Extracts reproduced with kind permission from The Tax Faculty-ICAEW

RATES AND ALLOWANCES – TAX, NATIONAL INSURANCE AND TAX CREDITS

The Pre-Budget Press Release PN02 sets out details of all the rates and allowances for income tax, National Insurance, tax credits and Child Benefit/Guardian’s Allowance for 2007/08, fuel duty rates from 7 December 2006 and air passenger duties from 1 February 2007.

Income tax

Income tax personal allowances

Personal allowances for 2007/08 have been increased in line with inflation. The basic personal allowance will be £5,225 (2006/07 – £5035).

The 2007/08 age-related personal allowance for those aged 65 to 74 will be £7,550, and for those aged 75 or over, £7,690 (2006/07 – £7280 and £7,420 respectively). The income limit for age-related allowances will increase to £20,900 from £20,100 in 2006/07.

The married couple’s allowance for 2007/08 (which will also apply to registered civil partners) where one partner was born before 6 April 1935 will be £6,285 for those below 75 and £6,365 for those aged 75 or over. The minimum amount of the MCA will be £2,440.

Income tax rates for 2007/08 will not be known until next year’s Budget.

National Insurance contributions

Employees' contributions

Class 1 NIC thresholds for 2007/08:

• The lower earnings limit for employees' Class 1 contributions will be £87 a week.
• The primary and secondary thresholds for Class 1 contributions will be £100 a week.
• The upper earnings limit for employees' Class 1 contributions will be £670 a week.

Class 1 rates for 2007/08:

• The standard main rate of employees' Class 1 contributions below the upper earnings limit will continue to be 11%, and above the limit will continue to be 1%.
• The employees' contracted-out rebate rate for salary-related and money-purchase schemes remains at 1.6%.
• The married women’s reduced rate between primary threshold and upper earnings limit remains at 4.85% and above the upper earnings limit remains at 1%.

Employers' contributions

• The standard rate of employers' Class 1 contributions will continue to be 12.8%.
• The employers' contracted-out rebate rate for salary-related schemes has increased to 3.7%, and the rate for money-purchase schemes to 1.4%. (2006/07 – 3.5% and 1% respectively).

The self-employed

• The rate of Class 2 contributions for 2007/08 will increase to £2.20 per week (2006/07 – £2.10 a week.)
• The annual small earnings exception will be raised to £4,635 (2006/07 – £4,465).
• The annual lower and upper profits limits for Class 4 contributions will increase for 2007/08 to £5,225 and £34,840 respectively (2006/07 – £5,035 and £33,540).
• The rate of Class 4 contributions will be unchanged at 8% on profits below the upper profits limit and 1% on profits above that limit.

Share fishermen

The special rate of Class 2 contributions for share fisherman, which allows them to build entitlement to contributory Jobseeker’s Allowance in addition to other contributory benefits available to the self-employed, will increase for 2007/08 to £2.85 per week (2006/07 – £2.75).

Volunteer development workers

The special rate of Class 2 contributions for volunteer development workers, that entitles them to the full range of contributory benefits, will be increased to £4.35 per week (2006/07 – £4.20).

Voluntary contributions

The rate of Class 3 voluntary contributions will be increased to £7.80 a week (2006/07 – £7.55)

Tax credits and child benefit

Tax credits

Tax credits rates and thresholds have for the most part been increased in line with inflation for 2007/08. Exceptions are:

• The basic child element of Child Tax Credit has been uprated in line with earnings to £1,845 per annum, in line with a commitment in the 2006 Budget.
• The limits on eligible childcare remain at £175 a week for one child and £300 a week for two or more.
• The maximum tax credit for childcare costs will remain at 80% of the weekly limit.
• The family element of Child Tax Credit (£545, plus £545 for a new baby) remains unchanged.
• The income threshold for those entitled only to Child Tax Credit rises to £14,495 for the year (2006/07 – £14,155).
• The first and second income taper thresholds for the family element remain unchanged at £5,220 and £50,000, and the first and second withdrawal rates remain at 37% and 6.67% respectively.
• The income disregard for increases in income from one year to the next remains at £25,000.

Child benefit and guardian’s allowance

For 2007/08 the rates will increase in line with inflation, except for the lone parent element, which has now been abolished.

