[Reproduced with the kind permission of our colleagues in the Tax Faculty of the ICAEW]

PRE-BUDGET REPORT 2007

The 2007 Pre-Budget Report (PBR) was delivered on 9 October 2007 and the Tax Faculty's technical team has produced a comprehensive summary.

You can find all the PBR publications on the HM Treasury site at www.hm-treasury.gov.uk/pbrcsr/pbrcsr07index.cfm and on the HMRC site at www.hmrc.gov. uk/pbr2007/index.htm

1. Overview

Alistair Darling's first Pre Budget Report was eagerly awaited, particularly given the relentless talking up that there would be a snap election. The PBR looked set to be the platform from which Mr Brown would go to the country. However, with the election called off (not that it was ever called) on the previous Saturday, one felt rather sorry for Mr Darling, who was charged with delivering a pre election budget without an election. In the event, he made a decent fist of presenting his first budget in potentially difficult circumstances, where his more homespun style was a vivid contrast to that presented by his predecessor. It was rather like listening to John Major's one and only speech as Chancellor after the fireworks and reforms of the Lawson years. Nevertheless, there was the heavy hand of the Prime Minster all over this speech, the presentation of endless statistics at lightening speed that allowed the eager audience little time to digest the words, let alone appreciate their significance. As is so often the case, it became clear very quickly that the devil was in the detail.

Given that Mr Brown had already set the course for the next few years in his April 2007 Budget, where he announced initiatives such as a 2% cut in the rate of income tax that would not come into effect until 2009, Mr Darling's room for manoeuvre looked very limited. However, those of us who expected few new ideas of substance were proved wrong. The Chancellor had a number of policy issues that he needed to address, in particular:

• the tax rules for non-domiciled individuals;
• the need to follow up with some action the Ministerial statement following the Arctic Systems decision;
• how private equity should be taxed; and
• how he should address the Conservatives’ tax proposals set out at their conference, particularly in respect of the proposed increase in the inheritance tax nil rate band to £1m.

In the event, he decided to tackle all of these issues, with a number of quite radical announcements which, if they are enacted, will have far-reaching effects on the UK system.

For non-domiciled taxpayers, his proposals to increase the tax they pay bore a surprising similarity to those proposed by the Conservatives. What was puzzling was the way in his speech he dismissed out of hand the Conservatives’ proposals to tax non-domiciliaries. However, when you turned to the PBR notes, the proposals did not look too dissimilar. Given the similar positions of the main political parties on this issue, the proposal should at least receive widespread support when the Finance Bill provision comes to be debated!

On Arctic, the Government has bought some more time to consider the issue. However, it looks as though they will introduce a wide-ranging anti-avoidance provision to counter income splitting but the provision will then be cut down in scope by guidance published by HMRC. Whilst we appreciate that the Government needs to do something in this area, we cautioned against such an approach because we do not think it will work. It now looks as though the professions are being drafted in to help with the unenviable task of trying to ensure that any guidance is reasonable and provides certainty to taxpayers.

Interestingly, private equity appears to have, so far, escaped rather lightly. Mr Darling's approach to this problem was to look at the issue from the other end of the telescope, and his solution was radical in the extreme: for disposals of assets after 6 April 2008 he will scrap all indexation and taper relief and charge CGT at one flat rate of 18%. This will certainly simplify CGT, but the impact will affect all those who pay CGT and there will be winners and losers. It looks like there will be more of the latter, because the PBR Red Book estimates that this move will be a revenue raiser.

This bold decision represents a complete policy reversal of the taper relief rules introduced by Mr Brown back in 1997: the favourable treatment of business assets has disappeared and it will not matter how long you have held an asset. Whether this new approach will be sustainable is debatable: only one day after the PBR the newspaper hoarding read ‘second homes tax bonanza’, reflecting the fact that second home owners are likely to see a cut in their CGT bills. Political pressures may force a rethink of a ‘one size fits all’ CGT rate. One thing is sure: advisers will now have to review their clients’ CGT positions before 6 April 2008 and decide what action needs to be taken.

On inheritance tax, the Chancellor adopted a policy which could best be described as ‘imitation is the sincerest form of flattery’. The potential doubling of the IHT nil rate band could of course already be achieved through the use of trusts but, nevertheless, the proposal will help many couples to pass on their assets intact to their children and this tax break is estimated to cost in the order of £1m. The proposal to also allow widows or widowers to also take advantage of this was an interesting variation on the theme and likely to be well received, particularly by potential beneficiaries!

Turning to simplification, a raft of new announcements were made. Given that we have been pressing for tax simplification for many years, perhaps we can hardly complain: after all a single CGT rate with no relief for indexation or taper could hardly be simpler, even if it will probably create as many problems as it solves. However, in relation to the closer alignment of income tax and NIC, the Government has concluded that this is not one for them, although a number of selective improvements will be made.

Budgets are, of course, all about the nation's finances and this PBR was more important than most in that it also presented the results of the comprehensive spending review. In our overview of the 2007 Budget, we expressed concern about the direction of the nation's finances. It is not that the financial position is poor, but taken overall the nation's finances are a cause for concern. We have now had a budget deficit for a total of seven years, the last surplus being in 2001/02. With each successive Budget and PBR, the net position appears to deteriorate and the date when the budget returns to surplus recedes: in 2001/02 it was predicted to return to surplus in 2006/07 whereas now it is predicted to be 2010/11. Whilst the deficits are not large when compared to overall receipts, this looks increasingly like a structural budget deficit that is proving hard to eliminate.

In an era of low inflation and stable growth, it would be usual to expect a government to run a budget surplus or, at the very least, a balanced budget. The fact that we are running deficits at such a period begs the question as to how our finances will cope when growth slows down. The Chancellor has had to downgrade the growth forecast by 0.5% from the April 2007 Budget amidst a more uncertain worldwide economic outlook.

This downgrade is likely to feed through to lower than expected tax receipts. With expenditure commitments continuing to rise, the UK's finances are looking increasingly vulnerable if there is a downturn. If the economic situation does deteriorate, the Chancellor will have little to tide him over, with the result that borrowing and/or taxes will have to rise. Raising taxes could be politically hard given that in April 2007 Mr Brown somewhat boxed in Mr Darling's room for manoeuvre on tax and NIC rates.

The pressures to cut expenditure are evident in the comprehensive spending review, where money is being reallocated to areas such as health and education at the expense of many other departments. Other departments, including HMRC, are being asked to do more with less. The 5% net budget reduction year on year that HMRC have been set would be a tall order to meet at the best of times, and it is not surprising that something has to give. Unfortunately, in HMRC's case what seems to be giving is services to taxpayers, which have been falling. The emphasis appears to be on cutting costs rather than doing more to improve services and we are seeing time and time again in telephone calls, letters and emails from our members that their frustrations are close to boiling over, if they have not already done so. We will continue to impress on HMRC that action needs to be taken now to improve services.

