Provided that all pertinent information is given to HM Revenue and Customs, the treatment agreed will be binding on HM Revenue and Customs. This will hold until (and unless) company circumstances change such that the original clearance is no longer in point. Reviews to determine whether this is the case may form part of any enquiry into a tonnage tax company's tax return. This clearance facility is likely to be of most use to complex groups, perhaps with 13. substantial non-qualifying activities, with unusual vessels or with offshore activities. However, all interested companies are invited to make use of the facility. The clearance procedure will differ from case to case according to the issues under discussion, but is likely to take the form of correspondence alone or a combination of correspondence and meetings.

14.

Clearance applications should be sent initially to the company or group's usual tax district – HM Revenue and Customs will notify the company or group if the case is then transferred to a specialist district (see paragraph 2 above). Adequate time should be allowed for HM Revenue and Customs to respond to the application (and for correspondence and meetings) before the expected date for making the election.

Foreign company/group considering commencing qualifying activities in the UK 15. A foreign company or group considering commencing ship operations in the UK within the tonnage tax regime may seek advice from Liverpool Large Business Office, which will deal with the initial stages of the clearance application.

16.

One of the queries most likely to be raised by such a foreign company or group is potential exit charges, should it subsequently cease operations in the UK. Where a branch or a subsidiary company of a foreign ship operator has been set up in the UK and that branch or company subsequently ceases operations in the UK there is unlikely to be a specific exit charge from the tonnage tax regime. There may however be a potential liability to tax on pre-migration capital gains on assets brought into the UK, if those gains have not already crystallised in another country before migration.

Group Arrangements 17. HM Revenue and Customs recommends that a tonnage tax group should operate under a group arrangement as set out in paragraph 120. A group arrangement will enable a nominated company to act as a representative of the group. This will reduce (although not eliminate) the need for administrative correspondence between HM Revenue and Customs and each individual company in the group, and make some aspects of the legislation much simpler to implement, for instance, the provisions of paragraphs 37 (75% limit) and 62 (finance costs).

18. i) ii) iii) iv) v) vi) vii)

19. i) ii) iii) iv) v)

A group arrangement will normally cover the following matters: Dealing with HM Revenue and Customs on behalf of group companies in respect of clearance applications. Dealing with HM Revenue and Customs on behalf of group companies in respect of the tonnage tax election and renewal elections. Making notifications on behalf of group companies as to whether or not the 75% limit on chartering-in (set out in paragraph 37) has been exceeded and making any appeal under paragraph 43 (against an exclusion from tonnage tax notice). Preparing and negotiating with HM Revenue and Customs calculations required under paragraph 62 (finance costs). Dealing with HM Revenue and Customs on matters arising under paragraph 126(4) (dominant party on a merger) and making an appeal under paragraph 126(5) (against Inland Revenue determination). Making notifications under paragraph 129 (duty to notify Inland Revenue of group changes). The provision of any other information in relation to the tonnage tax regime, which it would be expedient to be provided on a group-wide basis. Notification of a group arrangement will normally include the following details: The name and unique taxpayer reference of each qualifying company in the group. The name and unique taxpayer reference of the representative company. A list of the matters to be handled by the representative company on behalf of the group, if different to the list in paragraph 18(i)-(vi) above, or confirmation that the representative company will handle all items in that list. A declaration signed by an authorised person for each qualifying company confirming that the representative company is authorised to act on their behalf in respect of these specified matters. A declaration signed by an authorised person for the representative company confirming that it agrees to act on behalf of the group companies in respect of these specified matters.

HM Revenue and Customs will agree in writing to the proposed group arrangement and 20. the issues to be covered by it, or suggest modifications to the proposals, as appropriate. The group arrangement does not need to be renewed if the composition of the group 21. changes unless there is a change in representative company. Paragraph 129 notifications will be accepted as notice of changes to the composition of the group arrangement, provided they include a declaration under paragraph 19(iv) in respect of any new additions to the group. The Tonnage Tax Election (Part II) 22. Where a company is a member of a group of companies, the tonnage tax election must be a group election. It is likely that most tonnage tax election will be group elections. Where, exceptionally, a single company makes a tonnage tax election, none of the information requirements listed below in relation to groups will be relevant, and may be ignored.

23.

The initial tonnage tax election should contain the information listed below.

i) ii)

The name and unique taxpayer reference of each qualifying company in the group. A name for the tonnage tax group that can be used as convenient shorthand in correspondence and on tax returns. For example, ‘XYZ TT Group’. It is suggested that ‘TT’ be included in the name, as a tonnage tax group may have a different membership to the UK group for other tax purposes. Full details of the tonnage tax group structure, including details of non-qualifying companies. For many groups this will be a straightforward comment to the effect that the group consists of XYZ parent company with 100% subsidiaries A, B and C. However, where control is, for instance, traced through individuals or complex share structures, then appropriate details will be required. For foreign owned groups, the information should include appropriate details of the overseas structure within which the UK companies are placed. The accounting period(s) from which the election is to take effect. If this is not the period in which the election is made, then further details must be given (see paragraph 26 below for more information). The signature of an authorised person from each company to confirm that the companies are jointly making the election. A declaration confirming that: a) all companies included on the election are qualifying companies, b) all qualifying companies in the tonnage tax group are included in the election, and c) a certificate of approval from the Department of the Environment, Transport and the Regions is in force with respect to the initial training commitment.

iii)

iv) v) vi)

The 75% limit on chartered-in tonnage is not a qualifying condition for making an 24. election. However, an election made during the initial period will be treated as never having been of effect if the limit is exceeded in the first accounting period after entering tonnage tax. Elections made after the initial period will be treated as never having been of effect, if the 25. 75% limit is exceeded in the each of the first three accounting periods (paragraph 38 refers). However, where an election is made after the end of the initial period and the 75% limit 26. is exceeded only in the first accounting period, or only in the first and second accounting periods, the election does not have effect for the one or two ‘exceeded’ accounting periods. Entry is effectively deferred until the first period that the limit is satisfied. In these circumstances, it is essential that the election must still be made within 12 months of becoming a qualifying company.

27.

A renewal election should contain similar information to the initial election, with the following changes:

i) ii)

A start date is not required. The training declaration should be that a training certificate is in force and that the group or company is not subject to a certificate of non-compliance.

An election will usually take effect from the start of the accounting period in which it is 28. made. However, paragraph 12 provides for an election to take effect from the beginning of certain other accounting periods. Where this is subject to the agreement of HM Revenue and Customs, the election should include details of the commercial reasons why one of these alternative start dates is required. For instance, the group might be carrying out a reorganisation to prepare for tonnage tax, and therefore would not wish the election to take effect until after this reorganisation was complete.

29.

In ‘exceptional circumstances’, paragraph 12(4) allows the elections made during the initial period to take effect from the second accounting period after the one in which the election is made. The ‘exceptional circumstances’ must be such that it is commercially impracticable for the company/group election to take effect at an earlier date. This could include contractual arrangements that affect qualification and which cannot be renegotiated in time, or unusually complex restructuring that will take more than one accounting period to achieve. An example of ‘exceptional circumstances’ might be the inability to renegotiate long-term time charters that would push a company or group above the 75% limit on time chartering-in.

30. HM Revenue and Customs will issue to the representative company an acknowledgement to confirm receipt of the election. The acknowledgement will normally include a statement of the date on which the ten-year period covered by the election will start and end, effectively confirming agreement to any backdating or postponement of the starting date, subject to any necessary enquiry into the date of entry. This acknowledgement will not mean that HM Revenue and Customs necessarily accepts that the companies, their activities or their vessels qualify for tonnage tax. A group that wishes to have reassurance on this point should take advantage of the clearance procedure discussed above. 31.

Paragraph 10(3) extends an opportunity for newly qualifying groups of companies to elect into tonnage tax after the initial window of entry. It includes a rule to prevent a group avoiding the normal time restrictions for making an election (paragraph 10(1) - initial period) by making minor changes to the composition of the group. For example, a group that became nonqualifying by divesting itself of its shipping interests and then became qualifying by buying most of them back would be ‘substantially the same’ group as before and would not be eligible to make an election.

Qualifying Companies and Qualifying Ships (Part III) Ships

Paragraph 16(1)(b) requires a qualifying company to operate ‘qualifying ships’ – in this 32. context ‘ships’ can mean a single ship. Strategic and commercial management 33. The definition of a qualifying company in paragraph 16 provides that qualifying ships operated by a company must be strategically and commercially managed in the UK. This is a completely different and separate test to that of ‘central management and control’ relevant in determining whether a company is resident in the UK. The ‘strategic and commercial management’ test arises from the European 34. Commission’s guidelines on State Aid in the maritime sector. No specific EC guidance is available on the meaning of strategic and commercial management and HM Revenue and Customs proposes therefore to adopt a common-sense interpretation, taking into account the various different strands of management activity that can be carried out in respect of a ship. HM Revenue and Customs is happy to provide guidance on this test as part of the clearance procedure outlined in paragraphs 8 to 14 above.

35.

All elements of management activity relevant to the ships in question will be taken into account in determining whether strategic and commercial management is carried out in the UK may include: A

Strategic functions for the shipping business, including i)

Location of headquarters, including senior management staff

ii) iii) iv)

Decision-making of the company board of directors Decision-making of operational board UK stock exchange listing

The types of decision included in (ii) and (iii) above include: decisions on significant capital expenditure and disposals (e.g. purchase and sale of ships); award of major contracts; agreement on strategic alliances (e.g. shipping conferences and pooling); and the extent to which foreign offices work under the direction of UK-based personnel. B

Commercial management of the ship/fleet, including i) Route planning ii) Taking bookings for cargo or passengers iii) Managing the bunkers, provisioning and victualling requirements iv) Personnel management v) Training organisation vi) Technical management including making decisions on the repair and maintenance of vessels vii) Extent to which foreign offices/branches work under the direction of UKbased personnel viii) Support facilities in the UK (e.g. training centre, terminal, etc.)

The fact that a vessel may be flagged, classed, insured or financed in the UK may add 36. further weight to the indicators in 35A and 35B above in deciding whether that vessel is strategically and commercially managed in the UK. Elements of each leg of the test, i.e. both strategic and commercial management, must be 37. demonstrated – the strategic management by features such as in list 35A above, and the commercial management by features such as in list 35B above. The more elements that are carried out in the UK, the more likely it is that the company 38. will be accepted as satisfying this test. However, the approach will not be purely mechanistic; the weight given to each element will depend on the precise facts of each case. Greater weight will be given to higher levels of decision-making and management, as opposed to routine day-to-day management. HM Revenue and Customs recognises that a worldwide shipping operation may have many of the lower level activities devolved to local branches. In assessing the weight and relevance of the various elements of commercial management activity, HM Revenue and Customs will take account of such factors as: i) ii) iii) iv) v)

The extent to which each element is carried out in the UK, as compared with the extent that it is carried on elsewhere The nature and extent of the accommodation occupied in the UK The number of employees engaged in these activities in the UK The country of residence of key management staff, including company directors For an international group, the extent to which such activities in the UK correspond to the UK’s share of the worldwide fleet. If some group functions in relation to the fleet are carried out in the UK and other functions elsewhere, the group may still be seen as commercially managing its fleet from the UK provided there is a reasonable balance of activities in the UK considering the proportion of the worldwide fleet represented by ships within the UK’s tonnage tax regime.

39. An activity, such as ship management, contracted out to a third party will still count as a positive indicator, provided that it is carried on in the UK. 40.

The test does not require the vessels to be operated in UK waters.

Paragraph 16(1)(c) states that the qualifying ships operated by a UK tonnage tax 41. company must be strategically and commercially managed in the UK. This does not mean that each ship operated by the company from the UK must be managed in like manner and to the same extent as every other one. So long as each ship can satisfy some of the criteria in lists A and B above, and the company’s fleet as a whole is strategically and commercially managed in the UK, the paragraph 16(1)(c) test will be satisfied. Examples of strategic and commercial management EXAMPLE 1 42. A wholly UK shipping company, where all management activities in relation to its ships are carried out in the UK. This company will certainly satisfy the test.

43. EXAMPLE 2 A company that has no commercial presence in the UK apart from its registered office and the occasional board meeting. This company will almost certainly not satisfy the test. EXAMPLE 3 44. An international group operates a quarter of its fleet from the UK, through a UK sub-group. The UK sub-group has UK premises and employs around 100 staff in the UK. All technical management of the worldwide fleet is carried out in the UK, but personnel management is in the Far East. The booking system for all vessels is intranet-based using a computer in North America, but UK staff contribute a quarter of worldwide bookings. The operational board of the UK sub-group includes directors based in London, but meets at various locations around the world. The UK ship operating company (ies) would be likely to pass the test, as sufficient activity is carried on in the UK to reflect its share of the ships. Temporary cessations Paragraph 17 is aimed at a single company that temporarily ceases to operate any 45. qualifying ships, perhaps for instance through loss at sea, and allows such a company to remain within tonnage tax throughout the period of temporary cessation. Such a single company would otherwise be excluded from tonnage tax for ten years under the rule in paragraph 140. A group company would not be so excluded, although it may also choose to take advantage of this provision if for example it were to sell all of its qualifying ships at once. HM Revenue and Customs will generally presume that a cessation of more than three months is permanent, unless there is evidence to the contrary.

46.

A company that takes advantage of this provision will calculate its tonnage tax profits as though it still operated the same ships as immediately prior to the cessation. The training obligation will continue to apply.

A group election covers all qualifying activities carried on by any company within the 47. group. If one company within the group ceases to operate any qualifying ships, but at least one other company in the group continues to do so, the group election will continue to have effect. If it is still in force, that election will cover the first company if it later starts to operate qualifying ships again.

48.

Subject to the rules on mergers in Part XII, the group election also extends to newly acquired companies. If a single company has ceased to have any qualifying activities and is then acquired by a larger group and the company resumes qualifying activities after the merger, it will be within the tonnage tax regime if there is a group election in force. The fact that the group contains what was formerly a single ex-tonnage tax company does not prevent the group making a tonnage tax election or a renewal election (paragraph 140(3) refers). Seagoing 49. Paragraph 19(1) describes a qualifying ship as a ‘seagoing ship of 100 tons or more gross tonnage’. Sub-paragraph (4) defines ‘seagoing’ as ‘certificated for navigation at sea by the competent authority of any country or territory’. HM Revenue and Customs will normally accept that a ship is seagoing if it is certificated as such under the International Load Line or the SOLAS (Safety of Life at Sea) conventions. Excluded vessels Paragraph 19(2) prevents a vessel that is used to provide ‘goods or services of a kind 50. normally provided on land’ from being a qualifying ship. Examples of businesses where HM Revenue and Customs will apply this rule include: i) ii) iii) iv) v) vi) vii)

retailers restaurants hotels prisons radio stations casinos financial service providers

This list is not exhaustive. Pleasure craft are excluded from the tonnage tax regime under paragraph 20(1)(b). HM 51. Revenue and Customs accepts that a commercially operated cruise liner, although operated primarily for the recreation of its passengers, is not a ‘pleasure craft’. This exclusion will be interpreted so as to exclude a vessel that is chartered as a whole by its passengers (for instance a holiday yacht) but not to exclude a vessel that has individual fare paying passengers. Chartered ‘as a whole’ will include charter by a passenger alone, or by passengers acting together, or by a third party acting on behalf of one or more of the passengers. The 75% Limit (Part V) 52. Where a company or group has breached the 75% limit for chartered-in tonnage under paragraph 37, and the breach has continued for two or more consecutive periods then, in the absence of any mitigating circumstances, HM Revenue and Customs will consider excluding the company or group from tonnage tax under paragraph 39.

53.

If a company or group is to avoid exclusion, there will have to be mitigating circumstances of an exceptional commercial nature and the company or group must demonstrate a reasonable expectation of falling within the limit in the near future. An example of such mitigating circumstances might be the accidental loss of an owned vessel and its temporary replacement with another on time charter.

54. The power to exclude is a permissive one. If HM Revenue and Customs considers that there is evidence of an attempt to engineer an early exit from the tonnage tax regime, then it may decide not to exercise the power to exclude.

Anti-avoidance (Part V) 55. Paragraphs 41 and 42 provide that a company or group that abuses the tonnage tax regime may be expelled. The provision is aimed at deliberate cases of serious or repeated abuse and will not be used to attack minor errors in the computations or genuine misunderstandings. Nor will it be used to attack any bona fide pre-election restructuring that is required to enable a group to opt for the regime, for instance the divisionalisation of shipping and non-shipping activities.

56.

Examples of situations where the provision may bite include: i)

ii) iii)

The artificial engineering of non-qualifying income so that it falls within the tonnage tax ring-fence; for example, including within the sale price of a cruise entitlement to a significant discount on the purchase of goods or services to be provided onshore; Creating a financing structure that circumvents the rules in paragraph 62. Involvement in leasing arrangements designed to circumvent the restrictions in Part X on finance leases.

Relevant Shipping Profits (Part VI) Core qualifying activities Paragraph 46 provides that core qualifying activities include the operation of qualifying ships and activities integral and necessary to such operation.

57.

58. Operation of the ship is defined by paragraph 18 in terms of ownership, but to be qualifying the ship must, under paragraph 19(1), be used for transporting passengers or cargo, providing marine assistance, or providing transport for services at sea. 59.

Activities ‘necessary and integral’ are those activities that are essential to enable the ship operation to take place. These include ship management operations such as purchasing fuel and hiring crew and commercial management operations such as booking cargo. They do not include activities that are merely customary or desirable, although such activities may count as qualifying secondary activities. For instance, providing food for short sea ferry passengers is not integral and necessary to their transport and is therefore not core. However, it is a wholly qualifying secondary activity.

60.

The following paragraphs give guidance on some specific maritime activities.

Tugs

61. The operations of a seagoing tug will normally be accepted as core qualifying activities. These will include: i) Assistance at sea ii) Salvage (but see also paragraph 62 below) iii) Construction work in the marine environment iv) Support activities for seagoing ships

62.

Where a tug is involved in raising sunken cargo, this will be regarded as diving support and will need to be treated under the principles described below for transport for services at sea. Any profits from the sale of salvaged goods will fall outside the tonnage tax ring-fence.

Vessels providing transport for services at sea 63. Vessels providing services at sea include diving support vessels, cable layers and crane barges (or ships performing a similar function). It is necessary to apportion the profits/losses

from the operation of such vessels between that attributable to transport and that attributable to the service provided. HM Revenue and Customs will accept any method of apportionment, which produces a just and reasonable result.

64. For example, HM Revenue and Customs will accept that the profit from transport will be the income that would be receivable on a time charter of a similarly modified vessel for the duration of the accounting period, less the actual expenses of running the vessel (excluding any expenses relating to the provision of the service). Any remaining profit will be the profit relating to the provision of the service and will remain outside the tonnage tax ring-fence. 65. Alternatively, the reverse of the method in paragraph 64 above could be used. For example, where both divers and a diving support vessel were provided, the income and expenses of providing the divers alone could be deducted from the overall profit or loss. Any remaining amount would then be ‘relevant shipping profits’ for tonnage tax. Merchant adventurers Some ship operators behave as ‘merchant adventurers’ by taking full or part ownership of 66. their cargo, rather than simply acting as carriers. If there is a price risk associated with the cargo, then a just and reasonable apportionment of the profit or loss on the voyage must be made. A price risk is any situation where the operator buys and sells the cargo at different prices. HM Revenue and Customs will accept that where the ship operator does not bear any price risk relating to the cargo, then the whole of any profit or loss on the voyage will be within relevant shipping profits for tonnage tax purposes.

67.

Tanker operators provide an example of merchant adventuring. For instance, some tanker owners load their own cargo of oil and transport it to a destination in the hope of reaching the market at the right time to achieve a larger profit. Similarly, oil can be sold on a ‘delivered’ basis, where the oil is sold at the end of a voyage at the prevailing price, the price risk remaining fully with the ship operator. In these situations a profit split would need to be made between the non-tonnage tax profit on the oil and the tonnage tax profit on its transportation.

68.

However, where the oil is sold FOB (free on board) to the ship operator and then sold on C&F (cost and freight), the ship operator would not have a price risk on the oil itself. In effect, the operator would receive freight income for the route, depending on supply and demand for tankers, plus additional remuneration from the shipper if diversions were made from that route to another port. In such a situation a profit split would not need to be made.

Pooling on liner services 69. A ship operator may form alliances or pools with other companies and share liner routes. It is the nature of a pooled liner service that the cargo, having been booked by the ship operator, may actually be carried in one of the partners’ ships. HM Revenue and Customs accepts that, provided a balance is maintained between the bookings made with originating customers (not being other shipping lines) and the cargo carried in its own ships, then the trade will be regarded as one of ship operation and will be a core qualifying activity.

70.

A reasonable balance will be regarded as maintained where in an alliance or pool, over a three year period, the aggregated slots/space allocated for use by originating customers of tonnage tax companies in a UK tonnage tax group match the slots/spaces provided to the alliance or pool in ships operated by those companies. An excess of bookings over cargoes carried of not more than 10% will be disregarded. Where there is consistent structural underprovision of more than 10% cargo carrying on own vessels, bookings over the 10% will be regarded as the carrying on of a separate trade outside tonnage tax.

71. Where similar arrangements exist in other non-liner sectors, similar principles will be applied as appropriate, suitably adapted to the circumstances of the sector. Secondary activities 72. Qualifying secondary activities are defined in the Tonnage Tax Regulations 2000. This next section provides guidance on some of the operational aspects of these regulations. Some of the regulations and notes below contain provisions whereby activities are 73. allowed up to a certain limit. Where this limit is breached, then the whole of the profit or loss from that activity will fall outside the tonnage tax ring-fence. However, where the limit is breached to a minimal extent then HM Revenue and Customs may accept, on de minimis grounds, that no adjustment is required. This relaxation is to apply in exceptional circumstances only and will not apply to habitual breaches.

74. Activities that are not listed in the regulations and which are not core qualifying activities will be outside the tonnage tax ring-fence. It is not possible to provide an exhaustive list, but some examples are given below: The operation of a port or harbour. In small ports where the port and a qualifying wharf/terminal are effectively one and the same, the non-qualifying element should be determined on a just and reasonable basis. ii) The processing of goods and materials whether on-board, on the quayside or elsewhere, other than consolidation and breaking of cargo under the regulations. The protection and maintenance of cargo (such as refrigeration or the maintenance of any ripening fruit) will not be regarded as processing. iii) The storage of cargo beyond what is immediately necessary whilst awaiting loading onto ships or onward transportation. For example, a warehousing or cold storage trade will not be within tonnage tax. iv) The hire of containers to customers for use otherwise than for cargoes booked by the tonnage tax company for transit by sea. v) Dealing or speculation in shipping futures or other shipping related financial instruments such as bunkers, not wholly entered into to hedge the company’s tonnage tax trade. vi) A ship based holiday where the ship remains moored and there is no sea transportation element. vii) Sales where orders are taken on- board for go ods t o be subseq uently delive red to an address provided by the c ustomer or w here the goods are not of a custo mary type for cruise or ferry passengers to purchase. viii) Operations that would fall to be treated as a separate trade under normal tax principles. For example, it is accepted the buy ing and selling ships is part of the norm al operation of ships and is a core qualify ing activit y. However, where the buy ing and selling takes place to such an extent tha t the trade effec tively becomes one of ship-dealing rather than ship operation, then it would fall outside tonnage tax. i)

The regulations allow activities carried out by one member of a tonnage tax group in 75. connection with qualifying ships operated by another member of the same group to be qualifying secondary activities. The regulations also set out that if such activities are carried out additionally for third 76. parties they may qualify as secondary activities if certain conditions are met. The first condition is that the activities for third parties should only use such staff and resources as are necessary to carry out the main function of the company – that is to say all qualifying activities (core or secondary) which it carries out in respect of qualifying ships that it (or another member of the same tonnage tax group) operates. The second condition is that the level of third party services should be minimal compared with the level of activities carried out in respect of those qualifying

ships. These conditions refer to the total of all third party activities, but in most cases, it will be simpler and more practical to apply them on an activity by activity basis. For example if a booking office for a cruise line also sold railway tickets, the level of railway ticket sales which could qualify as secondary activities would depend on the level of staff needed to sell the group’s cruise tickets and the comparative volume of railway tickets sold compared with cruise tickets.

77. Companies may prefer to separate out secondary activities carried on for third parties and compute and return the profit on such activities outside the ring-fence. In such cases, HM Revenue and Customs would only look at the third-party work still conducted within the tonnage tax ring-fence in applying the test to determine whether third-party work was minimal. 78.

For example, say a ship operator within tonnage tax has a substantial ship management department providing services to third parties as well as other members of the group. It divides its 32 staff into 12 managing group ships and a dedicated section of 20 staff doing third party ship management. If the 20 third party staff do occasional work to help the in-house department, this work should be transfer-priced across the ring-fence. If the 12 in-house staff do occasional work for the third-party department then, provided this is minimal in comparison with the level of the in-house work done by those 12 staff, then any profit from that third-party work would be within tonnage tax.

In order to determine whether the conditions are met, the level of activity may be 79. determined by any reasonable method including reference to turnover, costs, tonnage of ships or number of TEUs, as appropriate. Only if the conditions are not met will it be necessary to make a full and proper allocation of income and expenditure between secondary activities inside the ring fence and those outside it. Whether the level of an activity is minimal will depend on the measure used and the facts 80. of the case, but HM Revenue and Customs will not normally accept that third party activity is minimal in any case where it exceeds 20% of that activity carried out in support of ships operated by the tonnage tax group. Where third party services are provided under a reciprocal arrangement between two 81. operators, HM Revenue and Customs will accept that third party services may qualify as secondary activities to the extent that they are reciprocated by the other party. Companies may seek confirmation concerning the extent to which an activity for third 82. parties will qualify as part of the clearance procedure outlined in paragraphs 8 to 14 above.

83. Where administrative and financial services provided under the regulations also relate to the ‘non-sea leg’ of an inclusively priced journey or, in the case of passengers, to a related excursion or holiday on land, then they will be accepted as being part of the wholly qualifying secondary activity. Passengers HM Revenue and Customs will accept that the following activities are carried out in 84. connection with the embarkation or disembarkation of passengers or as part of an inclusive transport service bought in at an arm’s length price: i) ii)

Car parking, provided that receipts from non-passengers do not on average exceed 10% of receipts from passengers; Train, coach, bus or other transport services (including flights) to take passengers to or from the ship or eligible linked holiday; including: a) purchase of single seats or block of seats on scheduled services, and

iii) iv)

b) chartered-in transport to and from cruise, provided that only qualifying passengers are carried; A single night's accommodation for passengers in transit immediately prior to embarkation or immediately after disembarkation; The provision of quayside shopping facilities for passengers, provided that the range of goods available is no wider than would qualify to be sold on board under the regulations.

85. HM Revenue and Customs will accept that the ‘provision of excursions for

passengers’regulation includes: excursions on non-qualifying vessels; i) the provision of a shore-based facility for the exclusive use of own passengers; ii) trips of longer than a single day provided the cabin on board ship remains iii) ‘occupied’ by the passenger.

Gambling Gambling is to be interpreted broadly and will include slot machines, casino games of chance, raffles, bets on horse racing etc. HM Revenue and Customs will accept that the turnover from gambling is negligible if it amounts to less than 10% of ticket sales plus receipts from the letting of cabins and sale of food and drink for immediate consumption for that voyage. For the purposes of this test, turnover will be regarded as receipts from gambling after deducting winnings paid out, but before any other expenses. The test applies separately to each individual voyage. In this context, a round-the-world cruise will be viewed as a single voyage.

86.

87.

Where the turnover from gambling on a particular voyage is more than negligible, then the whole of the profits from gambling on that particular voyage will fall outside the ring-fence.

88.

Where third party concessionaires offer gambling facilities and the ship operator’s income from the concessionaire varies partly in relation to turnover, then the ‘negligible’ test will also apply to the income from the concessionaire.

Sale of luxury goods 89. Whether or not goods are luxury goods depends upon the standard of goods and services that would normally be expected by the passengers on a particular cruise or journey, and the extent to which they will continue to be enjoyed by the purchaser after completion of the journey. HM Revenue and Customs will accept that turnover from the sale of luxury goods is negligible if it does not exceed 10% of total ticket sales plus receipts from the letting of cabins and sale of food and drink for immediate consumption for that voyage. Where the turnover from sale of luxury goods on a particular voyage is more than 90. negligible, then the whole of the profits from sale of luxury goods on that particular voyage will fall outside the ring-fence. Where luxury goods are offered for sale on-board by third party concessionaires and the 91. ship operator’s income from the concessionaire varies partly in relation to turnover, then the ‘negligible’ test will also apply to the income from the concessionaire. Slot charters 92. Slot charters between shipping companies will be accepted as qualifying secondary activities under the same principles set out in paragraphs 69 to 71 above on pooled liner services. Incidental activities 93. This category of income will be very restricted in scope and will deal with minor items of shipping related income that do not fit comfortably into core or secondary categories. The aim

will be to prevent what is otherwise a wholly qualifying shipping company from having to apply normal corporation tax rules to insignificant items of ship-related income.

94. Incidental shipping related activities may come within tonnage tax if the turnover from them is less than 0.25% of the turnover from other activities that fall within the tonnage tax ringfence. Any unused balance of this limit will not be available to set off against non-qualifying secondary activities. 95.

However, if ship-related activity, which could fall within the definition of ‘qualifying incidental activities’ is consistently returned outside the tonnage tax ring fence, then HM Revenue and Customs will not argue that it should be treated as a qualifying incidental activity for the purposes of applying the 0.25% of turnover test to other items of incidental income.

Distributions of overseas shipping companies The tests set out in paragraph 49(2) are very strict, in particular the paragraph 49(2)(d) 96. requirement that all the overseas company’s income is such that it would be relevant shipping income if it were a tonnage tax company. HM Revenue and Customs appreciates that this test may in practice be very difficult to comply with, particularly where the company is not wholly owned. For instance, dividends from a company with income from a secondary activity in excess of permitted levels could not be included under this provision.

97.

Tonnage tax groups wishing to ensure that overseas companies will qualify under paragraph 49(2) should make sure that any non ship-related activities are taken out of those companies. The condition in 49(2)(d) will be satisfied if the overseas company has no activities which could generate income other than relevant shipping income. However, the test applies to income and not to activities, and HM Revenue and Customs will accept that the test is satisfied if effective arrangements are in place to ensure that no income arises which is not relevant shipping income. This will ensure that all profits arising from non-qualifying activities will be taxed outside the tonnage tax ring-fence when paid up to the UK as dividends.

98. HM Revenue and Customs will accept that the tests should be applied afresh for every period of account of the overseas company. For example, suppose a tonnage tax company has an overseas subsidiary with a December year-end that carries out mixed activities. During 2005, this overseas company sells its non-shipping activities so that in 2006 and 2007 it complies with the paragraph 49(2)(d) condition. Half way through 2008, it again becomes a mixed activity company. In this example, dividends declared out of 2006 and 2007 profits paid in either of those two years would meet the conditions. Dividends declared out of profits for 2005 and prior or 2008 and subsequent (whenever paid) would not meet the conditions. 99. HM Revenue and Customs will also accept that where an overseas company receives minimal levels of non-relevant shipping income, this may be disregarded on de minimis grounds when considering the paragraph 49(2)(d) condition. Minimal in this case means income up to the level specified in paragraph 48(2), i.e. 0.25% of turnover from core and qualifying secondary activities. 100. In paragraph 49(2)(f) there is a condition that the profits from which the dividends are paid must be subject to tax. This test may still be satisfied even if there is no actual liability to tax on those profits (for example because of the operation of loss relief), so long as the profits in question are ‘subject to a tax on profits’. The rules of computation for tax purposes of those profits are also immaterial - for example, dividends paid by a company within a comparable tonnage tax regime in another country would satisfy the ‘subject to a tax’ test. 101.

HM Revenue and Customs will accept that a qualifying dividend that is credited in the accounts of a tonnage tax company will fall within the tonnage tax ring-fence, even if it is

actually received when the company has ceased to be a tonnage tax company. A dividend that is credited in the accounts of a company after it has ceased to be a tonnage tax company will not fall within the tonnage tax ring-fence, even if it meets the conditions of paragraph 49

102. HM Revenue and Customs will accept that profits arising on the disposal of all or part of an overseas shipping business may be paid out as dividends under these rules, provided that the overseas company has qualified to pay such dividends (see above paragraphs) for the five years prior to the disposal 103.

Where dividends from overseas shipping companies are regarded as relevant shipping income, the supporting computations must give appropriate details. These should include all the information to justify inclusion within tonnage tax, such as name of ship, IMO number, type of charter, etc. plus of copy of the accounts for each foreign company

Exclusion of interest income etc 104. Under paragraph 50, only such interest, as would under normal corporation tax rules be treated as being trading income arising from the trade consisting of a company’s tonnage tax activities, may come within the ring fence as relevant shipping profits.

105. In deciding whether or not interest received would be treated as a trade receipt under normal corporation tax principles, companies should bear in mind the cases of Nuclear Electric v Bradley (68 TC 760) and Bank Line Ltd v CIR (49 TC 307). In the latter case Lord Avonside commented ‘Income becomes a trading receipt when it arises from capital actively employed and at risk in the business because it is required for its support or, perhaps, to attract customers looking to the credit of the business. Trading income is ‘the fruit’ of the capital employed in the business in the present and active sense’. This description would not extend to cover interest arising from the proceeds of ships held on deposit whilst replacement ships are sought. The Ring Fence (Part VII) Transfer-pricing 106. Paragraphs 58 and 59 require adjustments to be made (in accordance with Schedule 28AA ICTA 1988) where transactions or arrangements involving connected persons, or indeed tonnage tax and non-tonnage tax divisions of the same company, are not on arm’s length terms. This applies to all transactions regardless of whether or not a hard charge would normally be made for the goods/services provided. The existence of the special ring-fencing rules for finance costs does not over-ride the requirement to apply the transfer-pricing rules to financial transactions across the ring fence or with a connected party outside the UK. Finance costs 107. HM Revenue and Customs will not insist on ‘hard charging’ for the cost of finance across the ring fence. However, where finance costs across the ring fence are at less than arm’s length rates, transfer pricing across the ring fence should be undertaken before reallocation of finance costs is computed.

108. A tonnage tax company or group must ensure that an appropriate proportion of its finance costs, in accordance with paragraph 61 or 62, is included in the company’s or group’s return(s) of profits, if it is not already charged against its relevant shipping profits. Further guidance is available in the Annexe to this Statement of Practice. Capital Allowances (Part IX)

Transfers of ships within a tonnage tax group 109. Section 343 of the Income and Corporation Taxes Act 1988 (company reconstructions without a change in ownership) can apply to transfers of shipping trade between members of the same tonnage tax group. Where a shipping business is transferred between members of a tonnage tax group in such circumstances as Section 343 would normally apply, the tonnage tax pool relating to that shipping business may be transferred along with the shipping business itself to the new owner.

110. One member of a tonnage tax group may own a ship which it bareboat charters to another member of the same group. HM Revenue and Customs will accept that this is a trade for the purposes of Section 343 ICTA 1988. If the ship (still subject to the bareboat charter) is transferred to A third Company within the group, the tonnage tax pool relating to that ship may also be transferred to the third company. Industrial buildings 111. Paragraph 82 provides that where an ‘identifiable’ part of a building is used for tonnage tax purposes, then that part of the building will be treated as though it does not qualify for industrial buildings allowances. Normal principles should be followed when applying this rule. For instance, the 25% rule in Section 18 of the Capital Allowances Act 1990 will apply in the usual manner. Finance Leasing (Part X) 112. Part X applies special rules to ships leased into the tonnage tax regime under finance lease terms. Paragraph 90 prevents a finance lessor claiming capital allowances in respect of the cost of a ship leased to a tonnage tax company where the leasing arrangement includes provision of security to such an extent that most of the non-compliance risk associated with the lease is removed from the lessor.

113. In measuring the ‘non-compliance risk’ it will be necessary to take into account the future realisable value of the ship. This may be derived from a series of valuations carried out as at regular intervals over the length of the lease. For example on a 20-25 year lease, valuations should be made as at intervals of not less than 5 years. These should be professional valuations taking into account normal valuation principles: factors such as the anticipated state of that sector of the shipping market, the forecast of future trends, the adaptability or otherwise of the ship to other purposes and the dominance of the lessee in that particular sector may be relevant if they are part of a normal valuation process. 114.

The valuation should be done from the perspective of Day 1 – if the circumstances subsequently change, HM Revenue and Customs will not seek to revisit the valuation.

115.

The ship should be valued unencumbered by any security sought (such as a mortgage given to a third party guarantor), to avoid any difficulties with circularity.

116.

Paragraph 90 will not apply to certain types of security. These are i) Any security inherent in the leased ship itself, provided to the lessor or to a third party guarantor, including - a mortgage on the leased ship - an attachment of the lessee’s earnings from the leased ship - assignment of any insurance proceeds arising in respect of the leased ship - rental rebates arising from the arm’s length sale of the leased ship ii) Any guarantee or other security which satisfies the conditions set out in paragraph 91(3)-(5).

117. Parental guarantees are also left out of account in considering whether the 50 per cent limit has been breached. In the case of a guarantee by the lessee’s parent this is because subparagraphs 92(2) and 91(3) apply equally to the lessee and a person connected with the lessee. In the case of a guarantee from the lessor’s parent, it is by virtue of paragraph 91(6). 118.

Whilst the paragraph 91 only refers to the security inherent in the leased ship, where more than one ship is leased as part of the same deal, HM Revenue and Customs will accept that the cross-collateralisation of all the ships leased under that deal falls under this heading.

119. The forms of security listed in Paragraph 91 will be completely disregarded in considering whether or not more than 50 per cent of the non-compliance risk associated with the lease is removed from the lessor (or a person connected with the lessor). This means that any such security should not be taken into account in computing the non-compliance risk and furthermore any security within paragraph 91 will be treated as not removing any of that non-compliance risk from the lessor. 120. Pre-delivery guarantees, whereby the putative lessor obtains guarantees in respect of interim finance during the construction stage, may also be left out of account in looking at the extent of removal of non-compliance risk from the lessor, since HM Revenue and Customs accepts that such guarantees are not part of the leasing structure once the ship has been delivered and the lease is in place. Offshore Activities (Part XI) 121. Paragraph 103(2) provides that the special rules applicable to offshore activities do not apply unless the number of days in which qualifying ships are operated in offshore activities exceeds 30. The 30 days to be taken into account are the total number of ship-days within the designated area operated by all of a company's vessels in the accounting period. Thus, a company operating two vessels in offshore activities, one for 15 days and the second for 16 days exceeds the 30 days total and both ships come within the special rules for offshore activities. 122. Qualifying ships engaged in the search for oil or gas on the UK continental shelf, e.g. a seismic vessel, fall within the description of offshore activities in paragraph 104(1) and, similarly, qualifying ships engaged in the exploitation of UKCS oil or gas e.g. a pipe-laying vessel also fall within it. However, the term ‘offshore activities’ is much wider than this because of the words ‘in connection with’ and covers all types of ships used in the actual task of exploring for or exploiting gas or oil either in an ancillary, subordinate or supporting role, e.g. a diving support vessel. 123. Paragraph 105 excludes certain vessels from the special rules for offshore activities. The reference to supply vessels, tugs and anchor handling vessels includes vessels performing one or more of the activities of supply, towage and anchor handling. 124. The period of inactivity referred to in paragraph 106(a) will include the period during which the vessel is being commissioned in preparation for its forthcoming operation. Similarly, any decommissioning activity on completion of the contract will also be included. 125. Paragraph 110(4) refers to where plant and machinery ceases permanently to be used for the purposes of offshore activities. In this context the question of whether an item of plant and machinery has permanently ceased to be used for offshore activities purposes is primarily a question of fact. In general HM Revenue and Customs would be prepared to regard a period of two years or less during which the item of plant and machinery is not used for offshore activities as being merely temporary.

