Extension of carry back of trading losses

A company may normally carry back trading losses arising in an accounting period for twelve months, and set that loss off sideways against its profits from any other source. In the pre budget statement last November, new rules were introduced in relation to losses of accounting periods ending in the window from 24 November 2008 to 23 November 2009 to allow trading losses to be carried back for more than one year in certain circumstances, effectively giving a three year carry back period. The government has announced further extensions to this support by extending the enhanced relief for two years rather than one.

Foreign profits

The tax exemption for most foreign dividends received by UK groups of companies has been confirmed and will be supported by a restriction on interest deductions combined with the replacement of the Treasury Consents rules with a new post transaction reporting requirement. This will herald the changes to the controlled foreign companies rules and is intended to improve the competitiveness of the UK as a location for multi national businesses.

VAT – change of standard rate

There is to be no extension to the period for the reduction in the standard rate of VAT which was reduced from 17.5% to 15% in the pre budget report. The rate will revert to 17.5% with effect from 1 January 2010 and legislation will be introduced to prevent any manipulation of the rules in relation to this.

Stamp duty

The stamp duty holiday for all houses costing up to £175,000 is to be extended until 31 December 2009.

Support for savers

The government has announced that the ISA investment limit is to be increased to £10,200, of which £5,100 can be saved in cash. The new limits are to be introduced for those aged 50 or over for the tax year 2009/10 but only for deposits being available from 6 October this year. The higher ISA limits will then apply to everyone from 6 April 2010.

Offshore disclosure

The much anticipated new disclosure opportunity for those with offshore bank accounts will run until March 2010, giving owners of these accounts the opportunity to disclose relevant details to the tax authorities of their own accord in exchange for lower penalties. This is in line with the coordinated international approach being taken towards undisclosed offshore bank accounts as outlined at the G20 Summit meeting recently.

Company car tax

In recognition of the ever lowering CO2 emissions from modern cars, on which benefit in kind tax charges are calculated, the government has announced that it is again moving the goalposts on these with effect from 6 April 2011, by shifting the CO2 emissions thresholds down by 5grams per kilometre with effect from 6 April 2011.

It has also announced that the current £80,000 cap on company car list prices for the purposes of calculating company car benefit will be abolished such that the drivers of the most expensive company cars will pay a tax charge based on the full list price of the car when new.

The old discounts available for different types of vehicles will be completely abolished and replaced by a single system which simply rewards lower CO2 emissions.

Income tax rates and allowances

The income tax personal allowance for 2009/10 remains at £6,475, as announced in the pre budget statement last November. However, rather than gradually reduce the basic personal allowance for income tax for individuals whose gross income is more than £100,000, the Chancellor has decided to fully withdraw the allowance for those with incomes over £100,000 with effect from 6 April 2010.

A new 50% top rate of income tax will be applied to those with incomes above £150,000 with effect from next April. This represents a two fold change from the pre budget statement where the Chancellor announced a top rate of 45% on incomes above £150,000 effective from 6 April 2011.

Tax rate on dividends

From 6 April 2010 there will also be a new higher rate of tax for dividend income. The new rate of tax of 42.5% will apply to dividends, which would otherwise be taxable at the new income tax rate of 50%.

Tax rate applicable to trusts

From 6 April 2010, the dividend tax rate will be increased to 42.5% and the trust rate of tax will be increased to 50%.

Tax relief on pension fund contributions

Higher rate tax relief will continue to be available on pension fund contributions until the end of the tax year 2010/11, however thereafter relief is to be restricted to those with incomes over £150,000 the effect of which will be to taper the relief to 20%.

The Chancellor has announced that he intends to consult on the implementation of this restriction but has already flagged up that prior to the change, the government will also introduce legislation to prevent higher rate tax paying individuals from taking advantage of the pensions relief by making substantial additional contributions prior to the restriction coming into effect on 6 April 2011.

Further extension of carry back of trading losses

The November 2008 pre budget report announced a temporary twelve month extension of loss carry back for business from one to three years, and this is to be extended for two years rather than one. It will be effective for the 2008/09 and the 2009/10 tax years.

The rules allow only trading losses to be carried back, but certain furnished holiday letting losses are treated as trading losses for these purposes.

Enhanced first year capital allowances.