In summary, Mr Darling has certainly sought to grasp some thorny issues whilst keeping the nations finances from falling over. He made some highly controversial announcements, the full significance of which are only now being appreciated. It was in many ways a bold and brave Budget, but if growth slows he will have the unenviable task of shoring up a precarious financial position that he has inherited. If he has made a mistake, it was probably made before this PBR. He might have been better not to accept the job just as the storm clouds were gathering.

2. Rates and Allowances

Tax rates and allowances for 2008/09

Usually, the tax allowances and rates of National Insurance and tax credits for the following year are announced at PBR time. However, this time the familiar table of rates and allowances is not to be found among the PBR press releases.

Instead, a note in press release PN01 indicates that:

• The 2008/09 rates and allowances for Income Tax, National Insurance Contributions, the Working and Child Tax Credits and Child Benefit/Guardian's Allowance will be published after the September Retail Price Index becomes available.

So, we can expect this information to be announced in the next few weeks. We already know (from previous announcements) that for 2008/09:

• The age-related personal allowances will be increased by £1,180 over inflation.
• The 10% starting rate of income tax will be abolished for earnings and pension income, and the basic rate will become 20%.
• The basic rate tax band will be increased by indexation only.
• The upper earnings limit for Class 1 NICs will increase by £75 per week above inflation.
• The income threshold for Working Tax Credit will increase to £6,420 but the taper rate for tax credits about the lower thresholds will increase to 39%.

However, the Chancellor did make one new announcement in respect of tax credits. The child element of Child Tax Credit will be raised by £175 a year above earnings indexation in April 2008 (ie even more than the £150 above earnings indexation promised in Budget 2007), and will be raised again by a further £25 above earnings indexation in April 2010.

In addition, the following information for 2008/09 in respect of other taxes has already been announced:

• The IHT nil rate band will be £312,000.
• The main corporation tax rate from 1 April 2008 will be 28%.
• The small companies'rate will be 21%.
• There will be a package of changes to capital allowances (see our report on the 2007 Budget).
• R&D tax credit increases to 175% and 130% for small and large companies respectively.

3. Tax Administration

SA payments on account threshold (PBRN28)

The threshold for taxpayers to make payments on account under the Income Tax Self Assessment (ITSA) system is to be doubled.

The current rule is that ITSA taxpayers are required to make two payments on account (POAs) towards their income tax liability for any year, unless:

• their income tax bill for the previous year was less than £500, or
• 80% or more of the tax due was deducted at source.

The £500 limit has remained unchanged since ITSA began in 1996/97, but from 2009/10 it will be £1,000. This will apply to tax due for 2009/10, ie POAs due in January and July 2010.

HMRC says in PBRN28 that this will remove 367,000 from the POA regime.

The change will be made by statutory instrument and draft legislation has been published today.

Three line account threshold doubled

The PBR Red Book at Box 4.6 contains the announcement that beginning this year, the three-line account threshold for filling in the Self-Employment pages of the tax return is being doubled to £30,000. This is welcome news, as the £15,000 limit has existed for more years than most tax advisers can remember.

Also, there will be shorter Self-Employment pages for businesses with turnover below the VAT registration threshold.

Tax appeals – See HMRC Powers

4. SME Business Tax

Small businesses under pressure

Small businesses are likely to be concerned following the latest PBR. We appear to be seeing a steady chipping away at the tax benefits that the Government has introduced over the past ten years to encourage business. There appear to be four main areas of concern:

Small companies rate of tax

In the early 1990s, the small companies’ rate shadowed the basic rate of income tax, which for much of this period was 25%. However, the link between the two was broken in 1997 when the small companies’ rate was reduced to 21% from 23% and further reductions saw the small companies’ rate fall to 19% in 2002, 3% below the income tax basic rate. In addition, the Government introduced the corporation tax starting rate on the first £10,000, famously reducing the rate to nil in 2002.

The potential tax savings were too great to ignore and many small businesses were encouraged to incorporate. It couldn't last: in 2006 the Chancellor started reversing these policies and abolished the starting rate. A year later, in his final Budget before becoming Prime Minister, Gordon Brown announced an increase in the small companies’ rate of taxation, rising in 1% steps for three years, starting on 1 April 2007. By 1 April 2009, the small companies rate of corporation tax will be 22%, 2% higher that the basic rate of income tax.

Income splitting

The growth in the number of incorporated small businesses has also encouraged the spreading of shareholdings around, for example, family members. One advantage of spreading share ownership is that it provides grater flexibility to maximise the use of personal allowances and the use of the basic rate tax bands. Following the Arctic Systems decision, the Government is now proposing to attack so-called ‘income splitting’ – see detailed comments on this below.

CGT reform

The radical reform of capital gains tax announced in this PBR is also likely to have unwelcome consequences for businesses. Further details of the reform are set out in the Capital Gains Tax section below. Currently, business assets held for two years can benefit from a 10% CGT rate. With effect from 6 April 2008, there will be one CGT rate of 18%. For those looking to dispose of business assets, for example shares, they will now be faced with an increased tax charge.

Business rates

The Government is consulting on a proposal that will allow local councils to levy a local business rate supplement. This will be set at a maximum of 2p per pound of rateable value and will be subject to a number of safeguards, including that it will not apply to properties with a rateable value of £50,000 or less. The concern of many businesses will be that this will be a disguised increase in business rates, loading more costs onto small business at a time when the economy appears to be slowing and costs are rising.

Taken together, these measures add up to a further tightening of the business tax regime. It remains to be seen how measures such as income splitting will work, but smaller businesses are likely to be concerned that they are being slowly, but surely, squeezed at a time when the UK growth outlook appears to be faltering.

Income splitting following Arctic Systems

The PBR material contains the announcement that the Government will shortly be launching a consultation on draft legislation to tackle the issue of income shifting, in the wake of the Arctic Systems decision. However, as yet we still have little detail about exactly what is proposed.

Background

On 25 July 2007, the House of Lords decided in favour of the taxpayers in the Arctic Systems case (Jones v Garnett [2007] UKHL 35). The facts of the case are well-known but in a nutshell Mr and Mrs Jones set up a company through which Mr Jones provided computer consultancy services. Mr Jones performed most of the work but Mrs Jones performed a number of ‘back office’ functions. They each owned half the shares and received most of the income by way of dividends, so that the income was divided 50/50 and both Mr and Mrs Jones were able to make full use of their personal allowances and lower rates of income tax. HMRC sought to assess Mr Jones on income received by Mrs Jones under existing settlements legislation, but the House of Lords rejected HMRC's arguments.

