Modernising the personal tax system
The following changes to the personal tax system have been announced:
the basic rate of income tax will be reduced to 20 per cent from 2008-09
- the starting rate of 10 per cent will be removed for earned income and pensions from 2008-09;
- age-related personal allowances for those aged 65 to 74 and 75 and over will be increased by £1,180 over indexation for 2008-09. The personal allowance for those aged 75 and over will increase to £10,000 in 2011-12;
- the upper earnings and profits limits for NICs will be increased by £75 per week (£3,900 for the year) above indexation for 2008-09;
- for 2009-10 the basic rate limit will be increased by a further £800 above indexation, and the upper earning and profits limits for NICs will be aligned with the amount at which higher rate tax is payable.
Homes abroad owned through a company
Individuals buying a home abroad through a company, typically for holiday use, will not face a benefit in kind charge in certain specified circumstances. The exemption is expected to apply where an overseas property is owned by a company that is in turn owned by individuals, as long as the sole activity of the company is to hold the property for occupation or letting.
The intention is to publish draft legislation for consultation this year and then to bring forward actual legislation in the 2008 Finance Bill, but with retrospective effect. The exemption will apply irrespective of the length of time for which the property has been owned by the company.
HMRC will not seek to tax anyone, in the interim, on the potential benefit in kind where all of the following conditions are met:
- the property is owned by a company that is in turn owned by individuals;
- the company's only activities are ones that are incidental to its ownership of the property;
- the property is the company's only or main asset;
- the property is not funded directly or indirectly by a connected company.
Managed service companies
Stringent new rules are introduced in relation to individuals providing their services through managed service companies (MSCs). These are typically mass marketed service companies promoted by MSC providers to large numbers of individuals.
In principle, such companies have potentially been caught under the so-called IR35 provisions in ITEPA 2003, Pt. 2, Ch. 8 if the individual worker would have been taxed as an employee were it not for the intermediary MSC. In practice, however, MSCs have presented particular difficulties for HMRC both when seeking to determine whether tax is due and in collecting such tax.
For MSCs (but not for other intermediaries) it is proposed to disapply the IR35 rules and to impose, instead, a new set of legislation to be inserted as Chapter 9 in ITEPA 2003, Pt. 2. The question of whether Ch. 9 will apply will be determined primarily by reference to the MSC provider (i.e. rather than the MSC itself), initially defined to include any business that is involved in promoting or facilitating the use of companies to provide the services of individuals. Exclusions will apply for those providing professional accountancy and legal services, for employment agencies and for employment businesses which do not influence or control the finances of the companies or the way in which payments to individuals are paid. Others may be excluded from the definition by regulation where a case can be made. Where a person is held to be an MSC provider, the rules will apply to all service companies made available by that person.
Where a company is within the definition of an MSC then all payments received by an individual providing services through the company will be taxed (and subjected to national insurance) as employment income. In an important difference from the IR35 rules, the cost of travel to each engagement will not be an allowable expense.
Where tax or national insurance cannot be recovered from the MSC itself, HMRC will be able to recover the debt from the director of the company, from the MSC provider or from various other persons who have been actively involved in the provision of the individual's services through the MSC.
Taxation of personal dividends
Legislation will be introduced in the 2008 Finance Bill to simplify the taxation of individuals on dividends received from non-UK resident companies.
Under the current law, individuals receiving dividends from UK-resident companies are entitled to a non-payable tax credit of one-ninth of the distribution. This treatment will be extended to dividends from non-UK resident companies, subject to the conditions that the individual must have less than a 10 per cent shareholding in the distributing company, and that they receive as dividends less than £5,000 in total per year from non-UK resident companies.
The Government is considering whether, and how, it will be possible to extend the availability of the non-payable tax credit for the minority of individuals who would not meet the two conditions.
Company car and fuel benefit tax
A reduced benefit in kind tax charge will apply, from 6 April 2008, to company cars that are capable of being run on E85 fuel. The proposal is to reduce, by two per cent, the appropriate percentage that would otherwise apply. The measure will be introduced by Treasury Order.
Where an employee's car fuel is paid for by the employer, other than strictly for business use only, an additional fuel scale charge is imposed. The fuel charge is calculated by applying the appropriate percentage (as used for company car purposes) to a fixed multiplier figure. This figure, which has been set at £14,400 since the present system for taxing car fuel was introduced in April 2003, will be unchanged for the tax year 2007-08.
Double counting of car/car fuel benefits: legislating ESC A104
ESC A104was introduced in July 2004 to remove an anomaly whereby there could be a double counting of certain expenditure when an employee earning less than £8,500 per year used an employer's credit card or voucher for certain car-related expenditure.
ESC A104 is to be given statutory effect in the 2007 Finance Bill.
Extension of the landlords energy saving allowance
The current landlords energy saving allowance (LESA) will be extended in legislation in the 2007 Finance Bill and by statutory instruments. Landlords can deduct from taxable profits the cost of certain energy-saving items in dwelling-houses which they let. The changes for landlords who pay income tax, effective for expenditure incurred on or after 6 April 2007, are as follows:
- floor insulation will be added to the list of items that qualify for deduction;
- £1,500 limit on deductible expenditure will apply to each property rather than, as currently, to each building (and so will apply to each flat in a block, instead of to the entire block of flats); and
- the lifetime of the allowance will be extended by six years so that it will cover expenditure incurred until 2015,rather than until 5 April 2009.
In addition, LESA will be made available to residential landlords who pay corporation tax, on expenditure incurred after state aid approval is received.
Relief from the 40% trust rate of tax for service charges and sinking funds in the private sector
Where landlords hold service charge payments and contributions to sinking funds made by tenants on trust, the income from the investment of those funds has previously been liable to income tax at the trust rate of 40 per cent. The Finance Act 2006 amended ICTA 1988, s. 686 (now ITA 2007, s. 479 and s. 480) to exclude social landlords (e.g. Housing Associations) from the 40 per cent charge and limit that charge to 20 per cent.