The government has doubled the first year capital allowance from 20% to 40% for one year, introduced retrospectively with effect from 5 April 2009.

Offshore Funds

The expected detailed rules relating to “Reporting Fund status” for offshore funds which are to take effect from 6 April 2009 were not included within the details of the Pre Budget Report announcements.

Offshore centres

The Government announced that they will shortly commission an independent review of British offshore financial centres in response to the severe financial turbulence facing the global economy.

It is likely that the review will in part focus on tax practices in the offshore centres and comes at a time when the US are considering targeted measures as regards the 2007 “ Stop Tax Haven Abuse Act”.

The Government have however made it clear that the review will not consider changes to the UK’s constitutional relationship with the crown dependencies.

Offshore disclosure facility

There will be a further opportunity in 2009 for holders of offshore accounts on which UK tax is due but has not been paid, to make a full disclosure of details to HMRC. It is likely that a reduced penalty of 10% on unpaid tax will apply but further details will be announced next year.

EU Savings Directive

The EU commission has recently published details that it is to extend the EU Savings Directive so as to widen both the scope of exchange of information control and the with-holding of tax at source on certain types of investments where an EU paying agent makes a payment to an individual in a member state.

The new proposals will affect:

• Offshore Trusts/ Foundations and other arrangements where the EU paying agent is able to identify and determine that the beneficial owner is a resident of a member state. This is therefore likely to catch nominee type structures.

• Securities where at least 95% of an investor’s capital is guaranteed.

• Life insurance contracts which are performance linked and where the mortality risk covered is less than 5% of the capital amount.

• Investment funds that have invested in certain structured products issued by an EU paying agent.

Property Authorised Investment Funds (“PAIFS”)

A range of measures have been introduced which will have effect from 1 January 2009 which include stamp duty reserve tax exemption for feeder funds to PAIFS. In addition a change will be made so as to allow a PAIF to pay net distributions to feeder funds which will reduce the administrative burden on shareholders.

UK Real Estate Investment Trusts (“REITS”)

Legislation will be introduced in Finance Bill 2009 which will make changes to the REIT regime. Broadly the conditions to be met by a company or group so at to obtain exemption from tax on both income and gains on property will be amended so as to ensure that they cannot be circumvented by the artificial creation of new group structures.

Qualified Investor Schemes (“QIS”)

A QIS is a type of Authorised Investment Fund. A new measure will be introduced which will have effect from 1 January 2009 onwards which will amend regulations so as to remove the current specific tax charge on substantial investors (those with a 10% or greater holding). This will however be subject to meeting a condition that investment in the QIS will not be limited to specific individuals or companies i.e. a genuine diversity test will be introduced.

Disclosure of tax avoidance Schemes

The current rules will be amended so as to simplify and improve the reporting of schemes. In addition changes will be made to the reporting date of such schemes to the tax year of the implementation and this will now apply in all cases. The changes will have effect for tax return periods beginning on or after 1 April 2009.

Employment Related Securities

As part of a simplification review, legislation will be introduced in Finance Bill 2009 to simplify certain tax rules that apply to employment-related securities or shares. It is proposed that there will be no tax charge in the following circumstances:

• where an employee receives shares which are payable by instalments and the shares are then sold before all of the instalments have been paid. This will not apply if the employee is released from payment.

• a sale by an employee of nil or partly-paid shares.

• where an employee receives new shares in proportion to their existing shareholding as a result of a scrip or bonus issue.

Principles based approach to financial products avoidance

Two new anti avoidance rules are introduced in the Government’s new “principles based” format, which appears to be a synonym for “widely drawn”, the intention being to counter tax avoidance by legislation with general application rather than drafting rules applying to particular situations. The risk is of course that “innocent” transactions in which avoidance is not a motive can be caught.

The first issue to be dealt with is “disguised interest”, where an arrangement is entered into by companies which is economically similar to a loan (involving an advance of capital with a subsequent repayment and reward based on the time value of money). There is existing legislation which deals with various types of disguised loans already and the intention is to replace this with a set of general rules, via amendments to the forthcoming Corporation Tax Act 2009, so that the time value of money return is charged to corporation tax where the arrangement is structured with the intention of producing a return that is not income.

The second issue is the sale of income streams. The proposed anti avoidance legislation is again intended to replace a patchwork of earlier rules that cover specific schemes with an overriding rule for both individuals and companies that the sale of income, as separate from the sale of an income-producing asset, will give rise to an income return and be taxed as such.