On 26 July 2007 the Financial Secretary to the Treasury issued a statement that the Government would take steps to counter ‘income shifting’ and reverse the Arctic Systems decision.

PBR announcements

Since the Treasury statement in July, small businesses have been braced for bad news. In the event, however, little concrete evidence has emerged as to exactly how the Government intends to tackle this issue. This rather cautious approach is not surprising, as framing a set of rules that are workable in practice and do not have unintended consequences is a tall order. We have already seen from the infamous IR35 rules that, although they introduced considerable complexity and uncertainty into the UK tax system, they do not appear to have raised anything like the amounts that were predicted when the rules were announced. This is probably as a result of a number of factors, not least that taxpayers appear to be adept at rearranging their affairs to fall outside of IR35 and that HMRC do not have the resources to police the rules properly.

The Government has announced that it will be launching a consultation shortly on draft legislation to counter income shifting and that the legislation will take effect from 6 April 2008. As noted above, the announcement is short on detail. The immediate conclusion is that the Government has still not decided in detail how this issue should be tackled.

Given this lack of clarity about the Government's intentions and how it should proceed, it is disappointing that the Government has decided to proceed straight to consultation on draft legislation. We have previously urged the Government to start by publishing a consultation document which should set out a range of options, which could then be narrowed down to specific proposals which would then be used to prepare draft legislation. It would therefore appear that consultation will focus on the details of an already-decided policy rather than the underlying principles that should then frame the policy. The approach being adopted increases the risk that we will end up with poorly targeted and probably unworkable legislation.

The PBR Red Book (at paragraph 5.100) says that the rules will only target arrangements intended to reduce tax rather than commercial arrangements. The more detailed statement (in press notice 02) states that:

• the legislation will work ‘alongside’ the existing tax rules, including the existing settlements legislation that HMRC sought (and lost) to use to tax Mr Jones on income Mrs Jones received from their company Arctic Systems Ltd; and
• that it will only apply to dividend income (as in Arctic) or partnership profits. It will not apply to employment income, savings income or any other income source.

There is little other detail on the proposal. Further, the statement says that HMRC will ‘work with the advisory community to frame practical guidance that minimises burdens and makes it easy for individuals to understand their position’. This looks like shorthand for saying that the draft legislation will be a wide-ranging anti-avoidance provision that will, on a plain reading of the legislation, catch almost all small incorporated businesses where profits are extracted by way of dividends. However, the ‘catch-all’ provisions in the legislation will then be cut down by HMRC guidance.

We have stated repeatedly that tax legislation should be properly targeted and that this approach is not the way to design tax rules.

The statement goes on to say that in framing the guidance, relevant factors that will need to be considered in deciding where or not income shifting has taken place could (our emphasis) include:

• the work done by individuals in the business;
• the investment made; and
• the risks to which they are subject.

In summary, the approach being adopted is a cause for concern. It lacks certainty, it is likely to be difficult for taxpayers and their advisers to comply with and it will be difficult for HMRC to police. We suspect that, like the IR35 rules before it, it will be unsuccessful in raising the amount of revenue that they have factored into their calculations (£260m in 2009/10 in the PBR Red Book).

That said, the measures could perhaps have been worse, at least in financial terms. The Government might have decided, for example, to apply a tax surcharge or national insurance contributions on dividends received from close companies. Whilst the precise impact would depend upon the actual rates, such proposals would have had much more far-reaching effects on the tax take from family companies.

5. Other Business and Company Tax

Consultation on tax relief for business expenditure on cars

HMRC has published a summary of responses to earlier consultations on this topic.

The Government began consulting on possible changes to the existing capital allowances rules for giving tax relief to business for expenditure on company cars in the Budget 2006. The proposals were refined and a further consultation was published with the Budget 2007. The Tax Faculty responded to each of these and published its views on the current proposals earlier this year, as TAXREP 40/07.

The proposals will replace the existing capital allowance rules that apply to cars costing over £12,000, with a proposal based on two pools. Cars will be allocated either to the general plant and machinery pool or to a pool with a lower rate of writing down allowance according to whether the CO₂ emission levels are above or below an emissions threshold. The existing 100% first-year allowance for cars with CO₂ emissions up to120g/km would be retained.

The Budget 2007 document also sought views on proposals to reform the lease rental restriction utilising the same emissions threshold and applying a uniform fixed percentage disallowance on relevant payments for cars with emissions above the threshold. There would not be any lease rental restriction for cars with CO₂ emissions up to 165g/km; lease payments for these would be allowed in full.

The document Consultation on modernising tax relief for business expenditure on cars: summary of responses, published with the PBR, summarises the responses to these two consultations, but gives no further details of the possible timescale for change. Nevertheless, it seems reasonable to expect that since the other changes for the capital allowances system for plant and machinery, announced in Budget 2007, are likely to take effect from April 2008, these may also be implemented by then.

Fire safety capital allowances (PBRN04)

From 1 April 2008 (6 April for individuals) companies will no longer be able to claim capital allowances for expenditure on building alterations, made in response to a notice from a Fire Authority.

Relief for expenditure on fire safety equipment such as fire alarms and sprinkler systems will continue to be available for all businesses.

Sale of lessors: companies in partnership (PBRN05)

Schedule 10 Finance Act 2006 is amended with effectfrom 5 December 2005 (the date that the provisions tookeffect) to avoid an unintended and unfair tax liabilitywhere a single company acquires all of the business ofleasing plant or machinery carried out by a partnership.

Schedule 10 counters avoidance involving the sale of companies leasing plant or machinery. In broad terms it does this by bringing into charge an amount of income that is taxed on the seller's group and giving an equal amount of relief to the purchaser's group. Where the business is carried on by companies in partnership and there is a change in a partner's interest in the business the legislation brings into charge an amount of income for the selling partner and a relief for the acquiring partner.

When a leasing business carried on by companies in partnership is sold to a single company, Schedule 10 brings an amount of income into charge for the partners. However, it does not currently give matching relief to the purchaser. Legislation will be introduced in Finance Bill 2008 to correct this.

Tax treatment of foreign currency hedging (PBRN08)

Companies holding shares and other investments not denominated in sterling will frequently hedge the foreign exchange risk by borrowing in the same currency or in currency derivatives. Current tax rules allow any exchange gains or losses to be disregarded where they hedge these investments, so that only the net gain or loss is taxed.

It is proposed to make a short-term change in 2008 whilst at the same time consulting on more extensive changes to be introduced the following year.

The short term-change is that the companies will be allowed to elect to value matched shares at the value of the net foreign currency assets underlying the shareholding (the net asset value matching method) rather than at net book value. Regulations will be issued before the end of 2007 and will apply to accounting periods beginning on or after 1 January 2008.

