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
and merged with the 20 per cent savings rate;
- the existing 10 per cent starting rate will be abolished and a new
10 per cent starting rate for savings income will be introduced from
- age-related personal allowances for those aged 65 to 74 and 75 and
over will be increased to £9,030 and £9,180 respectively
- and the basic personal allowance will be increased by indexation to
£5,435 for 2008-09 (as already provided for by a Treasury order
made on 10 December 2007).
The higher rate will remain at 40 per cent. There are no changes to the
10 per cent dividend ordinary rate or the 32.5 per cent dividend upper
Employer provided vans:
fuel benefit rules
To ensure consistency, the 2008 Finance Bill will amend the Income
Tax (Earnings and Pensions) Act 2003 to ensure that:
- the reimbursement of private
fuel costs to employees who are provided with a company van available
for their private use is not treated as earnings for tax purposes
- this merely ensures there is no double charge, ie, on both the fuel
scale benefit and the reimbursed cost, as is already the case for company
This measure will have effect from the date on which the 2008 Finance
Bill receives Royal Assent.
Restrictions on trade loss
relief for individuals
Legislation was introduced in the Finance
Act 2007 to restrict the loss relief available to be
set against other income for the same year by a
non-active or limited
partner. Similar legislation is now to be introduced to cover sole traders
who are carrying on a trade in a
non-active capacity; broadly,
someone who spends on average less than 10 hours per week personally involved
in the trade.
Where the losses arise as a result of tax avoidance arrangements made
on or after 12 March 2008, no relief will be available for losses against
total income. In other cases, the relief from all trades carried on in
a non-active capacity will be capped at £25,000.
Double taxation relief:
For income arising on or after 6 April 2008 and for foreign tax paid
on or after 6 April 2008, the credit for any foreign tax paid on trade
or professional earnings is no more than the UK income tax due in respect
of the same earnings.
Income tax exemptions for
the return to work credit, in-work credit, in-work emergency discretion
fund and in-work emergency fund
Payments made on or after 6 April 2008 under the following schemes will
be exempt from income tax:
- return to work credit;
- in-work credit;
- in-work emergency discretion fund; and
- in-work emergency fund.
The necessary legislation will be introduced in the 2008 Finance Bill
Child trust fund: voucher
Changes are to be made to the rules for opening child trust fund (
accounts, with effect from 6 April 2009.
Under the new rules, parents will no longer have to give the CTF voucher
for a child to the CTF provider or distributor within seven days after
the expiry date on the voucher in order for the provider or distributor
to be able to open the account. Instead, the provider or distributor will
be able to open the account having obtained the information on the voucher
in other ways; for example, by telephone or over the internet. However,
providers and distributors will still be able to require vouchers to be
provided to them if they so wish.
Individual savings accounts
and Northern Rock Bank
As announced on 18 October 2007, the 2008 Finance Bill will introduce
legislation which will allow investors who withdrew cash from their Northern
Rock individual savings accounts (
ISAs) between 13 and 19 September
2007 to reinvest that cash in a new ISA; the cash that was withdrawn will
not be counted in the annual limit for investment in a cash ISA.
So, for example, an investor may invest £3,000 in a cash ISA for
2007-08, plus any amount of cash that was withdrawn from a Northern Rock
ISA between 13 and 19 September 2007.
The cash must be reinvested in an ISA between 18 October 2007 and 5 April
Taxation of personal dividends
From 6 April 2008, UK-resident individuals and UK and EEA nationals with
small shareholdings in non-UK companies will be entitled to a non-payable
dividend tax credit of one-ninth of the distribution received.
From 6 April 2009, the availability of such a credit will be further
Gift aid: transitional relief
A side effect of the cut in the basic rate of tax to 20 per cent from
6 April 2008 is that charities and community amateur sports clubs will
see their tax repayments on Gift Aid donations reduce. For each £100
of donations the tax repayment will fall from £28.20 to £25.
For donations made in a three-year period, 2008-09 to 2010-11, HMRC will
add a supplement to the repayment so that the tax repayment remains at
£28.20 per £100 of donations.
Armed forces council tax
This measure provides for council tax relief payments made to members
of the Armed Forces to be tax exempt with effect from 1 April 2008
Greater London Authority
This measure will ensure that severance payments made to members of the
Greater London Authority, which are currently taxed in full, will be tax
exempt up to the amount of £30,000 with effect from 6 April 2008.
Residence and domicile
Tax law rewrite: remittance
basis and foreign dividend income
An error in the Income Tax (Trading
and Other Income) Act 2005 resulted in the foreign dividend income of
those UK residents who are liable under the remittance basis being charged
at the dividend higher rate of 32.75 per cent rather than 40 per cent
higher rate. This is to be corrected with effect from 6 April 2008
Residence and domicile:
the residence test and day counting rules
As announced in the Pre-Budget Report, legislation is to be introduced
to change the way days in the UK are calculated for the purposes of determining
residence for tax purposes. HMRC practice has been not to count days of
arrival and departure. However, in the case of Gaines-Cooper
v R & C Commrs  BTC
704, HMRC departed from this policy and counted days
of arrival on the basis that the taxpayer was present in the UK at midnight
on that day. This new policy is now to be given statutory authority with
effect from 6 April 2008.
An exemption is to be provided for those in transit through the UK en
route to another country, even if present at midnight, so long as the
individual does not undertake activities which are to a substantial extent
unrelated to their passage through the UK.
Residence and domicile:
personal allowances and the remittance basis
As part of a package of well-publicised measures relating to non-domicilliaries
and the remittance basis, it is proposed that where individuals claim
the remittance basis for a tax year, they should not also benefit from
personal allowances and the capital gains tax annual exemption for that
year. The restriction does not apply to those who are entitled
to the remittance basis because their unremitted foreign income is less
than £2,000 p.a. (double the figure originally proposed).
The allowances involved are the basic personal allowance, the age-related
personal allowances, the married couples' allowance, the blind persons'
allowance and relief for life insurance payments.