Leasing

With effect from 13 November 2008 the government has taken steps to prevent a loss of tax in respect of:

• Transactions involving the leasing of plant or machinery under long funding leases;

This will affect businesses leasing plant and machinery and has been introduced to counter avoidance involving a leaseback following the sale or lease of plant and machinery where excess relief may have been obtained.

• The sale of a company that is an intermediate lessor of plant or machinery;

This will affect companies carrying on a business of leasing plant or machinery. The measure is to counteract an avoidance scheme that uses a sale and leaseback arrangement.

• Rents payable on long funding leases of films.

This will affect lessors of films, including partnerships and other businesses. Legislation will be introduced in Finance Bill 2009 to counter aggressive avoidance involving businesses leasing films to others under a long funding lease by providing that rents under the lease are taxable in full.

Corporation tax small companies’ rate

The increase in the small companies’ corporation tax rate from 21% to 22% will be deferred until April 2010.

Extension of carry back of trading losses

A company may normally carry back any trading loss arising in an accounting period for 12 months, and set that loss against its profits from any source. New rules apply to losses of accounting periods ending in the period 24 November 2008 to 23 November 2009 to allow trading losses to be carried back for more than one year in some circumstances.

If a company’s trading losses for an accounting period ending in the year to 23 November 2009 cannot be fully relieved by carrying back one year, then up to £50,000 the unrelieved excess may be carried back against trading profits only for a further two years, on a LIFO basis. This means that, for example, where a company’s trading results are as follows:

Year ended 31 December 2008    (£150,000)
Year ended 31 December 2007    £40,000
Year ended 31 December 2006    £40,000
Year ended 31 December 2005    £40,000

the company can offset £40,000 of the 2008 loss against any income of 2007 as normal. A further £50,000 is carried back to the two earlier years, £40,000 of which is offset against the 2006 trading profits before £10,000 is carried back against the 2005 trading profits. The unrelieved loss of £60,000 is carried forward against future profits of the same trade as normal.

There are a number of computational rules to ensure that companies do not abuse the relief by altering their accounting year end dates. If the accounting period ending in the year to 23 November 2009 is less than 12 months long, the £50,000 limit will be reduced proportionally. In addition, if two accounting periods end in the year to 23 November 2009, the £50,000 limit applies to both periods.

Loan relationships

Two changes will be introduced in Finance Bill 2009 to amend the loan relationship rules affecting connected companies and it is proposed that the changes will have effect for company accounting periods beginning on or after 1 April 2009.

The first change means that a debtor company would no longer be taxable on the release of a trade debt from a connected creditor. Previously where a creditor formally released a connected debtor from a trade debt, the creditor would have been denied a deduction for the loss on the debt but the debtor may have been taxed on its ‘profit’.

The second proposed change is still under consultation however the change concerns the rule that allows a debtor company a deduction for interest payable to a connected creditor that is outside the loan relationships rules only on a paid basis, rather than on an accruals basis that normally applies. It is proposed that the rule should be amended to provide certainty about its operation.

Taxation of foreign profits

The Government will bring forward a package of reforms to the taxation of foreign profits in Finance Bill 2009 which will include:

• An exemption from tax for most foreign dividends received by medium and large companies regardless of level of shareholding.

• A Targeted Anti- Avoidance Rule to avoid the dividend exemption being exploited.

• Worldwide debt cap on interest.

• Changes to the Controlled Foreign Company (CFC) rules.

• Reform of the existing Treasury consent rules.

Pension schemes – the annual and lifetime allowances

The annual (AA) and lifetime allowances (LTA) for pensions tax relief were set in the Finance Act 2004 for the period 2006/07 until 2010/11. The LTA will rise to £1.75m in 2009/10 and then to £1.8m in 2010/11; the AA will at the same time be increased to £245,000 and then £255,000.

Thereafter, both the LTA and AA will be frozen at their 2010/11 rates for a period of five years, up to and including 2015/16.

Enterprise Investment Scheme (”EIS”) investments

Two technical amendments were announced to the EIS to be introduced in Finance Bill 2009. Firstly the “use of money” requirement will be amended, so that EIS companies have two years to employ the funds raised, rather than having to use 80% in year one with the remainder the following year.