The longer-term change is to introduce a new comprehensive code to cover the tax treatment of hedging transactions. Currently, there are two alternative tax treatments, one set of rules using the so-called ‘disregard’ regulations for companies that have adopted IFRS or the UK equivalents, and companies using ‘old UK GAAP’. The latter was repealed by the F(No 2) A 2005 from the day to be appointed. The continuation of two parallel regimes makes for a highly complicated set of rules and it is now proposed that a comprehensive code will be introduced for the taxation of all foreign exchange matching and the ‘old UK GAAP’ rules will be repealed. In advance of this change, HMRC will issue a technical note and draft regulations for consultation in the first quarter of 2008, with a view to the new rules applying to accounting periods beginning on or after 1 January 2009.

It is proposed that the comprehensive new code will include a number of amendments, as follows:

• the present matching rules, which rely on the company's intentions, will be replaced with a more straightforward and objective measure;
• the ‘net asset value matching method’ referred to above will be further refined; and
• a targeted anti-avoidance rules will be introduced to prevent companies disregarding exchange gains in circumstances where the exchange losses would be claimed for tax.

Links with large businesses

HMRC has published its latest progress report on the outcome of Sir David Varney's review Links with large business. This review was published in 2006 and set an ambitious list of 14 delivery targets, spread across four key themes: the need for greater certainty, better risk management, the speedy resolution of issues and clarity through effective consultation.

HMRC is forging ahead with meeting the delivery targets and has published a further paper setting out their progress in meeting the targets. The progress report Making a difference: clarity and certainty sets out the following developments:

• an Advance Agreements Unit will provide greater certainty and support for inward investments and significant corporate reconstructions. It will apply across all duties and taxes;
• relationship managers will be extended to a wider proportion of the largest businesses, according to their complexity and risk profile;
• HMRC will implement the Risk Framework. HMRC say that early indications are that 40% of the largest businesses could be classified as ‘low risk’, thereby reducing their compliance burden, and 75% of ‘low risk’ open issues could be settled in the short term;
• responses to the consultation document published in the 2007 Budget Giving certainty to business through clearances and advance agreements were broadly welcomed the proposals, and HMRC are working with business to deliver new arrangements for clearances in time for the 2008 Budget; and
• HMRC is on course to deliver the proposed new approach to transfer pricing enquiries from December 07.

Looking ahead, all historic outstanding issues across the large business sector will have agreed action plans to resolve them by December 2007 and this will be extended to all open enquiries by March 2008.

HMRC is also working to raise standards with a programme of new qualifications and refresher training for its professional staff, which will work alongside a programme of events involving the private sector.

We have commented previously that the targets set out in the Varney review are commendably ambitious and that they are worthy of support. We have two concerns:

• whether HMRC will continue to ensure that this project has the necessary resources to deliver given HMRC's year-on-year budget reduction of 5% net in real terms and the continued reduction in staff numbers; and
• there is a pressing need to extend these principles to all taxpayers, not only because they appear to us to embody emerging ‘best practice’ but also because there is danger that other taxpayers, in particular the SME sector, will perceive that they are being treated as second class taxpayers.

In short, we welcome these developments and for the longer term think that HMRC should invest further resources to roll out these proposals, modified as necessary, to all taxpayers.

6. Capital Gains Tax

The Chancellor announced that he proposes to introduce legislation to simplify the capital gains tax (CGT) legislation. From 6 April 2008, taper relief and indexation allowance will no longer exist for individuals, trustees and personal representatives, and there will be a single 18% CGT rate applying to all gains. One effect of the changes is to remove the much-publicised 10% CGT rate for private equity investors, but clearly their impact will be far wider than that. There will be many winners and losers.

Such details as we have so far are in PBRN17.

An outline of the proposals is as follows:

• Changes will apply to disposals on or after 6 April 2008.
• They will apply to individuals, trustees and personal representatives but will not affect companies.
• The rate of CGT will be reduced to 18% for all disposals. The rates will no longer vary depending on the top slice of income and will be a single rate of 18%.
• Taper relief will no longer be available for disposals or in respect of held over gains coming into charge on or after 6 April 2008
• Indexation relief will no longer be available in respect of assets owned before 6 April 1998.
• For assets owned before 31 March 1982 it was possible to elect for the original value to be used in calculating the gain instead of the value at 31 March 1982 value. This option will not be available on or after 6 April 2008 and the 31 March 1982 value must be used.
• Reliefs were available in respect of deferred gains arising before 31 March 1982, called ‘halving relief. These reliefs will be removed with effect from 6 April 2008.
• For disposals of shares the identification rules will be simplified. After identifying shares using the same day rules for bed and breakfasting, shares will be identified with shares in a share pool.
• Capital losses brought forward and arising in the current year will still be available to offset against gains.
• The CGT annual exemption will still be available
• Other capital gains tax reliefs will still apply, including Principal Private Residence Relief, business asset roll over relief, business asset hold over relief, Enterprise Investment Scheme relief and Venture Capital Trust relief.

The intention is to issue draft legislation before the end of this year, with final legislation in the Finance Bill 2008 and (subject to Parliamentary approval) the new rules applying from 6 April 2008. There is no indication of any transitional provisions.

The Chancellor has indicated that he will consult with professional bodies and other interested parties to discuss the draft legislation before it is enacted, and the Tax Faculty will be taking part.

This change is radical in the extreme but it is highly controversial. It is a complete reversal of the CGT policy introduced in 1997 which provided incentives for holding business assets and encouraged (at least to begin with) the holding of assets for the longer term. The proposals will simplify CGT, but the winners look to be those who hold non-business assets, such as share portfolios or second homes. All advisers will now need to review their client's assets to see whether action needs to be taken before 6 April 2008 to secure the benefit of the existing reliefs.

7. Inheritance Tax

Transferable nil rate bands for spouses and civil partners (PBRN16)

The Chancellor has proposed immediate changes to the inheritance tax (IHT) legislation for married couples and civil partnerships.

The proposals, with examples of how the new legislation will work, are set out in PBRN16.

Draft legislation (including guidance notes) has been published, and will be included in Finance Bill 2008.

Currently, the basic rule is that when an individual dies he is required to pay inheritance tax on the value of the estate at a rate of 40% over and above the nil rate band (which for 2007/08 is £300,000). Transfers between spouses are treated as exempt but situations arise where the nil rate band on the first death is not always used.

The Chancellor is proposing to introduce measures so that of a proportion of this ‘lost’ nil rate band can be used. In other words, spouses can transfer their nil rate bands. The combined nil-rate band for 2007/08 will be £600,000, and this will increase to £700,000 in 2010. This in effect makes nil rate band discretionary will trusts redundant.