Fuel duty rates

From 7 December 2006 effective excise duty rates (after rebates) for road and non-road fuels will be increased by 1.25 pence per litre in line with the inflationary increases announced in the March 2006 Budget. For full details see PBRN 20.

Air passenger duty rates

From 1 February 2007 the rates of air passenger duty will be doubled. The intra-EU rate for the lowest class of travel increases from £5 to £10 and other classes from £10 to £20.Those for travel outside the EU increase from £20 to £40 and £40 to £80 respectively. For full details see PBRN 23

The passenger destination countries subject to the lower rates of duty have been widened to cover countries included in the European Common Aviation Area.

BUSINESS MEASURES

Controlled Foreign Companies

The Government is to introduce legislation in FA 2007 to give effect to the European Court of Justice (ECJ) Judgment of 12 September 2006 in Cadbury Schweppes C-196/04. That Judgment indicates that CFC regimes can be compatible with the EC Treaty but only ‘if they [target] wholly artificial arrangements intended to escape the national tax normally payable.’

The proposed legislation, of which draft clauses have been published, does not seem to give adequate effect to the ECJ Judgment. If a company comes within the CFC regime then a part of the CFC company profits will be eliminated from the potential apportionment to the UK controlling company to the extent that ‘[those profits] represent the net economic value created directly by work carried out by individuals working for the CFC in business establishments in other EU member states.’ That seems to imply that only the return from labour can escape the CFC provisions and not any return on capital.

There is also a proposed addition to the Exempt Activities exemption. The new rules apply an additional ‘effectively managed’ condition so that in relation to CFCs in EU Member States there must be ‘sufficient individuals working for the company in the territory who have the competence and authority to undertake all, or substantially all, of the company's business’.

We are concerned that the proposed changes are too restrictive and do not give proper effect to the Cadbury Schweppes decision. The Tax Faculty made representations, TAXREP 35/06, to HM Treasury in November 2006 setting out the changes that it considered to be necessary to give effect to the ECJ Judgment. We will be pressing the Government to introduce changes along the lines proposed in our paper and we have already made representations to the Treasury Select Committee reviewing the PBR at meetings from 11 to 13 December 2006.

Taxation of foreign profits

The Government has held a series of meetings throughout 2006 with business and representative bodies, including the Tax Faculty, to consider changes to the corporation tax system and in particular the taxation of foreign profits. The Pre-Budget Report book indicates (paragraph 5.102) that consultations will continue during 2007.

Six year limitation period for all direct tax claims

The House of Lords recently determined in the case of Deutsche Morgan Grenfell that the company had paid ACT earlier than it need to have done under a mistake of law (paragraph 143 of the decision) and that the mistake could be held to have been discovered only when the ECJ gave its Judgement in the Hoechst case in March 2001. The fact that the early payment represented a mistake of law meant that section 32 of the Limitation Act 1980 was in point and section 32 provides that the period of limitation, for making a claim, only starts when the mistake is discovered.

New provisions will be introduced in FA 2007 which will amend section 32 in respect of any direct tax action involving mistake of law brought before 8 September 2003 except where a claimant is subject to a final judgment given by the Courts before 6 December 2006.

The effect of the proposal will be to deprive claimants which have commenced litigation to benefit, in restitution (or damages), from the rectification of their earlier mistake of law. In these cases the litigation is a civil law procedure under common law, and not a Taxes Act claim.

In the context of EU law, the ECJ has held that limitation periods cannot be reduced without allowing an adequate period after the enactment of the legislation for lodging the claims for repayments which persons were entitled to submit under the original legislation. The current proposal does not give effect to this and in our view is itself therefore a new and inexcusable breach of the EU law principle of effective remedy.

We have made representations to the above effect to the Treasury Select Committee which is taking evidence from HM Treasury officials on 12 December 2006 and from the Chancellor of the Exchequer on 13 December 2006.

International accounting standards

The introduction of international accounting standards (IAS) and, in particular, the move to ‘fair value’ accounting for financial assets has resulted in increased volatility for many companies that hold financial assets. Without special provisions, this volatility would have a knock-on effect on tax charges. A number of changes were made in the FA 2005 and FA 2006, and related regulations, in order to mitigate tax charges arising as a result of the adoption of IAS.