Groups, Mergers & Related Matters (Part XII) 126. Paragraph 117(2) provides that a company will not be brought into a tonnage tax group if the individual treated as controlling it does not in practice have any ‘significant influence over the affairs of the company in question’. Whether significant influence exists will be interpreted according to the facts of each particular case. It will generally be presumed that where there is a close family relationship, such as husband and wife or parent and minor child, then significant influence will exist. An example of where significant influence may not exist is where there has been a long-term demonstrable family rift and the controlling parties have no contact with each other. 127. Where a foreign group including companies operating qualifying ships comes to the UK for the first time, it will have 12 months to decide whether to elect into tonnage tax under paragraph 10(3). If it decides to elect in, the election will have effect from the time that the group came to the UK. If such an election is made, the group will be considered as a tonnage tax group from the moment it comes to the UK for the purposes of applying the rules on mergers set out in paragraphs 123 to 126. Corporate Partnerships (Part XIII) 128. Companies that are members of a partnership may bring qualifying activities carried on through that partnership into tonnage tax, even if some or all other partners are outside the regime. The detailed rules are contained in Paragraphs 130 to 136 and in Regulation 8 onwards of the Tonnage Tax Regulations 2000. 129.

These rules cover, amongst other things: i) the computation of tonnage tax and non-tonnage tax profits, ii) the application of the 75% chartering-in limit, iii) the computation of chargeable gains, and iv) the calculation of capital allowances following a partner’s exit from tonnage tax , and will apply equally to those partnerships that have legal personality (as in Scotland), as they do to partnerships that do not.

130. Broadly speaking, the effect of these provisions will enable a partner, which is a tonnage tax company to calculate the partnership profit along tonnage tax lines. Partners, who are not within tonnage tax, will calculate their share of partnership profit by reference to normal UK corporation tax principles. Thus, there may be different parallel computations of the profits of one partnership, e.g. one on tonnage tax lines and one on normal corporation tax lines. The Tonnage Tax Unit at Liverpool, Large Business Office (see paragraph 6 above) will advise on points of concern or difficulty. Exit Charges (Part XIV) 131. Paragraph 137(2) provides that exit charges will apply where a company ceases to be a tonnage tax company ‘...for reasons relating wholly or mainly to tax’. This paragraph is aimed at situations where a company or group deliberately engineers an exit from tonnage tax, perhaps through a temporary cessation of all qualifying activities or a deliberate manipulation of corporate structures. HM Revenue and Customs will not seek to apply exit charges if: (i) the company has reached the natural expiry date of its election (even if the reason that the company chooses not to renew its election is ‘relating wholly or mainly to tax’, for instance, if the reason for not renewing is that it wishes to utilise shipping losses); or

(ii) the company has good commercial reasons, aside from considerations of tax, for leaving tonnage tax; or the company is wound up, except in circumstances where company liquidations are a feature of a group scheme to engineer a deliberate exit from tonnage tax; or (iii) the company leaves the UK except in circumstances where the change in company residence is a feature of a group scheme to engineer a deliberate exit from tonnage tax; or (iv) the company ceases to be a tonnage tax company as a result of the operation of the rules on mergers.

ANNEXE Finance costs Broad approach of the legislation This statement provides guidance on the implementation of paragraphs 61 to 63. These 1. require that where a single company or members of a group include an excessive deduction for finance costs in computing profits outside the tonnage tax ring-fence, then additional taxable profits should be brought into account to reflect the excess. The rules will apply to all tonnage tax companies or groups that carry on non-tonnage tax activities and incur finance costs that are deductible for the purposes of corporation tax.

2. A simple example of a situation where an additional charge would normally arise is a diversified group that funds its shipping subsidiaries through equity and its non-shipping subsidiaries through debt. 3.

The legislation does not include detailed rules prescribing exactly how the calculation of the additional profits should be carried out. Instead, companies and groups may choose an appropriate methodology for this calculation to ensure a just and reasonable result when their own circumstances are taken into account.

4.

This guidance assumes that a tonnage tax group is involved, although the principles can be adapted for a single company, as shown in example G below. Where a group operates under a group arrangement as described in paragraphs (17) to (21) above, HM Revenue and Customs will accept that these calculations should be carried out by the representative company and not by every tonnage tax company in the group. However, any resulting adjustment should be allocated to all the tonnage tax companies, as required by paragraph 62(5).

Computational principles The calculation of the excess finance costs for an accounting period will involve the 5. following stages: i)

Determine the total UK-deductible finance costs of the tonnage tax group that are taken into account in computing profits arising outside the ring-fence (after any statutory disallowances including transfer-pricing adjustments). Intra-group finance costs with a corresponding direct receipt chargeable to UK Corporation tax (outside the ring fence) in the same accounting period elsewhere in the group do not need to be counted for this purpose.

ii)

Determine the total UK-deductible finance costs of the tonnage tax group, as if there were no tonnage tax election in place. This could be approximated by the amount determined in (i) above, plus finance costs charged in the calculation of relevant shipping profits. Intra-group finance costs with a corresponding contemporaneous UK taxable receipt that were not counted under (i) above should again be ignored here.

iii)

Determine the proportionate amount of the costs calculated in (ii) that cannot be regarded as being incurred so as to give rise, directly or indirectly, to relevant shipping profits. This should be done on a just and reasonable basis having regard to the underlying funding and the generation of relevant shipping profits. Further guidance is given below.

iv)

Calculate the excess of (i) over (iii), if any.

v)

Allocate this excess to the tonnage tax companies in proportion to their tonnage tax profits.

6. Stages (i) to (iv) can be represented by the following formulae, which are used to facilitate the examples below: E = A - (F x B) IF (F x B) > A THEN E = 0 where: is the excess finance costs to be allocated to the tonnage tax companies. is the group finance costs that can be taken into account outside the ring-fence (before the application of paragraph 62). B is the group finance costs determined as if there were no tonnage tax election in place. F is a just and reasonable fraction. E A

7.

Where there are non-coterminous accounting periods, then the periods should be matched using any just and reasonable method.

Definition of finance costs 8. Finance costs are defined at paragraph 63. All of the costs arising from debt financing should be included and HM Revenue and Customs will expect this provision to be interpreted very broadly. It could include off-balance sheet methods of financing. However, finance costs will not normally include costs incurred through the late payment of debts, such as interest paid to trade suppliers or interest on late payments of corporation tax/PAYE/VAT. Determining the just and reasonable fraction (F) It is not possible to specify a single universally applicable formula for determining F, as 9. different groups will have different operational and financial circumstances. Each group will therefore have to devise its own methodology. A group may wish to discuss this with its tax office as part of the clearance procedure.

10. In devising an appropriate methodology, HM Revenue and Customs will generally expect the following considerations to be taken into account: i)

The calculations must observe the principle of fungibility. This means that individual items of finance should not be linked with individual activities or individual assets. Instead the financing should be viewed as funding the totality of all the tonnage tax and non-tonnage tax activities of the group's UK companies and those of its overseas subsidiaries.

ii)

Any consideration of tonnage tax activities must include the activities of overseas shipping companies whose dividends would ordinarily be relevant shipping profits under paragraph 49 (and thus subject to UK corporation tax solely under the tonnage tax regime). This is the case irrespective of whether any such dividends are paid during the accounting period under review. This approach is necessary to avoid distortionary tax effects that could otherwise be caused as a result of the group’s commercial decisions as to where debt is to be located. See examples I and J below.

iii)

If the funding requirements of a business differ from activity to activity the calculation of F should take this into account. Shipping is generally a capital-intensive activity due to

the high costs of the assets and would be expected to require greater funding than many other activities. iv)

The existence of and circumstances surrounding intra-group financing across the ringfence should be taken into account in considering the nature of the activities outside the ring fence and in arriving at the adjustment required.

v)

A group that utilises complex international funding structures must take these fully into account in determining whether or not a proposed methodology produces a just and reasonable result.

11.

The methodology chosen must be used consistently from period to period, unless group circumstances change so that this would no longer produce a just and reasonable result.

Examples 12. The examples below are designed to demonstrate how a just and reasonable result might be reached. They are not exhaustive and are necessarily simplified.

A

A tonnage group carries out wholly qualifying shipping operations and all income and expenses (including £100 finance costs) are accounted for within the tonnage tax ring-fence. In this situation there are no activities outside the ring-fence and therefore neither paragraph 61 nor paragraph 62 applies.

B

The same situation as A, except that the £100 finance costs are borne outside the tonnage tax ring-fence, and the group now has £100 of interest income outside the ring-fence. This interest income is negligible when compared to the rest of the group's activities and therefore any funding used to support the interest bearing deposit will also be negligible. This means that F is 0% so E is 100. The net result is taxable income outside the ringfence of £100.

C

The same situation as B, except now the £100 of interest income is material to the group, representing 10% of its total income. It might now be reasonable to regard some of the debt as funding the interest bearing deposit, and therefore F increases to (say) 10% and E reduces to 90.

D

The same situation as C, except the £100 of interest income now represents 10% of the group’s total profits but only a negligible proportion of its total income. A just and reasonable view might be that the funding applicable to the interest bearing deposit is negligible compared to the funding for the business as a whole, giving the result that F is 0% and E is 100.

E

A tonnage tax group contains two UK companies, one of which is a tonnage tax company carrying out wholly qualifying shipping operations and the other of which is not a tonnage tax company. Both businesses are of similar size with similar funding requirements and therefore it is appropriate for F to be 50%. Each company incurs £100 finance costs, of which the tonnage tax company’s are inside the ring fence. In this situation A = 100 and B = 200. This means that E = 0 and no adjustment is required.

F

The same situation as E, except that the tonnage tax company is now wholly equity funded and all the finance costs have been charged in the non-tonnage tax company. Now A = 200, B = 200, F = 50%, and therefore E = 100.

G

The same situation as F, except that the tonnage tax group is a single company with two divisions. The finance costs are charged equally inside and outside the ring-fence. There is already an equal sharing of finance costs on either side of the ring-fence, so E = 0.

H

A tonnage tax company decides to increase its borrowings at the same time as it acquires a non-tonnage tax company. Finance costs are £100. Before this borrowing, the group was entirely equity funded. The two businesses are of similar size and with similar funding requirements. The group takes the full £100 into account in computing its profits outside the ring fence. The principle of fungibility means that the finance costs must be regarded as relating to both businesses. Thus, F = 50%, and A = 100, B = 100 and therefore E = 50.

I

A tonnage tax group consists of three companies: one is a tonnage tax company carrying out wholly qualifying shipping operations, another is an overseas company qualifying to pay dividends under the provisions of paragraph 49 and the other is a UK non-shipping company. All three businesses are of similar size and with similar funding requirements. Finance costs of £900 are all taken into account in computing the profits of the non-shipping company. Non-tonnage tax activities account for one third of the group. The paragraph 49 company counts as tonnage tax for this purpose therefore F = 33%. This means that A = 900, B = 900 and E = 600.

J

The same situation as I, except that the finance costs are charged £375 in each UK company and £150 overseas. This means that A = 375, B = 750 and F = 33% giving E = 125. It can be seen that this gives a net UK deduction of 250/750 outside the ring-fence, which is proportionately the same as the 300/900 in example I. This satisfies the principal at 10(ii) and takes proper account of the fact that overseas debt reduces the extent of the group's UK source financing requirement.

K

The same situation as J, except that the non-shipping company is now an overseas company. This means that A = 0, B = 375 and E = 0 (E cannot be negative).

L

The same situation as J, except that additional finance costs of £150 are paid by the nontonnage tax company to the tonnage tax company. The interest does not constitute trading income and is therefore taxed outside the ringfence. A still = 375 (as the additional costs can be ignored), B still = 750 and F = 33% giving E = 125 (as in J).

M

The same situation as L, except that the additional finance costs of £150 are paid by the nontonnage tax UK company to the overseas shipping subsidiary. A = 525 (the additional costs are now brought into account), B = 900 and F = 33% giving E = 225.

N

Mrs X controls a group of UK non-tonnage tax companies that are funded primarily by debt. Her husband controls a group of tonnage tax companies that are funded primarily by equity. The debt and finance costs in the Mrs X companies must be taken account of in the paragraph 62 calculations.

O

A tonnage tax group incurs UK finance costs of £100 outside the ring-fence. F is determined at 2/3 which means that E = 33.3. The group enters into a financing arrangement whereby equity is invested in a subsidiary in a low tax regime and funds loaned back from this subsidiary to a tonnage tax company.

There are no additional commercial activities created by this transaction and prima facie, F remains at 2/3. Interest paid by the tonnage tax company to the overseas finance company increases B but has no impact on A, thus reducing E. The main benefit of this arrangement to the group is to avoid an additional tax charge. HM Revenue and Customs would view this as not being a just and reasonable result and would expect a further adjustment to be made.

SP1/01

Treatment of Investment Managers and their overseas clients

1. This statement gives guidance on the application of the rules in Finance Act 1995 regarding the assessment of UK investment managers who act on behalf of overseas clients. In particular, it sets out HM Revenue and Custom’s view on: (a) the extent to which trading in the UK by a non-resident client affects protection from assessment in the name of an investment manager (section 127, Finance Act 1995); (b) the factors to be taken into account in determining whether active management of a portfolio on behalf of a non-resident client constitutes the exercise of a trade in the United Kingdom by that client; (c) the circumstances in which an investment manager is considered to be acting in an independent capacity within section 127(3)(c) Finance Act 1995, and (d) the application of the 20% rule in section 127(4) Finance Act 1995. Part I: Background 2. Sections 78-85 Taxes Management Act 1970 contained a number of provisions concerning the assessment of a UK agent acting on behalf of a non-resident principal. In particular section 78(2) ensured that certain UK investment managers were not assessable to tax on behalf of their overseas clients. Statement of Practice 15/91 gave guidance on the application of those provisions. 3. Finance Act 1995 repealed sections 78-85 Taxes Management Act 1970 and introduced (in sections 126-129 and Schedule 23) new provisions which apply to agents generally from April 1996 and in relation to investment managers from April 1995. This Statement of Practice gives guidance on the application of the Finance Act 1995 provisions. 4. The broad effect of the 1995 legislation is to ensure that non-residents (excluding certain non-resident trustees) are not exposed to any additional liability to tax by using the services of independent investment managers in the UK. This is done by restricting the tax chargeable on the income of non-residents in respect of investment transactions carried out through independent UK investment managers. The tax is restricted to the tax, if any deducted at source. Special rules apply where the transactions carried out by the UK investment manager amount to the carrying on of the whole or part of the non-resident’s financial trade in the UK. These special rules are considered in Part III. 5. The provisions do not apply to income from or connected with a trade carried on in the UK by the non-resident other than through a broker or independent investment manager. For instance income arising from the temporary lodgement of funds used in a manufacturing business carried on in the UK is liable to corporation tax or income tax in the normal way. The same applies where the transactions are part of a wider trade, e.g. insurance, carried on in the UK whether by the investment manager, another agent, or a branch of the non-resident. 6. Where the limit on charge does not apply to income arising through the UK investment manager, it does not necessarily follow that the non-resident is liable to UK tax on that income. For example certain UK securities are exempt from tax. Also, the non-resident may be able to claim exemption under a Double Taxation Agreement where the investment manager is not a permanent establishment of the non-resident. Exemption under an Agreement will depend on both the facts and the terms of the Agreement. 7. It is sometimes the case that a non-resident appoints an investment manager overseas who in turn appoints a UK investment manager, often its affiliate, to manage the investment of all

or part of the portfolio. In those circumstances the legislation is applied as between UK manager and the non-resident on the basis of looking through the overseas manager. The fee income retained by the overseas investment manager should do no more than reflect the work carried out offshore. Part II: Relevance of Trading 8. Section 127 Finance Act 1995 only applies to an investment manager who is carrying on the trade of a non-resident client in the UK. If the non-resident is not trading in the UK then the investment manager cannot be the non-resident’s ‘UK Representative’ within section 126 Finance Act 1995 and cannot be assessed. 9. If the transactions carried out through the investment manager are part of the trade carried on by the non-resident then, unless the conditions in section 127 are satisfied (see Part III), the income from that trade, including any profit from the realisation of securities, etc., is taxable. 10. Whether or not a taxpayer is trading is a question of fact to be determined by reference to all the facts and circumstances of the particular case. This applies as much to financial transactions as to other activities. 11. In determining the question of trading, any transactions carried out through an investment manager are to be considered in the context of the status and world-wide activities of the nonresident. An individual is unlikely to be regarded as trading as a result of purely speculative transactions. For a company, a transaction will generally be either trading or capital in nature. (This may also be the case for non-resident collective investment vehicles whether open-ended or closed). If the main business of a non-resident company is a trade outside the financial area, or an investment holding business, the activities in the UK would normally amount to trading only if they constituted or were part of a separate financial trade. But if, exceptionally, activities which are an integral part of the profit earning activities of a non-financial trade are carried out through a UK investment manager (e.g. hedging on the London terminal markets by a non-resident dealer in physical commodities), then that might amount to trading here. The view to be taken on a particular case will depend on all the facts of that case. 12. The active management of an investment portfolio of shares, bonds and money market instruments such as bills, certificates of deposit, floating rate notes and commercial paper does not normally constitute a trade. But every case must be considered in the light of its own facts. Where futures and options are concerned, the Statement of Practice 14/91 ‘tax treatment of transactions in financial futures and options’ will be applied to non-resident clients who are collective investment vehicles (whether open-ended or closed), pension funds and other bodies which either do not trade or whose principal trade is outside the financial area. 13. If a non-resident carries on a financial trade outside the UK, any transactions carried out through a UK investment manager are likely to amount to trading in the UK. That is so whether there is a discretionary agreement or whether the manager acts on the instructions of the client. The criteria for deciding whether a non-resident financial company is an investment company or a trading company are the same as those which apply to a resident company. Part III: Particular Provisions of Section 127(3) Finance Act 1995 - the independence test and the 20% rule 14. Where there is trading in the UK, no assessment is due on the investment manager if the provisions of section 127 are satisfied. And, except in the circumstances mentioned in paragraph 5 above, no assessment is due on the non-resident. Liability is instead limited to tax deducted at source. 15 The following paragraphs give guidance on two of the tests that must be passed: the independence test (see paragraph 18 below) and the 20% rule (see paragraph 24 below). These

two tests ensure that section 127 does not apply to financial trades carried out through an investment manager who is either not independent of the non-resident or who acts on terms other than would be customary between independent parties acting at arm’s length. 16. Application of the investment manager provisions is restricted to transactions in shares, stock, commercial paper and warrants, futures (including forward) contracts, options contracts or securities of any description (but not futures contracts or option contracts relating to land, although futures or options contracts involving indices of land may qualify), interest rate swaps, equity swaps, currency swaps, commodity swaps and commodity index swaps (but not transactions in physical commodities, including gold, nor warrants on the London Metal Exchange which give the holder title to the metal). 17. It is also a requirement that the non-resident does not carry on any other trade through the investment manager. a)

The independence test

18. The manager must act for the non-resident in an independent capacity. This means ascertaining whether, having regard to its legal, financial and commercial characteristics, the relationship between manager and client is a relationship between persons carrying on independent businesses that deal with each other at arm’s length. Where the other conditions of section 127(3) are met, the Revenue will regard the independence test as satisfied where any of the following applies: i.

the provision of services to the non-resident and persons connected with the non-resident is not a substantial part of the investment management business;

ii.

from the start of a new investment management business provided the above condition was satisfied within 18 months;

iii.

an intention to satisfy either of the above conditions was not met for reasons outside the manager’s control, although reasonable steps to fulfil that intention were taken;

iv.

investment management services are provided to a collective fund, the interests in which are quoted on a recognised stock exchange or otherwise freely marketed, for instance as units in a unit trust;

v.

investment management services are provided to a widely held collective fund.

19. The condition in (i) above would be satisfied where that part did not exceed 70% of the investment management business, either by reference to fees or to some other measure where that would be more appropriate. Where investment management services are provided to a collective investment scheme constituted as a partnership, participants in the scheme would not be regarded as connected persons for this purpose solely by reason of membership of the partnership. 20. Most funds which are transparent for UK income tax purposes (i.e. where the beneficial entitlement to the income rests with the participant rather than the fund itself) will satisfy the condition in (i) above. 21. Condition (v) is likely to apply mainly to overseas funds which are not treated as transparent for UK income tax purposes, e.g. most funds constituted as limited companies. The condition will be regarded as satisfied if either no majority interest in the fund was held by five or fewer persons and persons connected with them, or no interest of more than 20% was held by a single person and persons connected with that person.

22. The list in paragraph 18 above is not exhaustive. Cases which fall outside these categories would have to be considered on their own facts. A subsidiary may be considered independent of its parent company in this regard notwithstanding the parent’s ownership of the share capital. 23. An example of a fund not meeting any of the criteria in paragraph 18, but which is likely to be independent on the facts, would be a company which is not widely held but which is itself a subsidiary of a company that is. b)

The 20% rule

24. In essence the requirement is that the investment manager and persons connected with him (the definition of connected persons is that in section 839 ICTA 1988) must not have a beneficial entitlement to more than 20% of the non-resident’s taxable income arising from transactions carried out through the investment manager. Professional fees paid to the investment manager and persons connected with him are not included in the 20% provided they are allowable as deductions in arriving at the taxable income. This applies equally to incentive or performance fees which are calculated by reference to any increase in the net asset value or profits of the relevant non-resident. 25. Where the 20% threshold is broken, the part of the income of the non-resident to which the investment manager and connected persons are beneficially entitled is excluded from the limitation of charge. The limitation of charge will apply to the part to which they are not beneficially entitled, provided the other conditions in the investment manager provisions are met. 26. The 20% rule is treated as satisfied throughout any period, not exceeding 5 years, for which it is met in respect of the total taxable income of the period arising from transactions carried out through the investment manager. It is also treated as satisfied if the manager intended to meet that condition but failed to do so, wholly or partly, for reasons outside the manager’s control, having taken any reasonable steps to fulfil that intention. This means that the manager must fulfil the intention to keep the beneficial entitlement within 20% of the total taxable income for the period insofar as it is reasonable to do so, but is not required to get within that figure at any cost, for instance where there are good commercial reasons for not achieving that. 27. Exam

ple

Years

1

2

3

4

5

Taxable income of non-resident

£100

£200

£200

£250

£250

Entitlement of manager to above

£32

£58

£40

£35

£5

Expressed as percentage for each year

32%

29%

20%

14%

2%

Average percentage over qualifying period

32%

30%

26%

22%

17%

It may be assumed that the test is satisfied for year 1 because (a) in this example it was the manager’s intention to have a beneficial entitlement to an average of 20% or less in aggregate over a five year period and (b) that intention was fulfilled. Had the 20% beneficial entitlement been achieved before the five years were up, then that shorter period would have been the qualifying period. A second qualifying period of up to five years could include years 2, 3, 4, 5 and 6 and so on.

28. In relation to a tax-transparent fund (see paragraph 20) having overseas investors, the non-residents will be participants in the fund. In such circumstances the 20% rule would be automatically broken where a non-resident participant is connected to the investment manager since this would mean that all the non-resident participants were connected under section 839(4) by virtue of their being partners in the same partnership. The investment manager and connected persons would then be entitled to all the income of that non-resident. Accordingly, where the investment management services are provided to a collective investment scheme (as defined in the Financial Services and Markets Act 2000), the 20% rule is applied by looking at the scheme as a whole rather than at the individual participators. It is not then relevant that the investment manager may be connected to the non-resident as partner (section 127(10)) or that the nonresident participants themselves carry on a financial trade: the availability of section 127 protection is instead tested solely by reference to the nature of the activities of the notional company represented by the scheme. 29. In certain circumstances the investment manager may be connected with the participants because both are partners in one or more partnerships which have an interest in the fund in question. Where the 20% test is failed as a consequence of aggregating the manager’s income with that of certain partners who are not connected persons otherwise than as a result of section 839(4), the failure will be regarded as a failure under section 127(4)(b) to fulfil an intention to satisfy the test. In certain situations that failure will be considered as (a) attributable to matters outside the control of the manager and persons connected with him and (b) as not being the result of a failure to take reasonable steps to mitigate the effect of those matters in relation to the fulfilment of that intention. In those situations the 20% test will therefore be passed (see paragraph 26 above). The legislation will be applied in this way where: •

the connected persons are partners other than solely in a fund under consideration, and

•

partnership is the only reason that the manager is connected with them.

30 Where overseas pension funds are set up under trust the trustees do not have beneficial ownership of the pension fund income although they may be the legal owners. The 20% rule will not therefore apply where the trustee is connected to the UK investment manager. In practice it would be unusual for an overseas pension fund to be carrying on a financial trade. 31 Where the establishment of a connected person’s relationship depends on the question of whether a person falls to be regarded as having control of a company’s affairs within the terms of s416 (2) ICTA 1988, it is not considered that a person’s ability (whether de facto or de jure) to appoint the majority of the Commissioners for Her Majesty’s Revenue and Customs of directors will itself constitute control of the company’s affairs – unless, that is, the Commissioners for Her Majesty’s Revenue and Customs exercises powers which would normally be exercised by the shareholders at a general meeting. c)

Interaction of the independence test and the 20% rule

32. The independence test and the 20% rule apply quite separately. Two examples may help to illustrate this. i.

A UK investment manager acts for an overseas trading fund constituted as a company which accounts for 75% of the business. The parent of the investment manager is an investor in the fund Company. If the investment manager is not acting in an independent capacity in relation to the fund company then the whole of the income of the fund is liable to assessment. If the independence test is satisfied, say because no majority interest in the fund is held by five or fewer persons and persons connected with them, then the 20% test must be separately addressed. If the parent’s interest in the fund company is 30% then that share of the fund’s trading income is liable to assessment.

ii.

A UK investment manager acts for a transparent trading fund constituted as a collective investment scheme in which its overseas parent company is an investor. The facts may show that the investment manager is acting in an independent capacity (e.g. because condition (i) in paragraph 18 above is satisfied) in relation to all investors including the parent company. As a separate matter the 20% test is then applied to the share in the whole of the taxable profits of the fund to which the manager and persons connected with him are entitled, so that depending on the level of the investment the test may or may not be satisfied.

ESC B40 33. Exceptionally, income in jointly held funds may have come within ESC B40 but not within the provisions of FA 1995. Where this applies and such funds were marketed by means of a prospectus or otherwise before 24 November 1994, ESC B40 will continue to apply on the same basis as before for the intended life of the fund when it was marketed (not including renewals or extensions), but not beyond 5 April 2005. SP2/01

Application of local currency rules in Finance Act 2000 to partnerships which include companies

This statement of practice is obsolete with effect from accounting periods beginning on or after 1st January 2005 GENERAL 1. This Statement of Practice supplements, and in one respect supersedes, an earlier statement (SP4/98) in so far as it relates to partnerships with corporate members where either the company or the partnership is subject to sections 93 and 94 Finance Act (FA) 1993 as amended by section 105 FA 2000. The pre-FA 2000 legislation provided for the right to elect to use a currency other than sterling in certain circumstances for restricted aspects of the calculation of trading profits or losses for tax purposes. The FA 2000 amendments replace this elective approach with a more widely drawn rule setting out the circumstances in which profits and losses for the purposes of corporation tax should be computed in a currency other than sterling. Accordingly, paragraph 29 of SP4/98, which deals with the making of local currency elections, ceases to be relevant for periods governed by the amended version of sections 93 and 94 FA 1993. Otherwise, that earlier Statement of Practice continues to apply in full. 2. The amended legislation takes effect generally for the purposes of corporation tax in relation to accounting periods of companies beginning on or after 1 January 2000 and ending on or after 21 March 2000. However, any company which did not make a local currency election under The Local Currency Election Regulations 1994 (SI 1994/3230) for the immediately preceding accounting period may elect that sections 93 and 94, as amended, should not apply to it until its first accounting period beginning on or after 1 July 2000. Such an election must be made on or before 31 August 2000. This Statement of Practice applies for all accounting periods to which the amended version of sections 93 and 94 FA 1993 applies. This means both the accounting periods of corporate members of partnerships and accounting periods of partnerships of which a company is a member. Statutory framework 3. Section 8(2) Income and Corporation Taxes Act 1988 (ICTA) provides that a resident company is chargeable to corporation tax on profits arising to it under any partnership wherever it would be so chargeable if the profits accrued to the company directly. Section 11(2) ICTA 1988 provides that a non-resident company is chargeable to corporation tax on the profits arising to it from a trade carried on in the UK through a branch or agency. A partnership is regarded as a branch or agency for this purpose.

4. Section 114 ICTA 1988 gives the rules for computing not only the profits and losses of a trade or profession carried on by persons in partnership where one member or more of the partnership is a company, but also the profits and losses of such partnerships which carry on nontrading business. In this context the word ‘business’ has a very wide meaning and generally encompasses any activity or venture of a commercial nature. The profits and losses of the partnership are computed, for the purposes of corporation tax, as if the partnership is a company, separate from any company which is a partner. The trade, profession or business carried on is also treated as separate from any trade or business which the company member carries on individually on its own account. 5. For the purposes of corporation tax, section 114 provides that the profits or losses of a partnership with a UK resident corporate member are to be computed as if the partnership were a UK resident company. The corporate member’s share of the resultant figure is determined in accordance with its interest in the partnership for the relevant period and charged on the company as if it had been carrying on the business itself. 6. If a corporate member of a partnership is not UK resident, section 114 (read with section 115) provides that the computation of partnership profits is to be made on the basis that the partnership is a non-UK resident company. The corporate member’s share of the profit determined in accordance with its interest in the partnership for the period is to be charged on the company as if it was carrying on the business itself through a UK branch. Accordingly, in a partnership involving both UK resident and non-UK resident companies, the profits and losses of the partnership have to be computed on two separate bases for the purposes of arriving at the profits and losses of these two types of corporate partner. 7. The effect of section 114 (as extended by section 115) is to determine the share of the section 93 and 94 FA 1993 profit of partnerships with UK resident corporate members, non-UK resident corporate members or both on which such companies are respectively to be charged to corporation tax. 8. Sections 93 and 94 FA 1993, as amended by section 105 FA 2000, set out the circumstances in which profits and losses of a business or part of a business for the purposes of corporation tax should be computed in a currency other than sterling and provide for the ways in which this computation may be made. The rules for computing any proportion of chargeable gains or capital losses for corporation tax remain as before, namely all are to be computed in sterling. 9. Paragraph 12 of Schedule 18, FA 1998 provides that the corporate member’s company return must include any amount which in ‘a relevant partnership statement’, within the meaning of section 12AB Taxes Management Act (TMA) 1970, is stated to be its share of the partnership results for the period. That statement is not directly concerned with the underlying accounts. But the statement is to form part of the partnership return required by section 12AA TMA 1970. In accordance with subsections (2) and (3) of the latter section an officer of the Commissioners for Her Majesty’s Revenue and Customs may require the partners, or one of them, to deliver a return of relevant information which may include ‘accounts, statements and documents’. 10. Such a partnership return is only required where the partnership is a UK partnership or a foreign partnership which carries on business in the UK through a branch or agency. A UK company may be a member of a foreign partnership which does not carry on business in the UK. In that case the company’s corporation tax return requires it to enclose a copy of the partnership accounts and tax computations showing its share of the partnership’s taxable profits and losses for the relevant period.

Election to defer application of the amended legislation 11. For the purposes of corporation tax, the profits and losses of partnerships to which section 114 applies for the accounting periods referred to in paragraph 2 above will have to be computed on the basis that sections 93 and 94 FA 1993 apply to the partnership. It is the view of HM Revenue and Customs that, because section 114 ICTA 1988 provides for computations to be prepared as if a partnership were a company, where at least one of the partners is a qualifying company it is open to that partnership to make an election to defer the application of the new rules to it until its first accounting period beginning on or after 1 July 2000. Such an election – which may only be made if the partnership had not previously elected to use a non-sterling currency in respect of its trade – had to have been made on or before 31 August 2000 and been signed by all partners who, at the time of the election, were subject to United Kingdom corporation tax. Without all the signatures, HM Revenue and Customs will treat the election as not effective. Cases where amended Sections 93 and 94 FA 1993 apply to a partnership with company members 12. For the purposes of applying section 114 ICTA 1988 to a UK resident corporate member of a (UK or foreign) partnership, it will be necessary to compute the profits and losses of the partnership’s business, or part of its business, in accordance with the rules in sections 93 and 94 FA 1993 (as amended) if •

the partnership prepares its accounts as a whole in a currency other than sterling in accordance with normal accounting practice; or,

•

although preparing partnership accounts as a whole in sterling, so far as relating to the business or part of its business the partnership accounts are prepared using the closing rate/net investment method from financial statements prepared in a currency other than sterling.

13. For the purposes of applying section 114 ICTA 1988 to a non-UK resident corporate member of a partnership, it will be necessary to compute the profits and losses of the partnership’s business or part of its business in accordance with the rules in sections 93 and 94 FA 1993 (as amended) if •

the partnership prepares its accounts as a whole in a currency other than sterling and uses that, or another, foreign currency in the accounts of the UK part of the business which may be required by section 12AA TMA 1970; or

•

the partnership prepares its accounts as a whole in sterling but, so far as relates to part of its UK business, the accounts are prepared using the closing rate/net investment method from financial statements prepared in a currency other than sterling; or

•

the accounts supporting the partnership return required by section 12AA TMA 1970 are in sterling but, so far as they relate to part of its UK business, they are prepared using the closing rate net investment method from financial statements prepared in a currency other than sterling.

14. It is the view of HM Revenue and Customs that the profits and losses of the business or part business for the period, as computed in the relevant foreign currency, should be allocated to corporate members of the partnership in accordance with their entitlement to share in the profits of the partnership for that period. This sum should then be adjusted to take account of the corporate partner’s share of any of the items mentioned in subsection (4)(b) of section 93

FA 1993 as determined in accordance with its entitlement by reference to its partnership interest in the relevant preceding period. (Paragraph 16 of SP4/98 sets out HM Revenue and Customs’ view that the partnership itself cannot carry forward items such as non-trading deficits.) 15. The sterling equivalent of the amount computed as a result of the process outlined in the preceding paragraph should then be found in accordance with the rules in section 94 FA 1993 as amended to the extent necessary to find the company’s profits or losses for the period for the purposes of corporation tax. 16. The notices of election to use an average arm’s length exchange rate and withdrawal of such an election for which section 94(5) provides will only be accepted by the Revenue where signed by all partners who, at the time of the election, are subject to United Kingdom corporation tax. Without all the signatures, HM Revenue and Customs will treat the notice of election or withdrawal as not effective. A valid election once made will not cease to be effective on subsequent partnership changes, unless validly withdrawn by all partners who at the time of the withdrawal are subject to United Kingdom corporation tax. Notices of election and withdrawal will take effect with reference to the accounting period of the partnership and not that of individual corporate partners. 17. Where the accounting period of the partnership differs from the accounting period of a corporate member of the partnership, the sterling figure of the company’s share of the results of the partnership’s business for the period should be allocated between the company’s relevant accounting periods on a just and reasonable basis (normally on a time basis). 18. To the extent that a corporate member of a partnership is entitled to a share of losses (within the meaning of section 93(7) FA 1993) computed in the relevant foreign currency which are not utilised for the purposes of corporation tax by the company in the company’s relevant accounting period or periods, it is the view of HM Revenue and Customs that these losses should be carried forward in the tax computations of the company to the next accounting period in that currency. Cases where amended Sections 93 and 94 apply to non-partnership income of a company member of a partnership 19. A company which carries on business in partnership may separately carry on its own business or part of its business in a currency other than sterling and, accordingly, be within the scope of sections 93 and 94 FA 1993 as amended in respect of that business or part business. It is possible that the company keeps its own accounts in the same currency as the currency used by the partnership or each may use a different non-sterling currency. Alternatively the company may account in foreign currency for its own business, but the business of the partnership may be accounted for in sterling. 20. Irrespective of the way in which the company accounts for its share of the partnership in any of these situations, it is the view of HM Revenue and Customs that it is necessary to arrive at the company’s share of the partnership profits for the relevant accounting period or periods and losses (to the extent these are brought into account for the purposes of corporation tax in that period) in sterling (by conversion of non-sterling profits and losses as computed above where the figure is not already in sterling). This is because section 114 ICTA 1988 treats the partnership income of a company as if it were due to an entirely separate company and only brings the two figures of profits together for the purposes of the company’s corporation tax computation. The profits and losses of the company in respect of its non-partnership business as computed in any non-sterling currency must be separately computed and converted to sterling in accordance with sections 93 and 94 FA 1993 so far as these are brought into account for corporation tax purposes for the accounting period. The two sterling amounts must then be combined to arrive at the final corporation tax liability of the company.

SP3/01

Relief for underlying tax

General In addition to tax credit relief for direct foreign tax on a dividend, where the United Kingdom resident shareholder is a company controlling directly or indirectly not less that 10% of the voting power in the foreign company paying the dividend, it is entitled to relief for the underlying tax attributable to the dividend. This relief may be due under the terms a double taxation agreement or, alternatively, on a unilateral basis under section 790(6) ICTA 1988. The amount of underlying tax to be taken into account for credit relief purposes is so much as is ‘properly attributable’ to the proportion of the foreign company’s relevant profits as is represented by the dividend paid to the United Kingdom company (section 799(1) ICTA 1988). A. Split rate taxes Under some foreign tax systems the amount of tax charged on company profits is dependent on how much of the profits is distributed. HM Revenue and Custom’s view is that in such circumstances the amount of tax to be taken into account in respect of a particular dividend is the actual tax charged on the portion of the profits that the dividend represents. The amount of underlying tax taken into account will therefore reflect the rate charged on the distributed profits and not the average rate of tax paid at that point on all of the relevant profits. The Underlying Tax Group will accept computations done on either basis for dividends paid to a UK company between 31st March 2000 and 31st December 2001 inclusive. Example 1 A foreign company has taxable profits of 1000, and after paying 20% company tax has relevant profits of 800. The company pays a dividend of 400 to a United Kingdom resident company. The foreign company pays additional company tax on the dividend at the rate of 10% - 40. The amount of underlying tax to be taken into account in respect of the dividend of 400 is 140 [(400/800 x 200) + 40]. Example 2 A foreign company has taxable profits of 1000, and after paying 40% company tax has relevant profits of 600. Distributed profits are taxed at 25% and on payment of a dividend of 300 to a United Kingdom resident company the foreign company receives a dividend rebate of 100. The amount of underlying tax to be taken into account in respect of the dividend of 300 is 100 [(300/600 x 400) - 100]. If the remaining 300 relevant profits are distributed there will be a further rebate of 100, giving underlying tax of 100, calculated in the same way. B. Losses Where the foreign company that pays a dividend has accumulated losses, HM Revenue and Customs view's is that the relevant profits are the undistributed profits of the most recent period available at the time that the dividend was paid. The Underlying Tax Group will accept computations prepared in accordance with this or in line with previous practice for dividends paid to a UK recipient between 31st March 2000 and 31st December 2001 inclusive. Example 1 The accounts for a foreign company show the following results Profits/(losses) Accumulated profits/(losses)

Year 1 1000 1000

Year 2 (3000) (2000)

Year 3 1500 (500)

After the end of Year 3, it pays a dividend of 2000 out of unspecified profits. The relevant profits are 1500 from Year 3 and 500 from Year 1. Alternatively, if the company pays a dividend of 500 for Year 1, the relevant profits are Year 1 profits. Example 2 Profits/(losses) Accumulated profits/(losses)

Year 1 1000 1000

Year 2 (2000) (1000)

Year 3 1500 500

After the end of Year 3 it pays a dividend of 2000 out of unspecified profits. The relevant profits are 1500 from Year 3 and 500 from Year 1. If the dividend were paid before the end of year 3, the relevant profits would be 1000 from Year 1 and 1000 from the most recent preceding profitable period. SP4/01

Double taxation relief: Status of the UK’s double taxation conventions with the former USSR and with newly independent states

Introduction 1. This statement of practice replaces and supersedes SP3/92, which made public the UK’s understanding at that time of the status, in relation to those former Soviet Republics that had been recognised by the United Kingdom as independent sovereign states, of the UK/USSR Double Taxation Convention. (‘The Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Union of Soviet Socialist Republics for the Avoidance of Double Taxation with respect to Taxes on Income and Capital Gains.’) What SP3/92 said 2. SP3/92 confirmed that the UK/USSR convention continued in force for Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. It also stated that the position in relation to the Baltic States (Estonia, Lithuania and Latvia) was unknown. Developments since 3. The UK has subsequently concluded new, separate, double taxation conventions with Azerbaijan, Belarus 2 , Estonia, Kazakhstan, Latvia, Lithuania 3 , Russian Federation, Ukraine and Uzbekistan. Negotiations for a new double taxation convention are also taking place with Georgia. 4. Details of the new conventions are provided later in this statement. Copies may be obtained from the Stationery Office, London (tel. 0870 600 5522). 5. We now know that the Baltic states have never considered themselves bound by the terms of the UK/USSR convention. It has also been established that, contrary to the previous understanding, Armenia, Georgia, Kyrgyzstan, and Moldova do not consider themselves bound by the UK/USSR convention. 2 3

Not yet in force Not yet in force

Announcement 6. In these circumstances, the UK will not apply the terms of the UK/USSR double taxation convention in the case of residents of Armenia, Georgia, Kyrgyzstan, Lithuania, and Moldova: •

for profits arising on or after 1 April 2002, in the case of corporation tax

•

for income and gains arising on or after 6 April 2002, in the case of income tax and capital gains tax.

