HMRC has published new guidance on the new penalty provisions that will apply from April 2008.

HMRC states that it has designed the new penalties so that:

• If people take reasonable care when completing their returns they will not be penalised.
• If they do not take reasonable care errors will be penalised, and the penalties will be higher if the error is deliberate.
• Disclosing errors before HMRC find them will substantially reduce any penalty due.

The new penalties initially apply to VAT, PAYE, National Insurance, Capital Gains Tax, Income Tax, Corporation Tax and the Construction Industry Scheme.

Further information can be found at:
http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf
http://www.hmrc.gov.uk/about/new-penalties/faqs.htm  

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The CBI recently published a paper setting out their view on why the UK corporate tax system is uncompetitive.

Basically the CBI has four areas of concern:

• The rising tax burden
• The increasing level of complexity 
• Growing uncertainty 
• Threat to revenues.

In the CBI’s opinion the key principles for a corporate tax system are: 

• Simplicity and clarity 
• Certainty and stability 
• Flexibility
• Neutrality, i.e. tax should not distort business decisions.

In their view the rapid legislative change coupled with inadequate scrutiny and consultation has added to uncertainty for all taxpayers. At present, looking at the position for individuals on capital gains tax and on the changes for those not domiciled in the UK, it is hard to argue with their view.

If you would like to read more, you can find the full document at http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/c9f94d05d0d0975b80257403003c66a6?OpenDocument.  

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Much of what will be included in this year’s Finance Bill was known long before the Chancellor stood up to make his Budget speech. The main items of relevance to businesses are summarised here, with links to earlier postings:-

• Corporation Tax – from 1 April 2008 the main rate will be reduced from 30% to 28% and the small companies’ rate increased from 20% to 21%. 
• Homes abroad owned through a company – removal of a benefit in kind tax charge where the company is owned by individuals and the sole activity of the company is to hold an overseas property for occupation by the individuals and/or letting. 
• Loss Relief – restriction of loss relief for interest payments made on certain qualifying loans in a partnership or a small company. Effective from 9 October 2007 this measure tackles a tax avoidance scheme which sought to advance the time at which relief could be claimed.
• CGT reform for individuals & trusts (not for companies) – abolition of indexation allowances and taper relief, and introduction of a flat rate of 18%, (subject to new entrepreneurs’ relief) from 6 April 2008.
• Research & Development – extension of SME tax relief schemes to include mid-sized companies with fewer than 500 employees.
• Company gains on life policies – to be brought within the loan relationship legislation.
• Capital Allowances – a range of new measures, including the reduction of annual writing down allowances to 20%, introduction of an Annual Investment Allowance of £50,000 and the reduction in the rate of allowances available for integral fixtures.
• Leased plant & machinery – changes to bring the proceeds of sale from finance leaseback arrangement into charge to tax, and other anti-avoidance changes to long funding lease rules.
  

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Anyone who has exchanged shares for non-qualifying corporate bonds (or non-QCBs, for short) needs to review their position carefully – before 5 April 2008.

Unless, in addition to the non-QCBs, they meet the criteria for the new Entrepreneurs’ Relief (e.g. they have been employed by the company that issued the loan notes and have owned at least 5% of the company’s ordinary shares throughout the twelve months prior to encashing the loan notes) they will face an 18% capital gains tax bill, rather than the 10% they might have expected when exchanging their shares.

It may be possible to benefit from the lower rate – but only by acting well in advance of the change.
If you think you might be affected by this and would like to discuss what you can do to keep your tax bill down, please contact Cathy Corns or me.

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The new Entrepreneurs’ Relief, which comes into play from 6 April 2008, will (subject to certain criteria) reduce the capital gains tax due when shares in trading companies – or business interests – are sold.

It will not, however, be available where business assets are sold in isolation, rather than as part of the disposal of a business. This would include, for example, the sale of land owned and used by a farmer, unless the sale could be argued to be of a distinct business.

This is likely to be an area of debate with the Revenue and, in many cases, might only be settled by the Courts.

If you would like to discuss how this might affect you – and whether there is anything you can do to avoid this hike in the tax likely to be due – please contact Cathy Corns or me.

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As you are only too well aware by now, the Chancellor announced a major reform of the capital gains tax (CGT) regime by setting a single flat rate of 18% from April 2008. Following a major outcry, the new entrepreneurs’ relief has been announced; this relief will reduce gains liable to CGT by 4/9ths, resulting in an effective rate of 10% on gains of up to £1m on disposals of a business by an individual.

But while business owners may be relieved by the introduction of a 10% rate of CGT on the first £1m of gain, their employees are likely to be far less happy as holdings of less than 5% will not qualify for relief.

The Government have encouraged companies to reward and motivate employees with shares but now exclude such employees from the new entrepreneurs’ relief.

There must be some logic – my problem is I just can’t see it!

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There was a very interesting tax case (T M Collins and the Commissioner of HMRC) recently. Very briefly, two individuals sold their shares; one for cash and one partly for cash and partly for a contribution to his pension fund. HMRC argued that the contribution was taxable as part of the consideration – and lost.