On 15 November 2006, regulations were laid which bring in a permanent regime for securitisation companies that hold financial assets. These regulations will apply for periods of account beginning on or after 1 January 2007.

The further changes in the PBR provide for the following:

• The rules for embedded derivatives will be clarified though an Order. The Order will apply for periods ending on or after the day it comes into force (which presumably will be in the very near future, although no date is specified).
• The ‘disregard’ and ‘change of accounting practice’ regulations will be amended to clarify and correct the existing rules. Two new elections will be possible under the disregard regulations which will allow companies to follow the income statement for tax purposes in a wider variety of circumstances. The disregard rules will apply to periods beginning on or after 1 January 2006 and ending after the date that the regulations come into force. The amendments to the ‘change of accounting practice’ regulations will have effect for accounting periods ending on or after the date that the regulation comes into force.

Aligning filing dates for companies

• Accounts to Companies House
• The company tax return to HMRC

In November 2005, Companies House and HMRC issued jointly a consultation document proposing a single online filing service covering company's obligations under both the Companies Act and the Taxes Act. The original proposals also suggested bringing forward the filing date to either 7 or 9 months after the company's year end and linking the enquiry window to the date on which the tax return is filed. It is perhaps worth noting that the Companies Act 2006 shortens the filing deadline for private company accounts, from 10 to 9 months.

The ICAEW respondedto this original consultation in March 2006 and subsequently took part in further discussions about the proposals during which we set out the practical problems which many of the proposals could have for our members. We are pleased that Government has listened to these which is reflected in the policy response now published.

The Government has concluded that the best option is to:

• Implement from 2008 Lord Carter's recommendation to link the window for HMRC to open an enquiry into a company tax return to the date when that return is submitted, for most companies;
• Ask HMRC and Companies House to continue to work together towards implementing a joint filing facility by 2010; and
• Keep under review the case for reducing the filing period for company tax returns at a later date.

The enquiry window will be 12 months from the date on which the return is submitted. Currently, early filing leads to a longer enquiry window and it is hoped that this change will encourage those companies which can file earlier to do so. There is to be further consultation on how this will affect groups where HMRC may need to see all companies results before considering opening an enquiry, which would pose problems if the companies filed on dates many months apart.

Construction Industry scheme (CIS)

The standard deduction rate for the new CIS is set at 20 per cent. The equivalent rate for deduction under the current scheme is 18 per cent, representing an increase of just over 11 per cent (paragraph 5.101PBR Book).

The new CIS comes into operation on 6 April 2007 and will operate very differently from the current one. The existing system with its exemption certificates, registration cards and annual returns, will be replaced by a system which will be heavily reliant on online facilities and a monthly return.

Tax-motivated incorporation

Buried away at paragraph 5.97 of the Pre-Budget Report Book we note that ‘the Government remains concerned about the tax-motivated incorporation of the self-employed, which involves businesses taking advantage of structural differences in the tax and national insurance treatment that applies to companies’.

This continues the debate which was highlighted at the time of the Pre-Budget Report 2004 by the publication by the Treasury of the paper, Small companies, the self-employed and the tax system.

The Tax Faculty will continue to monitor developments in this area.

Capital allowances for cars

Business expenditure on cars

Paragraph 5.106 of the Pre-Budget Report Book refers to the recent consultation ‘Modernising relief for business expenditure on cars’. Although no further details are available in the PBR, it is likely that Ministers could favour continuing to use the existing capital allowances system, but with a range of first year allowances based on a car's CO₂ emission levels and a car pool which would contain all cars. The £12,000 cost differentiator would disappear. We have expressed our concerns at these proposals and published our response as TAXREP 28/06

Insurance Companies

Measures will be introduced for transactions on or after 6 December 2006 to ensure that any difference between the fair value and the admissible value of an asset held in the long-term insurance fund of a life assurance company is brought into tax when the asset leaves the fund.

The tax rules relating to life assurance companies will be amended to reduce the number of categories of long term business requiring separate tax computations for accounting periods beginning on or after 1 January 2007.

Legislation will be introduced to codify the exercise of the Crown's option to compel life assurance companies to calculate their corporation tax liabilities on the ‘I minus E’ basis, to take effect for accounting periods beginning on or after 1 January 2007.