An outline of the proposed changes is as follows:

• In respect of the death of a surviving spouse or civil partner on or after 9 October 2007 a proportion of the unused nil rate band from the death of the first spouse or civil partner can be used on the second death.
• The amount that can be transferred will be based on the proportion of the nil rate band unused at the date of first death and applied in the same proportion to the current nil rate band.
• The amount available to be transferred is restricted to the amount of the nil rate band in the year of the second death. The maximum nil rate band that can then be claimed on the second death is thus twice the standard nil rate band for that year. This is intended to deal with the situation where an individual may have outlived more than one spouse or civil partner and therefore more than one unused nil rate band.
• The transfer of nil rate bands is available only on death – it cannot be used for lifetime gifts by the surviving spouse or partner.
• The claim for transfer of unused nil rate band will be made by the personal representatives of the estate of the second spouse or civil partner on submission of the IHT return. No claim is required on the first death.
• A claim must be made within two years of the second death although there are provisions to extend this in certain circumstances.
• A separate claim is required for each transfer of unused nil rate band if there was more than one deceased spouse or civil partner.
• Where the first death was during the period 13 March 1975 to 18 March 1986, when an estate was subject to capital transfer tax, a claim may still be made for the unused nil rate band to be transferred in the same way as it works for IHT.
• Before 13 March 1975 estate duty applied and measures have been introduced for calculating unused allowance that can be transferred in these circumstances which are explained in the guidance.

The guidance notes accompanying the legislation set out how it is intended the new provisions will work in general, and how they will apply in circumstances relating to existing wills and immediate post death interests.

It is also proposed that the IHT provisions for alternatively secured pensions (ASP) will be modified if the nil rate band was not fully used when the original owner of the ASP died.

8. Personal Tax

Domicile, residence and remittance basis

The Chancellor has announced changes from 6 April 2008 affecting taxpayers who are not domiciled or not resident in the UK. Full details are in PBRN18.

Remittance basis – new tax charge

The main change affects those who are not domicile or not ordinarily resident in the UK and are able to take advantage of the remittance basis of taxation for overseas income and gains.

After 6 April 2008, a UK resident who has been resident for at least seven years will only be able to use the remittance basis if he or she pays a charge of £30,000 a year. If the decides not to use the remittance basis (or pay the extra charge) he or she will be taxed on worldwide income and gains on an arising basis. The £30,000 will be in addition to the actual tax on remittances.

In addition, anyone who uses the remittance basis for a particular tax year will not be entitled to UK personal allowances for that year. However, a de minimis limit will apply so that remittance basis users with unremitted foreign income of less than £1,000 a year will still be able to get personal, married couple's and blind person's allowances.

All previous years of residence will be taken into account in establishing if someone has been resident for seven years when the new charge comes into effect on 6 April 2008.

HMRC also intends to consult on whether a higher charge could be made after 10 years of UK residence.

Remittance basis – other changes

HMRC is also proposing a number of other changes, applying from 6 April 2008, to correct what it, describes as anomalies in the way the remittance basis operates:

• Correcting a flaw in the current claims mechanism which allows income arising in one year to be remitted tax free the following year by claiming the remittance basis in the first year but not in the second.
• Reducing the scope for the alienation of income and gains through the use of offshore structures, such as companies and trusts, which convert taxable income and gains into non-taxable payments.
• Extending those existing anti-avoidance measures which currently do not apply to remittance basis users so that in future they do.
• Removing the ‘ceased source’ rule so that remittances after the source has ceased will still be taxable.
• Extending the definition of remittance in relevant foreign income.

Residence

HMRC also intends to introduce legislation in Finance Bill 2008 to make clear that days of arrival and departure are to be counted in determining whether an individual is resident in the UK in a particular year. HMRC's usual practice (per booklet IR20) is not to count such days. The change clearly comes in the wake of the Gaines-Cooper case.

Consultation

There will be consultation on all the above changes, based around draft legislation which will be published towards the end of this year. Clauses will be included in Finance Bill 2008.

Remittance basis: Irish income (PBRN19)

At present, the remittance basis does not apply to investment income arising in the Republic of Ireland or earnings from an employment with an Irish-resident employer. Such income is taxed on UK residents on an arising basis.

This anomaly will be removed from 6 April 2008. The change actually follows a question raised with the UK by the EU earlier this year. The EU had noticed that certain Irish income was not being taxed in the UK in the same way as other foreign income, which appeared to be discrimination against Irish-source income.

Income tax and National Insurance alignment

At Budget 2006, the Government announced that it would review the case for aligning income tax and National Insurance, with the aim of reducing administrative burdens on employers and improving outcomes for those on lower incomes. A report published on 9 October 2007 entitled Income tax and national insurance alignment: an evidence-based assessment sets out the conclusions of the review, and includes detailed analysis of the costs and benefits of moving to an annual and cumulative NICs system. It also sets out HMRC's plans to reduce administrative burdens.

The review has examined ways of improving the administrative alignment of the two systems for employers, and examined the impact this might have on individuals. It is unfortunate that it has not looked at the fundamental simplification which would really do the job properly, that is a merger of the two taxes. The reasons for this are long rehearsed, ie that:

• each system serves a different purpose, with NICs providing entitlement to contributory benefits, and that
• such a change would have a significant impact on the amounts payable by individuals depending on their circumstances, particularly for those over State Pension age, who currently do not pay any NICs (many of whom will of course be paying more income tax following the abolition of the lower rate band of income tax)

Instead, the review has focused particularly on a proposal to make NICs operate in a similar way to tax by moving them onto an annual basis and collecting them cumulatively.

Aligning tax and NICs in this way has a variety of implications for employers, individuals and Government. The review found that:

• net savings for employers depend on the extent to which they continue to move away from manual processing but are smaller than might have been expected. Maximum estimated savings are around 4.5% of the costs of operating the payroll taxes by 2012, which is the earliest year by which changes could be introduced. One-off transitional costs of alignment would be around £200 million;
• while approximately 5 million people would save an average of £120 per year in NICs, 1 million individuals, including some low earners, would pay up to £550 more NICs per year; and
• the Exchequer costs would be around £340 million per year.

The Government has concluded that on balance the benefits of administrative alignment do not outweigh the costs, and so the idea of a merger is rejected.

However, even though the review is not recommending administrative alignment, a number of areas have been identified where improvements to the current systems could be made, particularly benefiting business by reducing administrative burdens. These include consulting on:

• collecting tax on benefits in kind and expenses through the payroll;
• improving and aligning information and guidance on tax and NICs; and
• improving collection of NICs for the self-employed.