It is proposed to extend this treatment to landlords in the private sector in respect of income arising on or after 6 April 2007.
Individual savings accounts: increased subscription limits
With effect from 6 April 2008, annual subscription limits for individual savings accounts will be increased and the structure of ISAs will be changed to remove the distinction between mini ISAs and maxi ISAs.
Currently the subscription limits, per tax year, are:
- £3,000 into a cash mini ISA;
- £4,000 into a stocks and shares mini ISA (with the same or different providers); and
- £7,000 into a maxi ISA, including up to £3,000 in cash.
From 6 April 2008, the subscription limits per tax year, subject to an overall limit of £7,200, will be:
Draft regulations on other changes to ISAs, also to be effective from 6 April 2008, were published on 21 March 2007.
- £3,600 into a cash ISA; and
- £7,200 into a stocks and shares ISA.
Tax relief on personal term assurance
Changes are to be introduced in the 2007 Finance Bill to prevent individuals (but not employers) from obtaining tax relief on pension contributions used to pay premiums under personal term assurance policies. The Finance Bill will also give powers to make secondary legislation so that any new products sold with a view to avoiding the new restrictions on relief can be targeted quickly and denied relief.
Draft legislation will be published and the Government is open to discussion with the industry about the detail of that draft, to ensure the measure is correctly targeted.
Changes to alternatively secured pension rules and consultation on inheriting tax relieved pension savings
New measures announced in the Pre-Budget Report are to be introduced to tighten up the provisions for the operation of members' and dependants' alternatively secured pension (ASP) funds with some changes and amendments. These include:
the introduction of a requirement to draw a minimum income from an ASP fund with effect from 6 April 2007;
a tax charge where ASP funds remaining on the death of a member on or before 5 April 2007 are transferred to the pension funds of other members in the scheme; and
provisions for schemes with members with money purchase arrangements that they have been unable to trace by age 75.
HMRC will also be consulting on ways to prevent inheriting tax-privileged pension savings.
Microgeneration: tax treatment of renewables obligation certificates
Where a householder receives a renewables obligation certificate (ROC) as a result of installing microgeneration technology in their home, providing the householder pays income tax, they will not be liable to income tax on the ROC or capital gains tax in the event of the sale of the ROC. The exemption from income tax relates to ROCs received on or after 6 April 2007 and the exemption from capital gains tax relates to ROCs received on or after 6 April 2007.
Armed forces operational allowance
Under legislation to be introduced in the 2007 Finance Bill, all payments of the new operational allowance to UK armed forces for service from 1 April 2006 will be exempt from tax.
Tax treatment of payments under Armed Forces Redundancy Scheme 2006
Legislation is being introduced in the 2007 Finance Bill to ensure that payments under the Armed Forces Redundancy Scheme 2006, from its commencement on 6 April 2006, will be tax-free in the same way as payments under the Armed Forces Redundancy Scheme 1975.
Charities: increase to Gift Aid benefit limits
The limits on the value of benefits which can be given by charities and community amateur sports clubs in recognition of donations made on or after 6 April 2007 and still qualify for gift aid relief are to be raised by the 2007 Finance Bill. For donations of more than £1,000, the limit on the value of benefits increases from 2.5 per cent to 5 per cent of the donation and the overriding limit on the value of benefits received by a donor in a tax year increases from £250 to £500.
Corporation tax small companies' rates
The small companies' rate for corporation tax has been increased from 19 per cent to 20 per cent in respect of all profits apart from ring fence profits, which will remain chargeable at 19 per cent. This rate change is effective from 1 April 2007 and will affect companies with profits under £1,500,000. In respect of companies with profits falling between £300,000 and £1,500,000 the marginal relief fraction will be 1/40 ,also effective from 1 April 2007. The marginal relief fraction will remain at 11/400 in respect of ring fenced profits.
Business tax reform package
The 2007 Budget includes three significant reforms to the business tax system:
- changes in the rate of offshore and small companies' corporation tax (see BN03 and BN04);
- changes to the capital allowances regime within the meaning of CAA 2001, Pt.4 (see BN06 and BN07)
- increases in the levels of deductions available in respect of qualifying expenditure on research and development (see BN05).
The majority of these changes will apply from 2008-09. However, certain measures will take effect from 2007-08. See the individual summaries for more detail.
Extension of the small and medium enterprise (SME) research and development tax relief scheme to include mid-sized companies
Various changes are proposed to the R&D rules and to related legislation.
For large companies, legislation will be introduced in the 2008 Finance Bill to increase the rate of relief from 125 per cent to 130 per cent.
For SMEs claiming an enhanced deduction against profits, the intention (again in the 2008 Finance Bill, but subject to state aid approval from the EC) is to increase the rate of relief from 150 per cent to 175 per cent. The payable credit will be broadly retained at its current value of 24 per cent of qualifying expenditure.
Legislation will be introduced in this year's Finance Bill, but again subject to EC approval and therefore having effect from a date to be appointed by Treasury Order, to extend the scope of the more generous relief to companies with fewer than 500 employees (rather than those with fewer than 250 employees, as at present). The intention is also to double the turnover threshold from 50 million euros and the maximum balance sheet total from its current level of 43 million euros.
An amendment to the vaccine research relief scheme, correcting an error whereby additional relief was sometimes available at 150 per cent rather than 50 per cent, will have effect from 1 April 2007.
Extension of increased rate of first-year capital allowances for small businesses
The 50 per cent rate of first-year allowances, applying for expenditure on plant and machinery incurred by small businesses only, is extended for a further period of one year. The 50 per cent rate (rather than the 40 per cent rate for other businesses) will therefore apply to expenditure incurred up to 31 March 2008 (corporation tax) or 5 April 2008 (income tax).