Measures will be introduced to allow the tax exemption for small premium life assurance business written by a friendly society to continue following the transfer of that business to a life assurance company, in respect of transfers on or after 1 November 2007.

There will be simplification of the rules applicable to life assurance companies transferring all or part of their business to other life assurance companies, which will take effect generally from 1 November 2007 (but from 1 January 2007 in some cases).

The current rules on general insurers’ reserves will be replaced in Finance Bill 2007 by more targeted anti-avoidance measures.

There will be changes to the tax regime on transfer of trading losses between companies for Lloyds corporate members (to be included in Finance Bill 2007).

Film tax relief for British films

The Finance Act 2006 introduced (in Chapter 3) a new tax relief for UK production costs incurred on ‘culturally British’ films. Since this represents a notifiable State Aid, the new scheme could only go live when approval had been obtained from the European Commission.

The Treasury announced on 22 November that the European Commission had given final State Aid clearance, subject to changes to the definition of what is a British film. These changes will be made and the new relief will be put into effect from 1 January 2007.

Relief for films under section 42, Finance (No 2) Act 1992 is to be extended until 31 December 2006. Films which commenced principal photography before 1 January 2007 and are complete by that date will not be covered by the new rules and will not be entitled to the new film tax relief. They will instead be able to claim relief under section 42, Finance (No 2) A 1992 provided they satisfy the relevant conditions. There will be transitional rules covering films which commenced principal photography before 1 January 2007 and are still incomplete then.

ANTI-AVOIDANCE

Closing some existing avoidance schemes

A number of avoidance schemes are to be closed down including those exploiting the public quoted company exemption under the CFC regime. The estimated saving from the closing of the CFC scheme is estimated to save over £300 million in the first year.

Other schemes that are to be closed down are:

• A scheme involving the creation of artificial tax losses by companies seeking deductions for payments to acquire the rights to annual payments from individuals but claiming the annual payments are exempt from tax.
• The use by banks and other financial traders of authorised investment funds (AIFs) to avoid restrictions on claiming double taxation relief.
• Arrangements to avoid the manufactured payment unallowable purpose rule by characterising such a payment as a fee.
• Arrangements involving guarantees and thinly capitalised companies to hedge currency exposure that result in tax relief where there is a loss on a loan relationship but no tax charge when there is a gain.
• Arrangements involving lease and leaseback of plant and machinery whereby the company claims tax relief for paying rents that are in substance a loan but is not taxable on what is, in substance, the repayment.
• Arrangements whereby companies seek to shift profits offshore and return them to the UK without incurring a tax charge. The schemes involve underlying tax where the double taxation relief sought relates to underlying UK tax. Section 804ZA will be amended to put beyond doubt that it applies to such schemes.

Changes to the tax disclosure regime

The Government will be issuing a consultation document later in December 2006 in relation to a new power to investigate a scheme where there are reasonable grounds to believe that a promoter has failed to comply with their statutory disclosure obligations.

Capital gains tax: targeted anti-avoidance rule

Many tax planning strategies in the past were aimed at creating capital losses so that they could then be offset against capital gains. Under the general CGT rules, where an ‘allowable capital loss’ arises, it can be set against capital gains. In the 2005 PBR, the Government introduced, for companies only, a targeted anti-avoidance rule that denies relief for artificially created capital losses. This provision is now found in section 69, FA 2006. The FA 2006 provision modifies the basic CGT rules so that a loss arising to a company is not an allowable loss if it arises as a result of arrangements where the sole or main purpose was the creation of a tax advantage.

One year on, the Government has decided to extend this rule further, so that it will apply generally for the purposes of capital gains tax. It will therefore apply not just to companies but also to individuals, trustees and personal representatives. The new extended rule will be rewritten into the Taxation of Chargeable Gains Act 1992 and will replace the companies provision inserted only this year.

It is proposed that the new extended rule will apply in relation to capital losses arising on or after 6 December 2006. Further details, including draft legislation and an explanatory note, are available from HMRC's website.

GREEN TAXES

Air Passenger Duty Rates Increase

From 1 February 2007 the rates of air passenger duty will be doubled (see the Rates and Allowances section). The passenger destination countries subject to the lower rates of duty have been widened to cover countries included in the European Common Aviation Area.

This measure will bring in £1 billion in 2007/08 which is one-half of the total addition to the public finances in that year.