7. The UK will continue to apply the terms of the UK/USSR double taxation convention in the case of residents of Armenia, Georgia, Kyrgyzstan, Lithuania and Moldova in respect of profits arising before 1 April 2002 and income and gains arising before 6 April 2002. 8.

The position in relation to each of the former Soviet republics is summarised fully below.

Country Armenia

Azerbaijan Belarus

Estonia Georgia

Kazakhstan

Kyrgyzstan

Latvia Lithuania

Moldova

Position Armenia has indicated that it is not operating the UK/USSR Double Taxation Convention (DTC) in relation to residents of the UK. The UK will cease to operate the UK/USSR DTC in relation to residents of Armenia, in accordance with paragraph 6 of this statement. A new DTC is in force. See the ‘Double Taxation Relief (Taxes on Income) Azerbaijan Order 1995’ No 762. Pending the entry into force of the new UK / Belarus DTC – the ‘Double Taxation Relief (Taxes on Income) (Belarus) Order 1995’ No 2706 - both Belarus and the UK will continue to operate the UK/USSR DTC in respect of their residents. A new DTC is in force. See the ‘Double Taxation Relief (Taxes on Income) Estonia Order 1994’ No 3207. Georgia has indicated that it is not operating the UK/USSR DTC in relation to residents of the UK. The UK will cease to operate the UK/USSR DTC in relation to residents of Georgia, in accordance with paragraph 6 of this statement. A new DTC is under negotiation. A new DTC is in force. See the ‘Double Taxation Relief (Taxes on Income) Kazakhstan Order 1994’ No 3211 and the ‘Double Taxation Relief (Taxes on Income) Kazakhstan Order 1998’ No 2567 (Protocol). Kyrgyzstan has indicated that it is not operating the UK/USSR DTC in relation to residents of the UK. The UK will cease to operate the UK/USSR DTC in relation to residents of Kyrgzystan, in accordance with paragraph 6 of this statement. A new DTC is in force. See the ‘Double Taxation Relief (Taxes on Income) Latvia Order 1996’ No 3167. A new DTC is in force with effect from April 2002. See the ‘Double Taxation Relief (Taxes on Income) Lithuania Order 2001’ – No 3925 and the ‘Double Taxation Relief (Taxes on Income) Lithuania Order 2002’ No 2847 (Protocol). Moldova has indicated that it is not operating the UK/USSR DTC in relation to residents of the UK.

Russian Federation Tajikistan Turkmenistan Ukraine Uzbekistan

SP5/ 01 1.

The UK will cease to operate the UK/USSR DTC in relation to residents of Moldova, in accordance with paragraph 6 of this statement. A new DTC is in force. See the ‘Double Taxation Relief (Taxes on Income) Russian Federation Order 1994’ No 3213. Both Tajikistan and the UK will continue to operate the UK/USSR DTC in respect of their residents. Both Turkmenistan and the UK will continue to operate the UK/USSR DTC in respect of their residents. A new DTC is in force. See the ‘Double Taxation Relief (Taxes on Income) Ukraine Order 1993’ No 1803. A new DTC is in force. See the ‘Double Taxation Relief (Taxes on Income) Uzbekistan Order 1994’ No 770.

CTSA: Claims to loss relief, capital allowances and group relief - outside limit The Commissioners for Her Majesty’s Revenue and Customs have powers under •

Section 393A(10) ICTA88 to admit late claims to set off or carry back losses

•

paragraph 82(2) Schedule 18 FA 1998 to allow the late making, amending or withdrawing of claims for capital allowances

•

paragraph 74(2) Schedule 18 FA 1998 to allow the late making or withdrawing of claims for group relief.

In this statement references to making claims should be read accordingly so that •

for capital allowances, making a claim includes amending or withdrawing a claim and

•

for group relief, making a claim includes withdrawing a claim.

The statement explains the time limit rules, sets out the Commissioners for Her Majesty’s Revenue and Customs’ general approach to late claims and gives details of the procedures to be followed. The normal rules Loss relief 2. Loss relief claims can be made within two years of the accounting period in which the loss is incurred. A loss relief claim made in a Company Tax Return may be amended at any time up to 12 months from the statutory filing date or, if the claim is within the rules in Schedule 1A TMA 1970 within 12 months of making the claim. Capital allowances 3. Claims to capital allowances under CTSA can be made, amended or withdrawn, up to the latest of: •

the first anniversary of the claimant company’s filing date

•

if the Revenue issues a notice of enquiry into the claimant company’s return, 30 days after the enquiry is completed

•

if the claimant company’s return is amended by HM Revenue and Customs following an enquiry (under paragraph 34(2) Schedule 18 FA 1998), 30 days after notice of the amendment is issued

•

if the claimant company appeals against the Revenue’s amendment, 30 days after the date on which the appeal is finally determined.

Group relief 4. Claims to group relief under CTSA can be made or withdrawn up to the latest of the following dates: •

the first anniversary of the claimant company’s filing date

•

if the Revenue issues a notice of enquiry into the claimant company’s return, 30 days after the enquiry is completed

•

if the claimant company’s return is amended by HM Revenue and Customs following an enquiry (under paragraph 34(2) Schedule 18 FA 1998), 30 days after notice of the amendment is issued

•

if the claimant company appeals against the Revenue’s amendment, 30 days after the date on which the appeal is finally determined.

5. In general a claim to group relief can only be made where notice of consent has been given by the surrendering company and the claim must be accompanied by a copy of the notice. But groups may apply to the Commissioners for Her Majesty’s Revenue and Customs to enter into simplified arrangements for claiming and surrendering group relief (SI 2975/1999). Special rules where the Revenue makes certain assessments or amendments 6. Special time limit rules apply where the Revenue makes certain assessments or amendments. They are: •

a Revenue amendment of a Company Tax Return under paragraph 34(2A) Schedule 18 FA 1998

•

a discovery assessment made under paragraph 41 Schedule 18 FA 1998 (other than an assessment made in a case involving fraudulent or negligent conduct ), and

•

an assessment to recover excess group relief made under paragraph 76 Schedule 18 FA 98.

7. Where such an assessment or amendment is made, a company may under paragraph 61 Schedule 18 FA 1998 make, revoke or vary certain claims etc. The time limit for these claims is one year from the end of the accounting period in which the closure notice was issued or the assessment was made. Any claims etc. made, given, revoked or varied cannot reduce the combined tax liability of the company and any other persons affected by an amount greater than the additional liability to tax arising from the amendment or assessment. 8. Where the Revenue makes a discovery assessment under paragraph 41 Schedule 18 to recover tax lost through fraudulent or negligent conduct, the rule in paragraph 65 Schedule 18 applies. It allows the admission of any claims which can be given effect in that assessment regardless of time limit.

The Commissioners for Her Majesty’s Revenue and Customs’ approach to extending time limits for making claims 9. The time limits allowed for making claims to loss relief, capital allowances and group relief under CTSA and the further provisions described above should generally be adequate and the Commissioners for Her Majesty’s Revenue and Customs will not make routine use of its powers to accept claims made outside these limits. But the Commissioners for Her Majesty’s Revenue and Customs recognises that there may be exceptional reasons why a claim is not made within the time specified. Applications to allow further time in accordance with the powers referred to at paragraph 1 above will be considered with the assistance of the following criteria. 10. In general, the Commissioners for Her Majesty’s Revenue and Customs’ approach will be to admit claims which could not have been made within the statutory time limits for reasons beyond the company's control. This would include, for example, cases where: •

at the date of the expiry of the time limit, the company or its agents were unaware of profits against which the company could claim relief, or

•

the amount of a profit or loss depended on discussions with an Inspector which were not complete when the time limit expired, and the delay in agreeing figures is not substantially the fault of the company or its agents.

In such cases the Commissioners for Her Majesty’s Revenue and Customs’ approach will be to admit late claims up to the amount of the profit or loss in question. Where the claim involves the withdrawal of an existing claim and the making of a fresh claim, the Commissioners for Her Majesty’s Revenue and Customs’ approach will be to admit these to the extent of the profit or loss in question. Claims which go beyond this and affect profits which were not in dispute at the time of expiry of the statutory time limits will not be within this approach. Reasons beyond the company's control would also include a claim where all of the following four features were present: •

an officer of the company was ill or otherwise absent for a good reason

•

the absence or illness arose at a critical time and prevented the making of a claim within the normal time limit

•

there was good reason why the claim was not made before the time of the absence or illness

•

there was no other person who could have made the claim on the company's behalf within the normal time limit

11. The Commissioners for Her Majesty’s Revenue and Customs would not, however, regard the following as reasons beyond the company’s control: •

oversight or negligence on the part of a claimant company or its agent

•

failure, without good reason, to compute the necessary figure

•

the wish to avoid commitment pending clarification of the effects of making a claim

•

illness or absence of an agent or adviser to the company.

12. There may be cases falling outside the general approach outlined in paragraph 10 where it would nevertheless be unreasonable, given the overall circumstances of the case, for the

Commissioners for Her Majesty’s Revenue and Customs to refuse a late claim. It is likely that such cases will involve a combination of factors, but the following criteria may be relevant: •

the reason why a claim is late – where the reason does not in itself warrant admission of the claim under the approach outlined above, it will still be taken into account by the Commissioners for Her Majesty’s Revenue and Customs in assessing the circumstances as a whole

•

the extent to which it is late

•

the consequences for the company if the claim is refused

•

any particularly unusual features.

For the purpose of this paragraph and those above, if the late claim forms part of a scheme or arrangement, the main purpose or one of the main purposes of which is the avoidance of tax (including the payment of tax), then that will be taken into account in the Commissioners for Her Majesty’s Revenue and Customs’ approach. Procedures 13. An application to admit a claim outside the statutory time limits should be sent to the Inspector dealing with the claimant company and should include a full explanation of the circumstances of the case. The explanation should cover, but need not be limited to, all the criteria set out in paragraph 12. The application should be made as soon as possible. Delay in making a late claim after the circumstances which caused the claim to be late have ceased to apply may result in the claim being rejected. SP1/02

Corporation Tax Self Assessment and Chargeable Gains Valuations

Corporation Tax self assessment enquiries: FA98/SCH18/PARA24: enquiries remaining open after expiry of the period within which a notice of enquiry may be issued solely because of an unagreed valuation for chargeable gains purposes. The following Statement of Practice applies where, in the case of an enquiry into a return made under paragraph FA98/SCH18/PARA3, • • •

HM Revenue and Customs has given notice under FA98/SCH18/PARA24 of their intention to enquire into that return, and the enquiry remains open after the expiry of the period within which that notice had to be issued (‘enquiry period’), and the enquiry remains open solely because of an unagreed valuation for chargeable gains purposes.

In such circumstances HM Revenue and Customs will not, as a matter of practice, raise further enquiries into matters unrelated to the valuation or the chargeable gains computation unless the circumstances are such that, had the enquiry already been completed, an officer could have made a discovery within the meaning of FA98/SCH18/PARA41. This practice applies only to valuations made for the purpose of computing chargeable gains of companies and other bodies within the charge to Corporation Tax. . This practice does not alter or fetter HM Revenue and Customs’ right to ask further questions or make additional enquiries on matters in connection with, or consequential to, the obtaining of the

valuation which were not raised when the valuation was first referred to Shares Valuation Division or the Valuation Office Agency. SP2/02

Exchange rate fluctuations

Introduction 1. This Statement of Practice sets out HM Revenue and Customs’ practice in relation to the tax treatment of exchange rate fluctuations in the tax computations of persons who are carrying on a trade, other than companies within the charge to corporation tax. It is put forward as a practical guide to facilitate the preparation and agreement of tax computations of such taxpayers, and takes account of case law and of the enactment of section 42 FA 1998 which requires the profits of a trade or profession (and hence, by virtue of section 21A ICTA 1988, a property business) to be returned on a basis that reflects a true and fair view. It is not relevant for concerns which are companies within the charge to corporation tax for which the rules relating to exchange differences are contained in sections 92 to 94AB FA 1993 and in Chapter 2 Part 4 FA 1996 (loan relationships) and Schedule 26 FA 2002 (derivative contracts). The general rules it contains may need to be modified in the way in which they are applied in particular circumstances, for example, where the local currency of an overseas trade or property business is a currency other than sterling. The Case Law - Marine Midland 2. The most recent relevant case law on the subject of exchange differences is Pattison v Marine Midland Ltd [1984] STC 10; 57 TC 219. In that case a United Kingdom resident bank carried on business in international commercial banking. For the purpose of making dollar loans and advances in the course of its banking business, it borrowed 15 million US dollars in the form of subordinated loan stock, redeemable in 10 years. As a result of exchange rate fluctuations, the sterling value of the loans to its customers increased, but so also did the liability in sterling terms of the loan stock. Its general aim was to remain matched in each foreign currency and for the most part the dollar borrowings remained invested in dollar assets. After 5 years the loan stock was repaid out of existing dollar funds and at no time was any of the 15 million dollars converted into sterling. 3. Each year in the accounts, the monetary assets and liabilities denominated in a foreign currency were valued in sterling at the exchange rate at the balance sheet date but to the extent that currency liabilities were matched by currency assets, no profit or loss was shown for accounts purposes. The Court of Appeal and the House of Lords held that in these circumstances no profit or loss arose for tax purposes. On the other hand the company brought into its profit and loss account any increase or decrease in the sterling value of excess dollars - i.e. to the extent that it was in an unmatched position - and this had been accepted as a profit or loss for tax purposes. Lord Templeman said that this practice ‘reflected the success or failure of the company in acquiring and holding excess dollars which could be converted into sterling’. He noted without disapproval the Revenue’s acceptance of the practice and said it was ‘. . . not inconsistent with the company’s submission that no profit or loss was attributable to dollar assets equal in dollar terms to dollar liabilities’. Definitions 4. In this Statement: • Translation into sterling is regarded as the valuation of a foreign currency asset or liability in terms of sterling at a particular date; • Conversion into sterling is the exchange of that asset or liability for sterling; • Local currency is the currency of the primary economic environment in which the trade or business is carried on and net cash flows are generated.

The recognition of exchange differences: accounts treatment and tax consequences 5. Before the enactment of section 42 FA 1998 (which has effect for periods of account beginning after 6 April 1999) it was the general practice in the case of trading companies to bring exchange translation adjustments, other than those in respect of capital items, into account for tax purposes where they have similarly been brought into account in arriving at the accounting profit or loss. Since the accounting treatment is sanctioned by Statement of Standard Accounting Practice 20 (Foreign Currency Translation) (‘SSAP 20’), it follows that accounts which observe this practice are, in this regard, giving a true and fair view, and since there is no rule of law which would overturn this practice, it must be followed for tax purposes. 6. It has also been the practice in some circumstances – mainly in the case of certain overseas trading activities dealt with for accounts purposes on what is now generally referred to as the ‘closing rate/net investment’ basis – to translate the net profit or loss for tax purposes (the so called ‘profit and loss account’ basis). The Revenue considers that, following section 42 FA 1998, where this basis is used in the accounts in accordance with SSAP 20 it also must be followed for tax purposes. Capital and current liabilities 7. Nothing in section 42 FA 1998 or in the case law regarding the computation of trading profits requires the distinction between capital and revenue items to be decided other than by reference to principles well established in tax case law. In computing trading profits for tax purposes, the question whether a loss or profit on exchange on a foreign currency loan made to the taxpayer is respectively an allowable deduction or assessable receipt is determined by the nature of the loan and whether it is to be properly regarded as a capital or current liability. The case law (such as Marine Midland and Beauchamp v F W Woolworth plc [1989] STC 510; 61 TC 542) shows that the distinction between capital and current liabilities is essentially between loans providing temporary financial accommodation and loans which can be said to add to the capital of the business. The answer in any particular case must turn on its facts and circumstances, which have to be considered in detail. 8. The Court of Appeal and the House of Lords did not find it necessary to decide whether the borrowing by Marine Midland was a capital or current liability; the House of Lords indicated that it would have needed further evidence and argument to decide the issue. The Commissioners and the High Court, however, agreed with the Revenue’s view that the borrowing was a capital liability. The Revenue remains of the view that the liability in question in the Marine Midland case was of a capital nature. Matched assets and liabilities 9. The Court of Appeal and House of Lords judgements in Marine Midland indicate that where foreign currency borrowings are matched by assets in the same currency the capital or current nature of the borrowing would no longer be relevant in determining whether adjustments are to be made for the purposes of computing trading profits or losses for tax. In these circumstances exchange differences, whether profits or losses, arising on long-term borrowings are not to be distinguished and adjusted in computing trading profits or losses for tax. Gains and losses taken to reserve 10. Under SSAP 20, some gains and losses on monetary assets and liabilities may be taken to reserve rather than to the profit and loss account. This may happen where paragraphs 27 to 29 SSAP 20 (liabilities hedging investments in certain equity holdings) and paragraphs 15 to 20 SSAP 20 (closing rate/net investment method) apply. In such cases, the gains and losses are not recognised for tax purposes even if they are not capital items. Same currency 11. Liabilities and assets of the same trader are regarded as matched in the way described in paragraph 9 above to the extent that foreign currency denominated monetary assets are equalled

by liabilities in the same currency and a translation adjustment on one would be cancelled out by a translation adjustment on the other. In general, therefore, where there are transactions in more than one foreign currency the question of matching must be considered separately for each currency (see paragraphs 15 and 34 below). However, it is possible for assets and liabilities in different currencies to be regarded as effectively matched when hedging transactions, such as forward foreign currency contracts, are taken into account (see paragraphs 41 to 43 below). Matching of capital assets in foreign currency with current liabilities 12. There may be circumstances where foreign currency assets which for tax would be treated as capital assets are matched with current liabilities in the same currency – the reverse of the situation in Marine Midland. This may arise for example in the case of certain monetary assets, e.g. where loans to subsidiary companies, which for tax would be treated as capital, are matched by short term currency borrowings, which for tax may fall to be treated as current liabilities. The Revenue takes the view that the Marine Midland matching principle applies in such circumstances, with the result that again exchange differences arising on the assets or liabilities are not to be distinguished and adjusted. Assets and liabilities not matched 13. In general, an adjustment is required to the tax computation of trading profits in respect of exchange differences that have been debited or credited to the profit and loss account in respect of capital items. It will be for the trader to demonstrate matching of capital currency liabilities, or assets, by reference to the position both during and at the end of the accounting period; and where such liabilities or assets are wholly or partly matched, to show the effect if any on the tax computation. 14. However, in practice, the extent to which currency assets are matched with currency liabilities will in most cases fluctuate in the course of an accounting period, so that it would be impracticable to measure and take account of such fluctuations on a day-by-day basis in determining what adjustment is required in the tax computation to the net exchange difference debited or credited in the profit and loss account. Instead, the practice outlined in paragraphs 17 and 34 below may be adopted, provided it is applied on a consistent basis from year to year. A practical approach 15. In essence the practice offered at paragraphs 17 and 34 below assumes that the extent to which currency assets and liabilities are matched during an accounting period is reflected in the size of the net exchange difference debited or credited to the profit and loss account. The rules suggested for determining the adjustment to be made for tax purposes in respect of the exchange difference arising on capital assets or liabilities which are unmatched, or only partly matched, are based on the premise that capital liabilities are matched primarily with capital assets in the same currency. Any capital liabilities not matched by capital assets in the same currency are regarded as matched by current assets of the same currency only to the extent that the current assets exceed the current liabilities in that currency. 16. Where this practice is not adopted, capital liabilities and assets will be regarded as matched only to the extent that this can be demonstrated by reference to the trader’s currency assets and liabilities during the accounting period. 17. Under the practice referred to in paragraph 15 above, the first step will be to ascertain the aggregate of exchange differences, positive and negative, on capital assets and liabilities in the profit and loss account figure. a. If there are no such differences then no tax adjustment is necessary.

Example 1 An individual normally trading in sterling incurs a liability on a trade debt of $600,000 when $1. 5 = £1. The liability is entered in the books in sterling at £400,000. By the accounting date sterling has fallen to $1. 25 = £1, so that the sterling value of the liability has increased to £480,000. The exchange loss of £80,000 is charged to the Profit and Loss Account. There were no capital exchange differences. No adjustment is required for tax purposes because the transactions are wholly on revenue account. b. If the net exchange difference on capital items is a loss and the net difference in the profit and loss account is also a loss, the smaller of the two figures is the amount to be disallowed in the tax computation as relating to capital transactions. Example 2 An individual trader borrows $600,000 on long-term capital account when $1. 5 = £1. He retains $150,000 as current assets and converts the balance of $450,000 to £300,000. The books will then show the following entries: Capital loan ($600,000)

£400,000

Current assets ($150,000)

£100,000

Cash on hand

£300,000

£400,000

£400,000

By the accounting date when sterling has fallen to $1. 25 = £1 these become: Capital loan ($600,000)

£480,000

Current assets ($150,000)

£120,000

Cash on hand

£300,000

Exchange difference to Profit and Loss Account

£60,000

£480,000

£480,000

The exchange difference on capital account is £80,000 (£480,000 - £400,000) but the tax adjustment is limited to the amount charged to the Profit and Loss Account so that £60,000 is disallowed. This reflects the fact that $150,000 of the liability is matched with $150,000 assets. The whole of the exchange difference £60,000 is attributable to the excess currency liability on capital account, the value of which has increased from £300,000 to £360,000. Example 3 A trader incurs a liability by way of overdraft on current account of $300,000 and borrows $600,000 on capital account when $1. 5 = £1. She retains $150,000 as current assets and converts the balance of $750,000 to $500,000. The books will then show the following items: Capital loan ($600,000) £400,000 Current assets ($150,000) £100,000 Overdraft on current account ($300,000)

£200,000 £600,000

Cash on hand

£500,000 £600,000

By the accounting date sterling has fallen to $1. 25 = £1 and the book entries are then:

Capital loan ($600,000)

£480,000

Current basis ($150,000)

£120,000

Overdraft on current account ($300,000)

£240,000

Cash on hand

£500,000

Exchange difference to Profit and Loss Account

£100,000

£720,000

£720,000

The net exchange loss of £100,000 in the Profit and Loss Account is made up of £120,000 loss on the liabilities and £20,000 profit on the assets. The exchange difference on capital account is £80,000 (£480,000 - £400,000). This is less than the Profit and Loss Account figure so the £80,000 is disallowed for tax purposes. This reflects the matching of the $150,000 current assets with $150,000 of the current liabilities. The capital liability is therefore wholly unmatched. b. If the net exchange difference on capital items is a profit and the net difference in the Profit and Loss Account is also a profit, then the smaller of the two figures is the amount to be deducted in the tax computation. Example 4 A trading partnership, consisting of individuals, incurs a liability by way of overdraft on current account of $150,000 and borrows a further £300,000 as a capital loan when $1. 5 = £1. It converts the £300,000 to $450,000 and makes a loan (not in the course of trade) of $600,000 to an associated company. The books show the following entries at this point: Overdraft on current account £100,000 Capital assets ($600,000) £400,000 ($150,000) Capital loan £300,000 £400,000

£400,000

By the accounting date sterling has fallen to $1. 25 = £1 and the book entries are as follows: Overdraft on current account ($150,000) Capital loan

£120,000

Exchange difference to Profit and Loss Account

£ 60,000

Capital assets ($600,000)

£480,000

£300,000

£480,000

£480,000

The net exchange profit of £60,000 in the Profit and Loss Account comprises £80,000 profit on the assets and £20,000 loss on the liability. The net capital exchange difference is £80,000 (£480,000 - £400,000) but the adjustment for tax purposes is limited to the figure in the Profit and Loss Account of £60,000. This reflects the fact that $150,000 of the assets are matched with the dollar liability. The non-taxable exchange profit

is attributable to the excess capital assets, whose sterling value changed from £300,000 to £360,000. d. Where the net exchange difference on capital items produces a loss but the net difference in the Profit and Loss Account is a credit entry, then no tax adjustment is required. Similarly no adjustment is necessary where there is a profit in respect of exchange differences on capital items but a net loss on exchange is debited to the Profit and Loss Account. Example 5 A partnership of individuals borrows $900,000 on capital account and raises a further sterling loan of £200,000. It converts the £200,000 to $300,000 and makes a loan (not in the course of trade) of $750,000 to an associated company. At this time $1. 5 = £1. The balance of $450,000 is retained as a current asset. The books show the following entries at this point: Capital loan ($900,000)

£600,000

Capital assets ($750,000)

£500,000

Capital loan

£200,000

Current assets ($450,000)

£300,000

£800,000

£800,000

By the accounting date the exchange rate alters to $1. 25 = £1 and the book entries become: Capital loan ($900,000)

£720,000

Capital assets ($750,000)

£600,000

Capital loan

£200,000

Current assets ($450,000)

£360,000

Exchange difference to Profit and Loss Account

£ 40,000 £960,000

£960,000

The Profit and Loss Account entry for the net exchange profit of £40,000 is made up of £160,000 profit on the assets and £120,000 loss on the liability. The net capital exchange difference is a debit of £20,000 i.e. (£720,000 - £600,000) - (£600,000 £500,000) but the Profit and Loss Account shows a net credit of £40,000. No adjustment is therefore required for tax purposes. This reflects the matching of the net capital liability of $150,000 with part of the dollar current assets. The taxable exchange profit of £40,000 is attributable to the balance of the dollar current assets, whose value increased from £200,000 to £240,000. e. It follows that normally the amount of any tax adjustment is limited in each case to the credit or debit for net exchange differences in the Profit and Loss Account. More than one currency Where there are transactions in more than one currency, the same principles will apply but each currency must be considered separately. In such circumstances the exchange difference in the profit and loss account is the aggregate of the net exchange profits and losses arising in the various currencies and the tax computation adjustment is determined by comparing the aggregate

exchange difference on capital assets and liabilities in a particular currency with the exchange difference for that currency in the profit and loss figure (but see paragraphs 41 to 43 below where hedging transactions are involved). Example 6 A partnership of individuals borrows $900,000 on long-term capital account and DM 300,000 on overdraft when £1 = £1. 5 = DM 3. 0. It makes a loan of $600,000 to an associated company (not in the course of trade) and converts $300,000 into DM 600,000. It loans DM 500,000 to another associated company (not in the course of trade) and retains the balance of DM 400,000 as a current asset. Capital loan ($900,000)

£600,000

Capital assets ($600,000)

£400,000

Overdraft (DM 300,000)

£100,000

Capital assets(DM 500,000)

£167,000

Current assets (DM 400,000)

£133,000

£700,000

£700,000

By the accounting date sterling has fallen to £1 = $1. 20 = DM 2. 5 and the book entries are as follows: Capital loan ($900,000)

£750,000

Capital assets ($600,000)

£500,000

Overdraft (DM 300,000)

£120,000

Capital assets (DM 500,000) Current assets (DM 400,000) Exchange difference to Profit and Loss Account

£200,000

£870,000

£160,000 £ 10,000 £870,000

The net exchange difference of £10,000 comprises £50,000 loss on the Dollar assets and liabilities offset by £40,000 profit on the Deutschmark assets and liabilities. The Dollar exchange loss is entirely on capital account and should be added back to the tax computation. The Deutschmark exchange difference comprises £60,000 profit on the assets and £20,000 loss on the liability. The net capital exchange difference on Deutschmark assets and liabilities is a profit of £33,000 i.e. (£200,000 - £167,000) so the adjustment for tax purposes is limited to £33,000. This reflects the fact that the overdraft is matched with Deutschmark current assets and the Deutschmark capital assets are unmatched. Thus the overall adjustment to the tax computation is an addition of £17,000 i.e. (£50,000 £33,000). Hedging transactions In considering whether a trader is matched in a particular currency, forward exchange contracts and currency futures entered into for hedging purposes may be taken into account, provided the hedging is reflected in the accounts on a consistent basis from year to year and in accordance with

accepted accounting practice. For example, where a trading transaction is covered by a related or matching forward contract, under SSAP 20 the transaction may be translated using the rate of exchange specified in the forward contract. Alternatively, the forward contracts open at the balance sheet date may be shown as assets or liabilities, valued on a ‘market to market’ basis or by reference to the difference between the contracted forward exchange rates and the spot rate on the balance sheet date. Where a trader enters into a currency swap agreement to exchange borrowed currency for an equivalent amount of another currency (including sterling) for a fixed period, the two transactions in the original currency should be treated as matched, so that the underlying liability in the first currency is effectively converted into a liability in the second currency for the duration of the swap. If, when the swap is terminated, the currencies are swapped back at the spot rate of exchange prevailing at the commencement of the swap there will be for Case I purposes no exchange loss or profit in terms of the original currency (but the capital gains consequences of unwinding the swap will need to be taken into account). In the Revenue’s view, where currency assets or liabilities are hedged by transactions in currency options no matching can be said to have taken place and such transactions are unaffected by the Marine Midland decision. Example 7 Hedging The facts are those of example 3 above in the subsequent accounting period at the start of which the book entries are: Capital loan ($600,000)

£480,000

Current assets ($150,000)

£120,000

Overdraft on current account ($300,000)

£240,000

Cash on hand

£500,000

Exchange difference b/f

£100,000

£720,000

£720,000

Three months from the end of the period of accounts (there having been no transactions in the meantime affecting the assets and liabilities referred to in the example), when $1. 18 = £1, the trader enters a forward contract to purchase $600,000 at $1. 20 = £1 in 6 months’ time, to hedge the capital loan which is repayable on the date the forward contract matures. By the accounting date, when $1. 10 = £1, the books show either: Capital loan ($600,000)*

£500,000

Current assets ($150,000)

£150,000

Overdraft on current account ($300,000)

£300,000

Cash on hand

£500,000

Exchange difference b/f

£100,000

Exchange different to Profit and Loss Account

£ 50,000

£800,000 translated at forward rate $1. 20 = £1 or

£800,000

Capital loan ($600,000)*

£600,000

Current assets ($150,000)

£150,000

Overdraft on current account ($300,000)

£300,000

Cash on hand

£500,000

Forward contract

£100,000

Exchange difference b/f

£100,000

Exchange difference to Profit and Loss Account

£ 50,000

£900,000

£900,000

Because the forward contract specifically hedges the capital loan the net exchange loss on capital items on either basis is £20,000 (£500,000 - £480,000; or £600,000 - £480,000 less £100,000 profit on forward contract). Because this is less than the overall exchange loss of £50,000, the capital loss of £20,000 is disallowed for tax purposes. Overseas branches and trades 18. Where a trade carried on wholly abroad, or an overseas branch of a trade, has a local currency other than sterling, accounts will normally be drawn up in the local foreign currency and translated into sterling using the ‘closing rate/net investment/’ method (SSAP 20 paragraphs 25 and 46). In such circumstances, computations taking as their starting point the sterling equivalent of accounts prepared in local currency, translated into sterling using the ‘closing rate/net investment’ method, will be the only acceptable method for tax purposes. Capital allowances and other statutory reliefs and charges must be calculated in sterling. 19. The principles outlined in this Statement of Practice should be applied in considering to what extent an adjustment for tax purposes should be made to the profit figure to be translated into sterling in respect of an exchange difference in the local foreign currency accounts. Assets held on the ‘realisation’ basis 20. Some financial concerns hold assets, the profits on the disposal of which are treated for tax purposes as receipts of their trade but which are not stock in trade. Where the concern does not account for such assets on a mark to market basis, such profits are assessable only when the assets are disposed of (the ‘realisation’ basis). Nevertheless it may be the practice for accounting purposes to revalue the assets to reflect exchange rate fluctuations. Where the resulting exchange differences are either taken to Profit and Loss Account or set off against exchange differences on liabilities as part of the matching process, with the result that the profits or losses on realisation are recognised for accounts purposes effectively net of exchange differences, the accounts treatment must be followed for tax purposes. The following example shows how this works. Example 8 A partnership of individuals which is a financial concern borrows $600,000 on capital account and raises a further sterling loan of £200,000. It converts the £200,000 to $300,000 and buys financial assets (realisation basis) for $900,000. At this time $1. 5 = £1. The books then show the following entries: Capital loan ($600,000)

£400,000

Capital loan

£200,000

Cost of financial assets ($900,000)

£600,000

£600,000

£600,000

At the accounting date the rate of exchange is $1. 25 = £1 so the entries are as follows: Capital loan ($600,000)

£480,000

Capital loan

£200,000

Exchange difference to Profit and Loss Account

£ 40,000

Financial assets ($900,000)

£720,000

£720,000

£720,000

Since the capital exchange difference is a debit of £80,000 (£480,000 - £400,000) and there is a net exchange profit of £40,000 overall, no tax adjustment to the £40,000 is needed. At the end of the next accounting period the rate of exchange has altered to $1. 2 = £1 and the assets are sold so the entries become: Capital loan ($600,000)

£500,000

Capital loan

£200,000

Exchange difference for Year 2 to Profit and Loss Account Exchange difference for Year 1 brought forward * Profit on realisation of assets

£10,000

Cash proceeds of sale of financial assets ($1,200,000)

£1,000,000

£40,000 £250,000 £1,000,000

£1,000,000

*Sale proceeds $1. 2m less cost $0. 9m giving a profit on realisation of $0. 3m or (at $1. 2 = £1) £250,000. The exchange profit from holding the $900,000 assets while the exchange rate moved from $1. 5 = £1 to $1. 2 = £1 has already been taken into account in the exchange differences. The capital exchange difference is a loss on the loan of £20,000 (£500,000 - £480,000) but there is a profit of £30,000 in respect of current assets, i.e. £750,000 ($900,000 at $1. 2 = £1) £720,000. Thus, there is no adjustment to the figure in the Profit and Loss Account for the exchange difference. Activities which are not trading 21. The practice outlined above applies to professions and to property business where the profits are computed in accordance with the rules of Case I (Schedule A and overseas property businesses). They have no application outside these contexts. In such cases, the capital gains tax rules will apply to the acquisition and disposal of foreign currency chargeable assets (except where the transactions give rise to profits assessable under Case VI of Schedule D) and exchange fluctuations will generally have no tax consequences outside the capital gains field. Capital gains 22. The decision in Bentley v Pike [1981] STC 360; 53 TC 590 established that a gain or loss on an asset should be computed by comparing the sterling value at the date of sale of the sale consideration with the sterling value at the date of acquisition of the acquisition cost. The

principle was reaffirmed in Capcount Trading v Evans [1993] STC 11; 65 TC 545 and is not affected by the Marine Midland decision, by section 42 FA 1998 or this Statement.

SP3/02

Tax treatment of transactions in financial futures and options

Introduction

1. This Statement of Practice sets out the Inland Revenue's views on the tax treatment of transactions in futures and options of the sorts defined in section 143 TCGA 1992 and relating to shares, securities, foreign currency or other financial instruments. It does not apply to contracts falling within the financial instruments legislation in Chapter 2 Part 4 FA 1994; or, for accounting periods beginning on or after 1 October 2002, derivative contracts falling within Schedule 26 FA 2002. The principles set out are of relevance to: • •

UK residents such as unauthorised unit trusts, charities and others (including com panies) which either do not trade or whose principal trade is outside the financial area; and non-resident collective in vestment veh icles (whether open- or cl osed-ended), pension funds and ot hers (including com panies) whic h either do not tra de or whose principal trade is outside the financial area.

2. This Statement does not apply to approved pension schemes, whose profits from futures and options are generally exempt from tax. 3. In relation to companies, this Statement will be applicable for accounting periods beginning on or after 1 October 2002 and only in relation to financial futures and options where the underlying subject matter is shares, a holding in an authorised unit trust, or a security to which section 92 or 93 FA 1996 applies. "Financial futures" is a wide term. It includes:

4. • •

• 5.

contracts for future delivery of shares, secu rities, f oreign currency or other financial instruments; contracts that are settled by payment of cash differences determined by movements in the price of suc h instrum ents (including cont racts where settlement is based on the application of an interest rate or a financia l index to a notional principal amount), as well as contracts settled by delivery; and both exchange traded and over the counter contracts. "Options" includes:

• • •

both exchange traded and over the counter options; options that are settled by a cash pa yment be tween the parties, as well as those that provide for delivery; and warrants.

Relevance of trading 6. Section 128 ICTA 1988 and section 143 TCGA 1992 provide, broadly, that transactions in financial futures and options will be treated as capital in nature unless they are regarded as profits or losses of a trade. It is immaterial for this purpose whether the profits of the trade are taxed under Case I of Schedule D or otherwise (see HSBC Life (UK) Ltd and others v Stubbs and others [2002] STC (SCD) 9). 7. If, under normal statutory and case law principles, profits or losses fall to be treated as trading in nature then section 128 ICTA 1988 and section 143 TCGA 1992 have no application to those profits or losses. It is therefore necessary first to determine whether or not the taxpayer's transactions in futures and options give rise to trading profits or losses.

8. Whether or not a taxpayer is trading is a question of fact and degree, to be determined by reference to all the facts and circumstances of the particular case. However, the Inland Revenue consider that an individual is unlikely to be regarded as trading as a result of purely speculative transactions in financial futures or options. Transactions in financial futures or options by a company may be either trading or capital in nature. 9. However, a financial futures or options transaction which is clearly ancillary to a trading transaction on current account will give rise to trading profits or losses. In contrast, a financial futures or options transaction which is clearly ancillary to a transaction which is not a trading transaction on current account will be capital. 10. A financial futures or options transaction that is not clearly ancillary to another transaction may be a trading transaction in its own right. Whether this is so will depend on all the facts and circumstances of the case. Consideration will be given to what are known as the "badges of trade". In such a case, intention and frequency are important. The transaction will not necessarily be regarded as trading. It may well be regarded as capital in nature, depending on all the facts and circumstances. Elimination or reduction of risk 11. In determining whether a financial futures or options transaction is ancillary to another transaction the following points are relevant: • • • • • •

there must be another transaction; that other transaction must already have been undertaken, or there must be the intention to undertake it in the future; the financial futures or options transaction is ancillary to the other transacti on if the intention is to eli minate o r reduce risk, or to reduce transaction c osts, in respe ct of that other transaction; the financial futures or options trans action m ust be econom ically ap propriate to the elimination or reduction of risk, or to the reduction of transaction costs; the financial futures or options transaction may be ancillary to more than one other transaction, and more than one financial futures or options transaction may be ancillary to another transaction; it m ay be ne cessary to e nter into ne w financ ial futures or options transactions or to terminate existing ones to reflect changes in the value of the asset s or liabilities resulting from the other transaction.

12. These points apply to long and short positions and apply whether the futures position is closed out or held to final maturity, or, in the case of an options position, closed out, exercised or held to final expiry. 13. In considering whether the financial futures or options transaction is "economically appropriate" to the elimination or reduction of risk, the Inland Revenue take the view that: • • •

the transaction must be on e which, by virtue of the relationship between fluctuations in its price and any fluctuati ons in the value of t he ot her transaction, m ay reasonabl y be expected to be appropriate to be used in order to eliminate or reduce risk; the use of a financial futures or options transaction based on an index of som e sort is not regarded as precluding the existence of such a reasonable expectation; it would not normally be expected that the amount of the principal on which the financial futures or options transact ion is based shoul d signif icantly exceed the principal of the other transaction.