More radical measures are proposed from April 2008, whereby first-year allowances for both small and medium-sized businesses will be replaced by an annual investment allowance of £50,000.
Corporation tax main rates
The main rate of corporation tax, which is currently set at 30 per cent,will become 28 per cent from 1 April 2008. This main rate applies to companies with profits above the upper relevant maximum amount of £1,500,000 or companies which are part of a group with group profits exceeding £1,500,000. The main rate of corporation tax for companies' ring fenced profits will be 30 per cent from 1 April 2008.
Industrial buildings allowance and agricultural buildings allowance
In a radical and unexpected measure, both industrial buildings allowances (IBAs) and agricultural buildings allowances (ABAs) are to be phased out over a four-year period.
The Budget press release contains few details of how the transition will be managed. It does state, however, that as a general rule there will be no further balancing adjustments (whether allowances or charges), and no re-calculation of writing-down allowances, for disposals made on or after Budget Day (21 March 2007). Exceptions are made for:
- balancing events occurring in pursuance of a relevant pre-commencement contract
- qualifying enterprise zone expenditure.
To qualify as a relevant pre-commencement contract, a contract must have been made in writing before 21 March 2007. If the contract is conditional, then all conditions must have been satisfied before that date. There must be no terms that remain to be agreed, and no significant variations made, after that date.
It appears that, for the remaining four-year period, the new owner will step into the shoes of the previous owner for the purposes of claiming writing-down allowances. However, the use of the term phased out may suggest further restrictions in the course of the four years.
Capital allowances: business premises renovation allowance
The scheme of business premises renovation allowances (BPRAs), announced in the Finance Act 2005will finally come into effect from 11 April 2007.
BPRAs are designed to encourage the renovation or conversion of vacant business property in certain areas of the UK that are designated as disadvantaged. The 100 per cent relief represents an enhanced rate for capital expenditure on buildings already qualifying for allowances and a completely new form of tax relief for expenditure on the renovation of buildings such as offices and shops that (in some cases) would currently attract no capital allowances.
Since the scheme was first announced, the definition of disadvantaged areas has been amended and premises relating to certain specified trades have been excluded from the scope of the new allowances.
Film tax regime: excluding non-cinema production
This measure will allow companies to opt out of the rules introduced in the Finance Act 2006 which provided for special tax treatment in respect of companies in the business of making films both for cinema and other media, with additional relief conferred on production companies making British cinema films (film tax relief). These companies (including those not eligible for the film tax relief) will instead be able to elect to be taxed according to general tax rules. Such elections may be made on or after the date on which the Finance Act 2007 receives Royal Assent.
The regime introduced by FA 2005, s. 83 which allows securitisation companies for periods of account ending before 1 January 2008 to be taxed on the basis of accounting standards in force before the introduction of international accounting standards will be extended by regulation.
The regulation-making power in the legislation will also be modified to cover a wider range of securitisations.
Changes to the venture capital schemes and enterprise management investment incentives
Several changes are to be made which will affect investors under the enterprise investment scheme (EIS), the corporate venturing scheme (CVS) and the venture capital trust (VCT) scheme, companies attracting investment under those schemes, VCTs themselves and companies using enterprise management incentives (EMI):
- for EIS, VCTs and CVS, there will be a limit of 50 on the number of full-time employees (or equivalent) that the money-raising company or group may have when the relevant shares or securities are issued (previously, there was no limit);
- for EIS, VCTs and CVS, there will be an investment limit of £2m raised under all schemes of the money-raising company or group in the 12 months ending on the date of the relevant investment;
- for EIS, VCTs and CVS, the current law requires a subsidiary carrying on a qualifying trade to be a direct 90 per cent qualifying subsidiary of the parent, but changes will be introduced to extend this to 100 per cent subsidiaries of 90 per cent subsidiaries, and to 90 per cent subsidiaries of 100 per cent subsidiaries, of the parent;
- for VCTs, the disposal of an investment that has been part of a qualifying holding for at least six months will be ignored for the next six months for the purposes of the requirement that the VCT have at all times at least 70 per cent of its investment in qualifying holdings, allowing VCTs up to six months to reinvest or distribute the disposal proceeds;
- for VCTs, HMRC will have powers to make regulations, for non-withdrawal of approval in certain circumstances, that will replace the current inadvertent breach guidance;
- for EIS, investors can currently claim income tax relief as if their subscriptions had been made on the date the fund closed, provided the funds are at least 90 per cent invested within six months of the closing date; that time limit will be extended to 12 months;
- for EIS, VCTs, CVS and EMI, new rules will be introduced to align the rules relating to the transfer of a qualifying trade of exploiting relevant intangible assets (RIAs) around a group of companies with those currently relating to other qualifying trades, to allow RIAs to be moved around groups without investors losing tax relief and without EMI companies losing their qualifying status.
Most of these changes will have effect on or after 6 April 2007, but the change to the investment period for EIS will apply for funds that closed after 6 October 2006, and the employee test and investment limits will not apply to investments relating to funds raised before 6 April 2007 or to EIS or CVS shares issued before the 2007 Finance Bill receives Royal Assent.
Sale and repurchase agreements "REPOS"
A new corporation tax regime for repos will be introduced in the 2007 Finance Bill. This will simplify and replace the existing rules ICTA 1988, s. 730A730C
Under the new rules, there will be a simpler accounts-based regime where profits and losses made by companies from their repo transactions will be taken directly from accounts prepared under generally-accepted accounting principles, subject to any adjustment required under the rules for taxing corporate debt FA 1996, Pt. 4, Ch. 2
The new provisions will apply to repos entered into on or after a day to be appointed. This will be after the completion of the current round of consultation with businesses and those involved in this specialised area of taxation.