Landfill tax: Increase in the Standard Rate

With effect from 1 April 2007 the standard rate of landfill tax will be increased from £21 per tonne to £24 per tonne. The lower rate for inactive wastes of £2 per tonne will remain unchanged.

Hydrocarbon Oils: Increase in Duty Rates

From 7 December 2006 effective excise duty rates (after rebates) for road and non-road fuels will be increased by 1.25 pence per litre in line with the inflationary increases announced in the March 2006 Budget.

Facilitating the use of Biofuels

Businesses producing or using biodiesel should note that the current rate of duty for mixes of biodiesel with rebated gas oil will be reduced from 54.68 pence per litre to 7.69 pence per litre where it is used in specific pilot projects to test the use of biofuels off-road. The change will be introduced by statutory instrument to be tabled shortly after the PBR and taking effect after 21 days. The duty incentive for biodiesel of 20 pence per litre will be available for a limited pilot scheme early in 2007 to test the use of biomass in conventional fuel production.

Extension to landlord's energy saving allowance

The Landlord's Energy Saving Allowance (LESA) is given for expenditure of up to £1,500 incurred in installing loft or cavity wall insulation in a dwelling house which is let.

Changes to the schedule of excepted vehicles

The schedule of excepted vehicles used by businesses in the agriculture and construction sectors, which are entitled to use rebated gas oil, is to be amended to bring definitions up to date and to improve consistency and clarity.

Vehicles falling within the Schedule are excepted vehicles for the purposes of the Oil Act and, unlike road vehicles, are entitled to run on rebated heavy oil. The Treasury Order amending Schedule 1 to the Hydrocarbon Oil Duties Act 1979 adds 5 new classes of excepted vehicle, removes 1 class (road construction vehicles) and redefines certain other classes to provide clarity for both HMRC and taxpayers.

The deletion of the road construction vehicle category will have effect on and after 1 April 2008. Other changes, as detailed in the Treasury Order, will have effect on and after 1 April 2007.

PERSONAL, EMPLOYER AND CAPITAL TAXES

Managed Service Companies

Managed Service Companies (MSC) are corporate structures through which workers provide labour services. The current proposals seek to differentiate MSC from Personal Service Companies (PSC), which will continue to be dealt with by the IR35 legislation.

MSC structures are most commonly used by persons working in construction, information technology, teaching and health workers, but their use could easily be extended to any sector. Large amounts of tax are now at stake which is why this has become such an important issue.

The workers of a MSC are not usually managing their own businesses, but are performing in the same capacity as would an employee doing the same work. The management of the umbrella company is being undertaken by a corporate provider. It is this lack of control which distinguishes workers in MSCs most clearly from those in PSCs and which will be most difficult to define in the proposed legislation.

Microgeneration: tax treatment of income from sales of surplus power by householders

Section 5, ITTOIA 2005 charges income tax on the profits of a trade. Receipts which arise other than in the course of a trade fall outside this section.

Legislation in Finance Bill 2007 will put beyond doubt that where private householders install microgeneration technology in their home for the purpose of generating power for their personal use, any payments they receive from the sale of surplus power to an energy company is not subject to income tax.

This exclusion will not apply to cases where surplus power is sold in the course of a trade.

Individual Savings Acccounts (ISA)

The Government has concluded its review of the ISA regime which replaced Tax-Exempt Special Savings Accounts (TESSAs) and Personal Equity Plans (PEPs) in 1999.

The objective of ISAs has been to develop and extend the saving habit and to ensure that tax relief on savings is more fairly distributed. The evidence shows that ISAs have been successful in meeting these objectives.

TAX CREDITS AND CHILD BENEFIT

A Written Ministerial Statement by the Paymaster General was released with the PBR on the subject on tax credits, ie Working Tax Credit (WTC) and Child Tax Credit (CTC).

This focused principally on one of the changes to the tax credits system announced at the 2005 PBR: the introduction of an automatic restriction on the rates at which tax credit overpayments are recovered in-year. This change was promised for November 2006 but the Minister announced that this will not be possible and it will be introduced from April 2007. It would seem there have been technical problems in making the necessary changes to the computer system.