14. There may be cases where a financial futures or options transaction is entered into in order to eliminate or reduce risk, but the other transaction then falls away (or the intention to enter into the other transaction is abandoned). If the financial futures or options transaction is closed out within as short a period as is practicable after this happens the transaction will continue to be treated in accordance with the principles outlined above. If, however, the futures or options transaction is not closed out at that time it may be arguable that any profit or loss arising subsequently is of a trading nature. In practice, where the taxpayer is not otherwise trading, the Inland Revenue would not normally take this point in view of the taxpayer's original intention. Base currency 15. The question may arise as to whether a financial futures transaction to buy or sell currency forward is ancillary to a capital transaction. In many cases the answer will be dependent on which currency is the taxpayer's base currency (that is, the currency in which value is measured). 16. For UK resident taxpayers the base currency will normally (but need not necessarily) be sterling. In determining whether there is a non-sterling base currency the Inland Revenue will have regard to factors such as: • • •

the currency in which accounts are prepared; the currency in which share capital is denominated; and evidence of the taxpayer's intentions (for example in a published prospectus).

Examples 17. The following examples illustrate the above and are not intended to cover every situation that may arise. In the first eight, the assets concerned are held or will be acquired as investments and the financial futures or options transactions would normally be treated as capital (on the assumption that the condition in the first bullet in paragraph 13 above is fulfilled): (1)

A taxpayer which holds gilts sells gilt futures to protect the value of its capital in the event of a fall in the value of gilt-edged securities generally.

(2)

A taxpayer which intends to purchase an asset does so in two stages, by (a) purchasing a foreign currency future in advance of the purchase of an asset denominated in that currency, or (b) purchasing an option in respect of an underlying asset as a first step towards the acquisition of the asset itself.

(3)

A taxpayer which holds a broadly based portfolio of UK equities sells FTSE 100 index futures or purchases FTSE 100 index put options to protect against the risk to the value of the portfolio from a fall in the market.

(4)

A taxpayer holding foreign currency assets acquires a futures or options contract to reduce the risk of a fall in the value of the foreign currency assets (as measured in the taxpayer's base currency).

(5)

A taxpayer which is intending to acquire a broad range of UK securities buys a call option on an FTSE 100 index to protect against a rise in the price of the securities in the period before they can be acquired.

(6)

A taxpayer sells or buys options or futures as an incidental and temporary part of a change in investment strategy, (e.g. changing the ratio of gilts and equities).

(7)

A taxpayer either has existing liabilities (e.g. loans) denominated in a currency other than its base currency or expects to incur such liabilities (e.g. as a result of an intention to borrow to acquire investments) and uses a futures or options contract to

protect itself against a rise in the currency in which the liabilities are or will be denominated. A taxpayer whose base currency is the dollar holds yen-denominated securities and, in order to eliminate the perceived risk of a fall in their value, enters a forward contract to sell for dollars an amount of yen equivalent to the yen value of the securities. (This is because the forward contract may be regarded as ancillary to the transaction in securities.)

(8)

The next two examples involve financial futures or options transactions which would be treated as trading (because they would be ancillary to other trading transactions): (9)

A taxpayer's futures or options transactions are incidental to its trading activity, for example a manufacturer entering into transactions to reduce the risk of fluctuations in the price of raw materials. (The profits and losses from these transactions would be taken into account as part of the profits and losses of the trade.)

(10)

A taxpayer has borrowed money at a floating rate of interest, for trade purposes, and enters into an interest rate future or option with a view to protecting itself against rises in interest rates. (Receipts or payments relating to the future or option would be taken into account as trading income or expenditure on current account. This is because the future or option is ancillary to a trading transaction i.e. the payment of interest for trade purposes. Given this, it does not matter whether or not the borrowing is on capital account.)

Finally, the three examples below illustrate circumstances where a taxpayer's transactions in financial futures and options will not generally be regarded as ancillary to another transaction. It is therefore necessary to look at the transactions in their own right to see whether they are to be treated as capital or as trading transactions. (11)

A taxpayer uses futures and options in conjunction with a holding of cash, bonds etc so as to create synthetic assets. (On the assumption that, in such circumstances, the financial futures or options transactions cannot all be shown to be ancillary to other transactions.)

(12)

A taxpayer uses futures and options to take a position in a currency in which it does not have a portfolio, and has no intention of acquiring a portfolio, so as to create an exposure to fluctuations in that currency by reference to its base currency.

(13)

A taxpayer whose base currency is sterling holds yen-denominated securities and, in order to eliminate the perceived risk of a fall in their value, enters a financial futures transaction to sell for dollars an amount of yen equivalent to the yen value of the securities. There is no intention of selling the yen-denominated securities and using the proceeds to acquire dollar-denominated securities. (The effect of the financial futures transaction is to increase the taxpayer's dollar exposure and to decrease its yen exposure.)

SP4/02

Definition of financial trader for the purposes of paragraph 31 Schedule 26 Finance Act 2002

General 1. For accounting periods of companies beginning on or after 1 October 2002, Schedule 26 FA 2002 provides rules for the tax treatment of derivative contracts. This means futures, options warrants and contracts for differences, except where the underlying subject matter is: • •

land, tangible assets (excluding commodities) or intangible fixed assets; or in some cases, shares.

2. An anti-avoidance rule in paragraph 31 Schedule 26 FA 2002 applies where certain derivative contracts to which non-residents are also party are entered into by companies to which the Schedule applies. Broadly, this rule (which replaces section 168 FA 1994) disallows any payment to the non-resident which is determined (wholly or mainly) by reference to a rate of interest. This applies for example to periodic payments under an interest rate swap or currency swap. However, paragraph 31(5) of the Schedule provides an exemption where the paying company is a bank, building society, clearing house or financial trader, holding the contract solely for the purposes of a trade carried on by it in the UK, and to which it is party as principal. Definition of financial trader 3. The term 'financial trader' is defined in paragraph 54(4) Schedule 26 FA 2002 as meaning: (a) any person who: (i) falls within section 31(1)(a), (b) or (c) of the Financial Services and Markets Act 2000, and (ii) has permission under that Act to carry on one or more of the activities specified in Article 14 and, in so far as it applies to that Article, Article 64 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544); or (b) any person not falling within paragraph (a) who is approved by The Commissioners for Her Majesty’s Revenue and Customs for the purposes of paragraph 54. 4. The Commissioners for Her Majesty’s Revenue and Custom’s approval under (b) above will, for instance, be relevant for a financial trader who does not need to be regulated and so would not qualify automatically as a financial trader by virtue of paragraph (a) above. Where an agent is acting for a disclosed principal and the principal is entitled to rights and subject to duties under the contract, the principal, as opposed to the agent, will require approval under (b). 5. This Statement of Practice explains the guidelines which the Commissioners for Her Majesty’s Revenue and Customs will operate in considering whether any person not within (a) above should be approved as a financial trader for the purposes of paragraph 54 Schedule 26 FA 2002. Financial trader guidelines 6. To obtain the Commissioners for Her Majesty’s Revenue and Customs’ approval, a company must demonstrate that: •

it is carrying on a trade, the profits or losses of which would fall to be dealt with under Case I of Schedule D;

•

this trade includes the provision of derivative contracts (within the meaning of Schedule 26 FA 2002) to counterparties in the normal course of trade; and

•

this part of the trade, on its own, satisfies the test in CIR v Livingston (11 TC 542) – i.e. the operations involved must be of the same kind and carried on in the same way as those which are characteristic of ordinary trading in the line of business in which the venture is made.

7. Where a company enters into derivative contracts with associated companies, then it will be easier for it to demonstrate that the third part of this test is satisfied if it also enters into derivative contracts to a significant extent with third parties on the same terms. Failing this, a company will need to produce evidence that it is conducting its operations with its associated

customers in the same way as if they had been unconnected. Relevant considerations will include: • • • • SP5/02

the type and range of contracts into which it enters; the management of market risk; the assessment of credit risk; the level of reward obtained in terms of fees or spread. Exemptions for companies’ gains on substantial shareholdings - sole or main benefit test - Paragraph 5 Schedule 7AC Taxation of Chargeable Gains Act 1992.

Introduction The regime in Schedule 7AC TCGA 1992 (‘Schedule 7AC’) for the exemption of gains on disposals of substantial shareholdings will apply to disposals of shares (or an interest in, or an asset related to, shares) by companies which have held a substantial shareholding for at least 12 months where – •

the company holding the shares (or an interest in, or an asset related to shares) is a trading company or a member of a trading group, and

•

the shares in question are shares in a trading company or the holding company of a trading group or subgroup.

The exemptions provided by the regime may create opportunities for manipulation. The provisions therefore contain an anti-avoidance rule at paragraph 5 of Schedule 7AC. This is aimed at tax-driven arrangements which are intended to exploit any of the exemptions. We expect cases where the anti-avoidance rule is in point to be unusual and infrequent. In what follows, references to paragraphs are to paragraphs of Schedule 7AC. Outline of the anti-avoidance rule Paragraph 5 is aimed at ‘arrangements’ from which the ‘sole or main benefit’ that can be expected to be derived is that a gain on a disposal will be exempt by virtue of an exemption in Part 1 of Schedule 7AC. The remedy is to deny exemption on any gain arising on the relevant disposal. ‘Arrangements’ is defined widely and includes ‘any scheme, agreement or understanding, whether or not legally enforceable’. Paragraph 5(1) provides that certain events must occur in pursuance of the arrangements before the ‘sole or main benefit test’ in paragraph 5(2) can apply: •

an untaxed gain must accrue to a company (‘company A’) on a disposal of shares, or an interest in shares or an asset related to shares, in another company (‘company B’),

and before the gain accrued either •

company A acquired control of company B, or the same person or persons acquired control of both companies, or

•

there was a significant change of trading activities affecting company B at a time when it was controlled by company A, or when both companies were controlled by the same person or persons.

Paragraph 5(5) provides that there is a ‘significant change of trading activities affecting company B’ if •

there is a major change in the nature or conduct of a trade carried on by company B or a 51% subsidiary of company B, or

•

there is a major change in the scale of the activities of a trade carried on by company B or a 51% subsidiary of company B, or

•

company B or a subsidiary of company B begins to carry on a trade.

A ‘major change in the nature or conduct of the trade’ in this legislation has the same meaning as in S768 ICTA 1988. For the purposes of paragraph 5(1) a gain is ‘untaxed’ if the gain, or all of it but a part that is not substantial, represents profits that have not been brought into account (in the United Kingdom or elsewhere) for the purposes of tax on profits for a period ending on or before the date of the disposal. ‘Profits’ for these purposes means income or gains, including unrealised income or gains. But profits are not ‘untaxed profits’ if an amount in respect of these profits is apportioned to and chargeable on a UK-resident company under the controlled foreign company rules for an accounting period of the company ending on or before the date of the disposal Application of the rule It will be a question of fact in any particular case as to whether a gain wholly, or wholly except for a part which is not substantial, represents untaxed profits. Broadly, this will involve looking at how the consideration obtained for the shares is derived from assets held directly or indirectly by company B. It will usually be obvious when profits are ‘untaxed’ within the meaning of paragraph 5. For example, unrealised profits on capital assets will be untaxed profits. It is impossible to provide a comprehensive catalogue of all situations where the gain will represent untaxed profits but some examples of situations where the profits will not be untaxed profits for the purpose of paragraph 5 would be – •

a dividend received by a holding company that is paid out of taxed profits of the subsidiary;

•

where the profits in question themselves represent an exempt gain on disposal of a substantial shareholding;

•

where no tax is payable on profits because they are covered by a specific relief (e.g. loss relief).

In many cases a gain will represent both taxed and untaxed profits. In these circumstances, the gain should be taken as first representing the taxed profits and only any balance which then remains as representing untaxed profits. In the context of this legislation we interpret ‘substantial’ as meaning more than 20%. Even if on this basis the gain wholly, or wholly except for a part which is not substantial, represents untaxed profits, the exemption would be denied only if – each of the circumstances set out in paragraph 5(1) occurs in pursuance of arrangements, and the sole or main benefit that could be expected to arise from the arrangements is that the gain accruing on the disposal would otherwise be exempt under Schedule 7AC, and

from the outset the sole or main benefit expected to arise from the arrangements is the achievement of that outcome. http://www.hmrc.gov.uk/cgt/anti_avoid_examples.htm SP1/03

Stamp duty: Disadvantaged Areas Relief

This Statement of Practice is intended as guidance for those claiming exemption from stamp duty in respect of transfers of property situated in designated areas (‘Disadvantaged Areas Relief’) and explains how Inland Revenue Stamp Taxes will interpret the extension to the relief introduced with effect from 10 April 2003. The relief is one of a number of measures set out in the Government’s Urban White Paper ‘Our Towns and Cities: The Future: Delivering an Urban Renaissance’ published in November 2000. The measure is designed to stimulate the physical, economic and social regeneration of the UK’s most disadvantaged areas by attracting development and by encouraging the purchase of residential and commercial property by individuals and businesses. The areas eligible for relief were designated 'Enterprise Areas' by the Chancellor in his 2002 Pre-Budget Report. In addition to the relief, a range of other Government policies designed to support enterprise and economic regeneration, including the Community Investment Tax Relief, will benefit these areas, helping to support the development of new and existing businesses. Introduction 1. Disadvantaged Areas Relief (provided for by section 92 of, and Schedule 30 to, the Finance Act 2001) was introduced on 30 November 2001 and was initially only available for conveyances or transfers on sale (of both residential and commercial property) for which the consideration did not exceed £150,000. Stamp duty in respect of conveyances or transfers of commercial property in disadvantaged areas was abolished in consequence of the Stamp Duty (Disadvantaged Areas) (Application of Exemptions) Regulations 2003 (‘the Regulations’), which have effect in relation to instruments executed on or after 10 April 2003. Thereafter the £150,000 limit applies only in relation to residential property. 2. Finance Act 2002 inserted the following provisions in Finance Act 2001 to distinguish residential from other property and to provide for differing stamp duty exemptions: • •

Section 92A which enables stamp duty relief in designated disadvantaged areas in respect of all properties to be varied depending on whether or not the property is ‘residential’; Section 92B which defines ‘residential property’ for the purposes of the relief. Nonresidential property, in respect of which unlimited relief is available, is therefore defined in the Act by exclusion. The section also sets out particular building uses that are specifically included within, or specifically excluded from, the definition.

3. In most cases there will be no difficulty in practice in establishing whether or not a property is ‘residential’. This statement sets out in more detail the Stamp Office’s approach to borderline cases and gives guidance on the practical application of the legislation. The annexed flowchart provides a quick guide for simpler cases as to whether property constitutes ‘residential property’. Certification 4. Claims for unlimited relief must be accompanied by a certificate stating either that none of the land in question is residential property or, if part is residential, the proportion that is nonresidential (together with the usual certificate of value for the remainder).

Residential property: Section 92A(4) of Finance Act 2001, together with the Regulations, provides that the exemption will only apply if the document is certified to the effect that the amount or value of the consideration does not exceed £150,000. • Non-residential property: Subsection (2) of section 92 of Finance Act 2001 provides that the exemption will only apply if the document is certified to the Commissioners as being an instrument on which stamp duty is not chargeable by virtue of subsection (1) of that section. 5.

The following are suggested forms of words for particular certificates: •

• •

Residential Property: ‘I/We hereby certify that the transaction effected by this instrument does not form part of a larger transaction or series of transactions in respect of which the amount or value of the consideration exceeds £150,000 and that stamp duty is not chargeable thereon by virtue of the provisions of sections 92 and 92A of the Finance Act 2001. Non-residential Property: ‘I/We hereby certify that this is an instrument in respect of nonresidential property on which stamp duty is not chargeable by virtue of the provisions of section 92 of the Finance Act 2001.’ Mixed Use Property: ‘I/We hereby certify that the transaction effected by this instrument is in respect of property part of which is residential property, and which does not form part of a larger transaction or series of transactions in respect of which the amount or value of the consideration relating to the residential part exceeds £150,000 so that stamp duty is not chargeable by virtue of sections 92 and 92A of the Finance Act 2001, and part of which is non-residential property on which stamp duty is not chargeable by virtue of the provisions of section 92 of the Finance Act 2001. The basis upon which the allocation between residential and non-residential parts has been made is as follows: …’

6. While the legislation does not specifically require the certificate to be included as part of the document, it is suggested that it should be so included. If the person submitting the document for stamping does not provide a certificate, either in the document or separately in writing, exemption will not be granted. 7. Appropriate contemporaneous evidence should be retained to support any certificate provided. Estate agents’ specifications, site plans, planning applications or permissions, marketing material and photographs may all provide relevant information. 8. Anyone falsely certifying a document with a view to obtaining relief that is not due will be committing a stamp duty fraud. The meaning of residential property 9. Section 92B defines ‘residential property’ as a building which: • • •

is used as a dwelling, or is suitable for use as a dwelling, or is in the process of being constructed or adapted for such use.

If a property meets any one of these separate tests it will be treated as residential property and be subject to the £150,000 limit for relief, as will any garden or grounds belonging to it or any interests or rights attaching to it. Each element of the definition is considered in turn below. The question of whether and to what extent a building and grounds are defined as residential property for stamp duty purposes may also have implications for its treatment for capital gains tax and local authority rates.

Use as a dwelling 10. Where a building is in use at the date of execution of the relevant instrument, it will be a question of fact whether and to what extent it is used as a dwelling. Use at the date the instrument is executed overrides any past or intended future uses for this purpose. 11. Where the property in question is in use as a dwelling at the date of execution, it is residential property for the purposes of the relief unless it is part of a multiple transaction qualifying for relief under the Regulations (see paragraphs 35 to 39 below). 12. For the treatment of buildings put to both residential and non-residential use, see paragraphs 17 and 18 below. Suitable for use as a dwelling 13. The suitability test applies to the state of the building at the time the instrument is executed, having regard to the facilities available and any history of use. For example, HM Revenue and Customs will not regard an office block as ‘suitable for use as a dwelling’, but a house which has been used as an office without particular adaptation may well be so. 14. If a building is not in use at the date of execution but its last use was as a dwelling, it will be taken to be ‘suitable for use as a dwelling’ and treated as residential property for the purposes of the relief, unless evidence is produced to the contrary (see paragraph 15). 15. Whether a building is suitable for use as a dwelling will depend upon the precise facts and circumstances. The simple removal of, for example, a bathroom suite or kitchen facilities will not be regarded as rendering a building unsuitable for use as a dwelling. Where it is claimed that a previously residential property is no longer suitable for use as a dwelling, perhaps because it is derelict or has been substantially altered, the claimant will need to provide evidence that this is the case. See also paragraph 29. 16. Where a building has been used partly for residential purposes and partly for another purpose, its overall suitability for use as a dwelling will be judged from the facilities available at the date of execution of the relevant document. For example, if two rooms of a house were in use as a dentist’s surgery and waiting room at the date of execution, HM Revenue and Customs would nevertheless normally consider this property suitable for use as a dwelling unless the claimant provided evidence to the contrary. In other words, the interaction of the Regulations with section 92B(1) enables a building that is used only partly as a dwelling to be nevertheless suitable for use wholly as a dwelling, with the effect that the £150,000 limit applies to the whole of the consideration. Where only a distinct part of the building is used and suitable for use as a dwelling, that part will be residential property for the purposes of the relief and the mixed use provisions will apply (paragraphs 17 and 18 below). Mixed use 17. Where only part of a building (and land or interest relating to it) is ‘residential property’ within section 92B(1), the consideration ‘shall be apportioned on such basis as is just and reasonable’ between the residential and non-residential elements. The £150,000 limit is then applied only to the residential portion, in accordance with the appropriate certification (regulation 5 of the Regulations). For example: A property situated wholly within a disadvantaged area is bought for a) £200,000 b) £400,000 50% of the property is ‘residential property’ on the basis of a just and reasonable apportionment.

Relief is conferred by section 92 FA 2001, applied in conjunction with regulation 5 of the Regulations. Paragraph (3) of regulation 5 calls for an apportionment of the total consideration between residential and non-residential elements. Paragraph (4) confirms that relief applies to the residential property element only where the consideration attributed to it does not exceed £150,000. In these examples: a) £100,000 is attributed to the residential property element, so relief is due. The part of the land that is not residential property is also exempt under the normal operation of section 92 FA 2001. So no duty is payable. b) the £200,000 attributed to the residential property element is not exempt, because of regulation 5(4), but attracts duty at the rate of 1% (stamp duty payable £2,000). The nonresidential property element is exempt as above. 18. The ‘just and reasonable’ test is necessarily subjective, and each case will be considered on its merits. Apportionment might be on the basis of the percentage areas quoted in planning applications, where appropriate, or alternatively of floor space relating to the respective uses. Other methods of apportionment will be considered as part of a claim. Specific cases 19. Some types of communal or institutional building are used neither as dwellings nor for commercial purposes. The legislation therefore outlines how these are classified for the purposes of relief, specifically including some such buildings within the definition of ‘dwelling’ (section 92B(2)) and specifically excluding others (section 92B(3)). If they do not fall within any of the specific categories of section 92B(3), most residential institutions will come within section 92B(2)(d) and will be treated as dwellings by default. 20. Categories of building use specifically included within the definition of ‘use as a dwelling’ (so that transfers of such buildings only qualify for relief if the consideration does not exceed £150,000) (section 92B(2)) are: a) residential accommodation for school pupils, for example accommodation blocks in boarding schools; b) residential accommodation for students, other than that within section 92B(3)(b). Student accommodation provided by private landlords is ‘a dwelling’, as is accommodation leased to students by universities or colleges in flats or houses rather than in halls of residence (see section 92B(3)(b)); c) residential accommodation for members of any of the armed forces, including accommodation for their families (section 92B(2)(c)); d) an institution that is the sole or main residence of at least 90% of its residents and does not fall within any of the categories referred to in section 92B(3) (see section 92B(2)(d) and also paragraph 21 below). This would include, for example, • sheltered accommodation for the elderly where no nursing or personal care is provided • accommodation for religious communities (subject to the rules regarding mixed use; see paragraphs 17 and 18). 21. Categories of building use specifically excluded from the definition of ‘use as a dwelling’ (so that transfers of such buildings in a disadvantaged area will qualify for unlimited relief) (section 92B(3)) are: a) a home or other institution providing residential accommodation for children; b) a hall of residence for students in further or higher education. This is not defined in the legislation but in practice property provided by a university or similar establishment will

c) d) e) f)

be judged on the facts (number of inhabitants, type of facilities, availability of communal areas); a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder; a hospital or hospice; a prison or similar establishment, or a hotel or inn or similar establishment.

22. The specific inclusions and exclusions set out in paragraphs 20 and 21 above apply not only to a building’s actual use at the date of the transfer, but to the uses for which it is suitable at that date. Where, however, a building is being put to one of the non-residential uses specified in section 92B(3), this overrides any suitability for another use (section 92B(4)). For example, a building used as a children’s home may also be suitable for use as a school boarding house, but this will not preclude a claim to unlimited relief. 23. Where a vacant building is suitable for at least one of the uses specified in section 92B(2) and at least one specified in section 92B(3), the tiebreaker in section 92B(5) determines, for the purposes of the relief, the use for which it is ‘most suitable’. Whether or not a vacant building has one or more uses for which it is most suitable is a question of fact. Evidence supporting such uses should be provided with the claim for relief. 24. Where there is a single use for which a building is most suitable, the fact that it is also suitable for another use will be discounted. 25. If there are a number of uses for which a building is most suitable and they all come within either of the two subsections, any other use for which the building is suitable will be discounted. 26. Where no most suitable use can be shown, the default will be to classify the building as residential property and apply the £150,000 limit. 27. Land and buildings that are not suitable for any use at the date of execution will be treated as residential property if they are ‘in the process of being constructed or adapted for such use’- see paragraphs 28 and 29 below. Process of being constructed or adapted for use as a dwelling 28. Undeveloped land is in essence non-residential, but land may be ‘residential property’ for the purposes of disadvantaged areas relief if a residential building is being built on it at the date the instrument is executed. The process of construction is taken as commencing when the builders first start work. A development of six or more dwellings is deemed to be non-residential under regulation 6 of the Regulations, even if in the process of construction at the date of the instrument (see paragraph 35 below). 29. Where (at the date the relevant instrument is executed) an existing building is being adapted for, or restored to, domestic use, it is ‘residential property’ for the purposes of the relief. This may apply, for example, where a derelict building is being made fit for habitation, or where a previously non-residential building is being converted to a dwelling. Again, the process is taken as commencing when the builders start work. The garden or grounds of a building used etc. as a dwelling 30. Section 92B(1)(b) includes within the definition of residential property ‘land that is or forms part of the garden or grounds of a building within paragraph (a) (including any building or structure on such land)’. The test HM Revenue and Customs will apply is similar to that applied for the purposes of the capital gains tax relief for main residences (section 222(3) of the Taxation

of Chargeable Gains Act 1992). The land will include that which is needed for the reasonable enjoyment of the dwelling having regard to the size and nature of the dwelling. 31.

A caravan or houseboat is not a ‘building’ for this purpose.

32. Commercial farmland is not within the definition of residential property. A farmhouse situated on agricultural land would be dealt with under the mixed use provisions (paragraphs 17 and 18 above). 33. Outhouses on land within the section 92B(1)(b) definition will also be ‘residential property’ unless it can be demonstrated that they have a specific non-residential purpose. Where a distinct non-residential use can be demonstrated, the mixed use provisions will apply. Interest in or rights over residential property 34. The treatment of interests in, or rights over, land or buildings for the purposes of disadvantaged areas relief will follow that of the land or buildings to which they relate. Six or more separate dwellings transferred by single contract 35. The Regulations provide that ‘where there is a single contract for the conveyance, transfer or lease of land comprising or including six or more separate dwellings, none of that land counts as residential property…’ Accordingly the transaction will qualify for unlimited relief. This recognises that commercial developers and institutional landlords, for example, frequently deal in numerous properties at one time. The fact that those properties may individually be ‘residential property’ does not detract from the inherently commercial nature of the transaction itself. 36. To qualify as ‘separate’, the dwellings must be self-contained. So for example, flats within a block, sharing some common areas but each with their own amenities, will qualify as separate dwellings. Rooms let within a house will not constitute separate dwellings if tenants share amenities such as a kitchen and bathroom. 37. A transaction in respect of six or more such dwellings must be carried out by means of a single contract in order to qualify for relief. Several instruments may however be presented for stamping if the properties are held under separate title. 38. Qualifying multiple transactions will be treated as non-residential property for the purposes of relief, even where the proportionate consideration for individual dwellings exceeds the £150,000 limit for residential property. It is not a condition of relief that multiple transactions comprise only dwellings. 39. The fact that some of the six or more dwellings within the single contract are outside a designated disadvantaged area will not prevent them from constituting a non-residential transaction. However relief will only be available for the portion of the land situated within the disadvantaged area. Property only partly within a disadvantaged area 40. Schedule 30 to Finance Act 2001, together with the Regulations, determines how property situated partly within and partly outside a designated disadvantaged area is to be treated for the purposes of the relief. Such cases are relatively rare in practice. Queries may be referred to Inland Revenue (Stamp Taxes) for guidance. Lease Duty 41. Relief is also available from duty on the rental element of new leases executed on or after 10 April 2003. Rental leases of residential property shall be eligible for relief where the average annual rent is no more than £15,000 and/ or where any premium does not exceed £150,000. For

non-residential property, full relief is available for the rental element of leases as well as for any premium. Other issues 42. The extended relief applies to documents executed on or after 10 April 2003, irrespective of whether the contract was entered into before or after that date. There is no scope to reclaim stamp duty already paid in respect of transfers executed on or before 9 April 2003.

FLOW CHART TO DETERMINE WHETHER PROPERTY IS OR IS NOT 'RESIDENTIAL PROPERTY' Is the subject of the conveyance/transfer/lease… (A) Is any part of the building not in use as a dwelling?

Yes A building that is 1 in use as a dwelling (including any of the uses specified at s.92B(2)2)?

No

Yes

The part that is in use as a dwelling is residential property

No

__________________________

[Continue down the flow chart for the part of the building that is not in use as a dwelling]

A building that is in use for any of the specific uses at s.92B(3)3?

Yes

The building is not 'residential property'

No A building that is suitable for use4 as a dwelling (including any of the uses specified at s.92B (2))?

No

Yes

Is the building also suitable for one or more of the uses specified at s.92B(3)

Yes

Is the building most suitable5 for one of the uses specified at s.92B(2)?

No A building that is in the process of being constructed or adapted for use6 as a dwellingNo (including any of the uses specified at s.92B(2))?

Yes

The building is 'residential property' *

No Is the building equally suitable for one of the uses specified at s.92B (2) and one of those specified at s.92B(3)?

Yes

Yes

No No

The building is not 'residential property'.

*unless the conveyance, transfer or lease comprises or includes six or more separate dwellings7 made pursuant to a single contract, in which circumstances none of the land will be ‘residential property’

Is the subject of the conveyance/transfer/lease…

(B)

Yes Land that forms part of the garden of grounds8 of a building that is residential property as determined under (A) above?

The land is 'residential property'

No

The land is not 'residential property'

(C) An interest in or right over land that subsists for the benefit of a building that is residential property under (A) or land that is residential property under (B)?

Footnotes 1. 2. 3. 4. 5. 6. 7. 8.

See paragraph [10] to [12] of SP See paragraph [20] of SP See paragraph [21] of SP See paragraph [13] to [16] of SP See paragraph [23] of SP See paragraph [28] to [29] of SP See paragraph [35] to [39] of SP See paragraph [30] of SP

Yes

No

The interest/right is 'residential property'

The interest/right is not 'residential property'

SP2/03

Business by telephone – services for non Contact Centre customers

For the purpose of this Statem ent of Practice, the term ‘non Contact Centre Customer’ is used to describe callers who contact an Inland Revenue office which is not currently served by a Contact Centre. The security afforded by Contact Centre technology enables us to offer a wider range of ser vices to customers contacting those centres. We ar e committed to expand the num ber of offices which will be served by Contact Centres and we intend that by 2005 ne arly all telephone calls will be handled by our Contact Centre network. In the meantime, we are improving the range of services offered to our non Contact Centre Customers. Previously, Statement of Practice 2/1998 , restri cted Business b y Telepho ne to indivi dual customers calling on t heir own behalf. From t oday’s date, we have extend ed the service t o personal representatives w hose identity and credenti als can be verified and for whom we h old written evidence of customer consent. We will also now provide so me specific informati on by telephone. Further guida nce will be i ssued with r egard to our contact with voluntar y intermediaries (e.g. welfare organisations such as Citizens Advice Bureaux). This Statement of Practice sets out, in full, the extended services which are now available for non Contact Centre Customers. It supersedes Statement of Practice 2/1998. Another Business by Telephone Statement of Practic e (SP3/03) is being issued toda y and will t o apply to customers whose affairs are served by a Contact Centre. SECURITY AND CONFIDENTIALITY HM Revenue and Custo ms is committed to ensuring the infor mation it receive s is accurate and that the priva cy of custom ers' affairs is protected. For the services described in this State ment of Practice: • • • • •

Callers will only be able to supply or amend information concerning individuals’ tax affairs. We will take steps to che ck the identi ty of the caller before di scussing a customer’s tax affairs. Callers who fail to satisfy the identity checks will be asked to put their enquiry in writing. We will check that we ha ve the customer’s written consent bef ore we discuss their affairs with a personal representative. We will carry out sam ple ‘call backs’ to en sure, am ongst other things, that our prescribed security procedures are being followed.

SERVICES AVAILABLE BY TELEPHONE FOR NON CONTACT CENTRE CUSTOMERS The services described bel ow are available to individual custo mers calling about their own tax liabilities, and to personal representativ es acting on behalf of the custo mer providing that we can satisfactorily check the identity of the caller. The directions by The Commissioners for Her Majesty’s Revenue and Customs under section 118 FA 1998 which provide for these services are at annex A. In most cases nothin g more than a telephone ca ll will be needed, although the call may lead to further action by HM Rev enue and Cus toms (for exam ple, sending out a revised PAYE coding

notice). Where business cannot be co mpleted by telephone we will send custo mers any forms or other information they need and explain what they need to do next. PERSONAL REPRESENTATIVES Some people prefer to ask a personal representa tive, such as an accountant, agent or fam ily member, to deal with their tax affairs fo r them. We will accept some ty pes of information from personal representatives providing that: • •

we have been able to check the identity of the personal representative, and we hold wri tten evidence that the c ustomer has given their consent for that personal representative to act on their behalf

Further guida nce will be i ssued with r egard to our contact with voluntar y intermediaries (e.g. welfare organisations such as Citizens Advice Bureaux). MATTERS THAT CAN BE DEALT WITH BY TELEPHONE Personal Details We will accept the following information over the telephone: • changes to name, address, post code and telephone number, • changes in personal circumstances such as marriage, separation or divorce, • other personal information - for example, National Insurance number and date of birth. Customers can also tell us when a personal re presentative is no longer acting on their beha lf. However, they will need to send us written consent for any new personal representative who starts to act for them. Employment Details We will accept the following information over the telephone: • details of a customer’s new employer and the date when the new employment began, • a customer’s works or payroll number, • details of earlier employments. We will not accept details of pay and tax over th e telephone. The se details should be notified in writing. Personal Allowances We will accept current year clai ms to the following personal al lowances by telephone fr om customers and personal representatives calling on the customer’s behalf: • Personal Allowance, • Married Couple’s Allowance 4, • Blind Person’s Allowance. The level of a person’s inco me affects their entitlement to the age-related allowances. We will accept new esti mates of i ncome over the telephone from customers or personal representatives calling on their behalf. And, using the figures provided, we will advise whether the amount of the customer’s allowances will change.

4

This allowance is available for tax year 2000/2001 and later years where either the husband or wife was born before 6 April 1935.

All claims for previous years must be made in writing. Expenses Some employees are entitled to tax relief for expe nses or certain professional subscriptions the y incur in carrying out their job. We will accept claims for ‘flat rate’ expenses from customers and personal representatives (Flat rate expenses ar e fixed am ounts we hav e agreed for certain categories of employees to save them h aving to m ake clai ms for individual amounts.) We will also acc ept clai ms for Pr ofessional Subscriptions up to a lim it of £100. (Most Trade Union subscriptions do not qualify for relief but where, exceptionally, a Trade Union subscription does qualify we will accept claims by telephone.) We will also accept repeat clai ms to certain travel expenses, an d other necessary expenses of employment where the entitlement has already been agreed in principle. Employee Benefits in Kind A customer, or a personal representative calling on the customer’s behalf, can tell us by telephone about any benefit in kind, not just the most common ones such as car benefits and fuel benefits. We will check the details of benefits in kind later, after the end of the tax y ear. But, telling u s about them earlier will help us to keep PAYE tax codes up to date and help the custo mer to pay the right am ount of tax during the tax year. In som e circu mstances, for exa mple if a benefit is partly for work purposes or a benefit is shared with other e mployees, we may ask for the details to be put in writing. Other information Customers, or personal representatives calling on the ir behalf, can also help us keep their PAYE tax codes up to date by telling us about: • • •

receipt of National Insurance Retirement Pension receipt of tax able Incapacity Benefit (Incapacity Benefit paid at the short ter m lower rate fo r the first 28 weeks is non-taxable) small amounts of income, for example bank or building society interest received gross.

Where caller s provide inf ormation ove r the telephone about expenses, benefits in ki nd or other information we will use this to adjust the customer’s PAYE code number for the current year and, if appropriate, the next year. Where we need to make adjustments for earlier tax years customers must put the information in writing. TIME LIMITS The same time limits apply to claim s and elections made by telephone as when they are made in writing. Where a claim is made by telephone, it will be treated as made at the time of the call provide d all the relevant information can be provided b y th e customer during that call. And a cl aim by telephone will, of course, be subject to the sa me co nditions and checks as if it were made on paper. Where a cl aim cannot be dealt with by telephone, for exam ple, because the caller does not have all the necessary inform ation, the customer may be asked to m ake the claim in writing. The written claim must still be made within the usual time limits. INFORMATION WE WILL GIVE TO CUSTOMERS BY TELEPHONE

We will provide the following details to custom ers, or personal representatives calling on their behalf: • the customer’s Payments on Account, • any amounts the customer owes us, • the amount of a repayment awaiting issue, • amounts of unpaid tax for earlier years included in the tax code for the current year, and • amounts of tax due for the current year included in a tax code for a later year GUIDANCE AND ASSISTANCE In addition to the services above, non C ontact Centre Customers can expect the norm al range of help and advice by telephone on general tax matters including: • general questions about income tax and capital gains tax for individuals, • help with completing returns and other Inland Revenue forms, and • requests for leaflets, forms, schedules and other Inland Revenue information. But, please note requests for supple mentary pag es to the Self Assessment return and the helpsheets mentioned in t he tax return guide shoul d be made to the Self Assessment Ord erline 0845 9000404 . The Orderline is open from 8.00 am to 8.00 pm 7 days a week.

Annex A DIRECTIONS UNDER SECTION 118 FINANCE ACT 1998 In the following directions references to ICTA88 mean the Income and Corporation Taxes Act 1988 and references to ITEPA03 mean the Income Tax (Earnings and Pensions) Act 2003. Claims, elections and notifications not included on a return The Commissioners of Inland Revenue hereby direct that from 1 September 2003 an individual who is not required to make a self assessment return for a year under TMA/S8 (1), or has made a self assessment return but the time limit specified in TMA70/S9ZA has passed, may: • •

make the claims or elections specified below, or notify the income or benefits specified below

by telephone PROVIDED THAT: • •

claims or ele ctions are for the ‘current y ear’ (that is the y ear of assess ment in which the claim or election is made) or the year following the ‘current year’, AND the clai m or election is made, or the inco me or benefit is no tified, in the manner authorised below

THE MATTERS TO WHICH THE DIRECTIONS RELATE ARE AS FOLLOWS: Claims and Elections 1

A claim to any of the following personal allowances Claims to Personal Allowance

under

ICTA88/S257 (1) ICTA88/S257 (2) (claimant 65 or over)

Claims to Married Couple’s Allowance

or

ICTA88/S257 (3) (claimant 75 or over)

under

ICTA88/S257A (2) This allowance is only available where claimant or wife born before 6 April 1935 but under 75) ICTA88/S257A (3) (allowance where cl aimant or wife 75 or over)

or

2

Elections for the transfer of 50% of the married couples allowance from husband to wife

under

ICTA88/S257BA(1) (An election under this section must be made before the commencement of the tax year to which it will relate. The only exception to this time limit relates to the year of marriage when the election may be made during that tax year).

Claims to Blind Person’s allowance

under

ICTA88/S265 (1)

or

ICTA88/S265 (2) (allowance to spouse)

A claim to an income tax reduction under the following provision Relief for interest paid

3

4

under

ICTA88/S353

A claim to make any of the following deductions from income in respect of expenses, Relief for professional membership fees and annual subscriptions

under

ITEPA03/S343 or S344

Relief for flat rate deductions within the terms of Extra Statutory Concession A1

under

ITEPA03/S367

A claim to make any of the following deductions from income in respect of expenses (providing the same class of expense was claimed the previous year),

Relief for expenses

under

ITEPA03/S336 ITEPA03/S337 ITEPA03/S338 ITEPA03/S341 ITEPA03/S342 ITEPA03/S346 ITEPA03/S352 ITEPA03/S370 ITEPA03/S371 ITEPA03/S373 ITPEA03/S374 ITEPA03/S376

Income and Benefits Notification of any of the any of the following benefits provided by reason of employment

5

Cash vouchers

under

ITEPA03/S81

Non cash vouchers

under

ITEPA03/S87

Credit tokens

under

ITEPA03/S94

Living accommodation

under

ITEPA03/S102

Cars available for private use

under

ITEPA03/S120

Car fuel

under

ITEPA03/S149

Vans available for private use

under

ITEPA03/S154

Beneficial loan arrangements

under

ITEPA03/S173

Benefits in kind

under

ITEPA03/S201

Payments, etc. free of tax

under

ITEPA03/S222

Director’s tax paid

under

ITEPA03/S223

Notification of any income from employment

6

THE MANNER AUTHORISED FOR DEALING WITH MATTERS BY TELEPHONE Claims and elections The claims, and elections specified above may be made orally, in a telephone conversation with a tax office, if made by: • •

the individual, or where the individual has notified HM Revenue and Customs that a personal representative is authorised to act on his or her behalf, that personal representative.