Alternative finance arrangements
New rules will be introduced in the 2007 Finance Bill which provide for the taxation of certain types of investment bonds, known as "sukuk", which satisfy the Shari'a law prohibition on paying or receiving in interest. The new measures will ensure that sukuk are taxed on a par with equivalent conventional debt securities.
The changes will apply to arrangements entered into after 5 April 2007 for income tax purposes or after 31 March 2007 for corporation tax purposes. The measures will also apply in relation to existing investment bonds; for income tax purposes, to amounts paid or received after 5 April 2007 ; or for corporation tax purposes, to profits or losses arising to companies from investment bonds within the statutory definition after 31 March 2007.
The new provisions will also amend the previous alternative finance rules to put the tax treatment of profit share agency arrangements beyond doubt.
Pension tax: technical improvements
Changes to the pension rules will be introduced in the 2007 Finance Bill and in associated regulations, and will include:
- an expansion of the group of "excluded benefits" on which there is no tax charge where former employers provide them to retired former employees, with effect from 6 April 2006;
- changes to FA 2006, s. 160 to define the amount of unauthorised payments made by a registered pension scheme, so as to prevent tax-charge reductions through the way in which payments are made;
- changes to the anti-avoidance legislation regarding the payment of ill-health pensions;
- a change for IHT purposes to the time limits relating to payment of death benefits in a case where a member of a pension scheme assigns the benefits payable on death to scheme trustees and the scheme is a discretionary trust for IHT purposes, to align the time limits for paying out death benefits with those applicable under the pension scheme rules from 6 April 2006.
Changes to the offshore funds regime
Measures are to be introduced to remove a restriction in the offshore funds regime on the structure of multi-tiered funds and to make minor changes to assist the application of the fund. These include:
- amending the definition of an offshore fund;
- the treatment of losses on disposal of units or shares in non-qualifying funds; and
- the meaning of "eligible income" for approved investment trusts.
The changes for multi-tiered funds and to the offshore fund definition will have effect for accounting periods beginning on or after 1 January 2007. The loss relief change will have effect for losses arising on or after 6 April 2007 for income tax payers, and on or after 1 April for corporation tax payers. The change for investment trusts will have effect from the date of Royal Assent.
The tax treatment of general insurers' reserves
As announced in the 2006 Pre-Budget Report, the 2007 Finance Bill will contain provisions to replace the current tax treatment of insurers' reserves with a narrowly-targeted rule which will have effect for periods of account ending on or after the date of Royal Assent to the 2007 Finance Bill
Life insurance companies: consulation outcomes
Nearly a year after consultation began, legislation will be introduced in the 2007 Finance Bill to amend the taxation of life insurance companies (LICOs). Consultation will continue on the detailed measures which will:
- set out the circumstances in which a LICO will be charged to corporation tax under Sch. D, Case I, rather than under the "I minus E" basis which normally applies;
- modify the treatment of structural assets held by LICOs;
- remove restrictions where a LICO disposes of units in an authorised investment fund (AIF) to a connected AIF manager; and
- allow tax exemption to be retained after the transfer of an existing tax-exempt business which is not a life assurance business from friendly societies to LICOs.
The majority of the measures have effect for periods of account beginning on or after 1 January 2007, except the friendly society business measure, which takes effect where a transfers occurs after the date of Royal Assent to the 2007 Finance Bill.
Life insurance companies: financing arrangements
Life insurance companies who use a variety of complex arrangements including contingent loans and financial reinsurance contracts to meet their capital requirements will be affected by measures in the 2007 Finance Bill to simplify and strengthen the tax law relating to such arrangements.
The new rules will affect periods of account beginning after 31 December 2006.
Life insurance policies and commission arrangements
Measures will be introduced in the 2007 Finance Bill to prevent excessive relief for premiums invested into short to medium-term life insurance policies, capital redemption policies or life annuity contracts where an intermediary passes on commission or reinvests it in the policy. The measures will be effective from 21 March 2007.
The chargeable events legislation allows a deduction, in calculating a gain, for premiums paid, but premiums is not defined. Where premiums paid under a policy or contract exceed £100,000 in a tax year, subject to certain conditions, the new measure will make it clear that the premium to be deducted:
- must be reduced by the amount of any commission passed on by an intermediary to the policy holder or a connected person; and
- must not include any commission waived by an intermediary and reinvested in the policy.
Auctions of emission allowances under the EU Emissions Trading Scheme
This measure announces the introduction of a legislative basis via the 2007 Finance Bill for the intended auctioning by the government of seven per cent of allowances, as well as allowances from closures and surplus allowances from the new entrants reserve.
Investment managers' exemption: carbon trading
The so-called "investment managers' exemption" provisions that ensure that UK investment managers can carry out certain types of permitted transactions on behalf of non-residents without bringing the latter into the UK tax net will be extended by Treasury regulations to include trading in carbon emission credits and similar instruments. The provisions concerned can be found at FA 1995, s. 127 and Sch. 23 for income tax purposes and FA 2003, s. 152 and Sch. 26 for corporation tax purposes.
Secondments to charities and educational institutions
Amendments are to be made to the relevant sections of the Income Tax (Trading and Other Income) Act 2005 to ensure that the special deduction available to an employer for the salary costs of employees seconded to a charity or educational institution will only be available on condition that the costs are paid within nine months of the end of the relevant accounting period. This condition was inadvertently disapplied when the legislation concerned was rewritten for income tax purposes by the Income Tax (Trading and Other Income) Act 2005.
Charitable lottery tax relief: Gambling Act 2005 consequentials
The 2007 Finance Bill will ensure that the current relief from tax available to charities, in respect of profits derived from licensed lotteries, will be retained. This measure will be effective from 1 September 2007, so as to be in line with the relevant provisions of the Gambling Act 2005.