Secondly the rules for the carry back of income tax relief will be changed so that any relief attaching to an investment made in a tax year can be carried back to the previous tax year (previously the investment had to be made in the first six months of the year for relief to be carried back). The carry back limit will be removed and replaced by the normal annual EIS income tax limit.

Furthermore, the Treasury will review the following areas to determine whether changes are needed:

• the rules concerning mergers and takeovers, with a view to relaxing the rules on the withdrawal of relief where all companies involved are EIS companies;
• the definition of non-qualifying activities, particularly the definition of relevant intangible fixed assets, the exclusion of lessee companies who develop IP, and the eligibility of online retailers for the scheme; and
• the definition of “qualifying subsidiary” with a view to facilitating joint venture arrangements.

In addition, the Treasury clarified that in its view payments in advance for shares are not considered to be “loans” which would prevent EIS relief on the subsequent issue of the shares. This was found by the Courts in a recent case, but it is helpful to have confirmation that HMRC accept the point.

Income shifting

The Government considers that it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax – known as income shifting. The Government has consulted on this issue, but given the current economic challenges is deferring action on income shifting and will not bring forward legislation at Finance Bill 2009. The Government will instead keep this issue under review.

Individual Savings Accounts (ISAs)

With effect from 16 December 2008 the list of investments that can qualify for the ISA regime will be extended to include bonds which are issued by Multilateral Institutions. The original regulations meant that the only eligible securities had to have been issued by the UK or a European Government or by a company which has a share capital.

Income tax rates and allowances

The income tax personal allowance is set for 2009/10 at £6,475. This is an increase of £440. The basic personal allowance for 2008/09 was increased from £5,435 to £6,035 in May 2008 and therefore the further increase reflects a rise above inflation.

It was also announced that from 6 April 2010 the basic personal allowance for income tax for individuals whose gross income is more than £100,000 will be reduced by £1 for every £2 above £100,000 up to a maximum of 50% of the personal allowance. For individuals with gross income of more than £140,000 the personal allowance will be further reduced by £1 for every £2 above £140,000 until the personal allowance is extinguished.

From 6 April 2011 there will also be a new 45% rate of income tax which will apply to taxable non-savings and savings income above £150,000.

Tax rate on dividends

From 6 April 2011 there will also be a new higher rate of tax for dividend income. The new rate of tax of 37.5% will apply to dividends which would otherwise be taxable at the new rate of 45%. There will therefore be three rates of tax for dividends, the 10% basic rate, the 32.5% upper rate and the 37.5% higher rate.

The rate applicable to trusts

Also from 6 April 2011, the trust rate will be increased. The dividend trust rate will be increased from 32.5% to 37.5% and the trust rate of tax will be increased from 40% to 45%. This will affect discretionary trusts and some specific capital receipts by all trusts.

National Insurance contributions

From April 2011 there will be a 0.5% increase in the employer, employee and self employed rates of national insurance together with an increase in the point at which people pay national insurance to align this with the income tax personal allowance. This will make the overall rate (tax and national insurance) of 46.5% on earnings above £150,000.

Extension of carry back of trading losses

An individual carrying on a trade, whether on his own account or in partnership may normally set the loss against general income in the same year or the previous year (referred to as “sideways loss relief”). New rules apply to allow trading losses of 2008/09 to be carried back to 2005/06 and 2006/07.

If an individual’s trading losses for 2008/09 are not fully relieved by making sideways loss relief claims for the same year or the previous year, then up to £50,000 of the unrelieved excess may be carried back against trading losses only to 2005/06 and 2006/07, on a LIFO basis.

The Treasury states that all the rules which restrict loss relief claims will also apply to the new relief, which is not entirely clear but could conceivably include the “inactive partner” rules that restrict loss relief claims to £25,000 per year and to the amount of capital contributed in some circumstances. We will need to wait for legislation to determine whether this is likely to be an issue.

The rules allow only trading losses to be carried back further, but professions, vocations and certain furnished holiday lettings losses are treated as trading losses for this purpose.

The new relief will also apply for the purposes of calculating Class 4 NIC liability, and could therefore conceivably lead to NIC repayments.

Tim Gregory, a Partner in the Private Wealth Group at Saffery Champness comments on the potential impact of the measures announced for private clients (more…)