(The directions do not apply to claims made by an individual in his or her capacity as a trustee or partner. Such claims must be made in writing) The claim or election will be treated as made on the date the telephone call is made, so long as the caller provides the information requested by HM Revenue and Customs during the telephone conversation. If the caller does not provide the information which HM Revenue and Customs requests during the telephone conversation a valid claim, or election will not have been made. Failure to establish a valid claim, or election by telephone does not prevent the caller from a further attempt to establish the claim or election. But, any subsequent attempt must be made in writing, within the statutory time limit for making the claim or election. Income and benefits The income and benefits specified above may be notified to HM Revenue and Customs orally, in a telephone conversation with a tax office, if notified by: • •

the individual, or where the individual has notified HM Revenue and Customs that a personal representative is authorised to act on his or her behalf, that personal representativ e.

The notification will be treated as given on the date the telephone call is made, so long as the individual, or personal representative, provides the information requested by HM Revenue and Customs during the telephone conversation. If an individual, or personal representative, does not provide the information which HM Revenue and Customs requests during the telephone conversation a valid notification will not have been given. The individual, or personal representative, should then write to the individual’s tax office to notify them about the income or benefit REVOCATION OF PREVIOUS DIRECTIONS The Commissioners of Inland Revenue hereby revoke their directions published on 24 August 1998 with effect from 1 September 2003. SP3/03

Business by telephone – Inland Revenue Contact Centres – superseded by SP1/05

SP1/04

Stamp Duty Land Tax: Disadvantaged Area Relief

This Statement of Practice is intended as guidance for those claiming exemption from Stamp Duty Land Tax in respect of transfers of property situated in designated areas (‘Disadvantaged Area Relief’). The relief is one of a number of measures set out in the Government’s Urban White Paper ‘Our Towns and Cities: The Future: Delivering an Urban Renaissance’ published in November 2000. The measure is designed to stimulate the physical, economic and social regeneration of the UK’s most disadvantaged areas by attracting development and by encouraging the purchase of residential and commercial property by individuals and businesses. The areas eligible for relief were designated 'Enterprise Areas' by the Chancellor in his 2002 Pre-Budget Report. In addition to the relief, a range of other Government policies designed to support enterprise and economic regeneration, including the Community Investment Tax Relief, will benefit these areas, helping to support the development of new and existing businesses Background

1. Disadvantaged Area Relief (provided for by section 92 of, and Schedule 30 to, the Finance Act 2001) was introduced on 30 November 2001 and was initially available for conveyances or transfers on sale (of both residential and commercial property) for which the consideration did not exceed £150,000. Stamp duty in respect of conveyances or transfers of commercial property in disadvantaged areas was abolished in consequence of the Stamp Duty (Disadvantaged Areas) (Application of Exemptions) Regulations 2003 (‘the Regulations’), which have effect in relation to instruments executed on or after 10 April 2003. Thereafter the £150,000 limit applies only in relation to residential property. 2. Finance Act 2002 inserted the following provisions in Finance Act 2001 to distinguish residential from other property and to provide for differing Stamp Duty Land Tax exemptions: • FA2002 Section 92A which enables stamp duty relief in designated disadvantaged areas in respect of all properties to be varied depending on whether or not the property is ‘residential’; Disadvantaged Area Relief under Stamp Duty Land Tax 3. Section 57 and Schedule 6 Finance act 2003 provides for Disadvantaged Area Relief under Stamp Duty Land Tax. 4. The definition of residential property under Stamp Duty Land Tax is provided at section 116 FA2003. Non-residential property is therefore defined in the Act by exclusion. Section 116 also sets out particular building uses that are specifically included within, or specifically excluded from, the definition. 5. In most cases there will be no difficulty in practice in establishing whether or not a property is ‘residential’. This statement sets out in more detail the Stamp Office’s approach to borderline cases and gives guidance on the practical application of the legislation. The annexed flowchart provides a quick guide for simpler cases as to whether property constitutes ‘residential property’. Claiming the relief 6. The way in which relief is claimed is different under Stamp Duty Land Tax. FA2003 Section 76 requires that most land transactions, including those that qualify for Disadvantaged Area Relief, must be notified to HM Revenue and Customs on a Land Transaction Return Form (SDLT 1). 7. Relief is claimed by simply completing a box within this form. Certificates of Value are no longer required and no supporting evidence or documentation is required at this point. Once the return has been submitted and we are satisfied with the information provided, the purchaser is issued with a certificate which they must present with documents when applying for registration of title at Land Registry, Registers of Scotland or Land Registry of Northern Ireland. 8. FA 2003 Schedule 10 Part 3 gives HM Revenue and Customs the power to enquire into a Land Transaction Return. These provisions permit HM Revenue and Customs to open an enquiry into any aspect of a Land Transaction Return, including claims to reliefs. Appropriate contemporaneous evidence should be retained to support any claim to the relief. There is no need to create records that would otherwise not be available. Estate agents’ specifications, site plans, planning applications or permissions, marketing material, photographs and print outs of an internet post code search may all provide relevant information should there be an enquiry into a land tax return. 9.

As with all claims the onus is on the purchaser to check whether or not the relief is due.

The meaning of residential property

10.

FA 2003 Section 116(1) defines ‘residential property’ as a building which: • is used as a dwelling, • or is suitable for use as a dwelling, • or is in the process of being constructed or adapted for such use.

If a property meets any one of these separate tests it will be treated as residential property and be subject to the £150,000 limit for relief, as will any garden or grounds belonging to it or any interests or rights attaching to it. Each element of the definition is considered in turn below. The question of whether and to what extent a building and grounds are defined as residential property for stamp duty purposes may also have implications for its treatment for capital gains tax and local authority rates. Use as a dwelling 11. Where a building is in use at the effective date of the transaction it will be a question of fact whether and to what extent it is used as a dwelling. Use at the effective date overrides any past or intended future uses for this purpose. For example, a purchaser is buying a house with the intention to refurbish it to create, in its place, an alternative therapy treatment centre. For the purposes of the relief the house in considered to be a dwelling because it was suitable for that use at the effective date of the transaction. (For another example see paragraph 34) 12. Where the property in question is in use as a dwelling at the effective date of the transaction, it is residential property for the purposes of the relief unless it is part of a multiple transaction qualifying for relief under S116 (7) FA 2003 (see paragraphs 40 to 44 below). 13. There is no motive test applicable to the usage of land or buildings, so where a residential property is purchased with the owner intending to use it as a non-residential business the building is considered residential, under the suitability test, for the purposes of the relief. 14. For the treatment of buildings put to both residential and non-residential use, see paragraphs 19 and 20 below. Suitable for use as a dwelling 15. The suitability test applies to the state of the building at the effective date of the transaction, having regard to the facilities available and any history of use. For example, HM Revenue and Customs will not regard an office block as ‘suitable for use as a dwelling’, but a house which has been used as an office without particular adaptation may well be so. 16. If a building is not in use at the effective date of the transaction but its last use was as a dwelling, it will be taken to be ‘suitable for use as a dwelling’ and treated as residential property for the purposes of the relief, unless evidence is produced to the contrary (see paragraph 17). 17. Whether a building is suitable for use as a dwelling will depend upon the precise facts and circumstances. The simple removal of, for example, a bathroom suite or kitchen facilities will not be regarded as rendering a building unsuitable for use as a dwelling. Where it is claimed that a previously residential property is no longer suitable for use as a dwelling, perhaps because it is derelict or has been substantially altered, the claimant will need to provide evidence that this is the case. See also paragraph 34. 18. Where a building has been used partly for residential purposes and partly for another purpose, its overall suitability for use as a dwelling will be judged from the facilities available at the effective date of the transaction. For example, if two rooms of a house were in use as a dentist’s surgery and waiting room at the effective date of the transaction, HM Revenue and

Customs would nevertheless normally consider this property suitable for use as a dwelling unless the claimant provided evidence to the contrary. A building that is used only partly as a dwelling may nevertheless be suitable for use wholly as a dwelling, with the effect that the £150,000 limit applies to the whole of the consideration. Where only a distinct part of the building is used and suitable for use as a dwelling, that part will be residential property for the purposes of the relief and the mixed use provisions will apply (See paragraphs 19 and 20 below). Mixed use 19. Where only part of a building (and land or interest relating to it) is ‘residential property’ within section 116(1), the consideration ‘shall be apportioned on such basis as is just and reasonable’ between the residential and non-residential elements. The £150,000 limit is then applied only to the residential portion (Schedule 6 FA 2003). For example: A property situated wholly within a disadvantaged area is bought for a) £200,000 b) £400,000 50% of the property is ‘residential property’ on the basis of a just and reasonable apportionment. In these examples: a) £100,000 is attributed to the residential property element, so relief is due. The part of the land that is not residential property is also exempt. So no duty is payable. b) the £200,000 attributed to the residential property element is not exempt, because of Schedule 6 paragraph 6, but attracts duty at the rate of 1% (Stamp Duty Land Tax payable £2,000). The non-residential property element is exempt as above. Where a transaction involves six or more mixed use properties, under S116 (7) FA 2003, providing certain conditions are met, the residential element is exempt and no Stamp Duty Land Tax is payable. See paragraphs 40 to 44. 20. The ‘just and reasonable’ test is necessarily subjective, and each case will be considered on its merits. Apportionment might be on the basis of the percentage areas quoted in planning applications, where appropriate, or alternatively of floor space relating to the respective uses. Other methods of apportionment will be considered as part of a claim. Specific cases 21. Some types of communal or institutional building are used neither as dwellings nor for commercial purposes. The legislation therefore outlines how these are classified for the purposes of relief, specifically including some such buildings within the definition of ‘dwelling’ (section 116(2)) and specifically excluding others (section 116(3)). If they do not fall within any of the specific categories of section 116(3), most residential institutions will come within section 116(2)(d) and will be treated as dwellings by default. 22. Categories of building use specifically included within the definition of ‘use as a dwelling’ (so that transfers of such buildings only qualify for relief if the consideration does not exceed £150,000) (section 116(2)) are: a) residential accommodation for school pupils, for example accommodation blocks in boarding schools; b) residential accommodation for students, other than that within section 116(3)(b). Student accommodation provided by private landlords is ‘a dwelling’, as is accommodation leased to students by universities or colleges in flats or houses rather than in halls of residence (see section 116(3)(b));

c) d)

residential accommodation for members of any of the armed forces, including accommodation for their families (section 116(2)(c)); an institution that is the sole or main residence of at least 90% of its residents and does not fall within any of the categories referred to in section 116(3) (see section 116(2)(d) and also paragraph 23 below). This would include, for example, sheltered accommodation for the elderly where no nursing or personal care is provided. An example of this would be where an elderly person purchases a home on a warden-assisted housing development. • accommodation for religious communities (subject to the rules regarding mixed use; see paragraphs19 and 20).

23. Categories of building use specifically excluded from the definition of ‘use as a dwelling’ (so that transfers of such buildings in a disadvantaged area will qualify for unlimited relief) (section 116(3)) are: a) a home or other institution providing residential accommodation for children; b) a hall of residence for students in further or higher education. This is not defined in the legislation but in practice property provided by a university or similar establishment will be judged on the facts (number of inhabitants, type of facilities, availability of communal areas); c) a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder (for example, an institution that provides accommodation as part of a wider care service such as residential care homes or residential drug treatment centres); d) a hospital or hospice; e) a prison or similar establishment, or f) a hotel or inn or similar establishment. Bed and Breakfasts/Guest Houses 24. Each case will be taken on its merits, however, paragraph 25 below provides general examples of the treatment of B&Bs/guest houses. 25. A property providing a Bed and Breakfast (B&B) service, which has amenities installed in each room such as bathing facilities, telephone lines etc and is available all year round as the rooms do not need any further adaptation, would be considered non residential for the purposes of the relief. Example; Mr and Mrs Boyd run a bed and breakfast in a disadvantaged area of Blackpool. They live on the premises and it is open all year round but trade declines during the winter months. Under section 116(3) FA 2003, the Boyd’s B&B is a ‘hotel or inn or similar establishment’ and is therefore not used as a dwelling. Mrs Leaver lives in Southwest London and lets out two spare rooms on a B&B basis during the fortnight of the Wimbledon tennis tournament. She doesn’t make any adaptations to the rooms other than the removal of some of her personal items. For the purposes of the relief Mrs Leaver’s property is, at all times, considered to be in use as and suitable for use as a dwelling.

26. Buy-to-let properties suitable for use as a dwelling are residential unless they are a development of six or more dwellings whereby they would be non-residential under S116 (7). 27. The specific inclusions and exclusions set out in paragraphs 22 and 23 above apply not only to a building’s actual use at the effective date of the transaction, but to the uses for which it is suitable at that date. Where, however, a building is being put to one of the non-residential uses specified in section 116(3), this overrides any suitability for another use (section 116(4)). For example, a building used as a children’s home may also be suitable for use as a school boarding house, but this will not preclude a claim to unlimited relief. 28. Where a vacant building is suitable for at least one of the uses specified in section 116(2) and at least one specified in section 116(3), section 116(5) determines, for the purposes of the relief, the use for which it is ‘most suitable’. Whether or not a vacant building has one or more uses for which it is most suitable is a question of fact. Evidence supporting such uses should be retained. 29. Where there is a single use for which a building is most suitable, the fact that it is also suitable for another use will be discounted. 30. If there are a number of uses for which a building is most suitable and they all come within either of the two subsections, any other use for which the building is suitable will be discounted. 31. Where no most suitable use can be shown, the default will be to classify the building as residential property and apply the £150,000 limit. 32. Land and buildings that are not suitable for any use at the effective date of the transaction will be treated as residential property if they are ‘in the process of being constructed or adapted for such use’- see paragraphs 33 and 34 below. Process of being constructed or adapted for use as a dwelling 33. Undeveloped land is in essence non-residential, but land may be ‘residential property’ for the purposes of Disadvantaged Area Relief if a residential building is being built on it at the effective date of the transaction. A development of six or more dwellings is deemed to be nonresidential under S116 (7), even if the process of construction or marketing has begun at the effective date of the transaction (see paragraph 40). 34. Where (at the effective date of the transaction) an existing building is being adapted for, marketed for, or restored to, domestic use, it is residential for the purposes of the relief. The process is taken as commencing when the developer begins marketing the properties for sale or starts physical work on the site which ever is earlier. This may apply, for example, where a derelict building is being made fit for habitation, or where a previously non-residential building is being converted to a dwelling. For example: Kristian is buying an apartment, in what will be a converted church, off-plan. The sale is completed on 15th March 2004, the properties were marketed for sale on 3 January 2004 and work on converting the church commenced on 2nd February 2004. For the purposes of this transaction the church is considered to be a dwelling, even though it has yet to be fully converted, from 3rd January. If the consideration is greater than £150,000 Kristian will have to pay the appropriate rate of Stamp Duty Land Tax. In the above example the developer that initially purchased the church will have bought it as a non-residential property regardless of the intention to turn the building into residential units.

The garden or grounds of a building used etc. as a dwelling 35. Section 116(1)(b) includes within the definition of residential property ‘land that is or forms part of the garden or grounds of a building within paragraph (a) (including any building or structure on such land)’. The test HM Revenue and Customs will apply is similar to that applied for the purposes of the capital gains tax relief for main residences (section 222(3) of the Taxation of Chargeable Gains Act 1992). The land will include that which is needed for the reasonable enjoyment of the dwelling having regard to the size and nature of the dwelling. 36.

A caravan or houseboat is not a ‘building’ for this purpose.

37. Commercial farmland is not within the definition of residential property. A farmhouse situated on agricultural land would be dealt with under the mixed use provisions (paragraphs 19 and 20 above). It may often be the case that farmhouses will occupy only a small fraction of the total land and will therefore, when apportioned, fall below the £150,000 consideration limit thus attracting the residential relief. 38. Outhouses on land within the section 116(1)(b) definition will also be ‘residential property’ unless it can be demonstrated that they have a specific non-residential purpose. Where a distinct non-residential use can be demonstrated, the mixed use provisions will apply. Interest in or rights over residential property 39. The treatment of interests in, or rights over, land or buildings for the purposes of Disadvantaged Area Relief will follow that of the land or buildings to which they relate. Six or more separate dwellings transferred by a single transaction 40. Section 116(7) FA 2003 provides that ‘where six or more separate dwellings are the subject of a single transaction involving the transfer of a major interest in, or the grant of a lease over, them, then… those dwellings are treated as not being residential property’. This recognises that commercial developers and institutional landlords, for example, frequently deal in numerous properties at one time. The fact that those properties may individually be ‘residential property’ does not detract from the inherently commercial nature of the transaction itself. 41. To qualify as ‘separate’, the dwellings must be self-contained. So for example, flats within a block, sharing some common areas but each with their own amenities will qualify as separate dwellings. Rooms let within a house will not constitute separate dwellings if tenants share amenities such as a kitchen and bathroom. 42. A transaction in respect of six or more such dwellings must be carried out by means of a single transaction in order to qualify for relief. 43. Qualifying multiple transactions will be treated as non-residential property for the purposes of relief, even where the proportionate consideration for individual dwellings exceeds the £150,000 limit for residential property. It is not a condition of relief that multiple transactions comprise only dwellings. One example of this would be where a purchaser is buying eight houses and four shops. Mixed use properties, such as pubs with self-contained residential accommodation, are also treated as non-residential. 44. The fact that some of the six or more dwellings within the single transaction are outside a designated disadvantaged area will not prevent them from constituting a non-residential transaction. However relief will only be available for the portion of the land situated within the disadvantaged area. Property only partly within a disadvantaged area

45. Schedule 6, Part 3, FA 2003 determines how property situated partly within and partly outside a designated disadvantaged area is to be treated for the purposes of the relief. Such cases are relatively rare in practice. Queries may be referred to Inland Revenue (Stamp Taxes) for guidance. Grants of new leases 46. FA2003 Schedule 6 Part 2 deals with the charge to Stamp Duty Land Tax on the grant of a new lease. Land all non-residential 47. If all of the land is non-residential it is exempt from any charge to Stamp Duty Land Tax. Land all residential 48. The general rule is that: (a) if the premium (and any other consideration than rent) does not exceed £150,000 then this is exempt from Stamp Duty Land Tax, and (b) if the ‘net present value’ of the rental payments does not exceed £150,000 then this is exempt from Stamp Duty Land Tax ‘Net present value’ is, broadly speaking, the total rental payments due under the lease, discounted to reflect the fact that future rental payments are of less value than current rental payments. There is a tool for calculating net present value on HM Revenue and Customs website. There is a special rule where the average annual rent exceeds £600. In such a case there is no relief or exemption for any premium. Any premium, however small, will be charged at 1% (or at higher rates if it exceeds £250,000). 49. Where there is mixed use apportionment is applied. The non-residential portion is exempt from lease duty. If the consideration includes rent and the relevant rental value does not exceed £150,000, the rent does not count as chargeable consideration. 50.

If the consideration includes consideration other than rent then: a) If the annual rent does not exceed £600 and the relevant consideration does not exceed £150,000, the consideration other than rent does not count as chargeable consideration b) If the annual rent exceeds £600, the consideration other than rent is counted as chargeable consideration

The ‘annual rent’ is the average annual rent over the term of the lease. Further Resources Information can be found on our website, which also contains: • A postcode search tool to help identify whether a property falls within a disadvantaged area, and • an intelligent decision-maker to help you decide whether a property is residential or nonresidential. • a lease duty calculator which provides the amount of Stamp Duty Land Tax payable on a lease transaction

FLOW CHART TO DETERMINE WHETHER PROPERTY IS OR IS NOT 'RESIDENTIAL PROPERTY' Is the subject of the conveyance/transfer/lease… (A) A building that is 1 in use as a dwelling (including any of the uses specified at 2 s.116(1) )?

Yes

Is any part of the building not in use as a dwelling?

No

Yes

No

The part that is in use as a dwelling is residential property __________________________

A building that is in use for any of the specific uses at 3 s.116(3) ?

[Continue down the flow chart for the part of the building that is not in use as a dwelling]

Yes The building is not 'residential property'

No

No A building that is 4 suitable for use as a dwelling (including any of the uses specified at s.116 (2))?

Yes

Is the building also suitable for one or more of the uses specified at s.116(3)

No A building that is in the process of being constructed or 6 adapted for use as a dwelling (including any of the uses specified at s.116(2))?

Yes

Is the building 5 most suitable for one of the uses specified at s.116(2)?

Yes

The building is 'residential property' *

No Is the building equally suitable for one of the uses specified at s.116(2) and one of those specified at s.116(3)?

Yes

No

Yes

No The building is not 'residential property'.

*unless the conveyance, transfer or lease comprises or includes six or more separate dwellings7 made pursuant to a single transaction, in which circumstances none of the land will be ‘residential property’

Is the subject of the conveyance/transfer/lease… (B)

Land that forms part of the garden of grounds8 of a building that is residential property as determined under (A) above?

Yes

The land is 'residential property'

No The land is not 'residential property'

(C) An interest in or right over land that subsists for the benefit of a building that is residential property under (A) or land that is residential property under (B) ?

Yes

No

The interest/right is 'residential property'

The interest/right is not 'residential property'

Footnotes 9. See paragraph [11] to [14] of SP 10. See paragraph [22] of SP 11. See paragraph [23] of SP 12. See paragraph [15] to [18] of SP 13. See paragraph [29] of SP 14. See paragraph [33] to [34] of SP 15. See paragraph [40] to [44] of SP See paragraph [35] of SP SP2/04

Allowable expenditure: Expenses incurred by personal representatives and corporate trustees

A new Statement of Practice, SP2/04, replaces SP8/94 in relation to certain expenses incurred by the personal representatives of deceased persons where the death in question occurred on or after 6th April 2004, and to expenses incurred by corporate trustees in making transfers and disposals on or after 6th April 2004. The text of SP2/04 is reproduced below.

Both Statements of Practice set out standard scales of allowable expenses which may be used for certain purposes of the Taxation of Chargeable Gains Act (TCGA) 1992 in place of the actual allowable expenditure incurred. The main changes introduced by SP2/04 are

• •

an increase in the monetary values set out in the scales broadly in line with the increase in the Retail Price Index since 1994, and the introduction of two new higher bands to cover larger estates.

In addition, there are some minor changes in wording to improve the clarity of the text. Expenses incurred by personal representatives 1. Following consultation with representative bodies, the scale of expenses allowable under Section 38(1)(b), TCGA 1992, for the costs of establishing title in computing the gains or losses of personal representatives on the sale of assets comprised in a deceased person's estate, has been revised. The Commissioners for Her Majesty’s Revenue and Customs will accept computations based either on this scale or on the actual allowable expenditure incurred. 2.

The revised scale is as follows: Gross value of estate

Allowable expenditure

A. Not exceeding £50,000

1.8% of the probate value of the assets sold by the personal representatives.

B. Over £50,000 but not exceeding £90,000

A fixed amount of £900, to be divided between all the assets of the estate in proportion to the probate values and allowed in those proportions on assets sold by the personal representatives.

C. Over £90,000 but not exceeding £400,000

1% of the probate value of the assets sold.

D. Over £400,000 but not exceeding £500,000

A fixed amount of £4,000, to be divided as at B. above.

E. Over £500,000 but not exceeding £1,000,000

0.8% of the probate value of the assets sold.

F. Over £1,000,000 but not exceeding £5,000,000

A fixed amount of £8,000, to be divided as at B. above. 0.16 per cent of the probate value of the assets sold, subject to a maximum of £10,000.

G Over £5,000,000 3. 2004.

The revised scale takes effect where the death in question occurred on or after 6th April

Expenses incurred by corporate trustees 4. Following consultation with representative bodies, HM Revenue and Customs have agreed the following scale of allowable expenditure under Sections 38 and 64(1), TCGA 1992, for expenses incurred by corporate trustees in the administration of estates and trusts. The Commissioners for Her Majesty’s Revenue and Customs will accept computations based either on this scale or on the actual allowable expenditure incurred. 5.

The scale is as follows:

Transfers of assets to beneficiaries etc (i) Publicly marketed shares and securities (A) One beneficiary

£25 per holding transferred

(B) Two or more beneficiaries between whom a holding must be divided

As (A), to be divided in equal shares between the beneficiaries

(ii) Other shares and securities

As (i) above, with the addition of any exceptional expenditure

(iii) Other assets

As (i) above, with the addition of any exceptional expenditure

For the purpose of this statement of practice, shares and securities are regarded as marketed to the general public if buying and selling prices for them are regularly published in the financial pages of a national or regional newspaper, magazine, or other journal. Actual disposals and acquisitions (i) Publicly marketed shares and securities trustees

The investment fee as charged by the

(ii) Other shares and securities

As (i) above, plus actual valuation costs

(iii) Other assets

The investment fee as charged by the trustees, subject to a maximum of £75, plus actual valuation costs

Where a comprehensive annual management fee is charged, covering both the cost of administering the trust and the expenses of actual disposals and acquisitions, the investment fee for the purposes of (i), (ii) and (iii) above will be taken to be £0.25 per £100 on the sale or purchase moneys. Deemed disposals by trustees (i) Publicly marketed shares and securities

£8 per holding disposed of

(ii) Other shares and securities

Actual valuation costs

(iii) Other assets

Actual valuation costs

6. This scale takes effect for transfers of assets to beneficiaries, actual disposals and acquisitions, and deemed disposals by corporate trustees on or after 6th April 2004. SP3/04

Double taxation relief: Status of the UK’s double taxation conventions with the former Socialist Federal Republic of Yugoslavia – superseded by SP3/07

SP1/05

BUSINESS BY TELEPHONE –CUSTOMS & REVENUE CONTACT CENTRES – superseded by SP1/10

SP1/06

Self Assessment: Finality and Discovery

Overview Self Assessment tax returns are usually issued to taxpayers in April, shortly after the end of the tax year. The Return has to be completed and sent in by the following 31 January. The Revenue can open an enquiry into that return within twelve months of 31 January to check that the self assessment returns the right amount of tax. If it is incorrect the self assessment can be corrected. There are some circumstances in which the tax inspector can assess further tax after the twelve month enquiry period. This usually happens when tax was under-assessed because of fraud or negligence by the taxpayer but it can also happen if the taxpayer does not provide enough information for the inspector to realise, within the enquiry period, that the self assessment is insufficient. The judgement of the Court of Appeal the case of Langham v Veltema was concerned with how much information the taxpayer needs to provide to remove the possibility of the inspector making a further assessment, known as a discovery assessment. This Statement of Practice clarifies the circumstances in which HMRC seeks to recover tax when a self assessment is found to be insufficient either: • after the end of the period in which a notice of enquiry may be given, or • after an enquiry into a return has been completed. and it is considered that the information provided by the taxpayer was not sufficient to make the Inspector aware of the insufficiency.The following examples illustrate what information taxpayers must disclose to guard against the possibility of a subsequent discovery assessment: Most taxpayers who use a valuation in completing their tax return and state in the Additional Information space at the end of the Return that a valuation has been used, by whom it has been carried out, and that it was carried out by a named independent and suitably qualified valuer if that was the case, on the appropriate basis, will be able, for all practical purposes, to rely on protection from a later discovery assessment, provided those statements are true. Most taxpayers will be able to gain finality with exceptional items in accounts. An example might be a deduction in the accounts under Repairs. If an entry in the Additional Information space points out that a programme of work has been carried out that included repairs, improvements and new building work and that the total cost has been allocated to revenue and capital on a particular basis, the inspector should not enquire after the closure of the enquiry period unless he becomes aware that the statement was patently untrue or unreasonable. Taxpayers who adopt a different view of the law from that published as the Revenue’s view can protect against a discovery assessment after the enquiry period. The Return would have to indicate that a different view had been adopted by entering in the Additional Information space comments to the effect that they have not followed Revenue guidance on the issue or that no adjustment has been made to take account of it. This Statement does not cover cases where a self assessment is insufficient due to fraudulent or negligent conduct by or on behalf of the taxpayer. This Statement applies to the two main areas of self assessment: • Income Tax and Capital Gains Tax (“IT”) • Corporation Tax (“CT”) This statement of practice applies to the following for the years specified: • Individuals – for returns from 1996/97

• •

Partnerships – for returns from 1996/97 For bodies within the charge to Corporation Tax – accounting periods ending on or after 1 July 1999

Background 1. Prior to the introduction of self assessment, discovery assessments were subject to statute, case law and practice. Cases of particular relevance were Cenlon Finance Co Ltd v Ellwood (40 TC 176) and Scorer v Olin Energy Systems Ltd (58 TC 592). Statement of Practice 8/91 explained how the provisions were applied. 2. When IT self assessment (“ITSA”) was introduced by FA 1994, new S29 TMA 1970 was intended to reproduce the mix of law and practice on discovery set out in SP8/91. The Self Assessment Legal Framework issued in 1995 explained that the redrafting of S29 TMA 1970 was to ensure “that a taxpayer who has made a full disclosure in the return has absolute finality twelve months after the filing date. This will be the case if the return is subsequently found to be incorrect, unless it was incorrect because of fraudulent or negligent conduct. In any case where there was incomplete disclosure or fraudulent or negligent conduct the Revenue will still have the power to remedy any loss of tax”. The intention was to offer finality, but there was also a recognition that there would be circumstances, even without fraud or neglect, that could still result in a discovery assessment. The equivalent legislation for CT self assessment (“CTSA”) is at Paras 41 to 49 Sch 18 FA 1998. 3. The Court of Appeal in the case of Langham v Veltema, [2004] STC 544, considered when disclosure was incomplete. It concluded that information made available, as defined in statute, must make an Inspector aware of an actual insufficiency in the assessment for that information to be complete enough to prevent the making of a discovery assessment. That conclusion gave rise to two concerns: • the lack of finality for the taxpayer at the close of the enquiry window; and • the inherent difficulty of complying with the law as expounded in the Court of Appeal. 4. Guidance was issued in December 2004 to help ITSA taxpayers achieve finality when completing their 2004 returns. This Statement of Practice confirms the position in respect of ITSA and extends it to CTSA. The circumstances in which HMRC will regard a taxpayer as having made a full disclosure are set out and assurance of finality is given in particular situations. Discovery Powers 5. The authority to make a discovery assessment is given by S29 TMA 1970 (ITSA), Para 41 Sch 19 FA 1998 (CTSA). In all cases, the relevant requirement for the purposes of this Statement is a discovery “that an assessment to tax is or has become insufficient”. Mere suspicion that an assessment may be insufficient is not adequate grounds for making a discovery assessment. 6. Where there has not been fraudulent or negligent conduct, discovery can only take place where HMRC “could not have been reasonably expected, on the basis of information made available before that time, to be aware of” the insufficiency in the assessment [S29 (5) TMA 1970; Para 44(1) Sch 18 FA 1998]. 7. ‘Information made available’ is defined at S29 (6) TMA 1970 (ITSA), Para 44(2) Sch 18 FA 1998 (CTSA). Relevant information includes that contained in documents accompanying the return.

8. The requirement that HMRC must discover that an assessment is insufficient restricts the opportunity for using discovery powers to make an assessment. If HMRC considers that an assessment may be insufficient, it may seek more information using S20 TMA 1970 to establish whether the assessment is insufficient. However, where there is no reason to suspect fraud, the taxpayer will be told about the use of Section 20 and will have the opportunity to make representations to an independent Commissioner. The ability of HMRC to “enquire” after the closure of the enquiry window is therefore subject to external oversight. Discovery in Practice 9. A taxpayer can further restrict the opportunity for discovery by providing enough information for an HMRC officer to realise within the enquiry period that the self assessment is insufficient. However taxpayers are encouraged to submit the minimum necessary to make disclosure of an insufficiency. The Veltema judgement does not require the provision of enough information to quantify the effect on the assessment. Information will not be treated as being made available where the total amount supplied is so extensive that an officer ‘could not have been reasonably expected to be aware’ of the significance of particular information and the officer's attention has not been drawn to it by the taxpayer or taxpayer's representative. 10. HMRC recognises that a taxpayer, unless acting fraudulently or negligently, will consider his return to be correct and complete with no insufficiency. Most figures entered on a return will be absolute, however some will be open to interpretation or uncertain. In these circumstances, the taxpayer will have made a judgement as to the correct figure to enter. HMRC may regard this figure as insufficient. Where the taxpayer has fully alerted HMRC to the full circumstances of such an entry on the return, then the HMRC officer is in a position to determine whether or not there is an insufficiency, the conditions set by the Court of Appeal in Langham v Veltema have been met and the assessment will not be open to discovery on that point. The following examples illustrate common situations. Examples of Common Situations Valuation Cases 11. Some entries on tax returns depend on the valuation of an asset. For example, if a company transfers a property to a director at less than market value, both the company and the director will need to use the market value in calculating the capital gain and benefit respectively. There is no obligation on the director to do any more than enter the resulting benefit in the relevant box on his return. However, the Court of Appeal decided in Langham v Veltema that the figure on the return does not give HMRC the level of information that is necessary to prevent a later discovery assessment. 12. Most taxpayers who state that a valuation has been used, by whom it has been carried out, and that it was carried out by a named independent and suitably qualified valuer if that was the case, on the appropriate basis, will be able, for all practical purposes, to rely on protection from a later discovery assessment, provided those statements are true. 13. The main exception will be where, as in the example of a property transferred to a director, the same transaction is the subject of an agreed valuation in a related tax return, that of the company. It may then come to light that the director’s return was insufficient and a discovery assessment raised. It is also likely that the insufficiency can be quantified without further enquiry. For this purpose, a related tax return is that of another party to the same transaction, rather than another transaction involving a similar or identical asset. The returns of several parties disposing of a jointly owned asset or shareholders disposing of all the shares in the same company in a single transaction, for example, may be related for this purpose. Where taxpayers’ interests in an asset or assets are similar, but not the same, any valuations agreed would not necessarily bind other taxpayers.

14. Information about the valuation may be provided in the Additional Information space (ITSA) or in accompanying documents (ITSA and CTSA). The return of capital gains for ITSA purposes requires an entry to indicate that a valuation has been used and asks for a copy of any valuation received. If these provide the information mentioned above the taxpayer can rely on protection from a later discovery assessment. Other Judgemental Issues 15. There are many items such as reserves, provisions and stock valuation that are routinely included in accounts, as well as some exceptional items such as capital/revenue expenditure in repairs, which require an element of judgement on the part of the taxpayer or representative. Prior to the introduction of self assessment it was customary to provide details of such items in the accounts or computations and many taxpayers have continued to do so. 16. It is difficult to see how HMRC might come to the conclusion that an assessment is insufficient because of one of these items without making an enquiry. There will be instances in which it becomes clear from an in-year enquiry that previous years figures were incorrect. The decision in the Veltema case does not alter that situation. 17. It may be possible to gain finality with the more exceptional items. An example might be a deduction in the accounts under Repairs. If an entry in the Additional Information space or accompanying documentation points out that a programme of work has been carried out that included repairs, improvements and new building work and that the total cost has been allocated to revenue and capital on a particular basis, the HMRC officer will not use discovery powers after the closure of the enquiry period unless he becomes aware that the statement was patently untrue or the basis of allocation was so unreasonable as to be negligent. Taking a Different View 18. It is open to a taxpayer properly informed or advised to adopt a different view of the law from that published as HMRC’s view. To protect against a discovery assessment after the enquiry period, the return or accompanying documents would have to indicate that a different view had been adopted. This might be done by comments to the effect that the taxpayer has not followed HMRC guidance on the issue or that no adjustment has been made to take account of it. This would offer an opportunity to HMRC to take up the return for enquiry. It is not necessary to provide all the documentation that HMRC might need to quantify that insufficiency if an enquiry into the Return is made. 19. Provided the point at issue is clearly identified and the stance adopted is not wholly unreasonable, the existence of an under-assessment or insufficiency is demonstrated by the statement that a different view of the law has been followed. In these circumstances the taxpayer achieves finality if no enquiry is opened within the statutory time limit. SP2/06

Venture Capital Trusts, the Enterprise Investment Scheme, the Corporate Venturing Scheme and Enterprise Management Incentives (supersedes SP2/00)

VALUE OF "GROSS ASSETS" The "gross assets" rule. 1. Paragraph 8, Schedule 28B, ICTA 88 provides that a Venture Capital Trust's holding of shares, or of shares and securities, in a company cannot be part of its qualifying holdings for the purposes of section 842AA ICTA 88 if the value of that company's gross assets exceeds •

£7 million immediately before the issue of the holding in question; or

•

£8 million immediately afterwards.

2. Section 293(6A) ICTA 88 provides that a company cannot be a qualifying company for the purposes of the Enterprise Investment Scheme in relation to an issue of eligible shares if the value of its gross assets exceeds • •

£7 million immediately before the issue of the shares; or £8 million immediately afterwards.

3. Paragraph 22, Schedule 15 FA 2000 provides that a company cannot be a qualifying company for the purposes of the Corporate Venturing Scheme in relation to any shares if the value of its gross assets exceeds • •

£7 million immediately before the issue of the shares; or £8 million immediately afterwards.

4. The limits set out above apply with effect from 6 April 2006. Before that date the gross assets limits were £15 million immediately before the issue of the shares and £16 million immediately after. The previous gross assets limits continue to apply in relation to investments made out of money raised by a Venture Capital Trust prior to 6 April 2006 or out of money derived from that money. 5. Paragraph 12 of Schedule 5 ITEPA 2003 provides that a company cannot be a qualifying company for the purposes of the Enterprise Management Incentives scheme, if the value of its gross assets exceeds – •

£30 million at the date the option is granted (£15 million up to 1 January 2002).

6. Where the company is a member of a group of companies, the limits set out in the preceding paragraphs apply to the aggregate value of the gross assets of all the companies in the group. For this purpose, no account is taken of – • •

any assets which consist in rights against another company in the group, or any shares in, or securities of, another such company.

VALUATION OF ASSETS 7. In applying these rules, HM Revenue and Custom's general approach is that the value of a company's gross assets at any time is the aggregate of the values of the company's gross assets as shown in its balance sheet if the company were to draw one up at that time. "Gross assets", means all the assets which would be shown on that balance sheet, without any deduction in respect of liabilities. This approach is subject to the proviso that the balance sheet would be drawn up on a basis consistent with that used in the accounts for preceding periods (if any), and in accordance with generally accepted accounting practice. (This is referred to later in this Statement as "the accounting practice proviso".) This general approach is also subject to what is said in paragraphs 11 and 12 below. 8. So if the shares or securities in question were issued, or as the case may be, the option was granted, immediately after the date to which the company's accounts were drawn up, the value of the company's gross assets immediately before the issue, or grant, would be the value shown in the balance sheet (subject to the accounting practice proviso and to paragraphs 11 and 12 below). And if the shares or securities were issued, or the option was granted, immediately before the date to which the company's accounts were drawn up, the value of the company's gross

assets immediately after the issue, or grant, would be the value shown in the balance sheet (subject to the accounting practice proviso and to paragraphs 10 and 11 below). 9. Where shares or securities are issued, or options are granted, at other times, the values will, in the first instance, be based on the values given in the company's latest available balance sheet (subject to the accounting practice proviso and to paragraphs 11 and 12 below). However, these values should be updated as precisely as is practicable, taking into account all the relevant information available to the company (and, where applicable, to its subsidiaries). For example, where a company is able to ascertain the amount of trade debts owed to it at any given time, it would be reasonable to take the aggregate amount of such debts outstanding at the time of the issue or grant. 10.