Stamp duty land tax: relief for new zero carbon homes
As announced in the 2006 Pre-Budget Report, a regulation-making power will be introduced to bring in a new time-limited relief from stamp duty land tax for the vast majority of new zero carbon homes in the UK.
Qualifying criteria for the relief, which will be set out in regulations to be laid before Parliament before the end of the summer recess, will require zero carbon emissions from all energy use in the home over a year. To achieve this,<?Pub Caret> the fabric of the home will be required to reach a very high energy efficiency standard and to be able to provide onsite renewable heat and power. There will be a certification process for all new homes and qualification for the exemption which will be dependant on homebuyers having a certificate. Detailed arrangements for the certification process will be issued in due course.
The relief will be effective from 1 October 2007 and will expire on 30 September 2012.
Stamp taxes reconstruction reliefs
This measure, effective from the day after Royal Assent to the 2007 Finance Bill, will mean that a company that holds some of its own shares will be able to claim relief from stamp duty and stamp duty land tax (SDLT) in respect of certain reconstructions and acquisitions without the need to cancel those shares.
Relief from stamp duty and SDLT is available for certain company reconstructions and acquisitions where there is no real change in ownership. The reliefs require that the same persons own the company or business after the transaction and the proportion of the company business that is owned by each shareholder remains unchanged.
The introduction of this measure will mean that a company that has purchased its own shares and holds them will no longer be regarded as a shareholder for the purpose of the overall ownership test and will no longer need to cancel them, or accept shares in the acquiring company in order to qualify for relief.
Stamp taxes reliefs for exchange intermediaries
New measures will be introduced to bring the reliefs from stamp duty and stamp duty reserve tax for intermediaries on securities exchanges on the purchase of UK shares, or for repurchases and stock lending, into line with the Markets in Financial Instruments Directive (MiFID) which will come into effect on 1 November 2007.
Stamp duty land tax: exchanges of property between connected persons
An amendment is to be made to the stamp duty land tax (SDLT) treatment of exchanges of property between connected persons. Currently, where the parties are connected persons the two legs of the exchange are linked transactions. This means that the market values are aggregated and the rate of SDLT is that applicable to the aggregate. The new rule will mean that where an exchange of property takes place between connected persons on or after Royal Assent to the 2007 Finance Bill, the two legs of an exchange will not be linked with each other for determining the rate of SDLT.
Stamp duty land tax: anti-avoidance measures
New stamp duty land tax anti-avoidance measures are to be introduced in the 2007 Finance Bill effective for any transaction the effective date of which is on or after Royal Assent to the Finance Act 2007. The new provisions will replace the Stamp Duty Land Tax (Variation of the Finance Act 2003) Regulations 2006 (SI 2006/3237) which are time-limited.
Stamp duty land tax: relief for shared ownership trusts
Stamp duty land tax (SDLT) relief for shared ownership leases is to be extended to properties purchased through shared ownership trusts. Shared ownership trusts are for those who wish to purchase properties where commonhold rather than leases are being offered. The tax relief will work in the same way as for shared ownership leases, so that SDLT is usually only chargeable on the first and last installments. Alternatively, purchasers can elect to pay SDLT once and for all on the market value of the property or on the maximum share which can be purchased. The extension of the relief will apply to purchases on or after Royal Assent to the 2007 Finance Bill.
Stamp duty land tax: payment of tax and self-certificate
From the date of Royal Assent to the 2007 Finance Bill, payment of the amount of stamp duty land tax (SDLT) self-assessed in a land transaction return will no longer be required to accompany the return, but will still have to be paid by the filing date for the return.
A measure will also be introduced for the SDLT self-certificate to include a declaration by the agent submitting the self-certificate on the purchaser's behalf. This will be subject to regulations to be made by HMRC at a later date.
Stamp duty land tax: surplus school land
Obsolete stamp duty and stamp duty land tax (SDLT) relief for transfers of surplus school land will be repealed from the date of Royal Assent to the2007 Finance Bill. A Treasury Order will be made which will come into force on 25 May 2007, to bring such transfers within the general SDLT relief for statutory reorganisations.
VAT: increased turnover thresholds for registration and deregistration
From 1 April 2007, the amount of the annual VAT registration threshold rises to £64,000 from £61,000 and the VAT deregistration threshold rises to £62,000 from £59,000.
From the same date, the registration and deregistration limits for relevant acquisitions from other member states rise to £64,000 from £61,000.
VAT: reform of VAT fuel scale charges
The basis of the VAT charge for fuel used for private motoring is changed from engine size to carbon dioxide CO2 emissions. The change applies from the start of the first VAT return period beginning after 30 April 2007. The rates of charge for returns covering one month, three months and 12 months are set out in the tables in Budget Notice BN55. Where the CO2 emissions figure of a vehicle is not a multiple of five, the figure is rounded down to the next multiple of five to determine the charge. For a bi-fuel vehicle which has two CO2 emissions figures, the lower of the two figures should be used. For cars which are too old to have a CO2 emissions figure, HMRC have prescribed a level of emissions by reference to the vehicle's engine capacity (cc).
This change aligns the basis of the VAT charge with that for direct tax.
VAT: amendment to VAT legislation following recent judgements of the European Court of Justice
There is a revised treatment of land and buildings or other assets which are used partly for non-business purposes. Until now, a person who acquires an asset which is to be used partly for business purposes could choose between:
- allocating the asset partly to business purposes, apportioning the VAT charges, so as to recover up front only the VAT attributable to the business use made of the asset;
- allocating the asset wholly to business purposes, recovering all the VAT charged up front (subject to the partial exemption rules) and accounting for VAT on the non-business use in each VAT return period, calculated by spreading the capital cost of the asset over an economic life and multiplying the cost attributed to the VAT return period by the proportion of non-business use in the period. This is known as Lennartz accounting; or
- allocating the asset wholly to non-business purposes, recovering none of the VAT charged and not accounting for output VAT when the asset is used or sold.
