Edge Tax December Newsletter

Welcome to our bumper Christmas Newsletter. We will be covering a wide range of topics this month, including the recent Autumn Statement and Finance Bill 2012.

Firstly, we would like to wish you and your family a very happy festive break and prosperous New Year from all of us at Edge. The office will be open as normal on the 28th, 29th and 30th of December, between the Christmas and New Year bank holidays should you need us.

Also, as we move into 2012 and towards the tax year end, we would like to remind you that we will be running our free P11D workshop, where we will give hands on advice covering the key areas that employers need to be aware of when preparing their end of year returns, including a Budget update – with the Chancellor’s announcement set for 21 March 2012.

In addition, we will provide an update on some topical changes and planning ideas. These morning events will be run in Bristol on 25th April and in Southampton on 26th April. It would be great to see you there, if you would like to reserve your place at one of these free events, please do so by emailing kvowles@edge-tax.com.

Autumn Statement

The Chancellor delivered the 2011 Autumn Statement and as we expected, there were limited tax changes, although those that were included were not without some surprise! We have briefly set out the headlines below.

Corporation tax

The Chancellor reaffirmed the Coalition’s intention to develop the G20’s most competitive corporation tax system, reducing the mainstream rate to 25% and setting out the newly issued foreign profits legislation.

100% capital allowances will be available for qualifying plant and machinery investment between April 2012 and March 2017 in the following six English Enterprise Zones:

• Black Country
• Humber
• North Eastern
• Sheffield
• Tees Valley
• Liverpool

Scotland, Wales and Northern Ireland may also have Enterprise Zones set up once discussions between the Treasury and the devolved Parliaments have taken place.

Budget 2012 will kick off a consultation proposing to introduce a new tax credit to encourage research and development (R&D) activity by large companies.

Income tax and capital gains tax

From April 2012, in a further addition to the Enterprise Investment Scheme (EIS), 50% income tax relief will be provided in qualifying companies, up to £100,000, regardless of the investor’s marginal rate of income tax.

Referred to as the Seed Enterprise Investment Scheme (SEIS), it is likely to be more of a good news story for the Coalition than a major new tax incentive, with individual companies restricted to an annual investment limit of £150,000.

A capital gains tax holiday will be offered for investments made to the SEIS. This will provide for CGT exemption on gains realised on the disposal of an asset in 2012/13, where the proceeds are invested through SEIS in the same tax year.

There will also be consultations on relaxing connected person rules for the Enterprise Investment Scheme and anti-avoidance rules to prevent its general abuse. The £1m investment limit per company for Venture Capital Trusts will be removed to reduce the administrative burden of the scheme.

It is expected that the Treasury may fund this by freezing the CGT annual exemption of £10,600 for 2012/13.

Finance Bill 2012

On Tuesday, 6th December, the Chief Secretary to the Treasury, David Gauke, published the Finance Bill 2012 detailing the draft legislation for 2012/13…and it more than made up for the lack of tax comment in the Autumn Statement!

Changes for individuals include:

• The newly proposed ‘Seed Enterprise Investment Scheme’, however there is some scepticism amongst advisers that it will not achieve what the Chancellor intends.
• The scheme will give generous income tax and CGT relief, up to 78 pence for every £1 invested, and so perhaps it is unsurprising that qualifying conditions for the relief have been heavily restricted.
• The cost to the Exchequer is expected to be £50 million in 2013/14 and less than £25 million in following years; so it must be assumed that not many businesses will actually qualify!
• Proposed changes effecting Enterprise Investment Schemes and Venture Capital Trusts have been made that are likely to restrict the take up of these schemes. However, there are favourable changes made to the connected persons rules and qualifying shares rules.
• The much anticipated ‘Statutory Residency Test’ has been delayed until Finance Bill 2013, to give the Government further time to ensure that the changes to be made provide certainty to individuals and businesses.

Corporation Tax changes include:

• A reduction in the main rate of corporation tax to be introduced in April 2013 to 24%, with the main rate already confirmed as reducing to 25% from April 2012. This will increase the attractiveness of incorporation or introducing a corporate partner to LLP structures.
• Changes to Real Estate Investment Trusts (UK-REITs) first announced in Budget 2011 have been enacted and are expected to provide stimulus to the formation of new UK-REITs over the next twelve months. There are also a number of relaxations of the current qualifying rules for REITs, again aimed at encouraging investment.
• New Enterprise Zones have been introduced; allowing businesses to claim 100% first year allowances on capital expenditure, in the six enterprise zones listed in the Autumn Statement above. The proposed legislation to be introduced in 2012 will restrict 100% first year capital allowances to the new Enterprise Zones only.
• Enhanced reliefs have been set out to encourage companies to carry out R&D activities. Reliefs can now be claimed regardless of how little a company spends;
• New regulations will give power to the Treasury to amend the Capital Gains Tax treatment by regulation for investors in collective investment schemes;
• New draft regulations into the Investment Trust Company Regime were produced, expected to come into effect on 1 January 2012;
• Foreign Exchange Matching Rules were put in place to confirm that companies can only defer foreign exchange gains under the Loan Relationship & Derivative Contract regulations from the date that they have a foreign currency loan relationship matched with shares, (or a ship or an aircraft);
• The draft legislation contains provisions confirming that the tax treatment for transfers of non-cash assets and liabilities between one UK resident company to another will be treated the same as transfers between a UK resident company and a non-UK resident company.
• Manufactured overseas dividends will again be consulted on after continuing abuse of the anti-avoidance legislation enacted on 15 September 2011;
• Business premises renovation allowance will be extended for five years to 5 April 2017;
• A relaxation of the rules on Property Authorised Investment Funds meaning that an investor can now invest through authorised unit trust feeder funds, increasing their holding in the fund over 10% without a chargeable gain arising – with the Government hoping that it will make funds more attractive to investors;
• Relief on employer asset backed pension contributions have been considered excessive by the Treasury and so new rules have been made effective from the date of the Autumn Statement (29 November 2011), restricting the total relief available.

New Anti-Avoidance provisions were proposed:

• Additional requirements have been introduced for schemes seeking to eliminate liabilities to stamp duty land tax. The regulations effect commercial property with a total value of at least £5 million and residential property with a total value of at least £1 million;
• Capital allowances claimed on certain artificial sale and leaseback arrangements have also been targeted.

The Office for Tax Simplification (OTS), has removed the following:

• Stamp Duty Land Tax relief for residential property in disadvantaged areas;
• The out of date exemption for the first 15p per working day for luncheon vouchers;
• The special relief for capital expenditure on structures to improve safety at sports grounds have all been removed;
• Meals for employees provided at ‘Cycle to Work’ days.

Reliefs that have been maintained despite review by the OTS:

• Land remediation;
• Employer provided taxis home for staff when there is irregular and insignificant late working;
• Compensation for mis-sold pensions.

There are considerably higher take up of such exemptions, and they have wider benefits than those repealed.

For further information on the Finance Bill or the Autumn Statement, please email togden@edge-tax.com or your usual Edge contact.

Dividend income or earnings?

Revenue & Customs Commissioners v P.A. Holdings Limited

In the Court of Appeal on 30 November 2011 HM Revenue & Customs appeal, against the decision of the Upper Tribunal in respect of how certain payments under a discretionary bonus scheme to employees were characterised for tax purposes, was upheld.

In summary, the taxpayer company had a discretionary bonus scheme which resulted in specific employees receiving dividends from preference shares in a third party company. The issue (and the dispute) was with regard to the income tax and National Insurance treatment.

At the First Tier Tribunal it was held that the payments were to be treated as emoluments from employment but that the payments also constituted dividends.However, the payments were earnings within the terms of the Social Security Contributions and Benefits Act 1992 (SSCBA). The judgement accordingly provided that, due to the structure of the legislation; income tax was not due under PAYE, but that Class 1 National Insurance Contributions were. This conclusion was subsequently upheld by the Upper Tribunal.

Unsurprisingly both parties appealed. HMRC on the basis that it considered the payments were not dividends at all but were in reality bonuses such that income tax (PAYE) was due as well as NICs. The taxpayer appealed on the basis that the income had not been from employment and the decision that the payments received in the form of dividends were “earnings” for the purposes of SSCBA was an incorrect one.

In the Court of Appeal it was adjudged that the correct approach in determining whether the employee receipts derived from profits or employment was to consider all of the relevant facts and to therefore look at the character of the receipt in the hands of the employee and not just the legal source of the payment.

In the Courts view:

• The payments received by the employees had owed everything to the amount the company had decided to award to its employees as bonuses;
• The amounts of the receipts were entirely dictated by the amount the company had decided to pay as bonuses;
• The payments were triggered by the company’s decision to continue with a policy of paying bonuses, notwithstanding the fact that they were paid under a different mechanism.

Thus the payments were adjudged to be earnings paid to an employee, the employees being regarded as such because they were gainfully employed in the UK under a contract of service.

Accordingly the HMRC appeal was upheld with PAYE income tax and NICs due. In summary therefore the approach taken by the Court of Appeal was to look to the substance and the purpose of the payments and not simply the form in which they were received. On the basis of the facts the judgement was that the payments were from employment and it followed they could only be taxed as such.

Income Tax Reliefs

We have produced a summary of the most common investments (VCT, EIS, BPRA), which obtain income tax relief on subscription, setting out the qualifying conditions for the scheme and the potential reliefs available for investors.
This is in addition to other income tax reliefs and reducers such as pension contributions, charitable giving and potential reliefs for investment into business.
More aggressive tax planning options have not been considered in this article as they may experience limited success from a tax perspective. The investments outlined are not risk free, although selecting a suitable provider and spreading investments can mitigate the risk.