Residence and domicile:
closing the loopholes in the remittance basis
Again as part of the well-publicised measures relating to the remittance
basis, legislation is being taken to plug some of the loopholes traditionally
exploited in this area. These include:
ceased source rule
whereby remitted income could not be taxed if its source did not exist
in the year of remittance;
- the fact that only income received in the UK in the form of cash could
- remitting income in a year following
that in which it arose but in a year when no claim to remittance basis
- clarification on the calculation
of remitted income where a remittance has been made out of a
fund of income and non-taxable capital.
In addition, numerous other measure are to be introduced affecting the
alienation of income to an immediate family member, non-resident trusts
and companies, the transfers of assets abroad provisions, the accrued
income scheme, losses for capital gains tax and offshore mortgages.
Residence and domicile:
remittance basis and art for public display
An exemption is to be made in respect of works of art brought into the
UK, which were purchased abroad with foreign income, from being treated
as a remittance, provided they are brought into the UK for the purposes
of public display and removed once the display ceases.
The exemption will have effect from 6 April 2008.
Residence and domicile:
changes for employment-related securities
The provisions relating to employment-related securities currently only
apply to employees who are resident and ordinarily resident. From 6 April
2008, those provisions will be extended to apply to those who are resident
but not ordinarily resident.
Gains arising from such securities which are attributable to duties performed
outside the UK may be assessed on the remittance basis.
Residence and domicile:
annual £30,000 charge for some users of the remittance basis
With effect from 6 April 2008, those adult individuals who are non-domiciled
or not ordinarily resident in the UK whose unremitted foreign income exceeds
£2,000 in a tax year and who wish to claim the benefit of the remittance
basis will have to pay an annual £30,000 charge.
In an effort to ensure that this charge ranks for double tax relief in
other countries, it is being described as a tax charge on the unremitted
income and gains. When originally proposed, it was to be a stand-alone
Power to give statutory
effect to existing concessions
HMRC has been reviewing its concessions following the decision in John
Wilkinson v HMRC Commrs which made clear that the scope of the discretion
of HMRC to make concessions from the strict application of the law is
not as wide as had previously been thought. The review is expected to
be completed in Autumn 2008.
Legislation will be introduced in the 2008 Finance Bill to provide for
existing HMRC concessions to be made statutory by Treasury order. This
power will have effect from the date of Royal Assent, but no orders under
this power are expected to be made until after HMRC's review of concessions
has been completed.
HMRC review of powers, deterrents
and safeguards: penalties for incorrect returns and failure to notify
a taxable activity
Legislation will be introduced in the 2008 Finance Bill to extend the
provisions in FA 2007, Sch.
24 to create a single penalty regime for incorrect returns
across all the taxes levies and duties administered by HMRC. The penalty
will be determined by:
- the amount of tax understated;
- the nature of the behaviour giving rise to the understatement; and
the extent of disclosure by the taxpayer.
Provision will also be made to extend and adapt FA
2007, Sch. 24 to cover penalties for failing to register
or notify HMRC of a new taxable activity and late VAT registration.
The new provisions will have effect from a date to be appointed by Treasury
Order. For incorrect returns, this is expected to be for return periods
commencing on or after 1 April 2009 where the return is due to be filed
on or after 1 April 2010. New penalties for failure to notify are expected
to have effect for failure to meet notification obligations that arise
on or after 1 April 2009.
HMRC have consulted on the proposals and will continue to consult on
the operation of the penalty provisions between the date of Royal Assent
to the 2008 Finance Bill and the implementation of the changes.
HMRC review of powers, deterrents
and safeguards: compliance checks
Following consultation in May 2007, legislation will be introduced in
the 2008 Finance Bill to reform the rules for checking that businesses
and individuals have paid the correct amount of tax or claimed the correct
reliefs and allowances. The new regime, which will apply to VAT and direct
taxes, will have three elements:
- aligned and modernised record-keeping requirements;
- new inspection and information powers; and
- aligned and modernised time limits for making tax assessments and
Information powers and penalties for failure to comply with these obligations
will have effect on and after 1 April 2009. Time limits for making assessments
and claims will need a transitional period and so will become fully operative
on and after 1 April 2010.
HMRC review of powers, deterrents
and safeguards: payments, repayments and debt
New measures have been announced to:
- enable HMRC to introduce a credit card payment
service from Autumn 2008;
- allow HMRC to set repayments it must make to individuals and businesses
against the payments it is owed by them, with effect from Royal Assent
to the 2008 Finance Bill; and
- modernise and align HMRC's debt enforcement powers to collect unpaid
sums by taking control of goods in England and Wales (to come into effect
in line with the appointed day for TCEA
2007, Sch. 12), or by taking action through the Civil Courts
(with effect from Royal Assent to the 2008 Finance Bill
Changes to Customs powers
Legislation will be introduced in the 2008 Finance Bill to clarify the
powers of HMRC to examine and search goods and baggage being imported
and exported. The measure will amend CEMA
1979, s. 159(1) to allow officers to open and unpack containers
themselves rather than insisting that it is done by the proprietor of
the goods. The changes will also make clear that HMRC's powers of examination
extend to searching containers and baggage.
The measures will come into effect from the date that the 2008 Finance
Bill receives Royal Assent.
Tribunal reform: simplifying
HMRC's approach to appeals
The Tribunals, Courts and Enforcement Act 2007 creates a First-tier
Tribunal into which most existing tribunal appeal functions will be transferred,
including tax appeals, and an Upper Tribunal which will hear appeals against
the decisions of the First-tier Tribunal (and may hear some first instance
appeals in certain circumstances).
Legislation to be introduced in the 2008 Finance Bill will provide a
power to introduce secondary legislation to change the way appeals against
HMRC decisions are handled; in particular, to provide more consistent
arrangements for internal review before appeals are referred to a tribunal.
It is intended that the secondary legislation will come into effect in
April 2009, alongside the tribunal reforms.
Legislation will be introduced in the 2008 Finance Bill to address how
a repayment claim in respect of tax treated as paid to HMRC by a funding
bond should be handled. The new legislation will have effect only where
the interest on the load or debt is paid by funding bonds, and the tax
deducted from that interest is also paid to HMRC using funding bonds.