From 1 September 2007, there is a repeal of the legislation that was introduced in 2003 to stop <i>Lennartz</i> accounting on land and buildings.
From 1 September 2007, a 10-year period applies for land and buildings so that each year, generally 10 per cent of the cost of a building is taken into account in calculating the charge for non-business use. Until now, HMRC allowed a maximum period of 20 years for land and buildings. The period for other assets will be announced.
Transitional provisions will probably apply where Lennartz accounting has already been applied to an asset and the revised basis applies for non-business use after 1 September 2007.
After 20 March 2007, the law ensures that a surrender of an interest in land for no consideration is treated in the same way as:
- the grant of a new interest to another person; or
- an assignment (transfer) of an existing interest to another person.
VAT: reduced rate for smoking cessation products
Reduced-rating at five per cent applies to over the counter supplies by retailers (including supplies made over the internet) of smoking cessation products for one year from, probably, 1 July 2007. This affects all non-prescribed sales of patches, gums, inhalators and other pharmaceutical products held out for sale for the primary purpose of helping people quit smoking.
Smoking cessation products that are dispensed on a prescription remain zero-rated.
VAT: transfer of going concern
From 1 September 2007, the record-keeping requirements where a business is transferred as a going concern will be brought into line with other tax and regulatory regimes so that the seller retains his records, except where the buyer takes over the seller's VAT registration number.
The seller must make available to the buyer information necessary for the buyer to comply with his duties under the VAT Act. HMRC may disclose to the buyer information it holds that the buyer needs to comply with his duties under the VAT Act.
VAT: Gambling Act 2005 consequentials
From a date to be appointed, which will probably be 1 September 2007, the VAT law on bingo and other games of chance will be amended to take account of the implementation of the Gambling Act 2005, so that:
- standard-rating applies to all participation fees for bingo and gaming, subject to certain exceptions, such as small-scale cash bingo, prize bingo and gaming played for fund-raising purposes, subject to monetary limits;
- the existing exceptions from taxation are preserved by mentioning the relevant parts of the newly-implemented law under which games are played; and
- the existing exemption is preserved for participation charges for remote gaming.
VAT: joint and several liability
HMRC can direct that a VAT-registered person receiving goods listed in VATA 1994, s. 77A(1) from another VAT-registered person is jointly and severally liable for VAT if he had reasonable grounds to suspect that VAT would go unpaid elsewhere in the supply chain. Originally, the provisions applied to telephones, computers and their parts and accessories. From 1 May 2007, the list of goods is extended to include certain types of electronic equipment, of a kind ordinarily owned by individuals and used by them for the purposes of leisure, amusement or entertainment.
Satellite navigation systems (SatNavs) are included on the list as computer equipment.
HMRC can presume that a person had reasonable grounds to suspect that VAT would go unpaid if he purchased specified goods for less than the open market value or less than the price payable for them by any previous supplier. That presumption is rebuttable on proof that the low price payable for the goods was due to circumstances unconnected with a failure to pay VAT. From Royal Assent to the 2007 Finance Bill, the Treasury may extend or otherwise alter the circumstances in which a person is presumed to have reasonable grounds for suspecting that VAT will go unpaid elsewhere in the supply chain.
Landfill tax: increases to rates
The standard rate of landfill tax (LFT) rises from £21 to £;24 per tonne for a disposal of waste made, or treated as made, on or after 1 April 2007.
For a disposal of waste made, or treated as made, on or after 1 April 2008, the standard rate of LFT rises from £24 to £32 per tonne and the lower rate of LFT rises from £2 to £2.50 per tonne.
Landfill communities fund: increase in value and simplification package
From 1 April 2007, the law concerning landfill tax (LFT) and environmental bodies (EBs) enrolled under the Landfill Communities Fund (LCF) is amended so that:
- the maximum credit that landfill site operators may claim against their annual LFT liability, for contributions made to bodies with objects concerned with the environment, enrolled under the LCF, falls from 6.7 per cent to 6.6 per cent;
- HMRC may specify conditions under which the regulatory body for the LCF is and remains approved. Additionally, the regulatory body may specify conditions under which an EB is and remains approved;
- an EB need no longer submit a copy of its independently audited financial accounts to the regulatory body each year, unless requested to do so;
- the relevant period for which an EB must submit details of its income, expenditure and balances is standardised to the 12 months ending on 31 March. An EB may need to submit such information at other times at the request of the regulatory body;
- if an EB transfers a contribution to another EB, the EB making the transfer must still notify the regulatory body, but the EB receiving the transfer need no longer do so;
- an EB must notify the regulatory body of project details in advance of spending on a project; and
- contributions made by a landfill site operator before 1 April 2003 are no longer qualifying contributions if they are spent on sustainable waste (object c and cc) projects unless there is a contract or documented record in place before 1 April 2007 committing those funds to such a project.
Aggregates levy: rates
For any aggregate commercially exploited on or after 1 April 2008, the rate of aggregates levy (AL) rises from £1.60 per tonne to£1.95 per tonne.
In Northern Ireland, registered operators with an AL credit certificate remain entitled to 80 per cent relief of the full levy rate.
Aggregates levy: exemption for aggregate from the improvement, maintenance and construction of railways, tramways and monorails
From a day to be appointed after the 2007 Finance Bill receives Royal Assent, exemption from aggregates levy (AL) applies to aggregate removed from the ground along the line, or proposed line, of any railway, tramway or monorail for the purposes of improving, maintaining or constructing it, providing the aggregate was not removed for the purpose of extracting the aggregate.
Climate change levy
Climate change levy: changes to rates
The rates of climate change levy (ccl) for 2007-08 were set by the Finance Act and those for 2008-09 will be included in the 2007 Finance Bill. The 2008-09 rates, which will rise broadly in line with inflation, are set out in BN68.