Fuel benefit charge (PBRN23)

Since it was first introduced in April 2003, the multiplier for calculating the benefit in kind charge for providing employees who have company cars with free fuel for private use has been set at £14,400. This figure is then multiplied by a percentage which is calculated by reference to the CO₂ emissions of the car, and tax and Class 1A NICs are calculated accordingly.

From 6 April 2008, the fixed multiplier will increase from £14,400 to £16,900.

9. Pensions and Investments

Changes to State Second Pension (PBRN01)

The State Earnings-Related Pension Scheme (SERPS) was introduced in 1978 to provide an earnings-related top-up to the basic state pension. Funding came from National Insurance contributions. From April 2002 SERPS was replaced by the State Second Pension (S2P), also known as the additional state pension. An employee is a member of S2P unless he or she contracts out. The self-employed are not in S2P and so cannot contract out via a personal pension.

In the Budget 2007 it was announced that the NIC upper earnings limit would increase and that from 6 April 2009, the upper limits for both employees and the self-employed will be aligned with the point at which higher rate income tax becomes payable, so increasing considerably the NIC payable by high earners. However, the other result of this move would be to increase the amount of S2P to those affected and increase the level of the contracting out rebates. Measures are now being proposed that will, in effect, scale back the pensions benefits secured as a result of these increased NIC contributions and rebates.

This will be achieved by specifying a new Upper Accruals Point for S2P purposes, which will be lower than the upper earnings limit. In other words, NIC contributions above the UAP and the upper earnings limit will not buy any entitlement to S2P. One of the provisions of the Pensions Act 2007 allows the Secretary of State for DWP to prescribe a date to introduce the UAP in relation to S2P At the time of the May 2006 White Paper, the intended date for this was 2012, or the date at which the basic State Pension is first linked to earnings.

The proposals in PBRN1 will now bring this forward to 6 April 2009, the date when the level of the Upper Earnings Limit will be aligned with the threshold for paying higher rate income tax.

This will mean that from 6 April 2009 employers and employees with occupational pension schemes and who are contracted out of S2P will receive contracted-out rebates on earnings between the Lower Earnings Limit (LEL) and UAP, rather than the UEL Furthermore, contracted out employers and employees will pay NICs at the full rates of 12.8% and 11% respectively on earnings between the UAP and UEL – so another rise in NIC payable for these people.

From a practical perspective, an additional column will need to be included on the P11/P14, or their equivalents, used by employers to show this band of earnings. Under pension reforms, these changes would have been required anyway from 2012 for employers and employees with defined benefit occupational pension schemes.

Employers who do not have occupational pension schemes will also have to record the earnings between the Primary Threshold and UAP and UAP to UEL. This is because until 2012, or the date at which the option to contract out is abolished for members of defined contribution pension schemes, they may have employees in pension schemes into which HMRC make minimum payments which will also be limited to the UAP from 6 April 2009.

Only earnings up to the UAP will be used to calculate S2P rights and so this information needs to be provided by employers in their annual return for the 2009/10 tax year onwards.

Technical Improvements to the pension tax legislation

A number of technical measures have been introduced to improve the pension tax rules, the details of which are set out in PBRN14 and are as follows:

• Amendments have been proposed to the lifetime allowance test take effect on or after 6 April 2006. See this link for the draft legislation issued.
• Protection of lump sums exceeding 25% of pension rights – changes are proposed to the calculation of protected lump sum rights in certain circumstances to take effect on or after 6 April 2006.
• Taxable property provisions – changes are proposed in the definition of investment-regulated pension schemes on or after 6 April 2006.
• Inheritance tax on overseas pension schemes – legislation will be introduced to give inheritance tax protection for certain overseas pension schemes to take effect on or after 6 April 2006.

Inheriting tax-relieved pension savings (PBRN15)

The general background to the legislation is that HMRC were concerned that tax-relieved pension savings were being diverted into inheritance rather than being used as income in retirement.

Draft legislation has now been published, following consultation on the paper issued at the time of the 2007 Budget Tax relief for pensions: inheriting Tax-relieved Pension Savings: see this link for the original consultation document with more background information.

There is already existing legislation to prevent life time surrenders of rights under pension schemes and the reallocation of assets after a member's death in certain circumstances and the proposed legislation extends these rules.

An outline of the proposed legislation is as follows:

• The new anti avoidance legislation introduced will apply to pension schemes with less than 20 members and those with 20 or more members where the increase in rights is not applied equally between members.
• It will apply to surrenders made on or after 10 October 2007 and for increases in pension rights for member deaths on or after 6 April 2008.
• In general terms, it will impose an income tax charge of up to 70% on unauthorised payments where rights to payment are surrendered under a lifetime annuity in certain circumstances and an inheritance tax charge for deaths of individuals over the age of 75 where there is an increase in pension rights or unauthorised lump sum payment. See PBRN15 and the draft legislation at this link for the detail.

Spreading of tax relief for large employer pension contributions (PBRN13)

Measures are to be introduced to ensure that spreading cannot be avoided.

Employers generally receive relief against profits for pension contributions in the chargeable period in which they are paid to a registered pensionscheme.

Spreading of some large contributions applies over a period of four years where the contribution is more than 210% of the contribution paid in the previous period, and is more than 110% of that contribution by £500,000 or more.

To avoid the spreading companies routed the contributions through a new company and measures have been introduced to stop this with effect from 10 October 2007. See PBRN13 for the detail.

Life insurance company taxation (PBRN11)

In May 2006, HMRC published a consultation document on proposals to simplify some of the tax rules for life insurance companies. That consultation consisted of five separate proposals and working groups were established for each of them. A number of measures were announced in the 2006 PBR and enacted in the FA 2007. Two further changes have now been announced stemming from the original consultation strands, as follows:

• The first change repeals some complex rules setting out the apportionment of the investment return arising where an ‘inherited estate’ is acquired and the investment return is then reattributed such that the tax exemptions granted to pension business are not granted to inherited estates that are not backing pension business liabilities. The current rules will be repealed for accounting periods beginning on or after 1 January 2008.
• The second change updates and simplifies the tax rules that apply to the transfers of long-term insurance business. A number of measures have been introduced in recent years to block a wide range of planning schemes associated with transfers of insurance businesses. Work has centred on simplifying the law and various targeted anti-avoidance measures. The measure was partially enacted in the FA 2007 which also gave a power to introduce (by 1 April 2008) further secondary legislation which could amend the primary legislation. Draft regulations have now been published to achieve this and it is planned that they will come in to force some time in 2008.

Company gains on life insurance policies (PBRN10)

It is proposed that all life insurance policies and life annuity contracts (except for protection type policies) to which a company is a party will be brought within the loan relationships rules. Currently any gains are taxed under the life insurance ‘chargeable event rules. In practice few companies own such contracts for investment purposes. The government considers that the return from such policies is in substance similar to debtlike instruments and therefore should be taxed under the loan relationships rules, subject to giving credit for taxation suffered in the underlying fund (the existing rules for qualifying policies provide for such a relief).