Where a repayment claim for the tax deducted is subsequently made, the
legislation will allow HMRC to give the claimant funding bonds in satisfaction
of the claim.
The new measure has effect for funding bonds issued on or after 12 March
Waiving interest and surcharges
for those affected by national disasters
HMRC will be empowered by the 2008 Finance Bill to waive interest and
surcharges due from those adversely affected by national disasters. This
power will be used in respect of tax paid late due to the floods in June
and July 2007.
Corporation tax main rates
The Finance Act 2007
set the main rate of corporation tax at 28 per cent from 1 April 2008.
The 2008 Finance Bill will set the same rate from 1 April 2009. The main
rate of corporation tax for companies' ring fenced profits will also remain
at 30 per cent from 1 April 2009.
Corporation tax small
The small companies' rate of corporation tax is to increase from 20 per
cent to 21 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 2008. The marginal relief fraction will be 7/400
The marginal relief fraction will remain at 11/400
in respect of ring fenced profits.
Where trading stock is acquired, disposed of or appropriated otherwise
than in the course of the trade, the long-established rule in Sharkey
v Wernher 36 TC 275 has applied to replace the actual cost of the
stock or the proceeds with their market value when computing the taxable
This rule is now to be put on a statutory basis with effect from transfers
of stock occurring on or after 12 March 2008.
Company car benefit tax
The CO2 emissions figure that determines the 15 per cent rate
applicable to list price in calculating company car tax for petrol cars
(the lower threshold) has already been set at 135 grams per kilometre
of CO2 for 2008-09 and 2009-10. From 2010-11, the lower threshold
will be reduced by 5g/km to 130.
Simplification of associated
Legislation will be introduced in the 2008 Finance Bill to simplify the
associated companies rules as they apply for the small companies rate
of corporation tax. The definition of
control in ICTA
1988, s. 13(2) will be revised to attribute rights or powers
held by business partners only where
relevant tax planning arrangements
(as defined) are or have been in place.
Capital gains tax: relief
on disposal of a business (entrepreneurs' relief)
In response to the criticism of the Chancellor's attempt at simplification
of capital gains tax as announced in the Pre-Budget Report (
a special relief will be introduced in the 2008 Finance Bill to provide
a continuation of the effective 10 per cent tax rate for disposals of
business assets. These proposals have been widely publicised and draft
legislation was published on 22 January.
The measures are basically the old retirement relief provisions, which
were phased out by 2003, but without the age requirement and with a lifetime
allowance of £1m of gains to be taxed at an effective 10 per cent
rate. The rate applied is still the flat 18 per cent as proposed in the
PBR but the gains qualifying for relief are to be reduced by
4/9 before being charged to tax, so
as to produce the effective 10 per cent rate.
The relief is to take effect in respect of disposals of business assets
on or after 6 April 2008, but with transitional provisions to allow pre-April
2008 gains which have been deferred to benefit from the relief.
Venture capital schemes
In measures affecting investors under the enterprise investment scheme
(EIS), the corporate venturing scheme (CVS) and the venture capital trust
- subject to State aid approval by the European Commission, the investment
amount on which an EIS investor can claim income tax relief in a year
will be increased from £400,000 to £500,000, with effect from 6 April
- for EIS, CVS and VCTs, shipbuilding and coal and steel production
will no longer be qualifying activities, so that investors will not
receive tax relief for amounts invested in companies whose trades consist
substantially of those activities. For EIS and CVS, this restriction
will have effect for shares issued on or after 6 April 2008, while for
VCTs it will have effect for money raised on or after 6 April 2008.
Enterprise management incentives
Three changes are to be made to enterprise management incentives (
- with effect from the date on which the 2008 Finance Bill receives
Royal Assent, EMIs will be limited to companies with fewer than 250
full-time employees (or the equivalent where there are part-time workers);
- also with effect from the date of Royal Assent, companies involved
in shipbuilding, coal production or steel production will no longer
qualify for EMI, as those activities will become excluded trades; and
- with effect for options granted on or after 6 April 2008, the individual
employee limit on grants of EMI qualifying options will be increased
from £100,000 to £120,000
Amendments to the research
and development and vaccine research relief schemes
Following an announcement made in the 2007 Budget, changes are to be
made to the research and development (
R&D) and vaccine research
VRR) tax relief schemes. The changes will have effect from
a date to be appointed by Treasury Order. The date will be announced once
EC State aid approval has been received.
The changes will be as follows:
- for small and medium-sized enterprises (SMEs) R&D relief will
be increased from 150 per cent to 175 per cent;
- for large companies, R&D relief will be increased from 125 per
cent to 130 per cent;
- companies whose most recent accounts are not prepared on a going concern
basis will be prevented from claiming R&D relief and VRR
- a cap will be introduced to limit the amount of relief available under
SME or VRR schemes to €7.5 million per project; and
- large companies will be required to make a declaration concerning
the incentive effect of the relief they are claiming under the VRR scheme.
Overseas pension schemes
A measure will be introduced in respect of non-UK pension schemes which
will affect internationally-mobile workers in the UK, their employers,
and the managers of the schemes. The measure will ensure that the amount
of an employer's contribution to a non-registered scheme outside the UK
will not affect the calculation of the proportion of the employee's pension
fund that is subject to UK tax rules. Prior to this measure, a larger
employer contribution has meant that a lower proportion of the employee's
pension fund has been treated as having received UK tax relief.
The measure will have effect:
- for overseas money purchase schemes, for employer contributions
paid on or after 12 March 2008; and
- for overseas defined benefit schemes, from 6 April 2008.
Pensions: regulation making
The 2008 Finance Bill will introduce amendments to existing regulation-making
powers in respect of registered pension schemes.
New powers will enable regulations to be made to provide that payments
deemed to be authorised payments should also be taxed in the same way
as other authorised payments. Currently, regulations may deem certain
payments to be authorised payments, but they may not provide for the way
in which they are to be taxed.