Climate change levy (CCL): simplification package
From Autumn 2007, there is no requirement for a customer to provide a certificate before receiving a supply relieved from climate change levy (CCL). This ensures that customers do not lose relief simply because a certificate was submitted late.
From Royal Assent to the 2007 Finance Bill, liability to a penalty for incorrect certification includes circumstances where a certificate becomes incorrect after its initial submission.
From Royal Assent to the 2007 Finance Bill, as regards exemption from CCL for exported and onward supplies, there is no requirement for a customer separately to notify the supplier. This enables exemption on the basis of certification only.
As regards energy-intensive businesses receiving supplies at the reduced rate of 20 per cent of the full rate, from Autumn 2007 procedures for reduced-rating are aligned with the CCL certification regime applying to other reliefs.
Insurance premium tax
Insurance premium tax (IPT): amendment to the definition of a premium
After 21 March 2007, the definition of premium for the purposes of insurance premium tax includes payments received by, or on behalf of, an insurer for a right to require the insurer to provide cover under a taxable contract of insurance.
Pre-owned assets: late elections
Legislation will be introduced to accept late elections from an individual to treat assets that are subject to the pre-owned assets (POA) income tax charge as part of their estate for inheritance tax purposes. The legislation will apply in relation to the 31 January 2007 deadline for 2005-06 cases and to future deadlines where a liability to the POA charge first arises in a later year.
Amending legislation for trust modernisation
Two minor amendments have been announced following draft legislation issued for consultation in February 2007.
The first omission in the wording of revised ICTA 1988, s. 686A means that for a company buying back its own shares, trustees who are shareholders would be charged on the entire payment received rather than on the amount in excess of the original subscription price. This will be rectified with effect from 6 April 2006.
The second amendment concerns the interaction of trustees' tax pools with payments received by trustees which are chargeable event gains on certain life assurance policies. There is a notional tax credit of 20 per cent on chargeable event gains from some of these policies which should not enter the tax pool. However, the legislation relating to the tax pool was not amended to ensure this notional tax credit did not do so. This will be rectified with effect from 6 April 2007.
Changes to self assessment tax return filing dates
Different filing dates are to be introduced for paper and online self assessment tax returns. The new measures, reflecting the Carter report and the revisions Lord Carter made to his recommendations in the light of extensive representations from the accountancy profession and elsewhere, will apply to returns issued from 6 April 2008 and will relate to the tax year 2007-08 and subsequent years.
For returns that are filed online, the current filing date of 31 January will be unchanged.
For paper returns, the new filing date will be 31 October (so 31 October 2008 for returns made for the tax year 2007-08), whether or not taxpayers wish HMRC to calculate their tax liability for them.
Consequential changes will be made to revise the period during which a return can be amended, to avoid disadvantaging those who file early.
For the tiny minority of those filing returns who are unable to do so online (eg registered pension schemes set up under trust), extra time for filing paper returns will be allowed.
HMRC review of powers, deterrents and safeguards: penalties for incorrect returns
The penalty regime for most tax errors and omissions is to be simplified, probably for return periods starting after 31 March 2008 where the return is filed after 31 March 2009. Legislation to be introduced in the 2007 Finance Bill will be subject to a period of consultation.
The single new penalty regime, replacing a number of different measures currently in the Taxes Management Act 1970 the Value Added Tax Act and elsewhere, will apply for income tax, CT, PAYE, NIC and VAT returns. Under the new regime, the penalty will be determined by reference to the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer.
According to the guidance, the penalty may be reduced to zero for an unprompted disclosure.
Part of the new measures will be full and explicit provisions for the right of appeal against all penalty decisions.
Changes to the income tax and corporation tax enquiry windows, the existing powers to require online filing and electronic payment, and the effective date of payment by cheque
Under proposals to be introduced in the 2007 Finance Bill, the period during which HMRC can enquire into income tax self assessment returns will be linked to the date the return is received by HMRC. This will apply to returns for 2007-08 and subsequent years. Similar measures will apply to company tax returns for accounting periods ending after 31 March 2008.
Changes to the regulation requiring online filing and electronic payment will provide a single set of regulation-making powers for all taxes and duties for which HMRC are responsible. These will be published in draft alongside the 2007 Finance Bill<?Pub Caret> and, subject to consultation, will be laid in September this year.
A requirement to file PAYE in-year forms online will be introduced in phases from 2009.
Requirements to file online, and pay electronically, are expected to be phased in from 2010 for VAT and from 2011 for corporation tax.
It is proposed that cheque payments of VAT and corporation tax will be treated as made at the point that funds have cleared into HMRC's account.
Review of powers and safeguards: new criminal investigation powers and safeguards
Legislation is to be introduced in the 2007 Finance Bill to provide consistent powers and safeguards for all HMRC criminal investigations. 25 existing powers of criminal investigation will be superseded and therefore repealed.
In Scotland, the legislation introduces some new powers and safeguards. For the whole of the UK, the intention is to provide greater consistency.
The changes will apply from a date to be set by Treasury order, likely to be before the end of 2007.
Purchased life annuities
The current requirement that the capital element of a purchased life annuity has to be determined by an officer of Revenue and Customs is to be repealed from a date to be appointed.
This repeal is part of a proposed rewrite of the purchase life annuity regulations to be undertaken after consultation with the industry.
Recognition of stock exchanges and definition of listed for tax purposes
Various measures relating to stock exchanges and listing for tax purposes will be introduced in the 2007 Finance Bill, to have effect from the date of Royal Assent.
Listed and listing are not currently defined in tax legislation; this will be remedied. In addition, HMRC will have powers to designate as a recognised stock exchange for tax purposes any investment exchange that is designated as a recognised investment exchange (RIE) by the FSA, to ensure equal tax treatment for FSA-listed shares. Finally, terms used in the legislation that are no longer current (such as the Official List of the Stock Exchange) will be updated.