When accounts covering — •

the accounting period in which the issue was made or the option was granted, and

•

if they were not available at the time of the issue or grant, those for the immediately preceding accounting period,

become available, the values arrived at in the way described in paragraph 9 above may need to be reviewed in the light of the information contained in those accounts. PAYMENTS IN RESPECT OF SHARES OR SECURITIES 11. HM Revenue and Customs will not regard the assets of a company immediately before the issue of the shares or securities in question as including any advance payment received by the company in respect of that issue. 12. Where shares or securities are issued partly paid, the right to the unpaid portion will be regarded as an asset of the company. That asset will be taken into account for the purpose of deciding whether the relevant gross assets rule is satisfied, whether it is shown in the company's balance sheet or not. SP1/07

VAT Strategy: Input Tax deduction without a valid VAT invoice

1. This Statement of Practice explains and clarifies HMRC’s policy in respect of claims for input tax supported by invalid VAT invoices. It also explains why amendments were made to section 24(6)(a) and paragraph 4(1) of Schedule 11 to the Value Added Tax Act 1994 (VATA), and regulation 29(2) of the Value Added Tax Regulations 1995 to introduce new measures. These changes were effective from 16 April 2003 and apply to supplies made on or after this date. The statement of practice was first issued in July 2003 and has now been revised to provide clearer guidance and the updated legal position. This guidance does not apply to situations where HMRC may deny recovery of input tax for other reasons such as “abuse” of the right to deduct. Why were changes needed? 2. These changes were made to address the increasing threat to VAT receipts by the use of invalid VAT invoices and are part of the Government's strategy to address fraud, avoidance and non-compliance in the VAT system. They are a proportionate and necessary response to a systematic and widespread attack on the VAT system, where the use of invalid VAT invoices is becoming an increasing pressure on revenue receipts, particularly in those business sectors involved in the supply of the goods listed at Appendix 2. In addition to the revenue loss, this has led to distortion of competition. 3. For the vast majority of business there will be no change, and for businesses trading within the targeted sectors the measure will only impact if you have an invalid invoice. If you are

a VAT registered business, and you have been issued with an invoice that is invalid, you should be able to return to your supplier and ask them for a valid VAT invoice that complies with the legislation. If for some reason you cannot, this Statement of Practice sets out whether or not you may be entitled to input tax recovery. In most cases, provided businesses continue to undertake normal commercial checks to ensure their supplier and the supplies they receive are 'bona fide' prior to doing any trade, it is likely they will be able to satisfy HMRC that the input tax is deductible. The 'right to deduct' principles 4. The basic principle of EU and UK law underlying input tax recovery is that of neutrality. In practice, this means that any business that makes taxable supplies has the right to deduct the VAT incurred on goods or services that form a cost component of those supplies. EU and UK law also provides for rules governing the exercise of the right to deduct VAT. These fundamental VAT principles governing the recovery of VAT are not being changed. 5.

A business has incurred input tax if the following conditions are met: ƒ

there has actually been a supply of goods or services;

ƒ

that supply takes place in the UK;

ƒ

it is taxable at a positive rate of VAT;

ƒ

the supplier is a taxable person, i.e. someone either registered for VAT in the UK, or required to be registered;

ƒ

the supply is made to the person claiming the deduction;

ƒ

the recipient is a taxable person at the time the tax was incurred; and

ƒ

the recipient intends to use the goods or services for his business purposes.

6. If you are a taxable person, in order to exercise your basic right to deduct input tax, you must hold a valid VAT invoice. Without a valid VAT invoice, there is no right to deduct input tax. However, in the absence of such an invoice, you may still be able to make claims for input tax, but these claims are subject to HMRC’s discretion. This of course assumes that a taxable supply has taken place. Where HMRC question the fact that an underlying supply has taken place, these provisions do not apply. What legislative changes have been made? 7. The change to section 24(6)(a), VATA permits HMRC to consider evidence other than that contained in documents when exercising their discretion (paragraph 4(1) of schedule 11 is merely a consequential amendment to this change). Before this change, regulation 29(2) permitted HMRC to accept alternative documentary evidence to support input tax deduction without a valid VAT invoice. The amendment to regulation 29(2) simply permits HMRC, in applying their discretion, to consider evidence other than just documents. What constitutes a valid VAT invoice? 8. A valid VAT invoice is one that meets the full legal requirements as set out in regulations 13 & 14 of the Value Added Tax Regulations 1995 (Statutory Instrument 1995/2518). The contents of a valid VAT invoice should show the following information (as set out in regulation 14(1)): a. an identifying number; b. the time of the supply; c. the date of the issue of the document;

d. the name, address and registration number of the supplier; e. the name and address of the person to whom the goods or services are supplied; f.

[Omitted by SI 2003/3220, reg. 7(a)]

g. a description sufficient to identify the goods or services supplied h. for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable excluding VAT, expressed in any currency; i.

the gross total amount payable, excluding VAT, expressed in any currency

j.

the rate of any cash discount offered;

k. [ Omitted by SI 2003/3220, reg. 7(a).] l.

the total amount of VAT chargeable, expressed in sterling.

m. the Unit Price A self-billed invoice is not a valid invoice unless the recipient meets the conditions for selfbilling in Reg 13 (3A) and (3B). The conditions for self-billing are also set out in Notice 700/62 - Self Billing. 9. A taxable person may issue either a less detailed tax invoice where the charge made for an individual supply is £250 or less including VAT, or a modified tax invoice with the agreement of customer. If this is the case, not all of the above information is required. Information about less detailed and modified tax invoices can be found in Section 16.6 of Public Notice 700 (The VAT Guide). Copies can be obtained from the National Advice Service on 0845 010 9000 or downloaded from HMRC’s web site. What is an invalid VAT invoice? 10. An invoice that falls short of any of the requirements laid down in Reg 14(1) of SI 1995/2518 is an invalid invoice - see Paragraph 8 above. This includes situations where some or all of the details do not relate to the person/business that made the supply or the details shown are those of a company that has gone into liquidation or is missing at the time the supply is made. What do I do if I have an invalid VAT invoice? 11. The simplest thing is to ask your supplier to issue a valid VAT invoice (suppliers are legally obliged to do this). If a taxable supply has taken place but a revised invoice cannot be obtained, HMRC may apply their discretion to allow recovery of input tax. How do I know I have an invalid VAT invoice? 12. The first step is to ensure that you hold an invoice that contains all the right information. It is difficult to spot an invalid invoice where a false name, address or VAT number has been used. HMRC have established a team who can confirm that supplied VAT registration details are current, valid and match information held by HMRC. This is not authorisation of a transaction with that VAT registration, but can help, along with other checks to verify the legitimacy of your supplier. Such information can be obtained by telephoning 01737 734 then 516, 577, 612 or 761. Invalid Invoice and HMRC’s Discretion 13. A proper exercise of HMRC’s discretion can only be undertaken when there is sufficient evidence to satisfy the Commissioners that a supply has taken place. Where a supply has taken place, but the invoice to support this is invalid, the Commissioners may exercise their discretion and allow a claim for input tax credit.

14. For Supplies/transactions involving goods stated in Appendix 2 HMRC will need to be satisfied that: o

The supply as stated on the invoice did take place

o

There is other evidence to show that the supply/transaction occurred

o

The supply made is in furtherance of the trader’s business

o

The trader has undertaken normal commercial checks to establish the bona fide of the supply and supplier

o

Normal commercial arrangements are in place- this can include payment arrangements and how the relationship between the supplier/buyer was established

What do I do if my checks indicate that a fraud exists? 15. If your checks indicate that there may be a fraud you should consider whether you wish to continue with the transaction. You may also wish to inform HMRC Confidential on 0800 595 000. I have an invalid VAT invoice; can I still recover input tax? 16. Not automatically. However, HMRC may apply their discretion and still allow recovery. How will HMRC apply their discretion? 17. For supplies of goods not listed at Appendix 2, claimants will need to be able to answer most of the questions at Appendix 1 satisfactorily. In most cases, this will be little more than providing alternative evidence to show that the supply of goods or services has been made (this has always been HMRC’s policy). 18. For supplies of goods listed at Appendix 2, claimants will be expected to be able to answer questions relating to the supply in question including all or nearly all of the questions at Appendix 1. In addition, they are likely to be asked further questions by HMRC in order to test whether they took reasonable care in respect of transactions to ensure that their supplier and the supply were 'bona fide'. 19. As long as the claimant can provide satisfactory answers to the questions at Appendix 1 and to any additional questions that may be asked, input tax deduction will be permitted. 20. Decisions on when to disallow VAT claims will only be made after an independent central review of the case has been carried out. Can I appeal against HMRC’s decision? 21. If HMRC refuse to allow deduction of input tax under this Statement of Practice, unsuccessful claimants can first ask for a reconsideration of the decision. Should that be unsuccessful, they will then be able to appeal against HMRC’s decision to the VAT & Duties Tribunal.

Decision Flowchart.

VAT Strategy: Input Tax deduction without a valid VAT invoice: Appendix 1 Questions* to determine whether there is a right to deduct in the absence of a valid VAT invoice 1. Do you have alternative documentary evidence other than an invoice (e.g. supplier statement)? 2. Do you have evidence of receipt of a taxable supply on which VAT has been charged? 3. Do you have evidence of payment?

4. Do you have evidence of how the goods/services have been consumed within your business or their onward supply? 5. How did you know that the supplier existed? 6. How was your relationship with the supplier established? For example: o

How was contact made?

o

Do you know where the supplier operates from (have you been there)?

o

How do you contact them?

o

How do you know they can supply the goods or services?

o

If goods, how do you know the goods are not stolen?

o

How do you return faulty supplies?

*This list is not exhaustive and additional questions may be asked in individual circumstances VAT Strategy: Input Tax deduction without a valid VAT invoice: Appendix 2 Supplies of goods subject to widespread fraud and abuse a. Computers and any other equipment, including parts, accessories and software, made or adapted for use in connection with computers or computer systems. b. Telephones and any other equipment, including parts and accessories, made or adapted for use in connection with telephones or telecommunications. c. Alcohol - those alcoholic liquors liable to excise duty, which are defined by section 1 of the Alcoholic Liquor Duties Act 1979 or in any regulations made under that Act (e.g. spirits, wines and fortified wines, made-wines, beer, cider and perry). d. Oils - all oils that are held out for sale as road fuel. SP2/07

Advance Agreements Unit – superceded by SP2/12.

SP3/07

Double taxation relief: Status of the UK's double taxation conventions with the former Socialist Federal Republic of Yugoslavia

Introduction This statement of practice replaces and supersedes SP3/04, which made public the UK’s understanding, at that time (2004), of the status of the UK/Yugoslavia Double Taxation Convention in relation to those former Yugoslav republics that had been recognised by the United Kingdom as independent sovereign states. SP3/04 itself updated an earlier statement of practice (SP6/93). What SP3/04 said SP3/04 confirmed that the provisions of the UK/Yugoslavia convention would remain in force for Bosnia-Herzegovina, Croatia, Macedonia, Serbia and Montenegro and Slovenia until such time as new bilateral agreements were made with those republics.

Announcement The UK has now agreed a new bilateral agreement with Macedonia. The agreement entered into force on 08 August 2007. It will be effective in the United Kingdom from 1 April 2008 for corporation tax and from 6 April 2008 for income tax and capital gains tax. Accordingly, with effect from 1 April / 6 April 2008: The provisions of the United Kingdom/Yugoslavia Double Taxation Convention will be treated as remaining in force between the United Kingdom and respectively, Bosnia-Herzegovina, Croatia, Montenegro, Serbia and Slovenia. Agreement has been reached at official level on a new double taxation convention with Slovenia. Negotiations are continuing with Croatia and Serbia. SP4/07

Advance Thin Capitalisation Agreements under the APA Legislation – superceded by SP1/12

SP1/09

Employees resident but not ordinarily resident in the UK: General earnings chargeable under Sections 15 and 26 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and application of the mixed fund rule under Sections 809Q onwards of the Income Tax Act 2007 (ITA)

Overview 1. Section 25 and Schedule 7 Finance Act 2008 introduced changes to the remittance basis affecting the taxation of employment income where the employee is resident but not ordinarily resident in the United Kingdom. Amongst other issues, they introduced rules to determine the kind and amount of income or chargeable gains remitted to the United Kingdom where a transfer is made out of a mixed fund. 2. This statement of practice sets out how HM Revenue and Customs (HMRC) will treat transfers made from an offshore account holding only the income or gains relating to a single employment and the apportionment of earnings where an employee is taxed on the remittance basis. 3. Statement of Practice 5/84 (SP5/84) is withdrawn and incorporated as part of this new statement of practice with effect from 6 April 2009. Detail of statement of practice Transfers made from an offshore account holding only the income or gains relating to a single employment 4. Sections 809Q ITA onwards set out rules to determine the kinds and amount of income or chargeable gains remitted to the United Kingdom from a fund containing more than one kind of income and capital, or income, or capital of more than one tax year. Such a fund is defined in sections 809Q and 809R as a “mixed fund”. Where amounts are transferred to the United Kingdom out of a mixed fund, Section 809Q(3) requires that the individual’s tax liability is calculated by reference to each individual transfer. This transfer by transfer approach is referred to below as the “mixed fund rule”. This is a change to HMRC’s previous practice, with respect to employees to whom SP5/84 applied, which was to allow the tax liability to be calculated by reference to the total amount transferred to the UK during the tax year as a whole. 5. In the circumstances outlined in this statement of practice, HMRC will accept that certain individuals who are resident but not ordinarily resident in the United Kingdom do not have to apply the mixed fund rule and can continue to calculate their tax liability by reference to the total

amount transferred out of a mixed fund during the tax year as a whole, rather than by reference to individual transfers. 6. Employees who are resident but not ordinarily resident in the UK and who perform duties of an office or employment both inside and outside the UK, do not have to apply the mixed fund rule in respect of transfers from a particular account where: • The mixed fund is an account held solely by the employee; and • The account only contains employment income from a single employment plus: o Any interest arising only on that account, and o Any gains arising from foreign exchange transactions in respect of the funds in that account o Any gains arising on employee share scheme related transactions o Any proceeds from employee share scheme related transactions, not otherwise covered at paragraph 7, in respect of amounts paid by the employee in acquiring the shares. 7. • • • •

The employment income from that employment may include: Employment income (subsection 809Q(4)(a)) Relevant foreign earnings (subsection 809Q(4)(b)) Foreign specific employment income (including termination payments and the proceeds from employee share schemes) (subsection 809Q(4)(c)), and Employment income subject to a foreign tax (subsection 809Q(4)(f)).

8. Employees who are resident but not ordinarily resident in the UK may also choose not to apply the mixed fund rule if the account contains only income or gains of a kind listed at paragraphs 6 and 7 above, but for more than one tax year. Where this is the case, the ordering rules at section 809Q(3) shall be applied – i.e. on a last in first out basis. 9. Where the employee applies this statement of practice, amounts transferred out of the account to the United Kingdom will be treated as comprising the kinds of income and gains in the order set out in section 809Q(4) for the tax year as a whole. 10. Accounts containing income or gains of more than one employment are not covered by this statement of practice. 11. Accounts containing income or gains of more than one individual are not covered by this statement of practice Apportionment of earnings 12. Employees who are resident but not ordinarily resident in the United Kingdom are chargeable to United Kingdom tax under Sections 15 ITEPA on general earnings wherever received for duties performed in the United Kingdom. They are also chargeable under Section 26 ITEPA on general earnings for duties performed outside the United Kingdom but only to the extent that the earnings are remitted to the United Kingdom. 13. Where the duties of a single office or employment are performed both in and outside the United Kingdom, an apportionment is required to determine how much of the general earnings are attributable to the United Kingdom duties. Apportionment of general earnings is essentially a question of fact, but for many years HMRC has accepted time apportionment, based on the number of days worked abroad and in the United Kingdom, except where this would clearly be inappropriate. For example, in the case of an employee with 200 working days in the United Kingdom and 50 working days outside the United Kingdom, the proportion of general earnings attributable to United Kingdom duties would be 200/250. This practice does not, of course, apply where the charge arises under Section 15 ITEPA and relief is due under Part 5 Chapter 6 ITEPA (Deductions from seafarers' earnings).

14. Where an employee resident but not ordinarily resident in the United Kingdom performs the duties of a single office or employment both in and outside the United Kingdom and is remunerated wholly abroad, he is permitted, by a broad interpretation of the decision in the case of Sterling Trust Ltd v CIR (12 TC 868), to say that any remittances made to the United Kingdom are made primarily out of general earnings for that year in respect of duties performed in the United Kingdom assessable under Section 15, and only any balance out of general earnings chargeable under Section 26 on remittance. 15. However, where part of the general earnings are remitted to the United Kingdom, it was the practice of HMRC to regard the proportion of the earnings remitted to the United Kingdom, as being in respect of duties performed both in and outside the United Kingdom, and to treat that proportion of such earnings as were attributable to duties performed outside the United Kingdom as remitted to the United Kingdom for the purposes of Section 26. 16. The practice changed with effect from 6 April 1983 when HMRC introduced a simplified procedure for employees who: • are resident but not ordinarily resident in the United Kingdom; • perform duties of a single employment both in and outside the United Kingdom, so that they are potentially chargeable under both Sections 15 and 26 ITEPA 2003 in respect of general earnings from that employment; and • receive part of their general earnings in the United Kingdom and part abroad. 17. In such cases, provided the general earnings chargeable under Section 15 are arrived at in a reasonable manner (i.e. in the absence of special facts, the proportion of the general earnings, including benefits in kind, relating to UK duties is arrived at on a time basis by reference to working days), HMRC is prepared to accept that a charge under Section 26 will arise only where the aggregate of general earnings remitted to the United Kingdom exceeds the amount chargeable under Section 15 for that year; and to restrict the charge under Section 26 to the excess of the aggregate over the charge under Section 15. SP1/10

Business by telephone – HMRC Taxes Contact Centres

This Statement of Practice sets out the expanded services which are now available from Taxes Contact Centres which deal with the tax affairs of individuals. It supersedes Statement of Practice 1/05. Security and confidentiality HM Revenue & Customs is committed to ensuring the information it receives is accurate and that the privacy of customers' affairs is protected. For the services described in this Statement of Practice: • • • • •

Callers will only be able to supply or amend information concerning individuals’ tax affairs. We will take steps to check the identity of the caller before discussing a customer’s tax affairs. Callers who fail to satisfy the identity checks will be asked to put their enquiry in writing. We will check that we have the customer’s consent before we discuss their affairs with their agent or other person calling on their behalf. Calls to our Contact Centres will be recorded for training and quality assurance purposes and will be available in case of any disagreement as to what was said.

Services available by telephone from HMRC Contact Centres

The services described below are available to individual customers calling HMRC Taxes Contact Centres about their own direct tax liabilities, and to agents or other persons acting on behalf of the customer providing that we can satisfactorily check the identity of the caller. The directions by the Commissioners for HMRC under section 118 FA 1998 which provide for these services are at Annex B. In most cases nothing more than a telephone call will be needed, although the call may lead to further action by HM Revenue & Customs (for example, sending out a revised PAYE coding notice). Where business cannot be completed by telephone we will send customers any forms or other information they need and explain what they need to do next. Agents and other personal representatives Some people prefer to ask another person, such as an agent or family member, to deal with their tax affairs for them. We will accept some types of information from agents and other representatives providing that: • •

we have been able to check the identity of the agent or representative, and we hold evidence that the customer has given their consent for that agent or representative to act on their behalf

Customer consent will usually be required in writing but customers using our Contact Centres can give verbal consent for a third party to act on their behalf for the duration of the call. Customers who want us to deal with third parties in this way will need to provide verbal consent each time they call with a third party present. Customers who want a third party to act on their behalf in calls when the customer cannot be present will need to give their written consent. We recognise that there will be some occasions when customers cannot be present to give their verbal consent for a third party to act on their behalf. In such instances, we will accept (but not provide) some specific information from the third party on a provisional basis and then contact the customer by post to confirm the information. Matters that can be dealt with by telephone The information, claims and requests that may be accepted, from individuals or their representatives, over the telephone are set out at Annex A. We will also provide certain information we hold about the customer by telephone. The main exceptions will be: • • •

personal details such as Name, Address, Date of Birth, National Insurance Number etc., pay and tax details, information contained in a Self Assessment Return (if customers require this information, to make the amendments or corrections to their return, we will provide details in writing).

Checking amendments notified by telephone Amendments to Self Assessment returns made by telephone will be checked in the same way as amendments made in writing and in some cases we may enquire into the amendment. Time limits The same time limits apply to claims and amendments made by telephone as when they are made in writing.

Where a claim is made by telephone, it will be treated as made at the time of the call provided all the relevant information can be provided by the customer during that call. And a claim by telephone will, of course, be subject to the same conditions and checks as if it were made on paper. Where a claim cannot be dealt with by telephone, for example, because the caller does not have all the necessary information, the customer may be asked to make the claim in writing. The written claim must still be made within the usual time limits. Guidance and assistance In addition to the services above, Contact Centres will provide the normal range of help and advice by telephone on general tax matters including: • • •

general questions about income tax and capital gains tax for individuals, help with completing returns and other HM Revenue & Customs forms, and requests for leaflets, forms, schedules and other HM Revenue & Customs information.

Annex A Information that will be accepted We will accept the following information, claims and requests over the telephone. N.B. Some notifications will require completion of Self Assessment Returns. See HMRC website for details. Personal Details Changes to name, address, post code and telephone number First notification or changes in personal circumstances such as marriage, civil partnerships, separation, divorce, date of birth, date of death. Notification that an Agent is no longer acting. Notification that a Payable Order has not been received.

Employment Details Details of a customer’s new employer and the date when the employment began A customer’s works or payroll number. Details of earlier employments

Notes

We will accept notification of date of death from nonmandated third parties providing that we can verify their identity.

We will require written notification of the appointment of any new agent. We will not issue a replacement until we have confirmed that the payable order has not already been cashed or returned to us.

Notes These details will usually only be accepted from Employers but we will accept them from customers in exceptional cases. These details will usually only be accepted from Employers but we will accept them from customers in exceptional cases.

Claims to Personal Allowances Personal Allowance

Subject to time limits.

Notes

Married Couples Allowance

The level of a person’s income affects their entitlement to the age related allowances. We will accept new estimates of income by telephone and using the figures provided, we will advise whether the amount of the customer’s allowances will change. Subject to time limits.

If you were married before 5 December 2005 If you are married and living together and at least one spouse was born before 6 April 1935, the husband can claim Married Couple’s Allowance.

If you married on or after 5 December 2005 or are in a civil partnership If you are married or in a civil partnership and living together and at least one spouse or partner was born before 6 April 1935, the person with the higher income can claim Married Couple’s Allowance.

Blind Person’s Allowance

Expenses Fixed or Flat Rate Expenses

Other Job Expenses

The level of the claimant’s income affects their entitlement to the age related Married Couple’s Allowance. We will accept new estimates of income by telephone and using the figures provided, we will advise whether the amount of the customer’s allowances will change. Subject to time limits.

Notes Fixed or Flat rate expenses are fixed amounts we have agreed for certain categories of employees to save them having to make claims for deductions individually. 2008/09 and subsequent years. We will accept notifications up to £1000. 2008/09 and all subsequent years. We will only accept claims for deductions for other job expenses where entitlement has already been established in principle. First time notifications will need to be made in writing. Where a form P87 has been issued, we will require completion of that form and will not accept a telephone

Subscriptions to professional bodies

Notification of Payments Gift Aid Payments

claim for the deductions even if the amount claimed is less than £1000. We will accept notifications up to £2500. 2008/09 and all subsequent years.

Notes We will accept notifications up to £5,000. 2008/09 and all subsequent years. Tax relief for Gift Aid payments is only available to Higher Rate taxpayers. Occasionally, pensioners who are not in receipt of full age related allowances, and who are not required to make a tax return, may also wish to notify Gift Aid payments as they may increase entitlement to age related allowances. All claims to carry back relief must be made in writing.

Pension Plans you pay into

We will accept notifications up to £5,000. 2008/09 and all subsequent years. Additional relief will only be due for Higher Rate taxpayers. All claims to carry back must be made in writing.

Retirement Annuity Payments

We will accept notifications up to £2500. 2008/09 and all subsequent years. We will only accept telephone notifications where entitlement to relief has already been established in principle. New claims and claims to carry back relief must be made in writing.

Notifications of Benefits in Kind Any benefits in kind – not just the most common ones such as car and fuel benefits

Notes No monetary limits to amounts of notification 2008/09 and all subsequent years. In some circumstances, for example if a benefit is partly paid for work purposes or a benefit is shared with other employees, we may ask for the details to be put in writing

Notification of Earnings Part time or earnings other than from main income.

Notes No monetary limits to amounts of notification

Commission

2008/09 and all subsequent years. No monetary limits to amounts of notification

Tips

2008/09 and all subsequent years. No monetary limits to amounts of notification 2008/09 and all subsequent years.

Notification of Other Income Interest without tax taken off (gross interest) Taxed Savings and Investment Income.

Notes No monetary limits to amounts of notification 2008/09 and all subsequent years. No monetary limits to amounts of notification 2008/09 and all subsequent years. Information will be recorded in all instances but is most likely to affect tax liability where the customer is a higher rate taxpayer. It may also affect entitlement to age related allowances.

State Pension

2008/09 and all subsequent years.

Pensions other than State Pensions

No monetary limits to amounts of notification

Incapacity Benefit

Job Seeker’s Allowance Income from renting your own home. (Income received as a result of renting your home for periods of time when you are temporarily not resident) Income from Rent a Room Scheme (Income received from letting a furnished room(s) within your home in which you reside) Other property income

Other taxable income (excluding earnings)

2008/09 and all subsequent years. 2008/09 and all subsequent years. Incapacity Benefit paid at the short term lower rate for the first 28 weeks is non-taxable. 2008/09 and all subsequent years. No monetary limits to amounts of notification 2008/09 and all subsequent years.

No monetary limits to amounts of notification 2008/09 and all subsequent years.

No monetary limits to amounts of notification 2008/09 and all subsequent years. No monetary limits to amounts of notification 2008/09 and all subsequent years.

Other Notifications Objection to coding out of nonPAYE income.

Current and later year

Claims for revenue delay under Extra Statutory Concession A19

Current year and previous four years only.

Amendments to Self Assessment Returns

Amendments to Personal Allowances within the range described above. Correction of Personal or Employment details On the Employment Pages of the Return: Amendments to claims for deductions or expenses which fall within the range of services described above; Amendments to employment income or employee benefits; Correction of provisional or incorrect figures (other than tax) Amendments to a return to correct the figure of interest received where capital from investments has been incorrectly included as interest, or where the full interest from a joint account has been entered rather than an individual’s share. Amendments to a return to correct figures of pensions or state pensions and benefits Amendments to a return where there is an entry for qualifying pension payments or retirement annuity paid but relief has not been claimed

Notes Any amendment must be made within 12 months of the filing date for the return. The filing date will usually be 31 January after the end of the year to which the return relates.

Self Assessment Notifications Commencement of Selfemployment

Notes Notification must be made to the Newly Self-Employed Helpline

Cessation of self-employment

Self Assessment Requests Requests to repay tax overpaid for the year Requests to include tax payable in PAYE Code for forthcoming year Requests to Reduce Payments on Account

Notes

Subject to time limits

Annex B Conduct of Income Tax Business by Telephone Directions The Commissioners for Her Majesty’s Revenue and Customs make the following directions in exercise of the powers conferred by section 118 Finance Act 1998. Commencement 1. These directions have effect from 26 April 2010. Interpretation 2. In these directions“FA 2004” means the Finance Act 2004, “ITEPA” means the Income Tax (Earnings and Pensions) Act 2003, “ITTOIA” means the Income Tax (Trading and Other Income) Act 2005, “ITA” means the Income Tax Act 2007, “TMA” means the Taxes Management Act 1970, and “caller” means the party to the telephone call other than the HM Revenue and Customs Taxes Contact Centre. Individuals in respect of whom business may be conducted by telephone 3. These directions apply to an individual who wishes to (a) make a claim or election, or to notify HM Revenue and Customs of income or benefits, or withdraw such a claim, election or notification, and who (i) is not required to make a self assessment return for a year under section 8(1) of the TMA, or (ii) has made a self assessment return but the time specified in section 9ZA of the TMA for amending a return has expired; or (b) amend a self-assessment for any tax year under section 9ZA of the TMA, if the time to do so specified in that section has not expired.

Matters to which these directions apply 4. These directions apply only to those matters specified in Parts 2 to 4 of the Schedule. Circumstances in which matters may be notified, etc by telephone 5. 1) The matters specified in the Schedule may be validly made, notified or withdrawn by telephone if the following conditions are met. (2) The first condition is that the telephone call is made to or from a HM Revenue and Customs Taxes Contact Centre. (3) The second condition is that the caller is (a) an individual acting on his or her own behalf, or (b) where an individual has notified HM Revenue and Customs that a third party is authorised to act on his or her behalf (and that notification has not been revoked) that third party. (4) The third condition is that the caller provides all the information which HM Revenue and Customs request during the telephone call. Restrictions on the application of these directions 6. (1) The application of these directions is subject to any monetary limit or other restriction noted in the Schedule. (2) These directions do not apply to an individual acting in the capacity of trustee, partner or personal representative, or to a third party authorised to act on behalf of an individual acting in such a capacity. (3) If, during a call to which these dir ections apply, the caller f ails to meet the third condition specified in paragraph 5(4) a bove, these directions do not appl y t o any subsequent attempt to establish or withdraw the same amendment, claim, or el ection, or notify or withdraw a previous notification of the same income or benefits. (4) Nothing in these directions varies an y requirement under an enact ment as to the period within which an amendment, claim, election, or notification may be made. Date claim, etc made 7. An amendment, claim, election, notification or withdrawal made in accordance with these directions will be treated as made on the date the telephone call is made. Revocation of previous directions 8. The directions relating to business by telephone published in April 2005 in Statement of Practice 1/05 are revoked.

26 March 2010

Dave Hartnett Bernadette Kenny Two of the Commissioners for Her Majesty’s Revenue and Customs

SCHEDULE Matters to which these directions apply Part 1 - Interpretation 1. In this Schedule “current year” means the year of assessment in which the claim, election or notification is treated as being made under these directions. 2. In Part 2 references to claims or elections include references to an amendment to a return to make a claim or election and to an amendment to a claim or election made in the original return.

Part 2 - Claims and Elections 3. A claim or election in respect of: (a) personal allowance under section 35, 36 or 37 of ITA; (b) tax reduction for married couples or civil partners under Chapter 3 of Part 3 of ITA; (c) blind person’s allowance under s38 or s39 of ITA. 4. A claim to make any of the following deductions from income in respect of expenses for 2008/09 and all subsequent years, subject to the monetary limit or other conditions specified: Deduction

Monetary limit

Deductions for professional membership fees under section 343 ITEPA

£2500

Deductions for annual subscriptions under section 344 ITEPA

£2500

Fixed sum deductions for repairing or maintaining work equipment under section 367 of ITEPA

No limit

Any other deduction for expenses permitted under Chapter 2 Part 5 ITEPA, provided that the same class of expense has been claimed for 2008/09 and all subsequent years.

£1000

5. A claim to any of the following income tax reductions for 2008/09 and all subsequent years,, subject to the monetary limit or other conditions specified: Income Tax reduction

Monetary Limit

Relief for gift aid payments under section 414 ITA

£5000

Relief for contributions to a pension scheme under section 193 or 194 of the FA 2004

£5000

Relief for contributions to a retirement annuity contract under section 194 of the FA 2004, provided that relief has been given for contributions to the same retirement annuity contract for 2008/09 and all subsequent years.

£2500

Part 3 – Income and Benefits 6. Notification of any taxable benefit within the meaning of Part 3 of ITEPA for 2008/09 and all subsequent years, an amendment to such a notification made in the original return. 7. Where an employer has made a PAYE return in respect of the individual, notification of the following types of income: (a) commission or tips received from that employment, and (b) any earnings from employment other than that employment, for 2008/09 and all subsequent years. 8. Amendment to return details of any income omitted from the employment pages of the original return for 2008/09 and all subsequent years.

9. Notification of, the following income: (a) interest and investment income (whether received gross or after deduction of tax), (b) state pension, (c) pensions other than state pension, (d) incapacity benefit, (e) job seekers allowance, (f) income from renting the individual’s own home, including income to which Part 1 Chapter 7 ITTOIA (rent-a-room relief) applies, (g) other property income, and (h) other taxable income other than earnings, for 2008/09 and all subsequent years.. 10. Amendment to a return to correct a figure of interest which is incorrect because (a) capital from investments has been entered as interest, or (b) full interest from a joint account has been entered (rather than the individual’s share). 11. Amendment to a return to correct figures of state pensions, pensions other than state pensions, incapacity benefit or employment support allowance. Part 4 - Other Amendments 12. Correction of a provisional figure in the employment pages of the original return to a final figure. 13. Correction of an incorrect figure in the employment pages of the original return. SP2/10 – Advance Pricing Agreements GENERAL INTRODUCTION This Statement of Practice (“SP”) updates an earlier Statement on Advance Pricing Agreements (“APAs”), published in 1999. The legislation that relates to APAs, formerly found at Section 85, Finance Act 1999, now appears at Sections 218 -230 of the Taxation (International and Other Provisions) Act 2010 (“TIOPA 2010”). This SP is intended to provide guidance about how H.M. Revenue and Customs (“HMRC”) interprets the APA legislation and applies it in practice. Key Paragraphs in this SP • • • • • •

What is an APA? - para 1 What issues can be covered? - para 3 Unilateral and bilateral APAs distinguished - para 8 Who may apply? - para 13 Criteria for acceptance in the UK APA Programme - para 14 Importance of Expressions of Interest - para 18

• • • • •

Anonymised approaches - para 23 Length of APA term and “Roll-back” - para 25 The application - para 29 Reaching Agreement, and timelines - para 36 Revising and renewing APAs - para 47

APAs – WHAT ARE THEY AND WHEN MIGHT BUSINESSES CONSIDER ONE? 1. An APA is a written agreement between a business and the Commissioners of HMRC which determines a method for resolving transfer pricing issues in advance of a return being made. When the terms of the agreement are complied with, it provides assurance to the business that the treatment of those transfer pricing issues will be accepted by HMRC for the period covered by the agreement. A bilateral APA – as discussed below – will provide a similar assurance in respect of the tax administration (“Administration”) dealing with the entity at the other end of the transaction. 2. An APA enables businesses to achieve certainty that the transfer pricing issues covered by the agreement will not be part of any enquiry into their self-assessment tax returns for the relevant period and so provides greater certainty over their tax liabilities. HMRC has also found that where there is considerable difficulty or doubt in determining the method by which the arm’s length principle should be applied, the transfer pricing issues can be more efficiently dealt with in real time as they arise rather than retrospectively years later when, for example, key personnel in the business may have moved on. 3. Sub-section 218(2), TIOPA 2010, sets out the transfer pricing issues which can be the subject matter of an APA. An APA can be used to resolve questions relating to the following broad situations giving rise to transfer pricing issues: a. Transfer pricing between separate business enterprises where questions may arise as to the determination of the arm’s length provision under the rules in Part 4 TIOPA 2010. b. Attribution of income or profit between parts of a business enterprise which operates in more than one country where questions may arise as to the taxable income to be recognised in any such part. (Note – this is conceptually a similar problem to transfer pricing and any references to “transfer pricing issues” in the remainder of this document should be read as including such attribution issues.) c. Across the UK oil-related ring-fence. 4. The potential scope of an APA is flexible. It may relate to all the transfer pricing issues of the business or be limited to one or more specific issues although Thin Capitalisation issues will generally be dealt with via a separate Advance Thin Capitalisation Agreement (“ATCA”). There is no requirement that the commencement of an APA should coincide with the commencement of the arrangements which it addresses so it may apply to preexisting issues. 5. The APA legislation does not specifically provide for a determination that a permanent establishment (“PE”) does not exist however it may be possible for the APA to include a determination that the income to be attributed to a potential PE is nil. 6. HMRC’s Business International Directorate (“BI”) has responsibility for all applications except enterprises operating in the North Sea (for which the Large Business Service’s Oil and Gas Sector is responsible). Otherwise, BI will involve such specialists and delegated competent authority officials as is necessary, and will ensure the business’ Customer Relationship Manager (“CRM”) is involved.

7. HMRC do not levy any charge on the business for their assistance during the APA process but potential applicants need to be aware that some other Administrations may do. HMRC can advise on this at the Expression of Interest stage (see below). UNILATERAL, BILATERAL or MULTILATERAL AGREEMENT 8. A binding agreement between a UK business and HMRC in accordance with Section 218, TIOPA 2010, is referred to as a “unilateral APA”. Although this agreement confirms the tax treatment in the UK, it does not determine how the issues are to be resolved in any other country involved. Consequently, it does not normally eliminate the risk of double taxation in relation to the transfer pricing issues it addresses. In order to achieve that comprehensively in the case of cross-border transfer pricing issues where a Double Taxation Agreement (“DTA”) exists between the UK and the other country containing a Mutual Agreement Procedure article, HMRC would have to reach agreement also with the Administration of the other country: this is referred to as a “bilateral APA”. 9. Businesses operating in several countries may wish to seek APAs that involve all the relevant Administrations affected by the transfer pricing issues. The term, “multilateral APA,” has been used to describe such agreements, but there is no discrete mechanism for reaching multilateral agreements, and multilateral APAs are strictly multiple and complementary bilateral APAs. 10. Multilateral agreements may be more appropriate where there is essentially only one activity, but several enterprises or parts of enterprises contribute to it. For example, where an enterprise of the UK is engaged in global financial trading through branches in countries X and Y, it may be appropriate for similar agreements to be reached between HMRC and country X and HMRC and country Y in order to determine how the profits from the activity are to be allocated to each of the three countries in order to eliminate double taxation. In such a situation HMRC will adapt the bilateral framework in order to reach agreement on a trilateral basis, subject to the acquiescence of the other Administrations and any constraints on exchanging information imposed by the relevant DTAs. 11. HMRC generally recommends that APA applications are bilateral rather than unilateral except where: a. Applicants are able to persuade HMRC that the extension to a bilateral APA would unnecessarily complicate and delay the process; or b. The other party to the transaction is resident in a jurisdiction with which HMRC has no treaty or where HMRC is aware that the treaty partner has no APA process; or c. There is considered to be little extra to be gained by seeking a bilateral agreement. For example where the UK is at the hub of arrangements with associated enterprises in many different countries and where the trade flows involved with any one particular country are relatively modest in scale. 12. Where there is an appropriate DTA in place, and HMRC considers that a bilateral APA would be more appropriate, HMRC may communicate with the other Administration if a unilateral is sought, to ascertain whether that Administration would consider entering into a bilateral APA process. Alternatively, (see Section 229(2), TIOPA 2010), HMRC’s ability to give effect to a mutual agreement reached with a treaty partner to eliminate double taxation under the terms of a treaty will not be restricted by the terms of a unilateral APA. WHO MAY APPLY FOR AN APA?