In addition, the rules for
trivial commutation payments will be
changed to allow small
stranded pots to be commuted into a lump
sum up to 25 per cent of which can be tax free, as well as savings below
£2,000 in occupational pension schemes. This will be in addition
to the current rule that imposes a limit of £16,000 on aggregate
pension savings for trivial commutation.
These changes will have effect from the date on which the 2008 Finance
Bill receives Royal Assent.
Pensions: technical improvements
Following the consultation on draft legislation issued at the time of
the Pre-Budget Report, legislation will be introduced in the 2008 Finance
Bill to change the way pension increases are tested against the lifetime
The changes will affect the way in which the lifetime allowance test
benefit crystallisation event 3 (
BCE3) operates for pension increases,
- increases of £250 or less per year will be exempt from the BCE3
- all pension increases, once awarded, will be able to be rounded
up to the nearest whole number without a further test; and
- there will be a choice in the RPI reference month to be used, so that
schemes will be able to use the RPI figure for any month within a period
of 12 months leading up to the increase in pension.
The changes for small annual increases and rounding will be backdated
to have effect from 6 April 2006 (
A Day). The change to the RPI
reference month will have effect from 6 April 2008.
Approved occupational pension
Legislation will be introduced in the 2008 Finance Bill which will affect
employers who have contributed to occupational pension schemes.
For accounting periods starting on or after 1 April 2004 and ending on
or before 5 April 2006, there was no express provision in the legislation
to ensure that a company's deduction in respect of pension costs was limited
to the pension contributions actually paid during the year. This had,
however, previously been provided in the legislation, and was the practice
and the continuing policy. The measure to be included in the 2008 Finance
Bill will have retrospective effect for that period from 1 April 2004
to 5 April 2006 and will confirm that the rule did apply.
Capital allowances: plant
and machinery: rate changes and new special rate pool
The following changes to capital allowances on plant and machinery will
be made by legislation to be introduced in the 2008 Finance Bill The changes
will have effect for the calculation of writing-down allowances (
for chargeable periods ending on or after 1 April 2008 (for corporation
tax purposes) or 6 April 2008 (for income tax purposes).
The main rate of WDAs for pooled plant and machinery (including cars)
will be reduced from 25 per cent to 20 per cent.
The rate of WDAs on long-life assets will be increased from 6 per cent
to 10 per cent. Any unrelieved expenditure in the long-life asset pool
will, from the date of the change, be allocated to a new 10 per cent
rate pool, at which point long-life asset pools will cease to exist.
Capital allowances: small
plant and machinery pools
The 2008 Finance Bill will contain legislation allowing businesses to
claim a writing-down allowance of up to £1,000 where the unrelieved
expenditure in the main pool or the new special rate pool is £1,000
or less. The measure will have effect from 1 April 2008 (corporation tax)
and 6 April 2008 (income tax).
Capital allowances: plant
and machinery: annual investment allowance
With effect from 1 April 2008 (corporation tax) and 6 April 2008 (income
tax), a new annual investment allowance will be available for a business's
first £50,000 of expenditure on plant and machinery each year.
Capital allowances: industrial
buildings allowances, enterprise zone allowances and agricultural buildings
Following announcements made in 2007, the 2008 Finance Bill will introduce
legislation to withdraw industrial buildings allowances (
enterprise zone allowances (
EZAs) and agricultural buildings allowances
Writing-down allowances (
WDAs) for industrial buildings and agricultural
buildings are to be phased out over three years, starting with chargeable
periods ending on or after 1 April 2008 (for corporation tax purposes)
or 6 April 2008 (for income tax purposes). In the first of those three
years, 75 per cent of the usual WDA will be available; in the second year,
50 per cent will be available; and in the third year, 25 per cent will
The withdrawal of EZAs will have effect from 1 April 2011 (for corporation
tax purposes) or 6 April 2011 (for income tax purposes). However, balancing
charges where a business disposes of a building within seven years of
first use will be retained after April 2011, as will the special rules
relating to certain capital value realisations (CAA
2001, s. 327-331).
In addition, an anti-avoidance rule will be introduced in the 2008 Finance
Bill to counteract schemes aimed at exploiting legislation in the Finance
Act 2007 relating to balancing adjustments and the recalculation of WDAs
for IBA purposes.
Capital allowances: plant
and machinery allowances: integral features and thermal insulation
The following changes are to be made to plant and machinery allowances,
with effect for expenditure incurred on or after 1 April 2008 (for corporation
tax purposes) or 6 April 2008 (for income tax purposes).
Integral features will qualify for a 10 per cent special rate
of writing-down allowances (
WDAs). Integral features are assets
such as electrical systems, cold water systems, heating or ventilation
systems, lifts and escalators, external solar shading and active facades.
The special rate will apply to both initial expenditure and replacement
expenditure, so preventing revenue deductions in cases where they might
previously have been available.
Currently, WDAs at 25 per cent are available for the costs of adding
thermal insulation to a building. A change will be made so that WDAs will
also be available for expenditure on thermal insulation added to all existing
buildings used for qualifying business purposes, other than residential
property businesses. However, WDAs will be at a rate of only 10 per cent.
100 per cent first-year
capital allowances for natural gas, biogas and hydrogen refuelling equipment
The 100 per cent first-year allowance (
FYA) for expenditure incurred
on natural gas and hydrogen refuelling equipment is currently due to end
on 31 March 2008. This availability will now be extended by five years,
to 31 March 2013.
In addition, the scope of the allowance will be extended, with effect
for expenditure incurred on or after 1 April 2008, to refuelling equipment
100 per cent first-year
allowances for expenditure on cars with low carbon dioxide emissions
With effect for expenditure incurred on or after 1 April 2008, the following
changes will be made to the current 100 per cent first-year allowances
regime for low CO2 emission cars:
- the scheme will be extended by five years so that it will now
end on 31 March 2013; and
- the emissions threshold for qualifying cars will be reduced from 120g/km
There will be a transitional rule to ensure that cars leased before 1
April 2008 that qualified as low-emission cars under the old rules will
not be affected by the reduction in the emissions threshold.