Venture Capital Trusts

A Venture Capital Trust (VCT) invests in shares and securities issued by qualifying unquoted trading companies with a permanent establishment in the UK. VCTs are attractive to investors who wish to spread their risk by indirectly investing in a number of unquoted companies rather than investing directly into just one company, as in the Enterprise Investment Scheme. An individual investing in a VCT can benefit from the following tax reliefs:

• income tax relief of up to 30% on up to the first £200,000 invested
  
• qualifying dividends from VCT are tax-free
• any gain on the sale of qualifying VCT shares is exempt from capital gains tax

An investor can subscribe for more than £200,000 worth of VCT shares in any one tax year. However, income tax relief is given on the first £200,000 only. VCT relief is always given in the tax year in which the subscription is made. There is no option to carry back the investment to obtain relief in earlier tax years.

The VCT tax relief is deducted from the tax liability in priority to any other tax reducers. The tax reduction can reduce an individual’s tax liability for the year to nil, although it cannot generate a tax repayment. The income tax relief is clawed back if the shares are sold within five years of issue or cease to qualify. Penalties and interest will apply when income tax relief is withdrawn.

Dividends from VCT ordinary shares are exempt from tax, but this exemption only extends to the first £200,000 invested in a VCT in a tax year.

If VCT shares are sold at a profit, the capital gain is exempt from capital gains tax (CGT). Losses incurred on a sale of VCT shares are never allowable for CGT purposes. It does not matter whether the shares were acquired by subscription or acquired from a third party.

The ownership period is irrelevant for the CGT exemption; there is no qualifying holding period condition. As with the dividend exemption discussed above, it does not matter how the shares were acquired.

The CGT exemption only applies to the first £200,000 of shares acquired in the tax year. Any shares acquired in excess of this threshold will be chargeable assets for CGT purposes and therefore a gain or a loss will arise on sale. There are no reporting requirements on the tax return where the entire sale is exempt.

Enterprise investment scheme tax relief

The Enterprise Investment Scheme (EIS) is a scheme that encourages individuals to invest money in shares issued by qualifying unquoted companies with a permanent establishment in the UK.
A subscription for eligible shares of a qualifying EIS company is a tax efficient investment for the individual. The individual can benefit from the following tax reliefs:

• income tax relief of up to 30% on the amount invested for subscriptions made on or after 6 April 2011 (previously 20%)
• The current permitted maximum investment is £500,000, although it is set to increase to £1m from 6 April 2012
• any capital loss on the EIS shares is an allowable loss for capital gains tax but gains are exempt if conditions are met
• the investment can be used to defer capital gains tax on the sale of any asset

The EIS tax relief is deducted from the tax liability after Venture Capital Trust income tax relief but in priority to any other tax reducers. The tax reduction can bring an individual’s tax liability for the year to nil, but it cannot generate a tax repayment. The income tax relief is clawed back if the shares are sold within three years of issue. The relief can be carried back to the previous tax year if the individual makes a claim.

Dividends from EIS companies are taxable, unlike dividends from Venture Capital Trusts.

The gain on the EIS shares is exempt from CGT providing the investor received income tax relief on the original subscription and the income tax relief has not been withdrawn (shares must be held for 3 years). If a loss is incurred it is allowable for CGT purposes. There are no reporting requirements on the tax return where the entire gain is exempt.

Re-investment relief, also known as deferral relief, is available if an individual or a trustee sells an asset and reinvests the sale proceeds in qualifying EIS shares. The capital gain can then be deferred until the sale of the EIS shares.

Business Premises Renovation Allowance

The Business Premises Renovation Allowance (BPRA) is available to any individual or company, who incurs capital expenditure on bringing qualifying business premises back into business use.

The BPRA gives 100% initial allowances for capital expenditure on the renovation or conversion of business properties that have been vacant for a year or longer in designated disadvantaged areas of the UK. The rules apply for qualifying expenditure incurred on and after 11 April 2007. The relief was originally intended to expire in 2012, but in Budget 2011, was extended for a further five years to 2017.

To qualify for the BPRA, the building:

• must be in a designated disadvantaged area
• must have been empty for at least a year before the renovation works began
• must have previously been used in a trade or been used as an office
• must not have been used as a dwelling, and
• must remain as business premises after completion of the renovation

Relief is given by deducting 100% of the renovation costs against trading profits. No relief is obtained for costs of acquiring the land on which the building is situated.

As with ordinary capital allowances, a partial claim for first year allowances can be made. Thereafter, writing down allowances ("WDA"s) are given at 20% on a straight-line basis.

The allowances are clawed back if the building ceases to be used for a qualifying purpose within 7 years after it was renovated and first made available for use.

An individual investing in a scheme will usually become a member of a partnership or syndicate and will receive the necessary tax certificates for their tax return from the administrators.

If you would like any further information on the schemes above or to discuss your own personal situation please email private@edge-tax.com or your usual Edge contact.

Once again have a fantastic festive break from all the team at Edge Tax!