The new rule will apply to accounting periods of companies beginning on or after 1 April 2008. Where a company is a party to a non-protection life insurance policy on the first day of the first accounting period after 1 April 2008, the policy will be brought within the loan relationship rules and the policy will be treated as surrendered in full on that date. Any chargeable event that may arise will be treated as a non-trading credit and brought into account in the accounting period in which the company actually disposes of the policy or contract (and not the period in which the change in treatment occurred).

Draft clauses have been published on HMRC's website. Once these changes are enacted, the chargeable event rules will be obsolete and will be repealed.

Changes to the investment manager exemption (PBRN07)

The UK tax rules provide for an exemption from tax for non-UK residents who have appointed a UK investment manager to manage their investment portfolio. The current investment manager exemption rules are found in s 127 and Schedule 23 of the FA 1995. The existing rules can be complicated to apply and can result in the exemption being withdrawn for non-qualifying transactions. This can result in the whole of the nonresident's UK profits potentially being subject to UK tax, a disproportionate response to the problem.

Following consultation earlier this year, on 20 July 2007 HMRC revised its guidance and published an updated version of its Statement of Practice 1/01. However, some of the changes could only be implemented through changing the legislation. It is therefore now proposed that:

• the scope of transactions to which the exemption applies will be clarified and simplified and will be aligned more closely with the activities regulated by the Financial Services Authority; and
• changes will be made to the withdrawal of the exemption to allow for a more proportionate response to non-qualifying transactions.

These measures will apply from the date that the Finance Bill 2008 receives Royal Assent. Presumably HMRC will not apply the legislation as currently drafted to cases before that date although this is not mentioned in note PBRN07.

Offshore funds: proposed changes

The Treasury has published a discussion paper on Offshore Funds. This sets out how the Government intends to modernise the offshore funds tax regime. The paper covers changes to the definition of offshore funds for UK tax purposes, a proposed framework for offshore funds, and the tax treatment of UK investors into those funds. Comments from interested parties are invited by 9 January, 2008.

10. National Insurance Contributions

Exploitation of national insurance contributions exemption (PBRN02)

Since the 1960s there has been an exemption allowing employers to provide holiday pay to employees without paying NICs (Para 12, Part 10, Sch 3, Social Security (Contributions) Regulations 2001). The exemption was originally envisaged for use by the construction sector, to take account of the high mobility and turnover of the labour force in the sector and to avoid situations where one employer would have to pay a benefit which they had not actually funded or had only partially funded. This exemption is now being used by employers outside this sector, with large impacts on Exchequer yield.

New legislation will amend the exemption so that it will be removed immediately for all but the construction sector. A five year transitional period will be introduced for the construction sector, before the exemption is withdrawn completely on 30 October 2012.

11. VAT and Duties

VAT and housing (PBRN25)

Works of renovation or alteration to residential properties that have been empty for at least three years are currently subject to VAT at the reduced rate of 5%. With effect from 1 January 2008, the qualifying period before which the reduced rate can be applied is to be reduced from three years to two years.

The current law is set out in Note 3 to Group 7 of Schedule 7A to the Value Added Tax Act 1994.

Facilitating the use of biobutanol (PBRN27)

Biobutanol is an alcohol derived from the fermentation of biomass, and a lower carbon emitting substitute for petrol. It is currently treated as a fuel substitute to petrol and is subject to duty at 50.35 pence per litre.

A statutory instrument will be laid before Parliament shortly to reduce the level of duty to 30.35 pence per litre in cases where Biobutanol is used as a road fuel in specific pilot projects to test the use of biofuels. This reduction in duty will take effect 21 days after the statutory instrument is laid.

Eligible pilot projects that offer potential environmental benefits will be approved individually by HM Revenue & Customs, subject to appropriate anti-fraud safeguards.

Excise reviews and appeals

Following consultation held over the summer, the Government will shortly be publishing draft legislation which will extend statutory rights to an independent review and appeal against a wider range of decisions made by HMRC on excise duty matters (PBR Red Book para 5.90).

Consultation on tax simplification – VAT aspects – see below

12. Stamp Taxes

Stamp duty admin burden (PBRN20)

From Budget Day 2008, transfers of shares or securities which currently attract a fixed or ad valorem duty not exceeding £5 will be exempt from stamp duty.

SDLT: notification thresholds for land transactions (PBRN21)

From Budget Day 2008, there will no longer be any need to notify HMRC of any land transactions relating to property (residential or non-residential) where the chargeable consideration is less than £40,000. This includes the grant of a lease of seven or more years for £40,000 or less.

SDLT: change to partnership anti-avoidance provisions (PBRN22)

Finance Act 2007 rules will be amended to ensure that, where there is a transfer of an interest in a property between partners in an investment partnership, there will be no charge to SDLT.

13. Anti-avoidance

No Budget or PBR is complete these days with a plethora of proposals aimed at countering tax avoidance, usually as a result of tax planning schemes that have been disclosed under the disclosure rules. This PBR was no exception, and the PBR Notes set out a number of targeted anti-avoidance measures.

Interest paid in advance (PBRN03)

Interest paid on a loan taken out to invest in a partnership or close company is tax deductible. Under a tax scheme, the loan interest is paid upfront, with the loan then being repaid at a discount to reflect the interest paid. Investors were then able to offset all of the upfront interest paid against tax even though in substance they had not paid all of the interest, thereby accelerating any tax relief.

Legislation will be introduced in the 2008 Finance Bill to counter interest paid on any such loans. The new rule will apply to interest paid on or after 9 October 2007. Draft legislation has been published on HMRC's website.

Disguised interest (PBRN09)

It is proposed to counter a corporation tax scheme that converts what is in substance interest into non-taxable income. Dividends paid between UK companies are generally exempt from corporation tax. An anti-avoidance rules was introduced in 2005 to provide that distributions from certain shares that are in reality akin to debt finance should be charged to corporation tax as interest income (the shares for debt rules).

However, the 2005 rules only apply to straightforward distributions such as dividends. Schemes have been developed to circumvent this rule by providing that the distribution is of such a nature that it falls outside the 2005 rules. The rules are now to be amended so as to ensure that shares for debt rules work regardless of the type of distribution.

The new measure will apply to distributions paid on or after 9 October 2007. Draft legislation has been published on HMRC's website.