Enhanced capital allowances
for energy efficient and water saving (environmentally-beneficial) technologies
From a date to be appointed by Treasury Order, the list of technologies
covered by the enhanced capital allowances for energy efficient and water
saving (environmentally-beneficial) technologies scheme will be revised.
Capital allowances: introduction
of first-year tax credits
The 2008 Finance Bill will contain legislation allowing loss-making companies
to surrender losses attributable to enhanced capital allowances on designated
energy-saving or environmentally-beneficial plant and machinery in return
for a cash payment (first-year tax credit).
Capital allowances buying
and acceleration: anti-avoidance
Where a company sells its trade on or after 12 March 2008, new legislation
will prevent avoidance by use of arrangements intended to crystalise a
balancing allowance on plant and machinery.
Unclaimed assets scheme:
This measure fine-tunes the powers of banks and building societies to
collect tax at the 20 per cent rate on outgoing interest payments. The
measure insures that the obligation to deduct tax on dormant accounts
is only in force when the dormant account is reclaimed.
Investment manager exemption
The legislation covering the investment manger exemption is to be changed
by the 2008 Finance Bill to:
- simplify the approach to defining transactions
that are within scope; and
- remove a condition that has to be met to be within scope.
Alternative finance arrangements
The 2008 Finance Bill will add the power to amend, by secondary legislation,
the existing rules on alternative finance arrangements.
Offshore funds: new tax
Changes are to be made by the 2008 Finance Bill to the taxation rules
for investors in offshore funds and to the rules allowing certain funds
to be classed as
reporting funds. Consultation on the definition
of an offshore fund will continue with a view to revising that definition
in the 2009 Finance Bill.
Timing of income tax payments
by unauthorised unit trusts
With effect from the date of Royal Assent to the 2008 Finance Bill, changes
to the time at which tax deducted from distributions made by unauthorised
unit trusts is payable to HMRC, which were unintentionally introduced
by the Income Tax Act 2007,
will be reversed.
Funds of alternative investment
Regulations will be laid to provide an additional tax regime for authorised
investment funds (AIFs) that take advantage of proposed new FSA rules
for Funds of Alternative Investment Funds (FAIFs) to invest mainly in
non-qualifying offshore funds.
Under the proposed new regulations:
- where an AIF elects for the new tax treatment, the fund will
be exempt from tax on offshore income gains; and
- an investor in a FAIF would then be chargeable solely to income
tax on any gain made on disposal of units in the fund.
The changes will have effect on and after a date to be set by Treasury
order, the date to be determined by the date the FSA regulatory changes
Property authorised investment
New regulations, which come into effect on 6 April 2008, will enable
certain authorised investment funds (AIFs) to elect for a tax treatment
that will move the point of taxation from the fund to its investors.
Under the new regulations:
- an AIF that invests mainly in property and
certain related securities will be able to elect for the property AIF
regime to have effect;
- in a property AIF, rental profit and certain other property-related
income will be exempt from taxation in the fund;
- it will normally be distributed to investors under deduction of tax
(basic rate taxpayers will have no further liability, non-taxpayers
and exempt bodies will be able to reclaim this tax, while higher rate
taxpayers and some corporates will have a further tax liability to pay);
- other taxable income of the property AIF will also be distributed
to investors under deduction of tax; investors will similarly be able
to either reclaim the tax or incur a further charge as appropriate;
UK dividends which are currently not taxable in the fund will remain
exempt, as they are for all corporate recipients and will fund dividend
payments carrying a tax credit to investors as at present.
To qualify for the new regime property, AIFs will have to meet certain
Life insurance companies:
consultation outcomes and simplification
For periods of account beginning on or after 1 January 2008, the tax
law is simplified in relation to financing arrangements (contingent loans
and financial re-insurance) used by life insurance companies.
For transfers taking place on or after the date of Royal Assent to the
2008 Finance Bill, the tax treatment of transfers of tax-exempt
businesses between friendly societies is aligned with transfers of such
businesses between a friendly society and a life insurance company.
For periods of account beginning on or after 1 January 2008 and ending
on or after 12 March 2008, the definition of foreign currency assets is
amended to remove a requirement to certify the amount of these assets
and allow companies to use the revised version for 2007.
From the date of Royal Assent to the 2008 Finance Bill, the power to
modify the computation of chargeable gains in respect of structural assets
Life insurance companies:
For periods beginning on or after 1 January 2008 and ending on or after
12 March 2008, interest paid by insurance companies on amounts deposited
back with them by re-insurers is apportioned appropriately between different
categories of business for corporation tax purposes.
Individual saving accounts
and other saving accounts: reducing the administrative burden
Changes are to be made to the administrative duties of individual savings
ISA) managers and of financial institutions which operate
the tax deduction scheme for interest (
With effect from 6 April 2007, ISA managers will no longer have to provide
HMRC with quarterly returns of statistical information, detailing subscriptions
received. Instead, there will be an annual return for this information.
From the same date, ISA managers will no longer be required to retain
copies of investors' applications for ISAs. If they choose not to, they
will instead be required to record the information in the application
and send a written copy of confirmation to the investor.
From a later date not yet confirmed, financial institutions which operate
TDSI will no longer be required to retain applications from investors
for gross payment of interest for UK non-taxpayers (Form R85) or for gross
payment of interest for non-ordinarily resident individuals (Form R105).
Again, if they choose not to retain the forms, they will instead be required
to record the information from the form and send a written copy of confirmation
to the investor.
Stamp duty: alternative
The 2008 Finance Bill will contain provisions classifying alternative
finance investment bonds which are similar to debt securities (
as loan capital for stamp duty purposes. This measure will come into effect
from the date that the 2008 Finance Bill receives Royal Assent.
Stamp duty: changes to loan
The 2008 Finance Bill will contain measures to widen the exemption from
stamp duty currently afforded to most forms of loan capital. In future,
even in cases where the right to interest depends on a future event, as
long as the loan capital instrument:
- is party to a capital market arrangement; and
- the right to interest is on limited recourse terms, it will qualify
for exemption from stamp duty.