13. An APA may be requested by a. any UK business, including a partnership, with transactions to which the provisions of Part 4 TIOPA 2010 apply; b. any non-resident trading in the UK through a Permanent Establishment; c. any UK resident trading through a Permanent Establishment outside the UK. 14. Every APA request will be considered on the basis of its particular facts and features, but generally HMRC will be looking for one or more of the following characteristics: a. The transfer pricing issues are complex rather than straightforward. To HMRC “complex” means there is doubt as to how the arm’s length standard should be applied. Conversely, where reliable market comparables can be readily identified for the transaction(s) in point, that should enable transfer pricing methods to be employed in accordance with the OECD Transfer Pricing Guidelines, and HMRC is likely to regard such a situation as “straightforward”. b. Without an APA, it is likely that the taxpayer’s transfer pricing policies or issues would not be regarded as “low risk” and/or there is a high likelihood of double taxation. c. The taxpayer seeks to implement a method which is highly tailored to its own particular circumstances. HMRC will be willing to consider an innovative proposal providing it is compliant with OECD Guidelines, and not one that HMRC considers Treaty Partners would regard as being overtly tax aggressive. 15. APAs will not be declined solely by reference to the size of the transactions giving rise to the transfer pricing issues because HMRC recognises that complex transfer pricing issues can be encountered by smaller businesses as well as by large multinationals. However many small and medium enterprises are exempt from the UK transfer pricing legislation by virtue of Section 166 TIOPA 2010 and so there may be limited occasions where the APA process will be appropriate for smaller businesses. 16. Since April 2004 UK-to-UK transactions have been subject to transfer pricing legislation: but, HMRC does not generally see such transactions as likely to warrant an APA. However some UK-to-UK transactions, for example oil-related ring fenced trades, are specifically provided for in legislation. 17. When a UK business does obtain an APA and the provision in question is made or imposed with a related UK business Section 222 TIOPA 2010 enables the other UK business to claim to have their profits adjusted in line with the APA where they are disadvantaged. However, HMRC seeks to avoid such issues by encouraging the business to agree wherever possible that the transfer pricing methodology will determine the commercial charge for the provision as well as the charge for tax purposes. THE INITIAL CONTACT – THE EXPRESSION OF INTEREST PROCESS 18. The APA process is initiated by the business but HMRC always strongly recommend that an enterprise interested in applying for an APA contacts it first to informally discuss its plans before presenting a formal application. This is to ensure that the resources of the business are not wasted on an unsuitable application and to ensure that the detailed work that will need to be undertaken by the business in finalising its application is focused on relevant issues. It also gives HMRC an opportunity to outline a realistic anticipated timetable for agreeing an APA based on past experience, or to discuss other practical “process” issues with the business.

19. The contact details for an Expression of Interest in an APA and for making an APA application in all cases except those involving oil taxation, is: APA Co-ordinator (Ian Wood) Business International 3rd Floor, 100 Parliament Street, London SW1A 2BQ Telephone: 0207 147 2715 Fax: 0207 147 2649 e-mail: [email protected] 20. For APAs involving North Sea and other offshore operations, the contact address is: Competent Authority, Large Business Service Oil and Gas (Susan New) 3rd Floor, 22 Kingsway, London WC2B 6NR Telephone 0207 438 7570 Fax 0207 438 6910 e-mail: [email protected] 21. Any business uncertain as to which contact point is appropriate in their circumstances is welcome to approach either. 22. The Expression of Interest should generally cover: a. The nature of the transfer pricing issues intended to be covered by an APA. b. Details of the tax residence of the parties involved and the importance to the wider business of the transactions intended to be covered. c. If decided upon, a description of the proposed transfer pricing method. d. An indication of the nature of any current transfer pricing enquiries, competent authority claims, and any other relevant issues that the business is aware of in the context of the suggested APA. HMRC’s experience is that discussion of these issues at a meeting is much speedier and more productive than correspondence. 23. An Expression of Interest can best be evaluated where the identity of the business is known. However, if a business wishes to preserve anonymity until a decision in principle is made to proceed with the application, HMRC will be prepared to enter discussions without knowing the identity of the business providing all other information relevant to the proper evaluation of the request is supplied. However, HMRC will not make any commitment over acceptance into the APA Programme until the identity of the business is known. Otherwise, HMRC is usually able to indicate at the conclusion of an Expression of Interest discussion whether it will be prepared to consider an application for an APA. 24. In the event that HMRC considers that an application should not be admitted into the APA Programme, HMRC will advise the business of the reasons why HMRC takes that view, and will allow the business the opportunity to make further representations. TERM OF THE AGREEMENT AND “ROLL-BACK” 25. An APA will be operative for a specified period from the date of entry into force as set out in the agreement. The business should propose an initial term for the APA taking into account the period over which it is reasonable to assume that the method for dealing with

the relevant transfer pricing issues will remain appropriate. Typically the term is from three to five years. 26. It is possible that a chargeable period to which the APA relates may have ended before agreement is reached. Section 224, TIOPA 2010, allows the APA to be effective for that chargeable period and the agreement may set out any adjustments to be made for tax purposes as a consequence of the agreement. 27. The agreed transfer pricing methodology may be relevant for an earlier period and to the resolution of any transfer pricing enquiries raised for earlier periods if the particular facts and circumstances surrounding those years are substantially the same. Consequently, in such circumstances, the business may wish to consider using the agreement as a basis for amending a self assessment return or to request that the method for dealing with transfer pricing issues contained in the APA should be considered for resolving any transfer pricing enquiries to which it is relevant for earlier years. HMRC may also suggest that the “roll-back” of the APA is an appropriate means of a resolving a transfer pricing issue in earlier years although, in bilateral or multilateral cases, the possibility of doing so will also be dependent on the ability or willingness of the Administration of the other country or countries involved to do so. 28. Except where “roll-back” is being considered, the request for an APA in respect of future years will not in itself affect any transfer pricing enquiry into earlier years. However, to the extent such an approach is appropriate and feasible, HMRC will co-ordinate the APA request in respect of future years with any transfer pricing enquiry in respect of prior years in order to improve overall efficiency and reduce duplication of enquiries. THE FORMAL APA APPLICATION 29. Where, following HMRC’s indication that it is willing to consider the APA proposal, the business wishes to proceed, it should submit a formal written application. This APA application should also be copied to the business’ primary business contact at HMRC – usually the business’ Customer Relationship Manager. 30. Annex 1 to this document contains full details of the information that should generally be incorporated in the formal application. HMRC may, in practice, be flexible with such requirements where the circumstances of the particular case mean that a different approach will make for a better process. In a bilateral case, HMRC is often able to agree to work from the same format application as is mandated by the other Administration’s procedures. These are issues best discussed with HMRC at the Expression of Interest stage. Annex 2 contains a diagram showing a timeline of the typical APA process for a bilateral case. 31. The application should ideally be made before the start of the first chargeable period proposed to be covered by the APA, but HMRC may exercise discretion over this, for instance, when a bilateral is sought and the other Administration is prepared to allow the business more time to lodge its’ application. 32. In the case of a bilateral APA the business will be asked to ensure that all information provided in the application supplied to one Administration is made available at the same time to the other Administration involved. 33. APA information is subject to the same rules of confidentiality as any other information about taxpayers. Information exchanged with treaty partners—for instance, in the course of reaching agreement on bilateral APAs—is also protected from disclosure by the terms of the Exchange of Information Article in the relevant DTA.

EVALUATION 34. On receipt of an application HMRC will evaluate its contents and will seek clarification and further information from the business as necessary. The examination of the application should be a co-operative process in which the transfer pricing issues are discussed openly and access to relevant supporting information and documentation is made available. Lack of co-operation in these respects may result in HMRC declining to give any further consideration to the application. 35. Where a bilateral APA is being sought, HMRC will expect the business to continue to make relevant information available at the same time to each Administration involved, and in turn will itself keep the treaty partner informed about the progress of its examination of the APA request, will seek to discuss with the treaty partner key issues arising at the earliest opportunity and will keep the business informed about the progress of the bilateral process. Whilst the finalising of a bilateral agreement with a treaty partner is a government-to-government process, HMRC is generally prepared to participate in joint meetings involving the business and the other Administration(s) to assist in the exploration and evaluation of key factual issues. REACHING AGREEMENT 36. The agreement between HMRC and the business will be made subject to its terms being observed. The terms will include: a.

a commitment from the business to demonstrate adherence to the agreed method for dealing with the transfer pricing issues during the term of the APA in the form of a regular compliance report (an “Annual Report”) as required by Section 228 TIOPA 2010 and

b. the identification of Critical Assumptions bearing materially on the reliability of the method and which, if subject to change, may render the agreement invalid. 37. A sample “plain vanilla” agreement is included as an annex to this Statement (Annex 3). Normally the person responsible for signing the agreement on behalf of the business would be the person responsible for signing a tax return, subject to that person having authority within the multinational group to commit the group to the terms of the APA. 38. HMRC aims to complete the APA process within 18-21 months from the date of the formal submission. It may well be possible to complete unilateral APAs much more quickly than that. This objective is dependent on the complexity of the case and, in the case of bilateral or multilateral applications, may be dependent on the working practice of the Administration(s) in the other country or countries. It is also, of course, dependent on co-operation from the applicant. HMRC may view significant and repeated delay on the part of the business as indicative of a lack of co-operation and may then terminate the APA process as a result. 39. HMRC expects the business to facilitate an efficient process by providing timeously all the information necessary to consider the application properly and reach agreement. This extends to the enterprise’s co-operation in ensuring that the formal APA agreement and any associated procedural paperwork are finalised shortly after the finalisation of the transfer pricing method and/or, in a bilateral or multilateral process, the concluding of agreements with treaty partner(s). 40. If agreement on the terms of an APA cannot be reached with the business, HMRC will issue a formal statement recording the reasons. HMRC does not consider it has any

obligation to continue discussion beyond the point at which it has determined that agreement cannot be reached. 41. A business may withdraw an APA request at any time before final agreement is reached. APA MONITORING AND REVIEW - ANNUAL REPORTS 42. The Annual Report will generally accompany the business’ tax return. The report should be sent to the HMRC office responsible for the business’ tax affairs. 43. The particular requirements of each report will be set out in the finalised agreement and will focus narrowly on the issue covered by the APA. The broad intention is that Annual Reports should demonstrate in a concise format whether the business has complied with the terms and conditions of the APA. NULLIFYING AND REVOKING APAs AND PENALTIES 44. In accordance with Section 225, TIOPA 2010, an APA may be revoked by HMRC in accordance with its terms, where the business does not comply with the terms and conditions of the agreement, or where the identified critical assumptions cease to be valid. In practice, when considering nullifying or cancelling a bilateral APA HMRC will consult with the business and with the Competent Authority of the treaty partner involved. In some cases, a change in the agreement may be possible – see also Paragraph 47 below. 45. Where false or misleading information is supplied fraudulently, or negligently, in connection with an application for, or in the process of monitoring, an APA, penalties may be applied, and the APA might be nullified (see Sections 226 and 227 TIOPA). 46. In accordance with existing appeal procedures, the business has the right to appeal against the amount of any additions to profits arising as a result of the revocation or cancellation of an APA. REVISING AND RENEWING APAs 47. In some cases the APA may provide for modification of its terms in specific circumstances; for example, a particular agreement may provide that where there has been a change which makes the agreed methodology difficult to apply, but which does not go as far as to invalidate a critical assumption, the agreement may be modified with the consent of the parties to resolve that difficulty. In such cases the APA may be revised in accordance with Section 225, TIOPA 2010 after consultations between the business and HMRC and, in the case of bilateral agreements, the Competent Authority of the other country involved. 48. The business may request renewal of an APA ideally not later than six months before the expiry of its current term, but HMRC will not rule as out of time requests made before the end of the first chargeable period affected by the renewal or, in the case of bilateral cases, later, if the other Administration is prepared to allow further time. The renewal application should expressly consider any changes or anticipated changes in facts and circumstances since the existing agreement was reached, whether any amendments are required to the agreement on renewal as a result, and should demonstrate that the proposed methodology is, or is still, appropriate. 49. HMRC will conduct a review of the renewal application, taking into account whatever revisions to the existing APA are necessary and appropriate in the light of any changed

facts and circumstances. Where it is agreed that the transfer pricing issues under consideration remain the same and the existing transfer pricing methodology can continue as before but with details updated to ensure continued adherence to the arm’s length principle, the agreement will simply be amended and extended for a further term. Where, however, the transfer pricing issues have changed, or a different method is being proposed, the business will be required to make a fresh APA application. A fresh application may also be necessary in a bilateral context where the processes of the other Administration require that. THE BACKGROUND TO THIS SP 50. HMRC has run an APA Programme since 1999 to assist businesses in identifying solutions for complex transfer pricing issues. 51. This Statement updates the original SP on APAs (SP3/99) and is intended as general guidance as to how HMRC interprets the APA legislation and how HMRC operates the UK APA Programme. HMRC is taking the opportunity to incorporate best practice identified since SP3/99 was published, but the publication of this Statement does not mark a material change in HMRC’s approach to APAs. 52. Although the same legislation is used as the basis for Advance Thin Capitalisation Agreements (“ATCAs”) HMRC has published a separate document, SP 04/07, to provide detailed guidance about its practice in reaching advance agreements over thin capitalisation issues. These cases have their own distinctive features and are therefore negotiated under an entirely separate process. This Statement consequently has no impact on the existing guidance on ATCAs in SP 04/07. ANNEX 1 – INFORMATION TO SET OUT IN THE FORMAL APPLICATION 1. The application should fulfil the requirements of Section 223, TIOPA 2010 and set out: a. the applicant’s understanding of the effect of the relevant legislation including the effect of any DTA in relation to the transfer pricing issues under consideration; b. the areas where, because of the difficulty of the transfer pricing issues, clarification of that effect is required; and c. a proposal for clarifying the effect of the legislation in accordance with the applicant’s understanding. 2. The intention is to ensure that any agreement about the practical treatment of specified transfer pricing issues is formed from a proper understanding of the relevant principles of the Taxes Acts. Thus, where the transfer pricing issue concerns, for example, pricing between associated enterprises, the application might include an explanation of why the transfer pricing rules at Part 4 TIOPA 2010 are applicable, and would acknowledge that the effect of those rules, which are to be construed in accordance with OECD Transfer Pricing Guidelines, is to require the substitution of the arm’s length provision for tax purposes. The application might then go on to explain in what ways the establishing of the arm’s length provision requires clarification, and submit a proposal for establishing the arm’s length provision in accordance with the requirements of the effective provisions. This guidance should be adapted to attribution issues involving Permanent Establishments (where OECD has latterly issued separate guidance in the form of Parts 14 of the Report on the Attribution of Profits to Permanent Establishments) in accordance with the general intention of ensuring that there is a proper understanding of the relevant principles of the applicable law from which an agreement about the practical treatment of a specified issue can be formed.

3. The centre-piece of the proposal will be a description of the method by which it is proposed to determine the transfer pricing issues in accordance with the arm’s length principle, and an analysis demonstrating how the application of that method satisfies the terms of the UK’s legislation, including the effect of any DTA, and is consistent with the OECD Transfer Pricing Guidelines. The nature of the detailed information supporting the proposal should be tailored to the specific features of the business and of the transfer pricing issues and should take into account discussions with HMRC at the Expression of Interest stage. 4. All proposals will also generally need to be supported by the following information: a. the identification of the parties and recent accounts (generally for the previous 3 years); b. a description of the transfer pricing issues proposed to be covered in the APA and analysis of the functions and risks of the parties and actual and projected financial data of the parties in relation to the issues; c. a description of the world-wide organisational structure, ownership, and business operations of the group to which the company in question belongs, the place or places where such operations are conducted, and all the major categories of transaction flows of the parties to whom the APA is intended to apply; d. a description of the records which will be maintained to support the transfer pricing method proposed for adoption in the APA and the information which it is proposed will be supplied each year to demonstrate that the tax return conforms to the terms of the APA; e. a description of any current tax enquiries or competent authority claims that are relevant to the issues covered by the proposed APA; f. the chargeable periods to be covered by the APA; g. the identification of assumptions made in developing the proposed transfer pricing method which are critical to the reliability of its application under the arm’s length standard; and h. where appropriate, a request for competent authority assistance in reaching a bilateral or multilateral APA. 5. The formal proposal should identify the assumptions made in proposing the method for dealing with the transfer pricing issues and which are critical to the reliability of that method. The method should be sufficiently robust to accommodate some changes in the commercial and economic climate from that reasonably foreseeable when the proposals were made and still be capable of replicating an arm’s length outcome. However, the accuracy of the method is likely to be predicated on assumptions in respect of particular factors fundamental to its application, such as the continuing nature of the functions performed, accounting policies and practices, the terms of contractual agreements impacting upon the covered transactions, or levels of market share. Critical assumptions are designed to protect both the business and the HMRC from the risk that the agreement may become inappropriate, but they should not be so tightly drawn that the certainty provided by the agreement is jeopardised. Setting parameters for acceptable divergence for some assumptions can help to retain flexibility. Where there is a change, or a change greater than any relevant parameters set, to circumstances that both parties have identified as critical to the agreement, a reconsideration of the agreement is then activated and may lead to its cancellation or modification depending on the terms of the agreement.

ANNEX 2 – A TYPICAL BILATERAL APA TIMELINE:

Pre Application Scoping Discussions

Researching & Testing Taxpayer Proposal

The Detail

Resolution

Closing Paperwork CASETEAM

COMPETENT AUTHORITY 0 Months

9 Months

12 Months

18 Months

21 Months

OTHER ADMINISTRATION(S)

Key

Application in

First engagement between administrations

Closing agreements

Negotiation between administrations

Intensive activity Less intensive activity No substantial involvement

ANNEX 3 – SAMPLE AGREEMENT ADVANCE PRICING AGREEMENT Between TAXPAYER And H.M. REVENUE AND CUSTOMS This Advance Pricing Agreement (“APA”) is made between Taxpayer, and HM Revenue and Customs acting through Business International Directorate (“HMRC”) The Taxpayer and HMRC (collectively “The Parties”) wish to enter into an APA, and to include in it an appropriate Transfer Pricing Methodology (“TPM”) to be applied to the transactions between the Taxpayer and the related party (or parties) identified below. (This agreement replicates under UK statute on Advance Pricing Agreements the terms of a bilateral/multilateral agreement reached under the Mutual Agreement Procedure Article of the relevant Tax Treaty covering the same transactions between HMRC and (fisc(s)) 1. Identifying Information Taxpayer (typically - a company registered in (country) , under registration number XXXXXXXX, Resident in (country), having a tax reference YYYYY YYYYY, (with a Permanent Establishment in (country)) and a Registered Office at (address) (or place of business at (address)) Related Party (similar information as for the taxpayer above – there may be a number of related parties) Set out relationship between Taxpayer and Related Party – e.g. one a subsidiary of the other or both companies members of the multi-national group Z headquartered in (country) 2. Covered Transactions The transaction(s) covered by this APA (the “Covered Transactions”) comprise (succinct explanation of all Covered Transactions) 3. Legal Effect This APA is made pursuant to and for the purposes of S218 Taxation (International and Other Provisions) Act 2010 (“TIOPA 2010”) and binds the Parties, for the term of this APA, to determine questions relating to the transfer pricing (or branch or PE attribution) matters covered by the APA in accordance with its terms. If the Taxpayer complies with the terms and conditions of this APA then HMRC will not contest the application of the TPM (as defined in Appendix A) to the Covered Transactions and will not make or propose any reallocation or adjustment that would be necessary in order for effect to be given to the provisions of Part 4 TIOPA 2010 with respect to the Taxpayer concerning the

transfer prices for the APA term (this will have to be amended or extended if we are/are also looking at a PE issue….and also refer to Rollback years if relevant). If, for any year during the APA term, the Taxpayer does not comply with the terms and conditions of this APA, or the Critical Assumptions (as defined in Clause 6 below) cease to be valid, HMRC may (subject to clause 9 below) revoke this APA and S.221 TIOPA 2010 shall apply. (The terms and conditions of this APA may also be modified or amended upon the agreement of the Parties, subject also to the terms of any bilateral/multilateral agreement) 4. Term Term of APA. (Rollback period if relevant) 5. Financial Statements and APA Records (typically – in accordance with S 228 TIOPA 2010 - the taxpayer is required to provide, in addition to Corporation Tax Returns and Audited Financial Statements: Submission of APA information set out by Clause 6 and 7 below. Compliance with this will constitute compliance with the record maintenance provisions of Section 12B Taxes Management Act 1970 and paragraph 21, Schedule 18 Finance Act 1998 with respect to the Covered Transactions during the APA term.) 6. Critical Assumptions (with respect to the Covered Transactions are set out in Appendix B) 7. Annual Reports (unless this requirement can be very simply put are typically set out in a separate Appendix C. Note that some bilateral or multilateral agreements may require a standard report to be sent to all involved tax Administrations and in that case Appendix C may have to cover the same ground and also any specific information - e.g. (say) conversion into UK currency or UK accounts standards so that the HMRC tax team can readily track the numbers through the relevant UK tax computations.) 8. Disclosure This APA and the information, data and documents related to this APA, are subject to the same rules of confidentiality as any other taxpayer’s information provided to HMRC, and any unauthorised disclosure of information by HMRC will be a breach of those rules. 9. Revocation HMRC will not revoke this APA unless and until it has explained in detail to the Taxpayer why and from when it is considered the taxpayer is in breach of the terms and conditions of this APA and the taxpayer has been given a reasonable opportunity to rectify any breach. (Note - this clause may need to be aligned with any relevant requirements in a bilateral or multilateral agreement. In a multilateral for instance the possibility of the taxpayer no longer being felt to satisfy the terms of the APA in one territory only may be considered. Or, similarly,

the consequences for the agreement between the other Administrations of there no longer being Covered Transactions in one territory may be tackled. HMRC may also want to emphasise that it will be working from the standpoint of seeking the continuance of the APA in the event of any such difficulty.) 10. Treatment of Allocations under the TPM (typically – this may cover the treatment of ongoing or end-of-year adjustments which may be required under the TRM to align the results on Covered Transaction business with the APA terms. 11. Professional Fees (as relevant – deductibility) 12. Tax Laws (typically – general statement along the lines of – notwithstanding any statement in this APA agreement, the taxpayer remains subject to all applicable taxation laws not directly affected by this APA. The Taxpayer is entitled to any benefits or relief otherwise available under all such laws). 13. Governing Law and Effective Date (typically - laws of England and effective from the later date below) Signatories Responsible Officer or Director on behalf of Taxpayer, and dated. Except in Oil cases (when it will usually be signed by the Competent Authority at Large Business Service Oil and Gas), usually Deputy Director responsible for APA Programme, or APA Coordinator, BID, HMRC, and dated. Notes Appendix A (the TPM) – see paragraph 3 - is the “core” of the APA. This section may need to be detailed, but it will always be highly tailored to the taxpayer’s particular circumstances. HMRC will try and ensure where there is a bilateral or multilateral agreement that Appendix A is expressed in wording which is identical or near-identical with the wording of the transfer pricing methodology in that agreement. If that is not possible, Appendix A will be operated as if it were expressed in identical terms to the methodology set out in the bilateral or multilateral agreement. Appendix B (Critical Assumptions) – see paragraph 6 - will generally have a clause to the effect that there should be no major commercial changes governing the Covered Transactions. In volatile, dynamic or cyclical businesses this may need some elaboration. Similarly, in cases involving trading or managing portfolios of Financial Products, consideration may be needed at the time of negotiating the agreement as to how it will be clear that “new generation” Products are or are not covered by the APA. In these kinds of situations there will generally be a requirement for relevant information to be automatically reported in Annual Reports, see below. In practice, other Critical Assumptions that have on occasion been agreed with taxpayers have included clauses relating to changes of control, the possibility that acquisitions might impact upon

the APA, to profit share and competition issues, and those involving Regulation, or arising from Government Policy or Laws. Appendix C (Annual Reports) – see paragraph 7. Ideally Annual Reports will include, in addition to any required or mandated information on the Covered Transactions (see, for instance, comment above) a one or two sheet or spreadsheet “proof” document demonstrating that all the conditions of the APA have been met for the Covered Transactions. Where it is agreed that such a “proof” will be provided, its format should be set out in the APA agreement. SP1/11

Transfer pricing, mutual agreement procedure and arbitration

1. This statement describes the UK’s practice in relation to methods for reducing or preventing double taxation and supersedes Tax Bulletins 25 and 31 which previously provided guidance in this area. 2. The statement considers the use of mutual agreement procedure (MAP) under the relevant UK Double Taxation Convention and/or the EU Arbitration Convention and also describes the UK’s approach to the use of arbitration where MAP is unsuccessful. It has particular relevance to transfer pricing and multinational enterprises. INTRODUCTION OECD Model Convention and UK Tax Treaties 3. Chapter IV of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (The Guidelines) contains details of administrative approaches to avoiding and resolving transfer pricing disputes. One approach to which it refers is that provided for under MAP, which is described and authorised by Article 25 of the OECD Model Convention (the OECD Convention) and is discussed in the Commentary on Article 25 of the OECD Convention. Article 25(1) has broad application and provides for MAP where a taxpayer considers he has been or will be taxed other than in accordance with the Convention, for example in a way contrary to Article 24, the Non-Discrimination Article. Article 25(3) may be used to resolve any difficulties or doubts arising as to the interpretation of the OECD Convention and for the elimination of double taxation in cases not provided for by the Convention. More specifically, to eliminate double taxation in transfer pricing cases, tax administrations may consider requests for corresponding adjustments as described in paragraph 2 Article 9 of the OECD Convention. That paragraph recommends that the competent authorities of treaty partner states consult each other if necessary to determine corresponding adjustments. This demonstrates that the MAP of Article 25 of the OECD Convention may be used to consider corresponding adjustment requests. In 2010 the OECD introduced a new version of Article 7 to the OECD Convention. This Article deals with the attribution of profits to permanent establishments and the new version includes an avenue for entering MAP similar to that in Article 9 of the OECD Convention. 4. The UK has tax treaties with over 100 countries. These treaties seek to protect taxpayers from double taxation, provide for the appropriate allocation of taxing rights in relation to profits from cross-border economic activities, and prevent fiscal discrimination by their signatories. The UK seeks to encourage and maintain an international consensus on international tax treatment of cross-border activity, and plays an important role in this field through its membership of the OECD. Accordingly, where the other signatory is agreeable the UK frequently adopts the terms of the OECD Convention into its own tax treaties and is guided in its interpretation of those tax treaties by the Commentary on the OECD Convention (The Commentary). 5. In this respect MAP performs an important function, establishing a process by which the UK competent authority and the competent authorities of tax treaty partners to our conventions can consult each other to resolve matters relating to the application of our tax treaties. As part of

its work on improving the resolution of cross-border tax disputes the OECD has published a Manual on Effective Mutual Agreement Procedures (MEMAP) which highlights the best practices of the competent authorities of OECD Member countries in relation to MAP. European Arbitration Convention 6. The European Union ”Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises” 90/463/EEC (the Arbitration Convention), may provide an alternative to the MAP procedure under the UK’s tax treaties where residents of EU member states are potentially subject to double taxation. The UK and other member states are signatories to the Arbitration Convention which came into force on 1 January 1995. MAP may be invoked under one of the UK’s tax treaties, under the Arbitration Convention or under both simultaneously. ADMINISTRATION 7. Presentation of cases to invoke MAP in relation to transfer pricing adjustments, under both the UK’s tax treaties and the Arbitration Convention, are dealt with by Business International with the exception of cases presented by enterprises in the North Sea sector which are dealt with by Large Business Service Oil & Gas Sector. 8. The MAP provided for in most of the UK’s tax treaties and the Arbitration Convention empower the competent authorities of the two tax treaty partners to consult each other when an enterprise claims that it is being taxed otherwise than in accordance with the convention as a result of the actions of one or both of the relevant fiscal authorities. MAP is a process of consultation, not litigation, between the two competent authorities. The taxpayer is not a formal party to those consultations as such, but may be invited to participate informally at the discretion of the competent authorities. Where it considers such participation likely to be useful the UK will press for, but cannot guarantee it; the position of the competent authorities of the UK’s treaty partners in this respect is outside the UK’s control. 9. In the UK the Commissioners for Her Majesty’s HM Revenue & Customs (HMRC), or their authorised representatives, are the competent authority. For cases under MAP the Commissioners have authorised to represent them: for matters relating to transfer pricing generally Judith Knott for matters relating to transfer pricing in the oil and gas industries Susan New 10. An enterprise may initiate MAP by presenting a case that it is subject to taxation, otherwise than in accordance with the tax treaty or the principles of the Arbitration Convention, to the competent authority for the country of which it is a resident or, in some cases, a national. In a transfer pricing case, a case might be presented by the enterprise which has had, or will have, an adjustment made to the price of goods or services transferred to or from a related party in another country. The enterprise may request that the competent authority of the first country reduce or withdraw the adjustment and/or that the competent authority of the second country allow a corresponding adjustment to the income of the related party to prevent economic double taxation. The UK is ready to receive the presentation of a case whether it is the state which has made a transfer pricing adjustment or whether it is the state being asked to make a corresponding adjustment for a transfer pricing adjustment made by its treaty partner. Treaty partners, however, may have their own practice and/or regulations regarding which competent authority should receive presentation of a case and taxpayers need to ensure compliance with those requirements. 11. The Arbitration Convention requires that at the same time an enterprise presents a case to the competent authority of the State of which it is resident or in which it has a permanent

establishment, it must at the same time notify the competent authority of any other States which may be concerned in the case. As a matter of good practice, the UK advises that a presentation of a case should also be copied to the competent authority of the other State in a MAP case even if it is outside the Arbitration Convention. 12. In the UK there is no set form of presentation. Specific treaties, however, may state that certain information must be provided before it is accepted that a case has been presented for the purposes of starting the period after which arbitration may be invoked. Other countries may also have more extensive domestic information requirements. It is therefore advisable to consult the relevant treaty and any public guidance on the matter provided by the UK’s treaty partner if presenting a case to that partner. 13. Otherwise, UK taxpayers may present their cases in writing to the person and the address set out at the conclusion of this Statement. A presentation should specify the year(s) concerned, the nature of the action giving rise, or expected to give rise, to taxation not in accordance with the convention, and the full names and addresses of the parties to which the MAP relates, including the UK enterprise’s tax office and reference number. SCOPE FOR GRANTING RELIEF 14. The terms of the Article establishing MAP in UK tax treaties and the Arbitration Convention circumscribe the competent authorities’ freedom of action. The Article provides no guarantee of relief from double taxation via MAP, although in the future some UK tax treaties will provide for arbitration. The Arbitration Convention (where it applies - see ‘Arbitration Stage’ below), of course also provides for arbitration. However, the competent authorities are enjoined to consult each other and to endeavour to resolve each case with a view to the avoidance of double taxation. In the UK, MAP has proved very effective in doing this in cases involving transfer pricing adjustments. 15. On considering the case presented to it, the UK competent authority may conclude that the taxation of relevant transactions proposed or applied by a tax treaty partner is in accordance with the tax treaty and may grant relief on a unilateral basis at this point. This might be the case even if the treaty partner is unwilling to enter MAP or is unable to do so because it is unable to derogate from a decision reached in its domestic courts. Similarly, the competent authority of the tax treaty partner might decide to relieve unilaterally transfer pricing adjustments made by HMRC. 16. In respect of adjustments made by the UK’s tax treaty partners there are issues on which they and the UK hold different views. Some partners do not consider that the level of capitalisation of a corporate borrower, as opposed to the rate of interest paid on its debt, is an issue involving the arm’s length principle prescribed by the OECD and Arbitration Conventions. Because it does not view thin capitalisation as a transfer pricing issue, the tax treaty partner may be reluctant, or refuse, to enter MAP in respect of such adjustments. Conversely the UK takes the view that thin capitalisation is an issue requiring application of the arm’s length principle in order to achieve a correct transfer pricing result. To the extent therefore that the cost of funding in question exceeds what the UK considers to be an arm’s length amount the UK is prepared to enter MAP in respect of adjustments made by the tax treaty partner and will consider whether it is appropriate to give relief unilaterally for any disallowance of interest in excess of an arm’s length amount. One purpose of tax treaties is the elimination of fiscal evasion and in its considerations the UK will take into account all circumstances surrounding the decision of the treaty partner to make an adjustment, including issues such as the commercial purpose, or otherwise, of the funding provided. 17. If the UK considers that the adjustment does not accord with the provisions of the tax treaty, for example because it does not accept that a transfer pricing adjustment complies with the arm’s length principle, the UK competent authority will take up the matter with its counterpart in

the treaty partner state. If negotiations between the competent authorities provide adequate evidence to satisfy the UK competent authority that an adjustment made by a tax treaty partner is in accordance with the tax treaty, and was required in order to comply with the arm’s length principle, there will normally be no difficulty in granting a corresponding adjustment. In many cases, the competent authorities can establish that the primary adjustment was in an excessive amount and agree a course whereby the primary adjustment is reduced and the remaining adjustment is relieved in an amount that reflects an arm’s length result. If, however, the UK remains dissatisfied, there is no obligation on it to grant relief and at the taxpayer’s request the matter may progress to arbitration if the Arbitration Convention is applicable or if the relevant treaty contains an arbitration article. 18. Experience has shown that it is advantageous for taxpayers involved in transfer pricing enquiries to present a case early to invoke MAP because early action by the competent authority can sometimes help to ensure that unrelievable double taxation does not arise from the actions of one fiscal authority. This might be the case, for example, where the UK’s treaty partner is adopting an inappropriate transfer pricing methodology during the course of an audit and the UK is able to persuade it to use the most appropriate methodology. As noted above, the taxpayer is not directly involved in the negotiations between the competent authorities but, as happens in the UK, it may participate indirectly through discussions with the competent authority of the state of residence/nationality. As is also stated above, the approach of the tax treaty partner in these matters is not at the discretion of the UK. 19. It is important to note that even though the competent authorities may begin discussions before a transfer pricing enquiry is completed, MAP is not an alternative to the normal enquiry process. MAP will seek to determine in principle how the double taxation of profits will be relieved by the tax treaty partners once the quantum of profits has been established by the transfer pricing enquiry. The competent authorities will not, however, conduct a transfer pricing enquiry as part of the MAP and MAP will not suspend or replace an enquiry. Equally, presenting a case for MAP should not of itself give rise to the opening of a transfer pricing enquiry, and it will not remove any of the UK‘s protections surrounding the opening of such enquiries. It may, however, be necessary for the UK to seek information from the taxpayer in order to determine whether a transfer pricing adjustment made by a tax treaty partner conforms to the arm’s length principle. Normally such information will exist as a result of the transfer pricing enquiry and/or be reflected in the case presented for MAP, but clarification of fact and /or economic analysis may be required as MAP negotiations develop. 20. Where a case has been settled under the UK’s judicial process before it is presented for MAP, the UK competent authority would expect, on request, to take the matter up under MAP. The UK considers that both a court and a tribunal form part of the judicial process. 21. MAP does not, however, provide a parallel avenue to the domestic appeals process, though early entry into MAP may be useful in helping a taxpayer determine whether the appeals process needs to operate. The UK follows the approach adopted by most countries and described in the Commentary on Article 25 at Paragraph 76. Under this approach a person cannot pursue simultaneously the MAP and domestic legal remedies. Thus a case may be presented and accepted for MAP while the domestic remedies are still available. In such cases, the UK competent authority will generally require that the taxpayer agrees to the suspension of these remedies or, if the taxpayer does not agree, will delay the MAP until these remedies are exhausted. Where the adjustment giving rise to MAP has been made in the other state the UK competent authority does recognise that whilst a taxpayer may be willing to suspend domestic legal remedies, the other fiscal authority may be unwilling to do so. Similarly, the UK competent authority may recognise that pursuit of domestic legal remedies in another state may take a considerable amount of time. In such cases the UK competent authority may be willing to continue the MAP while the domestic legal process continues, but of course cannot guarantee that the other competent authority will be willing to do so.

22. Where the MAP is first pursued and a mutual agreement has been reached, the taxpayer and other persons directly affected are offered the possibility to reject the agreement and pursue the domestic remedies that had been suspended. In such a case, the UK would consider that the efforts of the competent authorities to resolve the case by MAP to have been exhausted. TIME LIMITS 23. In order to invoke MAP under a UK tax treaty it is necessary for a person to present a case showing why taxation has arisen that is not in accordance with the terms of the treaty (S124(1) TIOPA 2010, formerly S815AA(1) ICTA 1988). To invoke MAP under the Arbitration Convention it is similarly necessary to present a case showing that the arm’s length transfer pricing principles set out in Article 4 of that Convention have not been observed. 24. Where MAP is invoked under one of the UK’s tax treaties, such a case must be presented before the expiration of: •

the period of six years following the end of the chargeable period to which the case relates; or

•

such longer period as may be specified in the tax treaty for claims after 27 July 2000.

See S125(3) TIOPA 2010, formerly S815AA(6) ICTA 1988. 25. The time limit for invoking MAP will therefore depend upon the specific terms of the particular UK tax treaty under which MAP is invoked. In older UK tax treaties the time limit for presenting a case invoking MAP is not addressed, so that the domestic limit of six years following the end of the chargeable period to which the case relates applies. More recent treaties do address the issue. In every case, the relevant tax treaty should be consulted, but generally UK tax treaties follow Article 25 of the OECD Convention. This provides that an enterprise must present its case “within three years of the first notification of the action which results or is likely to result in double taxation” (first notification). Because the first notification may occur after the expiry of six years following the chargeable period to which the claim relates, the relevant tax treaty article may thus extend the basic six year time limit. 26. Where MAP is invoked under the Arbitration Convention, the time limit for presenting a case is determined by Article 6(1) of the Arbitration Convention. This uses wording similar to Article 25 of the OECD Convention and therefore also provides that a case must be presented within three years of the first notification of the action which results or is likely to result in double taxation. 27. It should be noted that in the presentation of a case under UK tax treaties and the Arbitration Convention the time limit is interpreted to the advantage of the taxpayer. That is, the time limit of three years only commences once first notification has been given. It is not necessary to await the first notification before presenting a case to invoke MAP. 28. This is made clear in the Commentary on the OECD Convention which the UK follows when interpreting its own tax treaties. In discussing Article 25, the Commentary states: •

at Paragraph 14 “It should be noted that the mutual agreement procedure … can be set in motion by a taxpayer without waiting until the taxation considered by him to be “not in accordance with the Convention” has been charged against or notified to him. To be able to set the procedure in motion, he must, and it is sufficient if he does, establish that the “actions of one or both of the Contracting States” will result in such taxation.”

•

at Paragraph 21 “The provision fixing the starting point of the three year time limit as the date of the “first notification of the action resulting in taxation not in

accordance with the provision of the Convention” should be interpreted in the way most favourable to the taxpayer … Since a taxpayer has the right to present a case as soon as the taxpayer considers that taxation will result in taxation not in accordance with the provisions of the Convention, whilst the three-year limit only begins when that result has materialised, there will be cases where the taxpayer will have the right to initiate the mutual agreement procedure before the three year time limit begins ...” •

at Paragraph 23 “There may, however, be cases where there is no notice of a liability or the like. In such cases, the relevant time of “notification” would be the time when the taxpayer would, in the normal course of events, be regarded as having been made aware of the taxation that is in fact not in accordance with the Convention.”