Tax credits renewal deadline

Apart from the uprating of some of the elements of tax credits (see the Rates and Allowances section) the only other change to the tax credits system mentioned in the PBR is that from next year the renewal period will be shortened to four months. Thus, the deadline for submitting final figures for 2006/07 and renewing awards for 2007/08 will be 31 July 2007. This year it was 31 August 2006; in all earlier years it was 30 September.

While we can see that shortening the renewal period will reduce the time for which claimants keep receiving provisional payments, which may be inaccurate and may lead to overpayments, we are concerned that a four-month deadline will be hard to meet. Employees who receive benefits in kind will not get their P11D information until July in many cases. And the self-employed may find it particularly hard to have their 2006/07 accounts information ready by 31 July, depending on when their accounting period ends. It is of course possible to renew by the deadline using estimated figures and then provide final ones by the ultimate deadline of the following 31 January, and there is no indication that this latter deadline will alter.

Child Benefit

Child Benefit is increased to £18.10 a week from April 2007. The lone parent rate for the eldest/only child is abolished (but it only made a difference of 10p a week).

From April 2009 every mother-to-be will be eligible for Child Benefit from week 29 of their pregnancy.

PENSIONS

Alternatively-secured pensions

New anti-avoidance rules further limit the scope to use alternatively-secured pensions (ASP) to transfer wealth to dependents. ASPs were introduced from 6 April 2006 in response to religious objections to annuity arrangements. Given the current low annuity rates and corresponding reluctance of pensioners to purchase an annuity, it is no surprise that ASPs are proving popular and not merely on religious grounds. In the 2006 Budget the Government introduced anti-avoidance measures to prevent ASPs being used to pass on wealth to family dependents in a way that avoids inheritance tax. This is now supplemented with three new rules which will take effect from 6 April 2007:

• Currently, an ASP is not required to pay any pension at all. From 6 April 2007 it must pay at least 65 per cent of the amount that could be paid if the ASP funds were used to purchase an annuity, and may pay up to 90 per cent of that amount. Any shortfall will be subject to a 40 per cent tax charge, levied on the scheme.
• An ASP may no longer be transferred tax-free to a dependent's pension fund on the member's death. Any transfer on death will attract an unauthorised payment tax charge of 40 per cent or 55 percent.
• ASPs will be excepted from the general rule that a guaranteed pension may be paid for up to 10 years, even if the member dies before; any ASP pension paid after death will be taxed as an unauthorised payment.

In addition, action will be taken from 6 April 2007 to prevent ASP funds passing tax-effectively to a member's dependents (typically his or her children working in the business) in the form of a scheme pension. There had been considerable interest in this following the investment restrictions on self-invested pension plans (SIPPs) introduced in the 2006 Budget.

The interaction of these new rules with the inheritance tax charges does not yet appear to have been fully considered. The Government will consult on this. Without changes they might result in a cumulative charge of 80 per cent or more on, say, a widower who fails to take any pension on reaching 75 and dies shortly after, with his surplus pension funds going to enhance his children's pensions.

Pensions Tax – technical amendments

The Government has responded to representations from the pensions industry requesting additional flexibility in the application of some of the rules under the new pensions tax regime that came into effect on 6 April 2006. Most of the changes are effective from that date but others will not be applicable until 6 April 2007.

The changes announced today include:

• Extend the period during which a lump sum can be paid from a registered pension scheme from three months to 12 after entitlement to the related pension arises, and allow the lump sum to be paid within this period even if the member has reached age 75 (the cut-off age for lump sum payments);
• At the scheme member's request, allow for a more frequent review of the maximum amount that can be drawn from an unsecured pension fund. The current requirement for a five-yearly review will remain but members will be able to request additional annual reviews as well if appropriate;
• Extend the circumstances in which transfers can be made between registered pension schemes without the member losing transitional protection, from the pension tax charges, of the rights they held at 5 April 2006;
• Allow pensions paid early because of the ill-health of the member to be reduced if the member recovers;
• A two year time limit for the scheme to make the payment of lump sum death benefits, from the date the scheme is notified of the member's death, subject to a reasonableness clause that the scheme could not have known about the member's death at an earlier date;
• A change to the winding-up lump sum rules so that the conditions that need to be met by the employer apply only to the member's current employer at the time the winding-up lump sum is paid and not to any previous employer;
• A need to receive permission from the Financial Services Authority in order to be eligible to establish a non-occupational registered scheme, simplifying the current legislation which has several categories of criteria, depending on the type of company.