Reduction of stamp duty administrative
Measures will be introduced in the 2008 Finance Bill to ensure that instruments
transferring shares on a sale which would have attracted stamp duty of
no more than £5 will no longer need to be sent for stamping. This
will apply to instruments executed on or after 13 March 2008.
Stamp duty land tax (SDLT):
relief for new zero-carbon flats
The relief from stamp duty for zero-carbon homes introduced in the Finance
Act 2007 has now been extended to apply to newly-built zero-carbon flats.
The measure also allows Government departments to charge a reasonable
fee for the carrying out of assessments to determine whether a flat meets
the requirements for qualifying as a zero-carbon home.
Stamp duty land tax (SDLT):
notification thresholds for land transactions and rate thresholds for
This measure effects three main changes by:
- raising the current threshold at which a person must has to
notify HMRC of non-leasehold land transactions from £1,000 to
£40,000. HMRC will also only need to be notified in cases where
a lease is granted for seven years or more and where the non-rental
consideration amounts to £40,000 or where the annual rental exceeds
- raising the threshold at which the one per cent rate becomes
chargeable on the annual rent on a lease from £600 to £1,000;
for residential properties, the £600 threshold will no longer
be effective; and
- amending form SDLT 60 so that agents may sign on behalf of the client.
Stamp duty land tax (SDLT):
anti-avoidance legislation affecting partnerships
Transfers of an interest in a property within an investment partnership
occurring on or after 19 July 2007 will not be caught by anti-avoidance
laws introduced by the Finance Act 2007.
Stamp duty land tax (SDLT):
group relief: anti-avoidance
For transactions with an effective date on or after 13 March 2008, a
new measure will counteract avoidance schemes where the intent is to avoid
the clawback of stamp duty relief that would normally occur when a property
is transferred between group companies and the vendor company then leaves
the group. HMRC will be able to treat the transaction as if the purchaser
has left the group before the vendor.
Stamp duty land tax (SDLT):
alternative finance: anti-avoidance
For transactions with an effective date on or after 12 March 2008, a
new measure will counteract avoidance schemes where financial institutions
assist parties to avoid payment of SDLT.
VAT and indirect tax
VAT: increased turnover
thresholds for registration and deregistration
From 1 April 2008, the amount of the annual VAT registration threshold
rises to £67,000 from £64,000 and the VAT deregistration threshold
rises to £65,000 from £62,000.
From the same date, the registration and deregistration limits for relevant
acquisitions from other member states rise to £67,000 from £64,000.
VAT: changes in fuel scale
For prescribed accounting periods beginning on or after 1 May 2008, the
table of VAT scale charges is amended for taxing private use of road fuel.
Indirect tax returns: correction
For accounting periods commencing on or after 1 July 2008, the limit
rises below which errors on previous returns may be corrected on the return
for the period in which the errors are discovered.
The de minimis £2,000 limit rises to the greater of £10,000
or one per cent of turnover, subject to an upper limit of £50,000
for VAT, IPT, LFT, CCL and AGL.
For VAT, LFT, CCL and AGL errors above £10,000, the limit for correcting
errors on the next return is calculated by reference to net VAT turnover
(Box 6 on VAT return) for the return period.
For IPT, this limit is calculated by reference to the net IPT turnover
(Box 10 on IPT return).
APD procedures will be amended to increase the de minimis limit to the
greater of £10,000 or one per cent of duty due, before adjustments
for errors from previous periods, subject to an upper limit of £50,000.
For LFT, CCL and AGL taxpayers, who are not required to be registered
for VAT, a single limit of £10,000 applies.
VAT: reduced rate for smoking
Reduced-rating at five per cent for
over the counter supplies
by retailers (including supplies made over the internet) of smoking cessation
products applies beyond the planned end date of 30 June 2008. This reduced-rating
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
VAT: transitional period
During a transitional period to 31 March 2009,
may claim VAT rights that accrued before the introduction in 1996 and
1997 of the three-year time-limit for late claims for a repayment.
Eligible businesses means those VAT-registered between 1 April
1973 and 1 May 1997 and who either declared more output VAT than they
were liable to pay, or claimed less input VAT than was due to them.
HMRC may assess any amounts repaid which are subsequently found to have
been incorrectly claimed by a business.
VAT: option to tax land
From 1 June 2008, taxpayers may revoke an option to tax after 20 years.
However, in practice, the earliest date an option to tax is revocable
is 1 August 2009.
Associated changes concern the following:
- opted properties held in a VAT group;
- opted buildings acquired for use as dwellings or for a
residential purpose and bare land acquired for construction of a
building for such purposes;
introduction of a new option to simplify the option to tax process for
taxpayers with a number of properties;
- early revocation of an option to tax within a
- the automatic lapse of an option to tax six years after the
taxpayer ceased to have any interest in a property that they had previously
opted to tax;
- the ability, in certain circumstances, to exclude a new building
from a previous option to tax; and
- late applications for permission to opt to tax.
VAT: amendment to the exemption
for fund management
For supplies of services made on or after 1 October 2008, exemption for
fund management is extended to apply to UK-listed investment entities
(including investment trust companies and venture capital trusts) and
certain overseas funds.
Insurance premium tax (IPT):
changes relating to overseas insurers
From Royal Assent to the 2008 Finance Bill, the compulsory requirement
for overseas insurers to appoint a tax representative will be removed
and HMRC will be restricted in its ability to assess an insured party
for tax due from an overseas insurer.
Landfill tax: exemption
for waste from cleaning up contaminated land
The exemption from landfill tax for cleaning up contaminated land disposed
by landfill is to be phased out. No new applications will be accepted
from 1 December 2008 and all certificates issued will cease to be valid
from 1 April 2012.
Landfill communities fund
The maximum credit that landfill site operators can claim for contributions
to environmental bodies is to reduce from 6.6 to 6 per cent with effect
from 1 April 2008. Other changes are to be made in respect of these environmental
bodies from the same date
New aviation duty replacing
air passenger duty (APD)
Legislation will be introduced in the 2008 Finance Bill to allow HMRC
to incur expenditure on the development of the new aviation duty announced
in the 2007 Pre-Budget Report before its formal introduction in November
2009. The new duty will be payable per plane and will replace air passenger
Aggregates levy: rate
The rate of aggregates levy will increase from £1.95 per tonne
to £2.00 per tonne for any aggregate commercially exploited on or
after 1 April 2009.