Capital gains tax: a targeted anti-avoidance rule
As announced in the Pre-Budget Report on 6 December 2006, legislation will be introduced in the 2007 Finance Bill to extend the current corporation tax anti-avoidance rule on allowable losses so that it also applies to persons liable to capital gains tax. The new legislation will apply to losses on disposals made on or after 6 December 2006.
Under the existing legislation for corporation tax, and under the proposed new legislation for corporation tax and capital gains tax, if a loss arises as part of arrangements and if a main purpose of those arrangements is the obtaining of a tax advantage, the loss will not be an allowable loss for the purposes of income tax, capital gains tax or corporation tax. This is designed to ensure that relief is available only where a loss is a genuine commercial loss.
Sale of lessor companies anti-avoidance
Anti-avoidance legislation will be introduced to counter attempts to undermine the effect of the sale of lessor companies provisions in the Finance Act 2006. Specifically, avoidance based on the mismatch between two concepts of control and on the manipulation of the accounting value of leased assets are to be tackled.
Corporate capital loss and gain buying
Legislation will be introduced in the 2007 Finance Bill to put a stop to schemes which have been exploiting an exception provided within one of the anti-avoidance rules introduced in December 2005. It will apply to losses or gains accrued or realised on or after 21 March 2007.
The anti-avoidance provisions may be found at TCGA 1992, s. 184A and 184B and restrict the offset of pre-entry losses. The exception concerns the treatment of losses occurring as a result of a de-grouping charge arising and is contained in FA 2006, s. 70(9) and (10). Although the relief provided by that legislation will be preserved, arrangements will be made to ensure that the anti-avoidance rules may no longer be sidestepped.
New anti-avoidance provisions will be introduced in the 2007 Finance Bill to counter schemes in which companies exploit a special accounting system used at Lloyd's which allows the recognition; for tax purposes; of profits or losses relating to an earlier year in a later year. Companies have been changing their group relationships after a loss is known but before it is recognised for tax purposes. The new legislation will require the maintenance of the group structure from the time the loss is known to the time it is declared.
Tax avoidance using employer benefit trusts
A new anti-avoidance measure, further strengthening existing legislation, affects certain employers who claim a deduction against taxable profits for employee benefit contributions. Employers can claim tax relief only to the extent that an employee benefit contribution is actually paid or transferred to the employee within nine months of the end of the accounting period in a form that gives rise to an income tax and National Insurance charge.
The new measure, broadly applying from 21 March 2007, is designed to catch all arrangements and schemes that sidestep the existing rules, including in particular those arrangements whereby employers declare a trust over assets that they already control.
Gaming, excise and fuel duties
Hydrocarbon oils duty: rates
From 1 October 2007, excise duty on main road fuels will increase by 2 pence per litre (ppl). With effect from 1 April 2008, excise duty on those fuels will increase by a further 2 ppl and a further 1.84 ppl on 1 April 2009.
From 1 October 2007,duty rates relating to unleaded petrol, leaded petrol, aviation gasoline and other heavy oil will be increased by the same percentage as the main road fuels.
In respect of non-road fuels, from 1 October 2007 effective rates of duty will increase by 2 ppl.
Changes in duty differentials and duty rates in respect of biofuels, blends of rebated gas oil with biodiesel and liquefied petroleum gas are also affected.
Energy products directive: expiry of derogations
Current legislation will be amended to provide that with effect from 1 November 2008, fuel used to power private pleasure flying craft and private pleasure boats will no longer be charged to tax under the reduced and exempt rates of duty.
Alcohol duty: rates
With effect from 26 March 2007, rates of duty on alcoholic beverages have been increased, mainly in line with inflation. The beverages affected are beer, wine and made wine, cider and sparkling cider, and sparkling wine. There is no increase on the duty rate affecting spirits and the small brewers; relief scheme is unaffected.
Tobacco products duty: rates
With effect from 6pm on 21 March 2007, the rates of duty on tobacco products have increased in line with inflation. Cigarettes now carry a rate of 22 per cent of the retail price plus £108.65 per thousand. Cigars now carry a rate of £158.24 per kilogram and hand-rolling tobacco is taxed at the rate of £113.74 per kilogram. Other tobacco carries the rate of £69.57 per kilogram.
Remote gaming duty
The rate of duty charged on the profits of remote gaming operators will be levied at 15 per cent. The effective date is expected to be 1 September 2007, in line with the full implementation of the Gambling Act 2005.
Gaming duty: rates and bandings
This measure has been announced to change the gross gaming yield banding and rates of duty for gaming duty. The new rates will be included in the 2007 Finance Bill and will come into effect for six-month accounting periods starting on or after 1 April 2007.
Amusement machine licence duty (AMLD): change to prize limit for category C machines
From 22 March 2007, the prize limit in respect of category C machines will increase from £25 to £35. Power is also to be conferred to HMRC to enable duties to be kept in line with any changes to the social definitions of the machine categories. The categories of machines as described in the Betting and Gaming Duties Act 1981 will also be revised.
Consequential amendments to the betting and gaming duties legislation
The full implementation of the Gambling Act 2005; expected to be on 1 September 2007; will render many of the current references within tax law to social law definitions of certain terms and expressions redundant. Legislation will be introduced to either update the cross-references into social law or replace them with new, free-standing, definitions.
Repeal of excise duties (small non-commercial consignments) relief regulations 1986
This measure announces forthcoming legislation which will repeal provisions made by the Excise Duties (Small Non-Commercial Consignments) Relief Regulations 1986, which exempt from excise duty small consignments of tobacco and alcohol,<?Pub Caret> thus bringing such items into the UK charge.