This opens up some interesting possibilities going forward.

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Please find below Lisa Spearman's latest blog on the Non-Doms issues, highlighted in our sister blog Tax Plus...

Following my blog of yesterday it now appears that the Chancellor has retreated on some of his proposals for the taxation of Non-Doms. Dave Hartnett, the Acting Chairman of HM Revenue and Customs has posted a letter on the Revenue website to clarify the Government’s intention in four areas where concerns have been raised.

According to the letter Hartnett wants….

“to make clear that the Government’s intention – which will be set out in legislation to be brought forward – has always been to ensure that:

• those using the remittance basis will not be required to make any additional disclosures about their income and gains arising abroad. So long as they declare their remittances to the UK and pay UK tax on them, they will not be required to disclose information on the source of the remittances;
• there will be no retrospection in the treatment of trusts and the tax changes will not apply to gains accrued or realised prior to the changes coming into effect;
• money brought into the UK to pay the £30,000 charge will not itself be taxable;
  
  and
  
  
• it will continue to be possible to bring art works into the UK for public display without incurring a charge to tax.
  
  In addition, we will continue to discuss with the US authorities how the £30,000 charge can become creditable against US tax.”
  
  
  

The full text of Hartnett’s letter can be found here.

This clarification is being interpreted as a retreat or a climb down by the Chancellor. However, a Treasury spokesman has been quoted as saying that the intentions have not changed it is just that the draft legislation has gone “slightly awry”. There are still a number of issues to be resolved and I expect we will have to wait until the Budget on 12 March to get further details.

Keep on watching this space.

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As the Chancellor’s proposals on taxing the so-called “non doms” (people born overseas or with foreign parentage) become clearer, it is apparent that his £30,000 annual levy is the tip of what could be a very large iceberg.

Media coverage over the past few days has highlighted the very real prospect of many non doms leaving the UK, as the potential impact of some of Mr Darling’s other ideas hit home.

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A members' voluntary liquidation ("MVL") can be a tax efficient exit option for the shareholders of a solvent company.

Under current legislation shareholders receiving a distribution through an MVL or, where appropriate, using Extra Statutory Concession C16, may benefit from the business asset taper relief provisions.

The government has recently announced (http://www.hmrc.gov.uk/cgt/disposal.htm) that as from 6 April 2008 all capital gains will be taxed at a flat rate of 18% irrespective of the marginal income tax rate of the taxpayer concerned; and also that the current systems of taper relief and of indexation allowance will be abolished. Alongside these reforms the government will introduce a tax relief for many entrepreneurs that will deliver a 10% tax rate for up to the first £1 million of lifetime capital gains.

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Last week, the Chancellor announced details of his so called “Entrepreneurs’ Relief”, the replacement for taper relief, for business owners facing an increase of more than 80% from 6 April 2008.

It would be easy, given all the hype surrounding this new relief, to forget the position for people holding assets that would never have qualified as “business assets” and the 10% capital gains tax rate. By this, I mean assets such as shares in investment companies, residential “buy to let” properties and others not used in trading businesses.

In some respects, their position is more complicated, as the reduction in capital gains tax rates will be offset by the abolition of indexation allowance (the effect of inflation before 1998) and the decision as to the best time to sell may not be so obvious. It is certainly not as simple as saying that the headline rate falls to 18% so matters are automatically better after the changes come into force.

You may think it is now too late to sell before 6 April 2008 – but this is not necessarily the question that needs to be answered.

If you would like to discuss how the new rules might affect you and what you might be able to do to ameliorate any negative effects, please contact Cathy Corns or me.

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HMRC has recently confirmed one very important point on assets that have been owned for a number of years. Such assets will have accrued a substantial amount of indexation relief (over 100% to date on assets held on 31 March 1982). Where an individual owns such assets on 5 April 2008 the indexation relief is irretrievably lost.

However HMRC have now confirmed (http://www.hmrc.gov.uk/cgt/faqs-cgt-reform.htm) that where an asset is transferred to a spouse or civil partner on a no-gain no-loss transfer the indexation relief is captured as part of the new owner’s base cost for tax purposes. This is an important planning possibility.

Regrettably though life in tax is never 100% straightforward – if the original owner would qualify for the new entrepreneurs relief and the new owner would not then the value of the historic indexation has to be compared with the value of the new relief before any transfer is made.

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The Chancellor’s announcement of the new “Entrepreneurs’ Relief” from 6 April 2008 appears to herald a marked change in the tax position of owners of commercial property.

Though the details have yet to be formalised, it seems that unless the property is let to the owner’s business – or to a company in which the owner has at least a 5% shareholding – the minimum tax rate on selling that property will increase to 18%.

Since 2000, anyone owning a commercial property used by an unquoted trading company would qualify for the higher rate of taper relief and could potentially pay only 10% capital gains tax on selling the property after two years.

It seems unlikely that this change will create a false market in such property before 6 April 2008 but there may be steps that can be taken to negate some of the impact of this effective tax increase in the time available.

If you would like to discuss what might be possible, please contact Cathy Corns or me.