Climate change levy: rates
The rates of climate change levy for supplies of taxable commodities
treated as taking place on or after 1 April 2009 are to increase broadly
in line with inflation.
Climate change levy (CCL):
electricity from coal mine methane
Electricity generated from coal mine methane on or after 1 November 2008
will not be regarded as renewable for CCL purposes and will therefore
no longer be exempt.
Climate change levy (CCL):
climate change levy accounting documents (CCLADs): simplification
Changes are to be introduced in the 2008 Finance Bill regarding what
an invoice needs to contain to qualify as a CCLAD.
Energy Products Directive:
expiry of derogations
Changes are to be made to the rates of duty on fuel used for pleasure-flying,
pleasure-boating and on waste oils re-used as fuel following the expiry
of the UK's derogations from the Energy Products Directive.
Amusement machine licence
duty (AMLD): gaming machines
The amount of amusement machine licence duty is to increase for any licence
applications received after 4pm on 14 March 2008.
Gaming duty: revalorisation
of duty bands
For accounting periods starting on or after 1 April 2008, the gross gaming
yield bandings for each duty band will increase in line with inflation.
Tobacco products duty: rates
Rates of duty on tobacco products imported into, or manufactured in,
the UK are to increase from 6pm on 12 March 2008.
Alcohol duty: rates
With effect from 17 March 2008, duty rates for alcohol will increase
by six per cent in real terms for all alcoholic drinks. Small brewers'
relief will continue.
Calculation of alcohol duty
Minor changes are to be made to the method for calculating the amount
of alcohol duty due.
Income of beneficiaries
under settlor-interested trusts
A measure will be introduced in the 2008 Finance Bill to prevent a beneficiary
of a settlor-interested trust with savings and/or dividend income finding
that the non-trust income is pushed into higher rates so that more tax
is due overall.
The new legislation will mean that income from a settlor-interested trust
will be treated within ITA
2007, s. 1012 as one of the highest slices of income.
Inheritance tax (IHT) nil-rate
A consequential amendment to the capital gains tax (CGT) provisions in
TCGA 1992, s. 274
has been announced following legislation to be introduced in the 2008
Finance Bill to allow any IHT nil-rate band unused on a person's death
to be transferred to the estate of their spouse or partner who dies on
or after 9 October 2007. To calculate how much nil-rate band can be transferred
from the first deceased spouse's estate, the value of assets in that estate
will need to be determined when the second spouse dies. In these circumstances,
if the value of the assets differs from any already agreed for CGT purposes,
TCGA 1992, s. 274 would
require CGT to be recalculated on the basis of the value agreed for IHT
This measure will mean that the requirement under TCGA
1992, s. 274 to use the IHT valuation for CGT purposes will
not have effect where the valuation of an asset does not have to be ascertained
for IHT purposes on the death of an individual.
Pension savings and inheritance
As announced in the 2007 Pre-Budget Report, the 2008 Finance Bill will
introduce legislation to:
- ensure that tax-relieved pension savings diverted into inheritance
using scheme pensions and lifetime annuities are subject to unauthorised
payment charges and, where appropriate, to inheritance tax (IHT); and
- restore IHT protection to savings in overseas pension schemes.
Inheritance tax: transitional
Legislation to be introduced in the 2008 Finance Bill will mean that
the new rules for interest in possession (
IIP) trusts introduced in
FA 2006, Sch. 20
will not apply where IIP trusts in place on or before 21 March 2006 come
to an end on or after 22 March 2006 and are replaced with new IIP trusts
for the same beneficiary within the transitional period.
The transitional period will be extended to 5 October 2008.
Anti avoidance measures
Controlled foreign companies:
Anti-avoidance legislation will be introduced in the 2008 Finance Bill
to block artificial avoidance schemes that rely on the use of a partnership
or a trust to escape a controlled foreign companies (CFC) charge either
by taking advantage one of the five exemptions or by arranging for profits
to fall to be taxed in such a way that they are outside the scope of the
The measure will take effect on or after 12 March 2008. Accounting periods
which straddle this date will be split, with the change affecting the
second part of the accounting period.
Leased plant or machinery:
Measures were announced in the Pre-Budget Report dealing with sale and
finance leasebacks which would prevent the finance lease from being treated
as a short lease with effect from 9 October 2007. In effect, therefore,
they will fall within the legislation relating to long funding leases
which denies capital allowances on the cost of the leased asset but, to
compensate, only a small proportion of the lease rental income is taxed.
The draft legislation published at that time is to be amended to make
it clear that, with effect from 12 March 2008, where there is more than
one finance lease in an arrangement, none of them are to be treated as
Also in the Pre-Budget Report measures were announced, to be effective
from 9 October 2007, which would put beyond doubt that where a deduction
is available for the cost of the leased asset the long funding lease rules
restricting the amount of taxable income do not apply. This was to prevent
the lessor generating artificial losses. The draft legislation published
at that time will be amended to make it clear that each finance lease
involved in the arrangement is not to be treated as a short lease which
will prevent the lessor from claiming capital allowances.
Legislation, as published in draft on 13 December 2007, is to be introduced
to prevent avoidance by the use of
mismatched lease chains. These
occur where plant or machinery is leased in by an intermediate lessor
(as a lessee) under one lease and simultaneously leased out a long funding
lease. The rentals paid by the intermediate lessor would be fully deductible
but those received would only be taxable in part. The legislation will
ensure that the rentals received are taxed on the same basis as the rentals
paid so that the intermediate lessor is taxed on its commercial profit.