Expenses of life insurance companies on reinsurance arrangements (PBRN12)

Companies carrying on life insurance business sometimes enter into reinsurance arrangements of some or all of that business. Usually, the reinsurer makes a payment to the insurance company to reflect the costs it incurred in selling the business it has reinsured. The payment is offset against any costs incurred and only the net amount is taxed. HMRC has become aware of some schemes whereby the insurance company has sought to deduct all the expenses incurred in selling the business without recognition of any reimbursement of those costs. Although HMRC is disputing these schemes, it has decided to bring forward a measure that will ensure that life insurance companies reinsuring their business can only obtain relief for true economic costs they have incurred.

The new rule will have effect for expenses incurred on or after 9 October 2007 and on or after 1 January for expenses incurred before then which are spread forwards.

Leased plant and machinery: anti-avoidance (PBRN06)

This measure will counter avoidance involving the sale and finance leaseback of existing plant or machinery by removing a rule that allows businesses to dispose of plant or machinery free of tax and by bringing the finance leaseback within the scope of the rules for taxing long funding leases.

It will also counter attempts to exploit the rules for taxing long funding leases to create a tax loss where there is little or no commercial loss, by bringing the measure of taxable profits into line with commercial profits.

The measure will have effect for transactions entered into on or after 9 October 2007.

Income splitting following Arctic Systems – see above

14. HMRC Powers and Tax Appeals

On 9 October HMRC published a consultation document on Tax Appeals against decisions made by HMRC.

This consultation has been prompted partly by HMRC's ongoing review of its powers and compliance procedures, but mainly by the new tax appeals tribunal system which is on the horizon for 2009.

The whole of the central government administrative tribunals are being reformed into a new, single two-tier structure. The legislation to achieve this is in the Tribunals, Courts and Enforcement Act, which received Royal Assent on 19 July 2007. Tribunals reform has far-reaching implications for taxpayers and tax credit claimants: the existing General and Special Commissioners, VAT & Duties Tribunal and Section 706 Tribunal will cease to exist.

The new tribunals system will also have implications for how appeals are handled by HMRC, and this is the reason for this consultation document, which has been prepared in liaison with the Ministry of Justice (MoJ). The MoJ is steering the tribunal reform and will be issuing its own consultation later this year, which will cover the whole of the tribunal system but is expected to have a chapter dealing specifically with tax appeals..

The HMRC consultation document:

• summarises the historical background and context;
• builds on the feedback received from HMRC Review of Powers (‘Powers Review’) consultations by developing thinking about a more consistent framework for internal reviews;
• seeks views about the extent to which the different appeals procedures canand should be aligned;
• describes how HMRC tax appeals will be transferred to the new tribunal system; and
• shares early thinking on how this might be achieved legislatively in a way which will involve the least administrative burden.

The deadline for responses is 31 December 2007.

15. Tax Simplification

As part of its commitment to simplify the tax system, the Government has announced three reviews in which it proposes to ‘work in partnership with business to evaluate how a range of tax policies could be simplified’.

These initial reviews will cover:

• how to simplify VAT rules and administration in the UK and the EU;
• how anti-avoidance legislation can best meet the aims of simplicity and revenue protection; and
• how to simplify the corporation tax rules for related companies.

These follow on from the Budget 2007 announcements intended to make the tax system fairer, simpler and more efficient by:

• modernising and simplifying both the personal and business tax systems;
• publishing the implementation plan for the 2006 Review of HMRC Links With Large Business; and
• delivering £300 million of administrative savings to business, helping HMRC towards achieving its administrative burden targets.

It is perhaps as well to remember that the modernisation and simplification to which this refers has so far included:

• the abolition of industrial buildings allowances and accompanying capital allowances changes, which are likely to cost businesses many millions in lost tax relief, particularly affecting many small farms and hotels; and
• aligning both the Upper Earnings Limit for employee's Class 1 NICs and the Class 4 National Insurance Upper Profits Limit for the self-employed with the point at which the higher rate of income tax becomes payable (after personal allowances have been taken into account) by 2009/10. This simplification will cost many middle income earners a further £500 a year in National Insurance.

To look at the three new reviews in more detail:

How can the VAT rules and administration in the UK and the EU be simplified?

HMRC is seeking views on the areas where VAT simplification is likely to be of most significance to all VAT registered business and has identified the following areas for particular attention:

• the administrative procedures associated with the election to waive exemption in relation to land and no-residential buildings;
• the scope for simplifying the standard partial exemption method; the rules and processes around de minimis; and the procedure for calculating and adjusting VAT recovery under the Capital Goods Scheme;
• the frequency with which businesses submit returns, with a view to getting more businesses to submit annual VAT returns and whether annual accounting arrangements could be attractive to larger businesses;
• the existing range of published retail schemes and whether, taking into account developments in retail till technology, the design of these schemes is consistent with the objective of simplifying retail accounting; and also whether the requirement that larger retailers agree bespoke schemes provides the right balance between simplification and certainty in tax accounting;
• the identification and prioritisation of complex VAT areas for simplification at EU level.

How can anti-avoidance legislation best meet the aims of simplicity and revenue protection?

HM Treasury and HMRC believe that simplification in anti-avoidance legislation is best achieved if it is clear, effective and well targeted. This applies both to existing and to new legislation. They say that the review could also look at whether all anti-avoidance provisions should be in primary legislation or use a more flexible combination of primary and secondary legislation. Business is asked to highlight those areas of anti-avoidance legislation that impose the most significant burden.

Our recent representations following the Finance Act 2007 Targeted Anti-Avoidance Rules as they affect capital gains and losses on share transactions and between spouses cover one such area. These rules are not well targeted and much has been left to HMRC interpretation and guidance.

How can the corporation tax rules for related companies be simplified?

HM Treasury and HMRC believe the areas where simplification will be of most significance to UK companies are:

• group aspects of corporation tax on chargeable gains;
• associated company rules for the small companies corporation tax rate;
• Corporation Tax Self Assessment (CTSA) filing and payment arrangements for groups; and
• further reductions in the administrative burden of transfer pricing rules.

We are often told that changes to tax legislation which carry a cost are not welcome. However, it seems that we now have an opportunity to ask for just these. Quite what will be possible of course is another matter, but we are pleased that the door is open at last.

A letter, published jointly by HM Treasury and HMRC, invites active contribution to these three reviews, at meetings, by email or online. Some initial suggestions have been proposed in each area which are intended to help Government set its priorities. The online questionnaires are fairly brief and are very much an overview, and we ask as many members as possible to participate in this exercise.

To take part in the reviews please follow the appropriate link below to each of three short surveys:

VAT simplification survey

Anti-avoidance simplification review survey

Related companies review survey

The Tax Faculty will also be responding (please email Anita.Monteith@icaew.com), but it is clear that a huge volume of responses from business sent direct to Government through the online questionnaires would also be helpful.

These and other specific announcements on tax simplification are set out in the Pre-Budget Report and Comprehensive Spending Review document.

[12 October 2007]