FIRST NOTIFICATION 29. Clearly the UK cannot leave itself exposed indefinitely to requests to enter MAP. For the purposes of both a UK tax treaty or the Arbitration Convention, HMRC will therefore regard the first notification as being the finalisation of a transfer pricing enquiry which gives rise to double taxation. This stage will be marked by the determination of the quantum of the additional profits arising from a transfer pricing adjustment such as the issue of a closure notice, or the amendment of a return during an enquiry (Paragraphs 30/31 Schedule 18 FA1998). HMRC considers that at this point, the taxpayer must be aware of the possibility that double taxation may arise and should therefore present a case to protect its position. 30. Because HMRC will admit a case to MAP prior to first notification, it may be that at the time the case is presented it is not certain that a transfer pricing adjustment will be made or that double taxation will arise. In particular, it may not be possible to gauge the quantum of profits that might be subject to double taxation. In such cases, HMRC may well defer MAP negotiations with the competent authority of the treaty partner until it becomes clear that such negotiations are likely to prove meaningful and effective in avoiding double taxation. Nevertheless, in cases of doubt, HMRC will contact the other state or states involved to explain why it does not consider it appropriate to commence MAP negotiations at that point and to seek the agreement of the other state as to the point at which negotiations should commence. 31. However, it should be noted that even if the UK is prepared to commence MAP negotiations, its treaty partner may not be and the UK has no power to compel it to enter negotiations. OECD GUIDANCE 32. In determining whether taxation of relevant transactions will satisfy the arm’s length principle and thus result in taxation in accordance with the provisions of a tax treaty, the UK will be guided by the OECD Transfer Pricing Guidelines, the OECD Report on the Attribution of Profits to Permanent Establishments and the Commentary on the OECD Convention. These documents represent the consensus view of OECD Member Countries on the application of the arm’s length principle and are also expected to be influential outside OECD Member Countries. ARBITRATION STAGE 33. The Arbitration Convention obviously provides for arbitration in certain circumstances, but the OECD Convention and Commentary thereon also contemplates the inclusion of arbitration provisions within tax treaties. The UK is now beginning to incorporate provision for arbitration in some of its tax treaties. 34. It will be necessary in every case to have regard to the relevant tax treaty, but generally for treaties with an arbitration provision, where a person has presented a case and the competent

authorities are unable to reach an agreement to resolve that case within two years from the presentation, the person can request that any unresolved issues be submitted to arbitration. 35. The relevant provision in the OECD Convention precludes the availability of arbitration where a decision on these issues has already been rendered by a court or administrative tribunal of either treaty partner state. However, where possible the UK will seek when agreeing treaties to have terms more favourable to the taxpayer included in the treaty. 36. Unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, it shall be binding and shall be implemented notwithstanding any time limit in the domestic law of either treaty partner state. 37. The competent authorities will decide the mode of application of the arbitration provision. This will include matters such as the form of the request for arbitration, the information that must have been provided to both competent authorities when the case for MAP was presented, terms of reference and the selection of arbitrators. 38. For MAP cases within the Arbitration Convention, Article 7(1) provides that if the competent authorities fail to reach an agreement that eliminates double taxation within two years from the date on which the case was first submitted they shall set up an advisory commission to deliver its opinion on the matter. Article 7(4) provides that the competent authorities may, with the agreement of the associated enterprises concerned, waive the two year time limit. Where the UK competent authority considers that continuation of the MAP is likely to result in earlier resolution of a case than referral to an advisory commission, it will assume the tacit agreement of the other competent authorities and the associated enterprises to waiving of the time limit. MAP will therefore proceed accordingly. 39. The associated enterprises, of course, retain the right to invoke the two year time limit when it expires. If the enterprises, or the other competent authority, notify the UK competent authority of their wish to invoke the time limit, the UK will cooperate fully in establishing an advisory commission. Similarly, when the UK competent authority does not consider that MAP will result in earlier resolution of the case, it will ask the other competent authority to cooperate in setting up an advisory commission. 40. The two-year time limit before a case proceeds to the second stage may also be extended where the case is still under appeal through domestic procedures in one of the treaty partner states. 41. The submission of a case to the advisory commission does not prevent a Contracting State from initiating or continuing judicial proceedings or proceedings for administrative penalties in relation to the same matters (Article 7(2)). 42. Article 7(3) provides that, where the domestic law of a Contracting State does not permit the competent authorities of that State to derogate from the decisions of their judicial bodies, the second stage will not commence until the time provided for appeal has expired without an appeal having been made, or the taxpayer has withdrawn the appeal or settled it by agreement. This might effectively present the taxpayer with a choice between pursuit under the domestic appeals process or arbitration. Although the UK has previously decided to apply Article 7(3) it no longer sees the need to do so. For the purposes of the Arbitration Convention the UK will be prepared to consider reference of a case to an advisory commission notwithstanding a prior decision within the UK judicial process. 43. The UK will adopt a similar approach where arbitration is provided for under its treaties unless the relevant treaty prevents it. 44. The advisory commission, constituted in accordance with Article 9 of the Arbitration Convention and before which the taxpayer may appear (Article 10(2)), must deliver within six

months a decision which will eliminate the double taxation (Article 11). The competent authorities must then act within six months in accordance with the decision, unless they agree to eliminate the double taxation by some other means (Article 12). 45. Article 8 of the Arbitration Convention provides that the competent authority of a Contracting State is not obliged to initiate either of the two stages, MAP or advisory commission, where one of the enterprises involved is liable to a serious penalty. The UK has declared that it will interpret the term ‘serious penalty’ as comprising criminal sanctions and administrative sanctions in respect of the fraudulent or negligent delivery of incorrect accounts, claims or returns for tax purposes. 46. The UK’s domestic provisions on penalties for inaccuracies were revised in Finance Act 2007, replacing the terms ‘fraudulent’ or ‘negligent’ with ‘deliberate’ or ‘careless’. In the light of its experience since 1990 the UK will, in practice, only exercise its discretion under Article 8 in cases involving the imposition of penalties for deliberate inaccuracy. In considering whether to proceed under the Arbitration Convention the UK will take into account the facts and circumstances which have led to the taxpayer becoming liable to such a sanction. There is no provision equivalent to Article 8 of the Arbitration Convention affecting MAP or arbitration in the OECD Model on which the UK seeks to base its tax treaties. 47. The UK and other EU Member States subscribe to the “Code of Conduct for the effective administration of the Arbitration Convention” (90/436/EEC and revised by 2009/C 322/01). The Code provides that the two years period from the presentation of the taxpayer’s case to the time at which arbitration can be invoked is started when the competent authorities receive certain information from the taxpayer. This includes identification of the enterprise concerned, details of the relevant facts and circumstances of the case, identification of the relevant tax periods, copies of any assessments, tax audit reports or similar giving rise to double taxation, details of any appeals and litigation initiated by the enterprise or other parties to the relevant transactions, an explanation of why the principles of the Convention are considered not to have been observed. The enterprise must also undertake to respond completely and quickly to requests by the competent authority for further information. 48. Although the Arbitration Convention is regularly invoked, it has generally been possible for States to arrive at agreement under MAP without proceeding to the secondary stage of the advisory commission. Enquiries about the provisions, or about presenting a case, should be addressed to the people named at the end of this statement. METHODS OF GIVING RELIEF 49. Where a solution or mutual agreement is reached under the terms of a UK tax treaty, it will be given effect notwithstanding anything in any enactment in accordance with S124(2) TIOPA 2010, formerly S815AA(2) ICTA 1988. Where normal time limits may have expired before a solution or mutual agreement is reached, a claim for relief consequential to that solution or mutual agreement, for example to losses, group relief, capital allowances etc., must be made within twelve months following the notification of the solution or mutual agreement (S124(4) TIOPA 2010, formerly S815AA(3) ICTA 1988). 50. Where a claim for relief is made in pursuance of an agreement or opinion reached under the Arbitration Convention, normal time limits for claiming relief under the Taxes Acts do not apply so there is no time limit for claiming the appropriate relief (S127(5) TIOPA 2010, formerly S815B(3) ICTA 1988). 51. The manner in which relief is granted by the UK depends on the facts and circumstances of the particular case. Relief may be granted either by deduction against UK profits or by tax credit. Following agreement between the competent authorities, the UK taxpayer will usually be invited to submit revised computations reflecting the agreed relief.

52. The UK does not accept that it is permissible for a taxpayer to make, unilaterally, an adjustment through its accounts and return to obtain corresponding relief for an adjustment which reduces its UK tax liability either when self-assessing or in response to an adjustment imposed by another jurisdiction. The only avenue to relief is presentation of a case invoking MAP. SECONDARY ADJUSTMENTS 53. Secondary adjustments are discussed in Chapter IV of the Guidelines. Complexities sometimes arise where an overseas jurisdiction makes a secondary adjustment following a transfer pricing settlement. Secondary adjustments may be defined as adjustments that are intended to restore the financial situation of the associated enterprises which have entered into the transactions giving rise to the transfer pricing adjustment to that which would have existed had the transactions been conducted on arm’s length terms. Such secondary adjustments recognise that while the primary transfer pricing adjustment is to the taxable profits of the associated enterprises, it does not rectify the situation where one enterprise actually retains funds that it would not have held had the transactions in question been conducted on arm’s length terms. A secondary adjustment seeks to rectify this, most commonly by assuming that a constructive dividend, constructive equity contribution or constructive interest-bearing loan has been made in an amount equal to the transfer pricing adjustment. For example, a jurisdiction making a primary adjustment to the income of a subsidiary of a foreign parent may treat the excess profits in the hands of the foreign parent as having been transferred as a dividend, in which case it may consider that withholding tax should be levied. 54. A secondary adjustment, however, may itself give rise to double taxation unless a corresponding credit or some other form of relief is provided by the other country for the additional tax liability resulting from the secondary adjustment. The UK will consider the merits of claims to deduct interest relating to the deeming of a constructive loan by a treaty partner following a transfer pricing adjustment. The issue would, however, be subject to the arm’s length principle and would be considered in the light of any relevant provisions relating to payments of interests. Where a treaty partner applies a secondary adjustment by deeming a distribution to have been made, the UK neither taxes the deemed distribution nor grants relief for tax suffered on the distribution in the other jurisdiction. ADVANCE PRICING AGREEMENTS 55. An Advance Pricing Agreement (APA) is a written agreement that determines, for a fixed period, a method for resolving transfer pricing issues in advance of a return being made. Guidance on APAs may be found at SP2/10 – ‘Advance Pricing Agreements’ issued on 17 December 2010. FURTHER INFORMATION Requests for further information should be addressed to: General cases Douglas Jones HMRC, Business International 3rd Floor, 100 Parliament Street, London SW1A 2BQ [email protected] Telephone 00 44 (0)207 147 2686

Financial cases Richard Clayton HMRC, Business International 3rd Floor, 100 Parliament Street, London SW1A 2BQ [email protected] Telephone 00 44 (0)207 147 2738 Oil & Gas cases Susan New HMRC Large Business Service Oil & Gas Sector 22 Kingsway, London WC2B 6NR [email protected] Telephone 00 44 (0)207 438 7570 Issues regarding individuals Ed Stuart HMRC CAR Personal Tax International Advisory Ferrers House, Castle Meadow Road, Nottingham, NG2 1BB [email protected] Telephone 00 44 (0)115 974 2563 SP1/12

Advance Thin Capitalisation Agreements under the APA Legislation

General 1. This Statement of Practice replaces SP 04/07, which introduced the practice of providing Advance Thin Capitalisation Agreements (ATCAs) under the Advance Pricing Agreement legislation. It updates the legislative references, largely to the Taxation (International & Other Provisions) Act (TIOPA) 2010, and reflects HMRC’s current practice. 2. The practice is intended to determine in advance the transfer pricing of financial transactions within Part 4 of TIOPA 2010. The legal basis for ATCAs is provided by the legislation at S218-230 TIOPA 2010 (formerly at S85-87 Finance Act 1999), which provides for Advance Pricing Agreements (APAs) in relation to transfer pricing more broadly. Detailed guidance on interpretation and practice is in HMRC’s International Manual (‘INTM’), available online at http://www.hmrc.gov.uk/manuals/intmanual/index.htm 3. The ATCA process is initiated by the business, in accordance with S223 TIOPA 2010, as an application for clarification by agreement of the effect of applying the arm’s length principle to the financial provisions between the business and any lender. 4. Thin capitalisation is a complex area of transfer pricing. Because transfer pricing is particularly fact-sensitive, it is helpful to be able to discuss the issues as close to real time as possible.

Confidentiality 5. Information supplied by the business in relation to an ATCA request will be kept confidential in accordance with Section 18 of the Commissioners for Revenue and Customs Act 2005. However, such information will contribute to the pool of information held by HMRC about that business and no undertaking can be given that it will be taken into account only in relation to the ATCA. Scope of ATCAs 6. Agreements under this Statement of Practice will be restricted to matters within S218(2)(d) TIOPA 2010: that is, the tax treatment of any provision made or imposed between the taxpayer and an associate. As this Statement of Practice relates to thin capitalisation the provisions involved will be financing provisions. 7. An ATCA covers the transfer pricing treatment of a particular borrower, or may extend to other issues in appropriate cases, such as interest imputation and the taxation of finance and treasury companies, subject to the usual criteria such as risk and complexity. There are currently no selection criteria for ATCA applications and none are planned. Smaller cases are more likely to be accepted where the information is comprehensive, clearly presented and accompanied by a draft agreement. Companies submitting incomplete applications may be asked to resubmit. 8. Funding arrangements suitable for ATCAs include, but are not restricted to, intra-group loans, quoted Eurobonds, and cases of indirect participation (“acting together”). 9. ATCAs will normally be for future (and possibly current) periods, depending on the timing of the application, but may also extend to periods which have ended, if the facts and circumstances are sufficiently similar. S224 TIOPA 2010 allows the agreement to have effect for periods which have ended before the agreement is made. Self-assessment returns may be amended and enquiries into earlier years resolved on the basis of an agreement. HMRC will not apply hindsight in doing so, but will consider the similarity of the circumstances prevailing during these earlier periods. Applications for an Advance Thin Capitalisation Agreement 10. An ATCA may be requested by a business which is, or will be, undertaking provisions of a financial nature within the meaning of Ss147(1) and 152(1) of TIOPA 2010, as extended by Ss158-162. Application for an ATCA is at the discretion of the business, though there may be circumstances where HMRC encourages businesses to apply, for example during an enquiry. 11. The process is designed to help resolve financial transfer pricing issues which have a significant commercial impact on an enterprise’s results, where the issues would be unlikely to be regarded as “low risk” by HMRC, or where the arm’s length provision is a matter of doubt. Making the application 12. An approach may be made to the Customer Relationship Manager (CRM) or Customer Contact (CC) to discuss making an application. The application when made must clearly include a request for an agreement under S218 TIOPA 2010, together with the applicant’s proposed treatment of the provisions in question. It will also need to include a diagram of the group structure for the time at which the provision occurred, background material providing a working knowledge of the business of the company or group under consideration, and details of the finance in question (see for guidance the chapter starting at INTM5750000). 13. The application must also have due regard to the requirements of S223, which states, regarding, an application by a person (“A”), that:

3)

It must set out A’s understanding of what would in A’s case be the effect, in the absence of any agreement, of the provisions in relation to which clarification is sought.

4)

It must set out the respects in which it appears to A that clarification is required in relation to those provisions.

5)

It must set out how A proposes that matters should be clarified in a manner consistent with the understanding mentioned in subsection (3).

14. Applications may be made before transactions are carried out, but HMRC will only enter discussions for an ATCA if the terms of the proposed transactions have been finalised, such that the steps involved are clear and the debt has been quantified and priced. HMRC will suspend or cease discussions if the plans turn out to be tentative in any significant respect. 15. Emailed applications and documents in electronic form are welcome: however, for practical reasons, where there is extensive supplementary documentation it may be better for this to be provided once the identity of the caseworker is known. Term 16. HMRC regards five years as the maximum period for which it is reasonable to assume that the method agreed for dealing with the relevant issues will remain appropriate, so ATCAs will typically be agreed for between three and five years, depending on the circumstances. If funding renewal is imminent at the end of that time, and the ATCA has proved durable, a shortterm ATCA may at that stage be available on the same or similar terms without the need for the full process, to enable the applicant to have an HMRC agreement coterminous with the actual funding timetable. Using the Model ATCA 17. HMRC’s purpose in making such a model available is to try to ensure greater consistency between agreements and to shorten the period of time it takes to reach agreement. 18. HMRC has updated the model ATCA, which provides a possible template for agreements under this Statement of Practice. The model presents a fairly straightforward outline of commonly used criteria and definitions, together with examples of the sort of terms which HMRC is likely to find acceptable. The inclusion of a complete draft ATCA with the application is likely to help progress and resolution of the discussion process. The Model is attached as an Annex 1 to this document, together with a Commentary and will be incorporated into the International Manual in due course. 19. It is recognised that the model will not be appropriate for all applications, but it should provide a useful framework for adapting to the particular needs of the applicant. Progressing the application 20. HMRC will endeavour to respond to the initial contact within 28 working days. 21. Unless the application is acceptable as proposed, or is subject to only minor adjustments, meetings between HMRC and the applicant will inevitably play an important part in the ATCA process, with initial contact probably by phone. However it is important that HMRC has an opportunity to consider a well-prepared briefing in the form of the written application before a meeting is arranged. HMRC will seek to agree a rolling action plan and update it regularly. HMRC will then consider the application in accordance with existing guidance (see INTM542000 onwards and INTM570000 onwards). Agreement

22. In accordance with S218 TIOPA 2010, an ATCA between the business and HMRC represents a binding undertaking on the parties that the treatment of the transfer pricing issues covered by the agreement will for a specified period be determined in accordance with the agreement. 23. All ATCAs will include specific reporting obligations, including a requirement that the applicant demonstrates whether it has satisfied all covenants and other conditions, and if not, what action it has taken to rectify the position in accordance with the agreement. This report will normally be included with the tax computations for the period. The wording of any reporting requirement should be incorporated into the ATCA, in compliance with S228 TIOPA 2010. Best practice suggests including as an appendix to the agreement a template of the basis of any calculations which are to be included in the report. 24. However, an ATCA shall cease to have effect if its terms are not observed and the provisions leading to revocation, nullification, revision or mutual agreement are triggered. 25. In form, the agreement between HMRC and the business will be based on the approach described at INTM582010 and will therefore include terms and conditions which may be familiar from thin capitalisation enquiry work. Comments below about interaction with other legislation and clearance procedures should be noted. The agreement will require a declaration under S218 that it has been made for the purposes of that section. 26. The ATCA should where appropriate include wording to provide guidance and allow flexibility for potential revisions, for example where there are issues which might merit the option of a periodic review, without necessarily interfering with the continuation of the agreement. This would probably only arise if there was a significant but manageable area of uncertainty for the future, and has limited application. Withdrawing from the ATCA process 27. HMRC may withdraw from the ATCA process if the business is not co-operating in providing the information necessary to consider the application properly, or where the proposals are too tentative (as described in para 14). In cases where agreement cannot be reached with the business, HMRC will issue a formal statement recording the reasons. HMRC does not have any obligation to continue discussion beyond the point at which it has determined that agreement cannot be reached. Any withdrawal from the ATCA process will be monitored centrally by CTIAA Business International. 28. A business may withdraw from the ATCA application at any time before final agreement is reached, but it would be helpful if HMRC was informed of the decision. Interaction with the Obligation to Deduct Withholding Tax 29. ATCA applications are very often received from UK companies borrowing from overseas lenders. This means that while the ATCA application will be made by a UK resident borrower, any related application for clearance for interest to be paid at a rate in accordance with a double taxation agreement will be made by the non-UK resident interest recipient. The two processes are entirely distinct. An ATCA does not remove the withholding obligation imposed by S874 Income Tax Act 2007 on the payer of UK source interest to account for income tax on the payments. The payer is obliged to withhold income tax at the basic rate until advised by HMRC to do otherwise. HMRC will only issue such a notice following a valid application by the overseas lender under the relevant DTA. 30. Guidance on applications for treaty clearance, including the Treaty Passport Scheme introduced in 2010, may be found on the HMRC website - see http://www.hmrc.gov.uk/cnr/app_dtt.htm.

Interaction with other legislation and clearance procedures 31. An ATCA will only cover financing provisions within the scope of S218(2) TIOPA 2010, and the only part of that subsection relevant to thin capitalisation is 2(e), which relates to “the treatment for tax purposes of any provision made or imposed, whether before or after the date of the agreement, as between A and any associate.” The definition of “associate” in S219 is the same as the “participation condition” for transfer pricing in S148. This means that an ATCA can only apply to the transfer pricing of debt. All other provisions in the Taxes Acts will continue to apply. For example, compliance with the terms of an ATCA would not prevent restriction of interest under the unallowable purpose rule at Sections 441-442 CTA 2009 (formerly Para 13 Sch 9 FA 1996). Details of other clearance procedures provided by HMRC can be found at http://www.hmrc.gov.uk/cap/ . Nullifying and Revoking ATCAs 32. Where HMRC believes that the business entering into the agreement has fraudulently or negligently provided false or misleading information in connection with the making of the agreement or otherwise in the preparation of the agreement, S226 TIOPA 2010 gives HMRC the power to annul the ATCA i.e. to treat it as if it had never been made. When considering using this power HMRC will take into account the extent to which the terms of the agreement would have been different in the absence of the misrepresentation. S227 includes details of the penalty for misrepresentation. 33. In accordance with S221 TIOPA 2010, a pre-return agreement is only valid as long as its terms are met. Therefore HMRC may revoke an ATCA if the business does not comply with its terms and conditions. The legislation refers to a failure in relation to a “significant” provision of the agreement. A provision is significant if it is a condition of the agreement having effect. This should be clear from the terms of the actual agreement in question. In practice, ATCAs frequently have alternative courses of action to revocation, including ways of rectifying a breach. In the event of nullification or revocation, HMRC would be obliged to reconsider any treaty clearance provided in respect of related financing provisions. Penalties 34. Because an ATCA is an agreement between HMRC and a business which decides how certain issues will be determined for the purposes of the Taxes Acts, a return made on any other basis in relation to those matters during the currency of an ATCA will constitute an incorrect return, with possible penalty consequences. 35. A penalty not exceeding £10,000 may be imposed where false or misleading information is supplied fraudulently or negligently in connection with an application for, or the monitoring of an ATCA, and the agreement may be nullified (see S226 and S227 TIOPA 2010). Appeals 36. In accordance with normal appeal procedures, the business has the right to appeal against the amount of any additions to profits that arise following the revocation or cancellation of an ATCA. 37. Where there is a mutual agreement made under and for the purposes of any double taxation agreements which is not consistent with the terms of the ATCA, it shall be the duty of HMRC to modify the ATCA to give effect to the mutual agreement reached with a treaty partner, in accord with S229 TIOPA 2010. Contacts within HMRC 38. CTIAA Business International has oversight of the ATCA process. 39. The first contact for information about advance thin capitalisation agreements under this Statement of Practice should be the CRM of the business concerned or its CC, and they will

engage the assistance of a transfer pricing specialist. If there is no known CRM or CC, the application may be sent to the local Transfer Pricing team leader or, in cases where it is unclear where the company will be dealt with, to CTIAA Business International. For assistance in locating the appropriate recipient, contact Ashley Culpin ([email protected]) at Business International. An email postbox will be made available for submission of Local Compliance cases. 40. CTIAA Business International’s involvement in issues relating to individual ATCAs is for the most part in a supporting or advisory role. It will retain oversight of the process, and direct policy in relation to ATCA work. For assistance on issues relating to policy matters, and comments on the process generally, contact Miles Nelson ([email protected]) on intra-group funding cases and Tony Clark ([email protected]) on private equity buy outs.

Annex 1 – Model ATCA Business Name Reference Advance Thin Capitalisation Agreement under section 218 TIOPA 2010 Section 1 – Preamble This is an agreement made between the parties identified below for the purposes of section 218 TIOPA 2010 in accordance with Statement of Practice 01/12. The agreement determines the tax treatment of the interest arising on the financial provisions identified below for the purposes of Chapter 1 Part 4 of TIOPA 2010. In accordance with section 229 TIOPA 2010, this agreement may be modified as necessary to enable effect to be given to a mutual agreement made under and for the purposes of any double taxation arrangements. Section 2 - Parties This agreement is made between [name of business or businesses] and HM Revenue and Customs. Section 3 – Financial provisions covered by the agreement [details of financial provisions] Section 4 – Term of the Agreement This agreement will apply to chargeable periods of the [business or businesses] ending between [xxx] and [xxx]. Section 5 – Definition of terms used in financial conditions Unless otherwise stated the terms defined below are to be measured by reference to the consolidated results of the UK group. Where the UK group does not produce consolidated financial statements, an informal statement of consolidated results will be provided. Debt means any financial indebtedness of the group calculated on a consolidated basis. Financial indebtedness includes any indebtedness in relation to; •

money borrowed (including any overdraft);

•

any debenture, bond, note or loan stock;

•

any finance lease, hire purchase, credit sale or conditional purchase agreement to the extent that it is treated as debt on the balance sheet;

•

the capital element of any amount raised under any other transaction having, as a primary and not as an incidental effect, the commercial effect of borrowing;

but excludes trade creditors unless their term is of sufficient length to be interest-bearing. Net Debt means Debt as defined above, less cash and cash equivalents. Cash may be reduced by an agreed amount set aside as working capital. Total Interest means interest and amounts in the nature of interest (such as discounts and the interest element on items included in Debt above) of [the UK Group], whether paid or accrued.

Net Interest means Total Interest less interest receivable and amounts in the nature of interest receivable by [the UK Group]. EBIT means the consolidated earnings of the UK Group before the deduction of interest and tax and exceptional items disclosed as such in the in the financial statements. EBITA means the earnings of [the UK Group] before the deduction of interest, tax, amortisation and exceptional items disclosed as such in the financial statements. EBITDA means the earnings of [the UK Group] before the deduction of interest, tax, depreciation, amortisation and exceptional items disclosed as such in the financial statements. Equity includes called-up share capital together with any associated share premium, reserves (including revaluation and capital redemption reserve reserves), retained profits and any amounts acting as equity such as interest-free loans and capital contributions. Loan to Value (‘LTV’) means the ratio of outstanding debt (as defined above) to the value of the assets on which it is secured. UK Group is defined as [name of borrower] and all its subsidiaries including any entity that is treated as a subsidiary under applicable accounting principles. Section 6 – Financial conditions Interest Cover Ratio -The [UK Group] agrees to maintain an interest cover ratio: [e.g. EBITDA/EBITA/EBIT to Total Interest/Net Interest] for each chargeable period during the Term of the agreement of at least the ratios set out in Appendix 1. Gearing Ratio The [UK Group] agrees to maintain a gearing ratio [e.g. debt to EBITDA or debt to equity or LTV] for each accounting period during the Term of the agreement not exceeding the ratios set out in Appendix 2. Section 7 – Monitoring of financial conditions For the period of the agreement, the corporation tax computations of [the borrower] will include a schedule demonstrating whether the Group has complied with the financial benchmarks and how any consequences have been dealt with; any other affected companies will reflect resultant adjustments in their computations. The schedule will also detail any adjustment required to the [UK Group’s] consolidated accounts to arrive at the defined terms (e.g. applying a ‘Frozen GAAP’ approach subsequent to the adoption of International Financial Reporting Standards). Section 8 – Consequences of meeting the financial conditions If both the financial conditions above are satisfied the Total Interest will not be subject to disallowance under Chapter 1 Part 4 TIOPA 2010. This agreement does not relieve any party to it of an obligation to deduct income tax from payments within section 874 ITA 2007, nor does it prevent the application of any other provision of the Taxes Acts.

Section 9 – Consequences of not meeting the financial conditions If the Interest Cover Ratio is lower than the ratio set out in appendix 1 or if the Gearing Ratio is higher than the ratio set out in appendix 2 then a financial condition has not been met. Where a financial condition has not been met then a failure arises under the terms of this agreement A failure under this agreement should be remedied by a disallowance of interest in the chargeable period in which the failure occurred. The disallowance will be calculated in accordance with the methods set out in either appendix 1 or 2, depending on which condition has not been met. Where neither of the financial conditions are met, any disallowance applied to correct the failure will be the larger of the two calculated according to the method laid out in the appendices. Section 10 – Circumstances in which this Agreement may be revised • •

Where the parties agree to a revision If the agreement is no longer considered appropriate to the facts and circumstances of the company, either the company or HMRC may seek to renegotiate the agreement for future periods.

Section 11 – Circumstances where the application of section 9 above may be modified [The list below is illustrative, but the changes must be substantial. The reader is referred to the International Manual at INTM582070.] Where the sole or principal reason for a company failing to meet a condition of the agreement is a wholly exceptional event not anticipated by the [UK Group] at the time the agreement was entered into, such as: (a)

a catastrophic or unusual disruptive event, which may be external or internal to the group, temporarily affecting the business of the [UK Group], such as a prolonged impairment to its income-producing capacity; or

(b)

a large acquisition or disposal; or a significant restructuring of the funding arrangements in relation to which the ATCA was agreed, or

(c)

an unexpected event such as a one-off accountancy provision that, while it has significant impact on the profit & loss account, does not affect the ability of the company to service the debt

then the [UK Group] will not be in breach, to the extent that the failure is due to the exceptional event. Signatures in agreement For [The Group] Name …………………………………..

Signature …………………………

Date ……………………….. Official Position ………………………………..

For HMRC Name: …………………....................

Signature ………………………..

Date ……………………….. Official Position: Transfer Pricing Specialist

Commentary on Model ATCA Section 1 1. This section establishes that this is an agreement under section 218 TIOPA 2010. In many cases the purpose of the agreement will be simply to determine the transfer pricing treatment of a particular loan, subject to modification under any mutual agreement procedure. 2. Where the situation is more complex it may be more appropriate to refer to an appendix containing the relevant factual information. Section 2 3. For illustrative purposes the model ATCA assumes that the applicant is a group of companies. The parties to the agreement will typically include the UK holding company and those of its subsidiaries which may be claiming a deduction for the interest arising on the financial provisions covered by the agreement. 4. In some situations the applicants may not be regarded as a group for the purposes of other parts of the Taxes Acts. Section 3 5. The financial provisions covered by the agreement will need to be identified, but again this might be by reference to a factual appendix. Section 4 6. The ATCA must specify the period it covers. This will typically be between three and five years. Section 5 7. The definitions included here are intended to cover the majority of situations. The intention is that the applicant should choose the relevant financial conditions and use the standard definitions provided. However these may need to be amended, for example to specify the treatment of payments made to make good a pension deficit. 8. In some cases it may be appropriate to define the reference enterprise using a list of businesses in an appendix.

Section 6 9. HMRC’s view is that ATCAs should include financial conditions monitoring both the level of debt and the capacity of the enterprise to service its debt obligations. Section 7 10. It may be appropriate to include specific conditions for monitoring the agreement. For example section 7 could commit the applicant to providing details of any adjustments made to arrive at the defined terms following the adoption of International Financial Reporting Standard similar to the ‘Frozen GAAP’ approach in lending agreements. Section 8 11. Where both the financial conditions are satisfied the UK group has certainty that Total Interest costs will not be subject to Part 4 TIOPA 2010. Section 9 12. Although the UK legislation designed to deal with thin capitalisation is based upon the position of an independent, third-party lender, it is impossible for HM Revenue & Customs to put itself precisely in the position of such a lender when a breach takes place. In accordance with INTM583010, an ATCA is therefore designed to give both HMRC and the other party to the agreement a degree of certainty. Section 10 13. It is impossible to give an exhaustive list of circumstances that should be ignored, but in general they include the sort of things that might be expected to invoke some sympathy in a third-party lender, such as a catastrophic or unusual event.

Appendix 1 Accounting Period Ended

EBITDA/EBIT/EBITA: Total/Net Interest ratio X:1 X:1 X:1 X:1 X:1 X:1

Calculation of Disallowance The disallowance will be calculated by reference to the ratio shown above for the relevant period (‘the required ratio’) and the interest cover ratio calculated using the actual results of the UK Group (‘the actual ratio’). The allowable interest can be calculated using the following formula: Actual ratio Required ratio

x

Interest

Illustrative calculation for period ending 31 December 2011 Assume that the interest charge is £z. This gives an actual ratio of EBITDA, EBITA or EBIT to interest of X : 1 which is lower than the required ratio of Y : 1. Applying the above formula gives the following result: X Y

x

£z = £m

This would result in a allowable interest of £m and the ratio of EBITDA, EBITA or EBIT to allowable interest is reduces to Y : 1, the required ratio.

Short Accounting Period For short accounting periods, see Appendix 3

Appendix 2 Accounting Period Ended

Debt : EBITDA / LTV ratio Y:1 Y:1 Y:1 Y:1 Y:1 Y:1

Calculation of Disallowance The disallowance will be calculated by reference to the ratio shown above for the relevant period (‘the required ratio’) and the gearing ratio calculated using the actual results of the UK Group (‘the actual ratio’). When considering the ratio of Debt to EBITDA or the LTV ratio in measuring gearing, the allowable interest can be derived from the following formula which calculates the amount of allowable debt: Required ratio (expressed as a whole number) Actual ratio (expressed as a whole number)

x

Debt

Illustrative calculation for period ending 31 December 2011 Assume that debts total £d. This gives an actual ratio of Debt to EBITDA or LTV ratio of Y : 1. This exceeds the required ratio of X : 1. Applying the above formula gives the following result: Y X

x

£d = £m

This identifies £m of arm’s length debt and at this level of debt the ratio of debt to either EBITDA or LTV reduces to X : 1, the required ratio. When considering the ratio of Debt (£d) to Equity (E) in measuring gearing, the allowable interest can be derived from the following formula which calculates the amount of allowable debt: Debt + Equity

-

Debt + Equity_____________________________ [Required ratio (expressed as a whole number) +1]

Illustrative calculation for period ending 31 December 2006 Assume that debts total £d. This gives an actual ratio of Debt to Equity of Y : 1. This exceeds the required ratio of X : 1. Applying the above formula gives the following result: £d + E - £d + E = £n

(X+1) This identifies £n of arm’s length debt and at this level of debt the ratio of debt to Equity reduces to X : 1, the required ratio.

Short Accounting Period For short accounting periods, see Appendix 3 Appendix 3 Short Accounting Period The X accounting period runs from X to X. The calculation of the gearing ratio will need to take account of this. The EBITDA for this should be increased pro rata on a monthly or daily basis to reflect a full year’s profits. The interest cover calculation does not need to be similarly adjusted as the accrued interest and EBITDA will both reflect the short period.

SP2/12

Inward Investment Support

INTRODUCTION This Statement of Practice (“SP”) replaces an earlier Statement on Inward Investment and Corporate Reconstruction (SP2/07), published in 2007. It explains the support that HMRC will give to non resident businesses who are thinking about investing in the UK. PROVIDING CLARITY ABOUT UK TAX 1. HMRC can help businesses based outside the UK by providing certainty about the tax implications of a significant investment in the UK. Please note that we will not comment on the structure of the investment. 2. Inward Investment Support (IIS) is a service offered by HMRC to businesses which are not resident in the UK and have no existing relationship with HMRC. IIS aims to give clarity and certainty by providing written confirmation of how HMRC will apply UK tax law to specific transactions. 3. HMRC will view an investment as “significant” if the amount to be invested is intended to be £30million or more, but it will also assist on smaller investments which it agrees may be of importance to the national or regional economy.

HOW IIS CAN HELP 4. IIS will provide written confirmation of how HMRC will apply UK tax law to specific transactions or events. Businesses should supply as much information as possible about the proposed investment, including: The name, address and country of residence of the businesses The nature and size of the projected transaction(s), the tax(es) involved and the chronology or proposed chronology of the transaction(s) The commercial background – describing the reasons why the business is considering the transaction Any specific legal points which are known or believed to arise. The points at issue should be outlined. If written legal advice is available, supplying a copy of it may enable HMRC to respond sooner The reasons why the investment is believed to be of importance to the national or regional economy 5. Any information provided to HMRC will be treated in the strictest confidence. HMRC officers are bound by a statutory duty of confidentiality. 6. IIS will respond within 28 days, drawing on HMRC’s network of technical tax specialists. If a full response cannot be provided within that time, an explanation will be supplied. There is more detail about HMRC’s service standards in the guidance document “When you can rely on information or advice provided by HM Revenue & Customs” which is available on the HMRC website. CONTACTING IIS 7.

The HMRC contact point is::

Colin Miller Inward Investment Support HM Revenue & Customs CTIAA Business International, 100 Parliament Street London SW1A 2BQ Telephone: 020 7147 2634

F4. Statement of Practice: artificial separation of business activities Introduction This Statement of Practice sets out how HMRC will apply the updated provisions aimed at countering the artificial separation of businesses to enable them to trade below the VAT registration threshold. The purpose of this statement is solely to clarify HMRC policy in this area. It does not qualify the relevant legislation, nor does it affect a taxpayer’s right of appeal to an independent tribunal. You can find information on the tribunal on the Tribunals Service website at www.tribunals.gov.uk or by phoning them on 0845 223 8080. Why the legislation is required The measures were originally designed to counter avoidance in circumstances in which a business is artificially separated, so that one or more of its parts trades below the VAT registration threshold. The impetus was twofold: •

firstly, unfair competition results from artificial separation because the split businesses, trading below the threshold, do not have to charge VAT on their supplies and may therefore be able to charge lower prices than their registered competitors, and

•

secondly, tax loss accrues to the Exchequer because, in the absence of separation, the whole business would be trading above the registration threshold and liable to register.

The new legislation became necessary because the existing measures proved ineffective and this type of avoidance remained widespread. Having to establish the intention of the parties proved difficult, as businesses were able to offer apparently legitimate reasons for the separation, which were, in fact, secondary to the real reason, which was the avoidance of registration. The legislation The provisions, which were contained in the Finance Act 1997, section 31, make the following main changes: •

Paragraph 1A is inserted into Schedule 1 to the Value Added Tax Act 1994. It clearly states that the purpose of paragraph 2 is to counter any artificial separation of business activities resulting in an avoidance of VAT. In determining whether or not any separation is artificial the extent to which the parties involved are closely bound to one another by financial, economic and organisational links must be taken into account.

•

Paragraph 2(2) (d) of Schedule 1 is repealed. It prevented the Commissioners taking action unless they were satisfied (amongst other things) that one of the main reasons for the separation was the avoidance of registration.

The purposive clause is an over-arching provision against which a direction made under this legislation must be tested. Its inclusion is a conscious attempt to indicate Parliament’s aims in passing the legislation, and to encourage tribunals and Courts, when considering appeals, to test not only the legal technicalities but also whether the disaggregated business arrangements result in a VAT loss.

How the new measures will be applied Whilst it is true that the new measures focus on the effect rather than the reason for the separation, it must be stressed that their purpose is to counter artificial separation, which results in an avoidance of VAT. HMRC will therefore not aggregate businesses unless they are satisfied that the separation is artificial. Under the new measures HMRC may only make a direction when: •

the separation is artificial

•

the separation results in an avoidance of VAT

•

the parties involved are closely bound by financial, economic and organisational links, and

•

the other legal requirements are satisfied.

What HMRC will consider to be artificial separation HMRC will be concerned with separations, which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries: •

Separate entities supply registered and unregistered customers In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.

•

Same equipment/premises used by different entities on a regular basis In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and takeaways such as fish and chip shops or mobile catering equipment such as ice cream vans.

•

Splitting up of what is usually a single supply This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals.

•

Artificially separated businesses which maintain the appearance of a single business This type of separation includes pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised 'shop within a shop' arrangements will not normally be considered artificial.

•

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations In this type of separation a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

The meaning of financial, economic and organisational links Again each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others: Financial links • financial support given by one part to another part • one part would not be financially viable without support from another part • common financial interest in the proceeds of the business. Economic links • seeking to realise the same economic objective • the activities of one part benefit the other part • supplying the same circle of customers. Organisational links • common management • common employees • common premises • common equipment. How the measure will apply in particular circumstances • Franchised businesses HMRC do not expect this measure to affect genuine, as opposed to artificial, franchising. •

Hairdressers The existing agreement between the National Hairdressers Federation and HMRC is used to determine whether or not a stylist working in a salon is an employee or a self-employed person. The new measure applies only to self-employed persons. HMRC will amalgamate those self-employed stylists who are artificially separated provided that the legal criteria are met.

•

Self-employed taxi drivers The ways in which taxi firms operate can vary. Only those firms which operate in such a way that the legal criteria are met, will be registered by HMRC as a single business.

•

Businesses already registered for VAT The measures enable HMRC to register businesses which otherwise would not be registered for VAT. Consequently HMRC will not use their powers to amalgamate when all of the parties involved are already VAT registered. However, where the powers are invoked, existing registrations will be cancelled from a current date and the newly amalgamated businesses will be registered with a new number.

•

Registration date for amalgamated businesses When HMRC invoke the measures, the liability to be registered as a single business will take effect from the date of the direction, or such later date as may be specified in the direction.

•

Penalties The new measures do not introduce any fresh penalty provisions. However, should artificial separation continue as a means of avoiding VAT, the position on penalties will be reconsidered.

•

Appeals Businesses which disagree with HMRC’s decision will be able to appeal to the tribunal. The basis of the Tribunal’s decision will continue to be whether HMRC could reasonably have been satisfied that there were grounds for treating all the separated parts as a single taxable person, given the legal criteria and the purpose of the legislation.

Advice on proposed separations It is a matter for the parties concerned, after due consideration of all the relevant factors, to determine how to structure their business activities. Accordingly, HMRC will not advise on the VAT consequences of any proposed structure but we will give a decision when faced with an actual situation. Responsibility for issuing directions Responsibility for issuing directions will remain with local offices, which should be contacted if you have any enquiries. These notes are for guidance only and reflect the position at the time of writing. They do not affect any right of appeal. Issued by HMRC © Crown Copyright 2012 30 January 2012