In addition, legislation is to be introduced to ensure that where a capital
sum is received which is either in connection with the granting of a lease
of plant or machinery, or reduces the rentals otherwise payable, it is
to be taxed as income of the lessor unless it is otherwise brought into
account as income or a disposal receipt for capital allowances. The draft
legislation published on 13 December 2007 indicated that the proposals
would have effect from that date; the Budget
Note BN20, however, says that the new rules will apply to payments
made on or before 11 March 2008 only in respect of leases of plant or
machinery which are not leased with other assets. From 12 March 2008,
the rules will also apply to leases of plant or machinery which are leased
with other assets but only where it is reasonable to attribute the payment
to that plant or machinery and if the payment was income it would not
be liable to corporation tax under Sch A.
Financial products avoidance:
disguised interest and transferring rights to lease rentals
As a result of disclosures made under the avoidance schemes disclosure
regime, a number of measures are to be introduced with effect from 12
March 2008. These measures aim to counter the following arrangements:
- where companies receive
disguised interest in the form
of distributions from other UK companies (which are therefore non-taxable);
- where a tax charge is covered by double taxation relief under ICTA
1988, s. 807A(3);
- where different accounting treatments for convertible debt are adopted
within a group of companies so as to give rise to tax asymmetry;
- where companies acquire partnership rights in advance at the discounted
value of those rights, so as to create disguised interest;
- where company members of a partnership obtain disguised interest on
their partnership contributions by changes in profit-sharing ratios;
- where transactions designed to produce disguised interest are sought
to be excluded from the derivative contracts legislation;
- schemes intended to exploit the
shares as debt rules (FA
1996, s. 91A); and
- schemes where the lessors of plant or machinery dispose of their right
to taxable income under the lease in exchange for a tax-free capital
Corporate intangible assets
New rules to be introduced in the 2008 Finance Bill will clarify that
the effect of the
related party rules in the corporate intangible
assets regime is unaffected by any administration, liquidation or other
equivalent proceedings that the company may be involved in.
This will affect intangible asset transactions, including royalties,
which become payable after 11 March 2008.
Legislation will be included in the 2008 Finance Bill to amend the wording
of the rules affecting the taxation of employment-related securities (ERS)
that were rewritten from the Income
and Corporation Taxes Act 1988 into the Income
Tax (Earnings and Pensions) Act 2003.
Users of avoidance schemes have argued that deductions for
that constitute earnings can include earnings which were exempt income
and therefore not charged to income tax, thereby:
- reducing amounts which count as employment income under ITEPA
2003, Pt. 7;
- reducing chargeable gains under the Taxation
of Chargeable Gains Act ; and
- increasing corporation tax relief available under FA
2003, Sch. 23.
The wording will be amended to confirm that this is not the case with
effect for all relevant events and transactions occurring on or after
12 March 2008.
Community investment tax
relief and banking
The 2008 Finance Bill will introduce a change to the anti-avoidance rules
for community investment tax relief (
CITR). The change will benefit
certain banks which make investments under the scheme. The changed rule
will be deemed always to have had effect.
Under CITR, tax relief is available to investors in community development
finance institutions (
Anti-avoidance rules reduce the relief available where the CDFI makes
certain kinds of payment to the investor. Where the investor also acts
as a banker to the CDFI, the existing rules have applied to reduce relief
when the CDFI makes deposits in an account it holds with the bank. The
change to be included in the 2008 Finance Bill will ensure that the anti-avoidance
rules do not apply to deposits made by the CDFI in the normal course of
its banking arrangements.
Repeal of obsolete anti-avoidance
The following legislation relating to shares and securities will be repealed
by the 2008 Finance Bill as it is considered to be no longer of any practical
- ICTA 1988, s. 731-736
relating to dividend buying;
1988, s. 704, para. B and s.
687, Circumstance B relating to transactions in securities;
- ICTA 1988, s. 138
and 139 relating
to employment securities.
The measure will have effect for individuals and exempt bodies on or
after 6 April 2008, and for companies for accounting periods beginning
on or after 1 April 2008.
Avoidance of income tax
using manufactured payments
As previously announced, a targeted anti-avoidance rule is to be introduced
to deny a deduction to individuals who make manufactured payments as part
of a scheme or arrangement where one of the main purposes is the obtaining
of a tax deduction.
The legislation will have effect for payments made on or after 31 January
Double taxation treaty abuse
A scheme seeks to avoid UK tax by diverting income of a UK-resident individual
to a foreign partnership comprised of foreign trustees. The scheme is
designed to ensure that the income still belongs to the UK resident as
he is a beneficiary of the foreign trust. Legislation will clarify, retrospectively,
provisions introduced in 1987 so that they apply as intended. This should
ensure that, notwithstanding the wording of any double taxation treaty,
UK residents pay UK tax on their profits from foreign partnerships.
For income arising on or after 12 March 2008, legislation stops tax avoidance
through the misuse of Double Taxation Treaties by UK residents.
Tax avoidance disclosure regime:
scheme reference number system
Legislation will be introduced in the 2008 Finance Bill to improve the
existing system of identifying users of disclosed tax avoidance schemes
through the scheme reference number (SRN) system. The key points of the
current sytem are:
- HMRC must issue a SRN to a promoter who discloses a scheme (FA
2004, s. 311 );
- a promoter must pass the SRN on to clients who implement the scheme
(FA 2004, s. 312);
- a client who uses the scheme to obtain a tax advantage must report
it to HMRC within time limits (FA
2004, s. 313 ).
Legislation will be introduced to ensure that a user of a disclosed scheme
is supplied with the SRN issued to the promoter who has disclosed it.
It will also require clients who receive a SRN to pass it on to any other
person who is party to the same scheme and is likely to obtain a tax advantage
from it. It will also provide for HMRC to withdraw a SRN, thereby removing
the obligation for the SRN to be passed on to other parties or reported
The legislation, which will contain substantive provisions and powers
to make regulations, will have effect from various dates to be appointed
by Treasury order.
Oil and gas taxation
North Sea management expenses
This measure serves to close a loophole in the taxation of oil and gas
rules by preventing expenses of managing an investment business from being
deducted from a company's ring fenced oil and gas profits.
North Sea fiscal regime
Various reliefs available to oil and gas companies operating in UK or
on the UK Continental Shelf for the costs of decommissioning North Sea
infrastructure are to be extended by the 2008 Finance Bill. The extensions
will have effect from various dates in 2008.
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