Pensions and Real Estate Investment Trusts

‘Taxable property’ held indirectly by certain types of registered pension schemes through a qualifying UK Real Estate Investment Trust (REIT) will only be exempt from the taxable property charges where the interest in the REIT is less than 10 per cent. This applies from 1 January 2007.

VAT

VAT: Partial Exemption

From 1 April 2007 a business applying to use a ‘tailor-made’ partial exemption special method to calculate how much VAT it can recover will be required to declare ‘to the best of its knowledge and belief that its proposed special method is fair and reasonable. Such special methods require the approval of HMRC and they will be given the power to set aside a method (including a method already approved) if the person signing the declaration knew or ought reasonably to have known that it was not fair and reasonable. Where a method is set aside the business will have to recalculate past returns to ensure that it recovers only a fair and reasonable amount of VAT.

Also from 1 April 2007 there will be a change relating to what are known as ‘out of country’ supplies – certain supplies to customers outside the EU which qualify for an input tax deduction. Businesses applying for a partial exemption special method after that date will be able to apply for a combined method that caters for the recovery of VAT on out of country supplies instead of making a separate calculation of relief for such supplies. This is expected to simplify the calculation of total recoverable input tax.

VAT: Transfer of a Going Concern – Business Records

The VAT record keeping requirements are to change to allow the seller of a going concern to retain the VAT records except in the few cases where the buyer wishes to retain the seller's VAT registration number.

PROPERTY

Real Estate Investment Trusts (REITs)

Companies and groups of companies whose main business is property investment can convert to REITs from 1 January 2007 and subject to various conditions provided such companies distribute at least 90 per cent of their income to shareholders the company pays no tax on its property investment income. Dividends paid by REITs out of exempt profits will be treated as UK property income subject to deduction of basic rate tax (currently 22%).

A number of modifications are to be made to the REIT regime. One change is designed to assist newly established companies wanting to become REITs: in future their shares won't have to be listed on a recognised stock exchange when they apply to join the REIT regime they will just have to affirm that they will be listed by the time they actually join the regime.

The other proposed revisions fall into three broad areas, definitions, extensions of the regime and ensuring that charities are exempt from tax on distributions.

• The definitions that are clarified are ‘owner-occupied’ for the purposes of tax-exempt income and excluded income, ‘profits’ and ‘financing costs’ as used in the interest cover test, measure of profits of the tax-exempt business and the Balance of Business Conditions, and ‘profit-linked loans’ that are prohibited.
• The REIT regime will apply to demergers in the same way as it does when one REIT takes over another REIT.
• Charities will be exempt from tax on distributions from REITs in the same circumstances that they are exempt from tax on UK dividends.

Planning Gain Supplement (PGS)

As part of a package of reforms to incentivise the release of more land for development, the proposed Planning-gain Supplement (PGS), alongside a revised planning regime, aims to release increases in land value created by the planning process to help finance the infrastructure needed to support new housing and growth. The Government responded to Kate Barker's recommendations in 2005, publishing a consultation paper on PGS alongside the 2005 Pre-Budget Report. The Government will move forward with the implementation of PGS if, after further consultation, it continues to be deemed workable and effective, but does not propose to introduce it earlier than 2009.

STAMP DUTY AND STAMP DUTY LAND TAX

Stamp Duty Reserve Tax (SDRT): Exemption for Overseas Exchange Traded Funds

With effect from 1 February 2007 an overseas exchange traded fund will be exempt from SDRT provided that both its central management and control and the location of its share register are outside the UK. Transfers of shares in exchange traded funds incorporated in the UK will continue to be subject to SDRT in the same way as shares in other UK companies. The change will bring into line the SDRT treatment of overseas incorporated exchange traded funds, overseas funds whose shares are not traded on any exchange and shares in overseas companies that are traded in London.

Stamp Duty Land Tax (SDLT): Anti-avoidance Measures

Anti-avoidance legislation was introduced by statutory instrument with effect from 6 December 2006 to make ineffective a number of schemes designed to avoid SDLT. There are transitional provisions to protect those who entered into contractual commitments before 2 pm on 6 December 2006.