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As we reported last week, Alistair Darling has released details of what he and HM Revenue & Customs are calling “Entrepreneurs’ Relief” (which probably sounds better than the U-turn that many consider it to be).

Under this new relief, which is set to become law from 6 April 2008, the self-employed, employees and directors will qualify for a 10% tax rate on selling their interest in the trading business or company for which they work.

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Is a key issue for most business particularly where tax is concerned. But did you know that HMRC run a committee just to look at the issue. (The question of another layer of administration reducing administration can be left for now I think). The last minutes were interesting reading – in particular –

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According to the Financial Times - there is a meeting today finally to decide on the much heralded (and on which the details are long awaited).

We will report on the changes once they are eventually published – watch this space.

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Below is a blog which you might find of interest from my colleague and fellow partner Lisa Spearman who contributes to our sister blog Tax Plus blog.

After some considerable wait HM Revenue & Customs and customs have finally published the draft legislation covering changes to rules for taxing UK residents who are not domiciled in the UK.

These are more wide ranging than expected and will have a significant impact on not only Non Doms but also beneficiaries and settlors of offshore trusts whether or not they are Non Doms.

There is a significant amount of new legislation to be considered and it may be amended before (or after!) 5 April 2008. Some points that are proposed are.

• Non Doms who have been here for seven years (out of ten) will have to pay £30,000 a year to elect for the Remittance Basis.
• All Non Doms claiming the remittance basis will lose personal allowances and capital gains tax annual exemptions. Subject to a de minimis limit of £1,000 of overseas income / gains.
• Bringing non cash items to the UK such as works of art, cars, furniture, and jewellery will be treated as a remittance after 5 April 2008. If those items were purchased with overseas income or gains then the remittance could be taxable in the UK. If such items have already been brought into the UK and are used after 5 April 2008 the legislation as presently drafted, indicates that there will be a remittance which will be taxable.
• Beneficiaries of offshore trusts who receive capital payments may be taxable on capital gains arising in the trust that have arisen as far back as 17 March 1998 (yes ten years ago!) or gains made at some point in the future.
  
  

There is much more to consider but if you are Non Domiciled or have an interest in an offshore trust it would be sensible to contact your accountant now. There are only a few weeks before the new rules become effective.

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Below is a blog which may be of interest, written by my colleague Barry Hallam for our sister blog Tax Plus...

Following reports of further meetings with business leaders it now seems that Mr Darling’s long delayed announcement regarding the capital gains tax regime will not now appear until next week according to the FT.

We are also still waiting for the draft legislation for the new Residence and Domicile rules. In a little over 10 weeks both sets of new rules are due to take effect and the uncertainty makes it very difficulty to plan.

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Below is a piece written by my colleague Barry Hallam on our sister blog Tax Plus.

Although January is traditionally the busiest time of year for tax professionals we are eagerly awaiting further details on the proposed changes in the rules for Residence, Domicile and Capital Gains which are rumoured to be available next week.

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A group of UK companies is considering appealing to the European Court of Justice (ECJ) against tax charges imposed on UK businesses that relocate their tax residence to another EU member state on the grounds that this is a breach of European Community Law. The ECJ has already indicated that taxation of capital gains on assets transferred to another Member State infringes the principle of freedom of establishment (de Lasteyrie du Saillant v Ministere de l’Economie, des Finances et de l’Industrie (Case C-9/02) [2005] STC 1722). The ECJ has further suggested that taxpayers are discriminated against by being subject to immediate taxation in their Member State of origin on capital gains not yet realised, if no such taxation occurs in similar domestic situations.

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I wanted to draw your attention to a blog posted by my colleague Barry Hallam on our sister blog Tax Plus blog...

It is being reported that Chancellor Alastair Darling will not be able to announce his revised proposals in the three weeks that had been promised. He told MPs today:

"It is not now going to be possible to conclude that process until the New Year,"

This is because he needed more time to study various, differing representations.

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In his address to the CBI conference earlier this week Alistair Darling announced that he does listen to businesses and intends to publish his final capital gains tax proposals "in the next three weeks".

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According to The Times the Government are looking to mitigate the changes proposed in the Pre Budget Statement three weeks ago. Apparently the plan is to introduce a form of retirement relief of £100,000, aimed to assist small businessmen who are selling up and retiring. As of the time this was posted the HMRC website had no details on this and so we do not know if it is accurate and, if so what is meant by small or retiring or what tests have to be met to qualify.

Any mitigation of the tax is welcome and I will be in touch again when more details are available.

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If you are concerned about the proposed change to a new flat Capital Gains Tax rate of 18% you may be interested to know that a petition has been opened on the Downing Street website.

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From 6 April 2008 there is to be a dramatic change in the calculation of Capital Gains Tax (CGT). Essentially there will be a flat rate of tax of 18% based on the difference between sale proceeds and cost. This applies irrespective of the type of asset held; the length of time held; removes relief for indexation totally (effectively halving the tax base cost for assets held pre March 1982) and removes a few other mitigation measures.

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There has been a lot of press speculation recently that, following the calls for a shake up in the tax breaks enjoyed by the private equity industry, the Chancellor may change capital gains tax for everyone.

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